Calumet Specialty Products Partners, L.P. - FORM 10-Q - May 7, 2020

Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - Calumet Specialty Products Partners, L.P.exhibit321-q12020.htm
EX-31.2 - EXHIBIT 31.2 - Calumet Specialty Products Partners, L.P.exhibit312-q12020.htm
EX-31.1 - EXHIBIT 31.1 - Calumet Specialty Products Partners, L.P.exhibit311-q12020.htm
EX-10.2 - EXHIBIT 10.2 - Calumet Specialty Products Partners, L.P.exhibit39-timothygoseparat.htm
EX-10.1 - EXHIBIT 10.1 - Calumet Specialty Products Partners, L.P.exhibit38-hkeithjenningsof.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM              TO             
Commission File Number: 000-51734
 
 
Calumet Specialty Products Partners, L.P.
(Exact Name of Registrant as Specified in Its Charter) 
 
 
Delaware
 
35-1811116
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
 
 
2780 Waterfront Parkway East Drive, Suite 200
 
 
Indianapolis, Indiana
 
46214
(Address of Principal Executive Offices)
 
(Zip Code)
(317) 328-5660
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
 
 
 
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common units representing limited partner interests
 
CLMT
 
The NASDAQ Stock Market LLC


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ   No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
☐
 
Accelerated filer
 
þ
Non-accelerated filer
 
☐ 
 
Smaller reporting company
 
☐
 
 
 
 
Emerging growth company
 
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  þ
On May 6, 2020, there were 77,956,842 common units outstanding.


CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
QUARTERLY REPORT
For the Three Months Ended March 31, 2020
Table of Contents
 
 
Page
 

2

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes certain “forward-looking statements.” These statements can be identified by the use of forward-looking terminology including “may,” “intend,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “plan,” “should,” “could,” “would,” or other similar words. The statements regarding (i) the effect, impact, potential duration or other implications of the ongoing novel coronavirus (“COVID-19”) pandemic and global crude oil production levels on our business and operations; (ii) demand for refined petroleum products in markets we serve; (iii) estimated capital expenditures as a result of required audits or required operational changes or other environmental and regulatory liabilities, (iv) our anticipated levels of, use and effectiveness of derivatives to mitigate our exposure to crude oil price changes, natural gas price changes and fuel products price changes, (v) estimated costs of complying with the U.S. Environmental Protection Agency’s (“EPA”) Renewable Fuel Standard (“RFS”), including the prices paid for Renewable Identification Numbers (“RINs”), (vi) our ability to meet our financial commitments, debt service obligations, debt instrument covenants, contingencies and anticipated capital expenditures, (vii) our access to capital to fund capital expenditures and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms, (viii) our access to inventory financing under our supply and offtake agreements, (ix) our ability to remediate the identified material weakness and further strengthen the overall controls surrounding information systems, (x) the future effectiveness of our enterprise resource planning (“ERP”) system to further enhance operating efficiencies and provide more effective management of our business operations and (xi) potential costs and savings associated with our cost reduction plan to reduce overall operating expenses, as well as other matters discussed in this Quarterly Report that are not purely historical data, are forward-looking statements. These forward-looking statements are based on our expectations and beliefs as of the date hereof concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our current expectations for future sales and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisition or disposition transactions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Known material factors that could cause our actual results to differ from those in the forward-looking statements are those described in (i) Part I, Item 1A “Risk Factors” and Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (“2019 Annual Report”) and (ii) Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” and Part II, Item 1A “Risk Factors” in this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
References in this Quarterly Report to “Calumet Specialty Products Partners, L.P.,” “Calumet,” “the Company,” “we,” “our,” “us” or like terms refer to Calumet Specialty Products Partners, L.P. and its subsidiaries. References in this Quarterly Report to “our general partner” refer to Calumet GP, LLC, the general partner of Calumet Specialty Products Partners, L.P.




3

PART I
Item 1. Financial Statements
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31, 2020
 
December 31, 2019
 
(Unaudited)
 
(In millions, except unit data)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
103.7

 
$
19.1

Accounts receivable, net
176.0

 
175.0

Other
11.0

 
13.5

 
187.0

 
188.5

Inventories
222.6

 
292.6

Derivative assets
22.8

 
0.9

Prepaid expenses and other current assets
8.3

 
11.0

Total current assets
544.4

 
512.1

Property, plant and equipment, net
964.7

 
973.5

Goodwill
172.5

 
171.4

Other intangible assets, net
68.4

 
71.2

Operating lease right-of-use assets
78.5

 
93.1

Other noncurrent assets, net
33.8

 
36.5

Total assets
$
1,862.3

 
$
1,857.8

LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
 
 
 
Accounts payable
$
158.5

 
$
230.2

Accrued interest payable
46.8

 
32.0

Accrued salaries, wages and benefits
22.4

 
35.7

Other taxes payable
13.7

 
11.8

Obligations under inventory financing agreements
95.1

 
134.3

Other current liabilities
50.2

 
58.6

Current portion of operating lease liabilities
49.0

 
60.6

Current portion of long-term debt
2.0

 
1.8

Total current liabilities
437.7

 
565.0

Pension and postretirement benefit obligations
7.6

 
7.9

Other long-term liabilities
20.6

 
20.8

Long-term operating lease liabilities
30.7

 
33.0

Long-term debt, less current portion
1,358.7

 
1,209.5

Total liabilities
1,855.3

 
1,836.2

Commitments and contingencies
 
 
 
Partners’ capital:
 
 
 
Limited partners’ interest 77,956,842 units and 77,560,355 units issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
6.1

 
20.2

General partner’s interest
11.7

 
12.0

Accumulated other comprehensive loss
(10.8
)
 
(10.6
)
Total partners’ capital
7.0

 
21.6

Total liabilities and partners’ capital
$
1,862.3

 
$
1,857.8

See accompanying notes to unaudited condensed consolidated financial statements.

4

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended March 31,
 
2020
 
2019
 
(In millions, except per unit and unit data)
Sales
$
692.6

 
$
851.3

Cost of sales
638.3

 
715.3

Gross profit
54.3

 
136.0

Operating costs and expenses:
 
 
 
Selling
13.3

 
13.3

General and administrative
20.2

 
34.9

Transportation
30.8

 
35.9

Taxes other than income taxes
5.0

 
5.1

Loss on impairment and disposal of assets
6.0

 
11.7

Other operating expense
3.0

 
1.3

Operating income (loss)
(24.0
)
 
33.8

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(29.3
)
 
(32.3
)
Gain on debt extinguishment
—

 
0.4

Gain on derivative instruments
38.5

 
9.1

Other
0.9

 
5.3

Total other income (expense)
10.1

 
(17.5
)
Net income (loss) before income taxes
(13.9
)
 
16.3

Income tax (benefit) expense
0.5

 
(0.1
)
Net income (loss)
$
(14.4
)
 
$
16.4

Allocation of net income (loss):
 
 
 
Net income (loss)
$
(14.4
)
 
$
16.4

Less:
 
 
 
General partner’s interest in net income (loss)
(0.3
)
 
0.3

Non-vested share-based payments
—

 
0.1

Net income (loss) available to limited partners
$
(14.1
)
 
$
16.0

Weighted average limited partner units outstanding:
 
 
 
Basic
78,399,314

 
78,111,551

Diluted
78,399,314

 
78,175,007

Limited partners’ interest basic and diluted net income (loss) per unit:
$
(0.18
)
 
$
0.20

See accompanying notes to unaudited condensed consolidated financial statements.

5

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended March 31,
 
2020
 
2019
 
(In millions)
Net income (loss)
$
(14.4
)
 
$
16.4

Other comprehensive loss:
 
 
 
Cash flow hedges:
 
 
 
Cash flow hedge loss
(0.2
)
 
—

Foreign currency translation adjustment
—

 
1.2

Total other comprehensive loss
(0.2
)
 
1.2

Comprehensive income (loss) attributable to partners’ capital
$
(14.6
)
 
$
17.6

See accompanying notes to unaudited condensed consolidated financial statements.

6

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
 
Accumulated Other
Comprehensive Loss
 
Partners’ Capital
 
 
 
 
General
Partner
 
Limited
Partners
 
Total
 
(In millions)
Balance at December 31, 2019
$
(10.6
)
 
$
12.0

 
$
20.2

 
$
21.6

Other comprehensive loss
(0.2
)
 
—

 
—

 
(0.2
)
Net loss
—

 
(0.3
)
 
(14.1
)
 
(14.4
)
Settlement of tax withholdings on equity-based incentive compensation
—

 
—

 
(0.3
)
 
(0.3
)
Amortization of phantom units
—

 
—

 
0.3

 
0.3

Balance at March 31, 2020
$
(10.8
)
 
$
11.7

 
$
6.1

 
$
7.0

See accompanying notes to unaudited condensed consolidated financial statements.

7

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
 
2020

2019
 
(In millions)
Operating activities
 
 
 
Net income (loss)
$
(14.4
)

$
16.4

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
26.4


28.2

Amortization of turnaround costs
5.1


4.8

Non-cash interest expense
1.5


1.9

Gain on debt extinguishment
—

 
(0.4
)
Unrealized (gain) loss on derivative instruments
(31.6
)

2.6

Loss on impairment and disposal of assets
6.0

 
11.7

Operating lease expense
20.2

 
20.8

Operating lease payments
(20.1
)
 
(20.6
)
Equity-based compensation
(4.5
)

2.2

Lower of cost or market inventory adjustment
66.3

 
(38.9
)
Other non-cash activities
2.2


(4.0
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(1.1
)

(69.8
)
Inventories
3.8


31.9

Prepaid expenses and other current assets
1.5


(3.5
)
Derivative activity
(1.4
)

(0.1
)
Turnaround costs
(9.8
)

(1.7
)
Accounts payable
(65.3
)

37.2

Accrued interest payable
11.2


14.4

Accrued salaries, wages and benefits
(8.5
)

(6.8
)
Other taxes payable
1.9


2.9

Other liabilities
(9.1
)

(1.8
)
Pension and postretirement benefit obligations
(0.2
)

—

Net cash provided by (used in) operating activities
$
(19.9
)
 
$
27.4

Investing activities
 
 
 
Additions to property, plant and equipment
(14.9
)

(9.5
)
Acquisition of business, net of cash acquired
(3.3
)

—

Proceeds from sale of unconsolidated affiliate
—

 
5.0

Proceeds from sale of property, plant and equipment
—

 
3.6

Net cash provided by discontinued operations
0.9

 
2.0

Net cash provided by (used in) investing activities
$
(17.3
)
 
$
1.1

Financing activities
 
 
 
Proceeds from borrowings — revolving credit facility
472.5

 
—

Repayments of borrowings — revolving credit facility
(325.3
)
 
—

Repayments of borrowings — senior notes
—

 
(23.2
)
Payments on finance lease obligations
(0.1
)
 
(1.0
)
Proceeds from inventory financing
245.1

 
279.2

Payments on inventory financing
(269.7
)
 
(286.1
)
Proceeds from other financing obligations
—

 
0.3

Payments on other financing obligations
(0.7
)
 
(0.6
)
Contributions from Calumet GP, LLC
—

 
0.1

Net cash provided by (used in) in financing activities
$
121.8

 
$
(31.3
)
Net increase (decrease) in cash and cash equivalents
$
84.6

 
$
(2.8
)
Cash and cash equivalents at beginning of period
19.1


155.7

Cash and cash equivalents at end of period
$
103.7

 
$
152.9

Supplemental disclosure of non-cash investing activities
 
 
 
Non-cash property, plant and equipment additions
$
10.8

 
$
3.3

See accompanying notes to unaudited condensed consolidated financial statements.

8

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED 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 under the ticker symbol “CLMT.” The general partner of the Company is Calumet GP, LLC, a Delaware limited liability company. As of March 31, 2020, the Company had 77,956,842 limited partner common units and 1,590,955 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), while the remaining 98% is owned by limited partners. The general partner employs the Company’s employees and the Company reimburses the general partner for certain of its expenses.
The Company is engaged in the production and marketing of crude oil-based specialty products including lubricating oils, white mineral oils, solvents, petrolatums, waxes, synthetic lubricants 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.
The unaudited condensed consolidated financial statements of the Company as of March 31, 2020 and for the three months ended March 31, 2020 and 2019, included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal nature, unless otherwise disclosed. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s 2019 Annual Report on Form 10-K.
2. Summary of Significant Accounting Policies     
Reclassifications
Certain amounts in the prior years’ unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation.
Other Current Liabilities
Other current liabilities consisted of the following (in millions):
 
March 31, 2020
 
December 31, 2019
RINs Obligation
$
30.6

 
$
13.0

Transition Services Agreement Payable
—

 
19.8

Net working capital adjustment liabilities
—

 
6.9

Other
19.6

 
18.9

Total other current liabilities
$
50.2

 
$
58.6

The Company’s Renewable Identification Numbers (“RINs”) obligation (“RINs Obligation”) represents a liability for the purchase of RINs to satisfy the U.S. Environmental Protection Agency (“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 must purchase RINs in the open market to satisfy the annual requirement. The Company’s RINs Obligation is based on the amount of RINs it must purchase and the price of those RINs as of the balance sheet date.

9

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 unaudited condensed consolidated statements of cash flows. The liability is calculated by multiplying the RINs shortage (based on actual results) by the period end RIN 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 unaudited condensed 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 condensed consolidated balance sheets. 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 unaudited condensed consolidated statements of operations. The liabilities associated with the Company’s RINs Obligation are considered recurring fair value measurements. Please read Note 6 - “Commitments and Contingencies” for further information on the Company’s RINs Obligation.
Loss on Impairment and Disposal of Assets
The Company’s unaudited condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 included a Loss on impairment and disposal of assets of $6.0 million and $11.7 million, respectively. For the three months ended March 31, 2020, Loss on impairment and disposal of assets consisted of a $4.5 million write-off of other receivable for the remaining payment related to the sale of Anchor Drilling Fluids USA, LLC in 2017 and $1.5 million for the disposal of assets related to Bel-Ray facility (please read Note 13 - “Restructuring” for additional information regarding the Company’s restructuring program). For the three months ended March 31, 2019, Loss on impairment and disposal of assets consisted of $10.7 million as the Company ceased use of the assets associated with the TexStar Midstream Logistics, L.P. Throughput and Deficiency Agreement and $1.0 million for the losses recorded on various other asset disposals during the period. The fair value of the Loss on impairment and disposal of assets were based on Level 3 inputs.
Adopted Accounting Pronouncements
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. The allowance for credit losses for accounts receivable was $0.9 million at January 1, 2020 and March 31, 2020.
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. Please read Note 5 - “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 the Company’s unaudited condensed 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. The adoption of ASU 2018-07 had no impact on the Company’s unaudited condensed consolidated financial statements.
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, Revenue from Contracts with Customers, the Company performs the following five

10

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 crude oil-based 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.
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):
 
Three Months Ended March 31,
 
2020
 
2019
Sales by major source
 
 
 
Standard specialty products
$
269.2

 
$
292.3

Packaged and synthetic specialty products
57.7

 
59.9

Total specialty products
326.9

 
352.2

 
 
 
 
Fuel and fuel related products
320.0

 
442.9

Asphalt
45.7

 
56.2

Total fuel products
365.7

 
499.1

 
 
 
 
Total sales
$
692.6

 
$
851.3

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

11

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 March 31, 2020 and December 31, 2019 was $176.0 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.
4. Inventories
The cost of inventory is recorded using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. In certain circumstances, the Company may decide not to replenish inventory for certain products or product lines during an interim period, in which case, the Company may record interim LIFO adjustments during that period. During the three months ended March 31, 2020, the Company recorded no increases (exclusive of lower of cost or market (“LCM”) adjustments) in cost of sales in the unaudited condensed consolidated statements of operations due to the permanent liquidation of inventory layers. The Company recorded a $0.9 million increase in cost of sales as a result of such activity during the three months ended March 31, 2019.
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 $15.8 million lower and $17.7 million higher as of March 31, 2020 and December 31, 2019, respectively.
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 7 — “Inventory Financing Agreements” related to the Great Falls and Shreveport refineries, respectively. The crude oil remains in the legal title of Macquarie and is stored in the Company’s refinery storage tanks governed by storage agreements. Legal title to the crude oil passes to the Company at the storage tank outlet for processing into refined products. After processing, Macquarie takes title to the refined products stored in the Company’s storage tanks until sold to third parties. 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 condensed consolidated balance sheets until processed and sold to a third party. The Company is obligated to repurchase the inventory in certain scenarios.
Inventories consist of the following (in millions):
 
March 31, 2020
 
December 31, 2019
 
Titled
Inventory
 
Supply and Offtake
Agreements (1)
 
Total
 
Titled
Inventory
 
Supply and Offtake
Agreements (1)
 
Total
Raw materials
$
25.1

 
$
4.8

 
$
29.9

 
$
48.3

 
$
11.6

 
$
59.9

Work in process
29.9

 
15.5

 
45.4

 
35.0

 
29.1

 
64.1

Finished goods
112.9

 
34.4

 
147.3

 
124.8

 
43.8

 
168.6

 
$
167.9

 
$
54.7

 
$
222.6

 
$
208.1

 
$
84.5

 
$
292.6

 
(1) 
Amounts represent LIFO value and do not necessarily represent the value of product financing. Please read Note 7 - “Inventory Financing Agreements” for further information.

12

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 three months ended March 31, 2020, the Company recorded an LCM valuation increase of $66.3 million in cost of sales, as a result of declining market prices. During the three months ended March 31, 2019, the Company recorded a decrease of $38.9 million in cost of sales due to the sale of inventory previously adjusted through the LCM valuation.
5. 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 to 16 years, some of which include options to extend the lease for up to 35 years, and others of which include options to terminate the lease within one year.
Supplemental balance sheet information related to the Company’s leases as of March 31, 2020 and December 31, 2019, were as follows (in millions):
 
 
March 31, 2020
 
December 31, 2019
Assets:
Classification:
 
 
 
Operating lease assets
Operating lease right-of-use assets (1)
$
78.5

 
$
93.1

Finance lease assets
Property, plant and equipment, net (2)
4.3

 
3.2

Total leased assets
 
$
82.8

 
$
96.3

Liabilities:
 
 
 
 
Current
 
 
 
 
Operating
Current portion of operating lease liabilities (1)
$
49.0

 
$
60.6

Finance
Current portion of long-term debt
0.5

 
0.3

Non-current
 
 
 
 
Operating
Long-term operating lease liabilities (1)
30.7

 
33.0

Finance
Long-term debt, less current portion
3.4

 
2.4

Total lease liabilities
 
$
83.6

 
$
96.3

 
(1) 
In the first quarter of 2020, the Company had additions to its operating lease right-of-use assets and operating lease liabilities of approximately $1.4 million.
(2) 
Finance lease assets are recorded net of accumulated amortization of $7.3 million and $7.1 million as of March 31, 2020 and December 31, 2019, respectively.
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 three months ended March 31, 2020 and 2019 were as follows (in millions).
 
 
Three Months Ended
Lease Costs:
Classification:
2020
 
2019
Fixed operating lease cost
Cost of Sales; SG&A Expenses
$
16.6

 
$
17.7

Short-term operating lease cost (1)
Cost of Sales; SG&A Expenses
2.7

 
2.0

Variable operating lease cost (2) (3)
Cost of Sales; SG&A Expenses
0.9

 
1.1

Finance lease cost:
 
 
 
 
Amortization of right-of-use asset
Cost of Sales
0.1

 
0.3

Interest on lease liabilities
Interest expense
0.1

 
1.0

Total lease cost
 
$
20.4

 
$
22.1

 
(1) 
The Company’s leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets.
(2) 
Approximately $0.8 million of the Company’s variable operating lease cost for the three months ended March 31, 2020 relates to its lease agreement with Phillips 66 associated with the LVT unit at its Lake Charles, Louisiana refinery (the

13

“LVT Agreement”). Pursuant to the LVT Agreement, Phillips 66 is obligated to supply a minimum supply quantity which the Company agreed to purchase through December 31, 2020. Pricing for the agreement is indexed to the prior month’s average of Platts Mid USGC 55 Grade Jet Kero price on the day of loading plus a specified margin. Phillips 66 invoices the Company for the estimated volume of product to be purchased by the Company based on a supplied forecast and differences between actual volumes purchased and the estimated volume of product originally billed, which makes up the variable component of the operating lease contract.
(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 March 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
2020
$
52.5

 
$
0.5

 
$
53.0

2021
12.9

 
0.8

 
13.7

2022
9.3

 
0.8

 
10.1

2023
6.4

 
0.8

 
7.2

2024
3.3

 
0.8

 
4.1

Thereafter
3.0

 
1.2

 
4.2

Total
$
87.4

 
$
4.9

 
$
92.3

Less: Interest
7.7

 
1.0

 
8.7

Present value of lease liabilities
$
79.7

 
$
3.9

 
$
83.6

 
(1) 
As of March 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 March 31, 2020.
(2) 
As of March 31, 2020, the Company’s finance 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 that have been signed but not yet commenced as of March 31, 2020.
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 were as follows:
 
March 31, 2020
Lease Term and Discount Rate:
 
Weighted-average remaining lease term (years):
 
Operating leases
2.5

Finance leases
6.1

Weighted-average discount rate:
 
Operating leases
7.3
%
Finance leases
7.8
%
6. Commitments and 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.

14

Environmental
The Company conducts crude oil and specialty hydrocarbon refining, blending and terminal operations and such 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 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 or capital expenditures to mitigate pollution from former or current operations, 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 delays 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, 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 is in process 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 will not become material.
Cotton Valley, Princeton and Shreveport Refineries
Since 2013, the Louisiana Department of Environmental Quality (“LDEQ”) has issued Consolidated Compliance Orders & Notices of Proposed Penalties to the Cotton Valley, Princeton and Shreveport refineries relating to various alleged air quality and wastewater regulatory violations.  The Company has responded to the various orders. The Company and LDEQ have reached a tentative agreement to resolve the applicable matters, which would require that the Company pay a penalty of approximately $0.1 million. The Company is working with LDEQ to formalize the settlement. The Company expects that the amount of the penalty contained in the final settlement will not be material to its financial position or results of operations and any conditions established by LDEQ on the Company’s operations will not be material to the Company’s operations.
Renewable Identification Numbers Obligation
In August 2019, the EPA granted the Company’s fuel products refineries a “small refinery exemption” under the RFS for the compliance year 2018, as provided for under the federal Clean Air Act, as amended (“CAA”). 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 exemptions resulted in a decrease in the RINs Obligation and are a charge to cost of sales in the unaudited condensed consolidated statements of operations. As of March 31, 2020 and December 31, 2019, the Company had a RINs Obligation of $30.6 million and $13.0 million, respectively.
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, as amended, 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.
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 (the “MIPA”), which was entered into in connection with the disposition of the Superior Refinery. The Claim Notice relates to alleged losses Husky incurred

15

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. 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. We believe that 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 seek recourse under the MIPA for such claims, they would be subject to certain limits on indemnification liability that may reduce or eliminate any potential indemnification liability.
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 unaudited condensed 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 March 31, 2020 and December 31, 2019, the Company had outstanding standby letters of credit of $31.9 million and $42.5 million, respectively, under its senior secured revolving credit facility (the “revolving credit facility”). Please read Note 8 - “Long-Term Debt” for additional information regarding the Company’s revolving credit facility. At March 31, 2020 and December 31, 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 the consent of the Agent (as defined in the Credit Agreement) to 90% of revolver commitments then in effect ($600.0 million at March 31, 2020 and December 31, 2019).
Throughput Contract
The Company has entered into a long-term agreement to transport crude oil at a minimum of 5,000 bpd through a pipeline, which is still being constructed and is expected to be serviceable in the third quarter of 2020. The agreement also contains a capital recovery charge that increases 2% per annum. This agreement is for seven years commencing once the pipeline is in service.
As of March 31, 2020, the estimated minimum unconditional purchase commitments under the agreement were as follows (in millions):
Year
Commitment
2020
$
2.0

2021
3.9

2022
3.9

2023
3.9

2024
4.0

Thereafter
10.0

Total (1)
$
27.7

 
(1) 
As of March 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 condensed consolidated balance sheets. This liability was accrued due to the fact that the contract was entered into to supply crude to a divested facility.

16

7. 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.
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 condensed consolidated balance sheets until processed and sold to a third party. Each reporting period, the Company records 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 condensed 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 unaudited condensed consolidated statements of operations. For more information on the valuation of the associated derivatives, please read Note 9 - “Derivatives” and Note 10 - “Fair Value Measurements.” The embedded derivatives will be recorded in obligations under inventory financing agreements on the condensed consolidated balance sheets. The cash flow impact of the embedded derivatives will be classified as a change in inventory financing activity in the financing activities section in the unaudited condensed consolidated statements of cash flows.
For the three months ended March 31, 2020 and 2019, the Company received a $1.8 million benefit and incurred a $1.8 million expense, respectively, for financing costs related to the Supply and Offtake Agreements, which are included in interest expense in the Company’s unaudited condensed consolidated statements of operations.
The Company has provided collateral of $8.8 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 (up to 90% of the collateral inventory). The deferred amounts under the Deferred Payment Arrangement bear interest at a rate equal to the London Interbank Offered Rate (“LIBOR”) plus 3.25% per annum for both

17

Shreveport and Great Falls. Amounts outstanding under the Deferred Payment Arrangement are included in obligations under inventory financing agreements in the Company’s condensed consolidated balance sheets. Changes in the amount outstanding under the Deferred Payment Arrangement are included within cash flows from financing activities on the unaudited condensed consolidated statements of cash flows. As of March 31, 2020 and December 31, 2019, the Company had $9.5 million and $26.3 million deferred payments outstanding, respectively. In addition to the Deferred Payment Arrangement, Macquarie has advanced the Company an additional $5.0 million which remained outstanding as of March 31, 2020.
8. Long-Term Debt
Long-term debt consisted of the following (in millions):
 
March 31, 2020
 
December 31, 2019
Borrowings under third amended and restated senior secured revolving credit agreement with third-party lenders, interest payments quarterly, borrowings due February 2023, weighted average interest rates of 3.9% and 4.3% for the three months ended March 31, 2020 and year ended December 31, 2019, respectively
$
147.2

 
$
—

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% and 8.0% for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively. (1)
351.0

 
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 three months ended March 31, 2020 and the year ended December 31, 2019, respectively.
325.0

 
325.0

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 three months ended March 31, 2020 and the year ended December 31, 2019, respectively.
550.0

 
550.0

Other
3.4

 
3.8

Finance lease obligations, at various interest rates, interest and monthly principal payments
3.9

 
2.7

Less unamortized debt issuance costs (2)
(17.2
)
 
(18.4
)
Less unamortized discounts
(2.6
)
 
(2.9
)
Total debt
$
1,360.7

 
$
1,211.3

Less current portion of long-term debt
2.0

 
1.8

Total long-term debt
$
1,358.7

 
$
1,209.5

 
(1) 
The balance includes a fair value interest rate hedge adjustment, which increased the debt balance by $1.0 million and $1.1 million as of March 31, 2020 and December 31, 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 $16.9 million and $15.7 million at March 31, 2020 and December 31, 2019, respectively.
Senior 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 7.625% Senior Notes due 2022 (the “2022 Notes”), 7.75% Senior Notes due 2023 (the “2023 Notes”) and 11.00% Senior Notes due 2025 (the “2025 Notes” and, together with the 2022 Notes and the 2023 Notes, the “Senior Notes”) are fully and unconditionally and jointly and severally guaranteed on a senior unsecured 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 Senior Notes). 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.
The Senior 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

18

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 Senior Notes.
The indentures governing the Senior 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 Senior 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 Senior Notes, has occurred and is continuing, many of these covenants will be suspended. As of March 31, 2020, the Company’s Fixed Charge Coverage Ratio (as defined in the indentures governing the Senior Notes) was 2.1 As of March 31, 2020, the Company was in compliance with all covenants under the indentures governing the Senior 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. The revolving credit facility includes a $25.0 million senior secured first loaned in and last to be repaid out (“FILO”) revolving credit facility limited by a FILO borrowing base calculation. The FILO commitment reduces ratably each quarter starting in November 2019 and ending in August 2020. The reductions in FILO commitments convert to revolving credit facility base commitments over the same period. 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.
On September 4, 2019, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”). The amendment expanded the borrowing base by $99.6 million effective 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 in 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.
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.
The margin can fluctuate quarterly based on the Company’s average availability for additional borrowings under the revolving credit facility in the preceding calendar quarter as follows:
 
Base Loans
 
FILO Loans
Quarterly Average Availability Percentage 
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. As of March 31, 2020, the margin was 50 basis points for prime rate based revolver loans, 150 basis points for LIBOR based rate revolver loans, 150 basis points for prime rate based FILO loans and 250 basis points for LIBOR based FILO 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, 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 margin (measured in basis points) 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

19

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 base under the revolving credit facility at March 31, 2020 was approximately $401.0 million. As of March 31, 2020, the Company had $147.2 million of outstanding borrowings under the revolving credit facility and outstanding standby letters of credit of $31.9 million, leaving approximately $221.9 million available for additional borrowings based on specified availability limitations. Lenders under the revolving credit facility have a first priority lien on the Company’s accounts receivable, inventory and substantially all of its cash.
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 sum of the greater of (i) 10% of the borrowing base 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), plus the amount of FILO loans outstanding, 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 March 31, 2020, the Company was in compliance with all covenants under the revolving credit facility.
Maturities of Long-Term Debt
As of March 31, 2020, principal payments on debt obligations and future minimum rentals on finance lease obligations are as follows (in millions):
Year
Maturity
2020
$
1.5

2021
2.8

2022
350.6

2023
472.9

2024
0.7

Thereafter
551.0

Total
$
1,379.5

9. 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), natural gas 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, collars, options and futures, 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.
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

20

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 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 unaudited condensed consolidated statements of operations.
The Company recognizes all derivative instruments at their fair values (please read Note 10 - “Fair Value Measurements”) as either current assets or current liabilities in the condensed consolidated balance sheets. 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 condensed consolidated balance sheets (in millions):
 
 
March 31, 2020
 
December 31, 2019
 
Balance Sheet Location
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Assets Presented
in the Condensed Consolidated Balance Sheets
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Assets Presented
in the Condensed Consolidated Balance Sheets
Derivative instruments not designated as hedges:
 
 
 
 
 
 
 
 
 
 
Specialty products segment:
 
 
 
 
 
 
 
 
 
 
 
Natural gas swaps
Derivative assets
$
0.1

 
$
(0.4
)
 
$
(0.3
)
 
$
—

 
$
—

 
$
—

Fuel products segment:
 
 
 
 
 


 
 
 
 
 


Inventory financing obligation
Obligations under inventory financing agreements
$
3.7

 
$
—

 
$
3.7

 
$
—

 
$
—

 
$
—

WCS crude oil basis swaps
Derivative assets
—

 
(6.2
)
 
(6.2
)
 
—

 
(1.3
)
 
(1.3
)
Gasoline crack spread swaps
Derivative assets
18.1

 
—

 
18.1

 
1.8

 
(0.5
)
 
1.3

Diesel crack spread swap
Derivative assets
10.8

 
—

 
10.8

 
0.9

 
(0.5
)
 
0.4

2/1/1 Crack spread swap
Derivative assets
0.4

 
—

 
0.4

 
0.5

 
—

 
0.5

Total derivative instruments
 
$
33.1


$
(6.6
)

$
26.5


$
3.2


$
(2.3
)

$
0.9


21

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 condensed consolidated balance sheets (in millions):
 
 
March 31, 2020
 
December 31, 2019
 
Balance Sheet Location
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented
in the Condensed Consolidated Balance Sheets
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented
in the Condensed Consolidated Balance Sheets
Derivative instruments not designated as hedges:
 
 
 
 
 
 
 
 
 
 
Specialty products segment:
 
 
 
 
 
 
 
 
 
 
 
Natural gas swaps
Other current liabilities
$
(0.4
)
 
$
0.4

 
$
—

 
$
—

 
$
—

 
$
—

Fuel products segment:
 
 
 
 
 
 
 
 
 
 
 
 
Inventory financing obligation
Obligations under inventory financing agreements
$
—

 
$
—

 
—

 
$
(7.2
)
 
$
—

 
$
(7.2
)
WCS crude oil basis swaps
Other current liabilities

(7.4
)
 
6.2

 
(1.2
)
 
(1.3
)
 
1.3

 
—

Gasoline crack spread swaps
Other current liabilities

—

 
—

 
—

 
(0.5
)
 
0.5

 
—

Diesel crack spread swaps
Other current liabilities

—

 
—

 
—

 
(0.5
)
 
0.5

 
—

Total derivative instruments
 
$
(7.8
)
 
$
6.6

 
$
(1.2
)
 
$
(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 March 31, 2020, the Company had three counterparties in which the derivatives held were in net assets totaling $26.5 million. As of December 31, 2019, the Company had three counterparties in which the derivatives held were net assets. 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 March 31, 2020 or December 31, 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 condensed consolidated balance sheets and is not netted against derivative assets or liabilities.
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. Any outstanding collateral is released to the Company upon settlement of the related derivative instrument liability. As of March 31, 2020 and December 31, 2019, the Company had provided no collateral to its counterparties.
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 unaudited condensed consolidated statements of cash flows.
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 gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. Upon the settlement of a derivative not designated as a hedge, the gain or loss at settlement is recorded to gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. The Company has entered into natural gas swaps, gasoline swaps, diesel swaps and

22

certain crude oil basis swaps that do not qualify as cash flow hedges for accounting purposes. However, these instruments provide economic hedges of the purchases and sales of the Company’s natural gas, crude oil, gasoline and diesel.
The Company recorded the following gains (losses) in its unaudited condensed consolidated statements of operations, related to its derivative instruments not designated as hedges (in millions):
Type of Derivative
Amount of Realized Gain Recognized in Gain on Derivative Instruments
 
Amount of Unrealized Gain (Loss) Recognized in Gain on Derivative Instruments
Three Months Ended March 31,
 
Three Months Ended March 31,
2020
 
2019
 
2020
 
2019
Specialty products segment:
 
 
 
 
 
 
 
Natural gas swaps
$
(0.1
)
 
$
—

 
$
(0.3
)
 
$
—

Midland crude oil basis swaps
—

 
1.1

 
—

 
(0.5
)
Fuel products segment:
 
 
 
 
 
 
 
Inventory financing obligation
—

 
—

 
11.0

 
(12.7
)
WCS crude oil basis swaps
—

 
3.6

 
(6.2
)
 
(3.5
)
WCS crude oil percentage basis swaps
—

 
0.1

 
—

 
7.2

Midland crude oil basis swaps
—

 
7.3

 
—

 
(2.1
)
Gasoline crack spread swaps
2.1

 
—

 
16.8

 
—

2/1/1 crack spread swaps
1.8

 
—

 
(0.1
)
 
—

Diesel crack spread swaps
3.1

 
0.7

 
10.4

 
(0.8
)
Diesel percentage basis crack spread swaps
—

 
(1.1
)
 
—

 
9.8

Total
$
6.9

 
$
11.7

 
$
31.6

 
$
(2.6
)
Derivative Positions
WCS Crude Oil Basis Swap Contracts
At March 31, 2020, the Company had the following derivatives related to WCS crude oil basis purchases in its fuel products segment, none of which are designated as hedges:
WCS Crude Oil Basis Swap Contracts by Expiration Dates
Barrels Purchased
 
BPD
 
Average Differential to NYMEX WTI ($/Bbl)
Second Quarter 2020
1,067,500

 
11,731

 
$
(13.10
)
Third Quarter 2020
1,610,000

 
17,500

 
$
(13.68
)
Fourth Quarter 2020
1,610,000

 
17,500

 
$
(15.02
)
Total
4,287,500

 
 
 
 
Average differential
 
 
 
 
$
(14.04
)
At December 31, 2019, the Company had the following derivatives related to WCS crude oil basis purchases in its fuel products segment, none of which are designated as hedges:
WCS Crude Oil Basis Swap Contracts by Expiration Dates
Barrels Purchased
 
BPD
 
Average Differential to NYMEX WTI ($/Bbl)
First Quarter 2020
544,000

 
5,978

 
$
(18.92
)
Total
544,000

 
 
 
 
Average differential
 
 
 
 
$
(18.92
)

23

Diesel Crack Spread Swap Contracts
At March 31, 2020, the Company had the following derivatives related to diesel crack spread swap sales in its fuel products segment, none of which are designated as hedges:
Diesel Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
BPD
 
Average Swap
($/Bbl)
Second Quarter 2020
379,000

 
4,165

 
$
21.68

Third Quarter 2020
368,000

 
4,000

 
$
22.23

Fourth Quarter 2020
368,000

 
4,000

 
$
21.91

Total
1,115,000

 
 
 
 
Average price
 
 
 
 
$
21.93

At December 31, 2019, the Company had the following derivatives related to diesel crack spread swap sales in its fuel products segment, none of which are designated as hedges:
Diesel Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
BPD
 
Average Swap
($/Bbl)
First Quarter 2020
500,500

 
5,500

 
$
22.15

Second Quarter 2020
379,000

 
4,165

 
$
21.68

Third Quarter 2020
368,000

 
4,000

 
$
22.23

Fourth Quarter 2020
368,000

 
4,000

 
$
21.91

Total
1,615,500

 
 
 
 
Average price
 
 
 
 
$
22.00

Gasoline Crack Spread Swap Contracts
At March 31, 2020, the Company had the following derivatives related to gasoline crack spread swap sales in its fuel products segment, none of which are designated as hedges:
Gasoline Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
BPD
 
Average Swap
($/Bbl)
Second Quarter 2020
379,000

 
4,165

 
$
16.41

Third Quarter 2020
368,000

 
4,000

 
$
15.24

Fourth Quarter 2020
368,000

 
4,000

 
$
9.77

Total
1,115,000

 
 
 
 
Average price
 
 
 
 
$
13.83

At December 31, 2019, the Company had the following derivatives related to gasoline crack spread swap sales in its fuel products segment, none of which are designated as hedges:
Gasoline Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
BPD
 
Average Swap
($/Bbl)
First Quarter 2020
591,500

 
6,500

 
$
12.54

Second Quarter 2020
379,000

 
4,165

 
$
16.41

Third Quarter 2020
368,000

 
4,000

 
$
15.24

Fourth Quarter 2020
368,000

 
4,000

 
$
9.77

Total
1,706,500

 
 
 
 
Average price
 
 
 
 
$
13.38


24

2/1/1 Crack Spread Swap Contracts
At March 31, 2020, the Company had the following derivatives related to 2/1/1 crack spread swap sales in its fuel products segment, none of which are designated as hedges:
2/1/1 Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
BPD
 
Average Swap
($/Bbl)
Second Quarter 2020
30,000

 
330

 
$
19.50

Total
30,000

 
 
 
 
Average price
 
 
 
 
$
19.50

At December 31, 2019, the Company had the following derivatives related to 2/1/1 crack spread swap sales in its fuel products segment, none of which are designated as hedges:
2/1/1 Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
BPD
 
Average Swap
($/Bbl)
First Quarter 2020
364,000

 
4,000

 
$
17.43

Second Quarter 2020
30,000

 
330

 
$
19.50

Total
394,000

 
 
 
 
Average price
 
 
 
 
$
17.58

Natural Gas Swap Contracts
At March 31, 2020, the Company had the following derivatives related to natural gas swap purchases in its specialty products segment, none of which are designated as hedges:
Natural Gas Swap Contracts by Expiration Dates
MMBtu
 
Average Swap
($/MMBtu)
Second Quarter 2020
1,006,500

 
$
1.97

Third Quarter 2020
1,518,000

 
$
2.08

Fourth Quarter 2020
1,518,000

 
$
2.25

Total
4,042,500

 
 
Average price
 
 
$
2.11

At December 31, 2019, the Company had no derivatives related to natural gas swap purchases in its specialty products segment.
10. Fair Value Measurements
In accordance with ASC 820, 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 unaudited condensed consolidated financial statements at fair value. The Company’s derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange.

25

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.
Commodity derivative instruments are measured at fair value using a market approach. 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 counterparty 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 March 31, 2020 and December 31, 2019, the Company’s net assets and net liabilities changed, in each case, 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 counterparties 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 9 - “Derivatives” for further information on derivative instruments.
Pension Assets
Pension assets are reported at fair value in the accompanying unaudited condensed consolidated financial statements. At March 31, 2020, the Company’s investments associated with its pension plan 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.
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 6 - “Commitments and Contingencies” for further information on the Company’s RINs Obligation.
Precious Metals Leases
The fair value of precious metals leases is based upon unadjusted exchange-quoted prices and is, therefore, classified within Level 1 of the fair value hierarchy.

26

Hierarchy of Recurring Fair Value Measurements
The Company’s recurring assets and liabilities measured at fair value were as follows (in millions):
 
March 31, 2020
 
December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas swaps
$
—

 
$
—

 
$
(0.3
)
 
$
(0.3
)
 
$
—

 
$
—

 
$
—

 
$
—

Gasoline crack spread swaps
—

 
—

 
18.1

 
18.1

 
—

 
—

 
1.3

 
1.3

Inventory financing obligation
—

 
—

 
3.7

 
3.7

 
—

 
—

 
—

 
—

Diesel crack spread swaps
—

 
—

 
10.8

 
10.8

 
—

 
—

 
0.4

 
0.4

2/1/1 crack spread swap
—

 
—

 
0.4

 
0.4

 
—

 
—

 
0.5

 
0.5

WCS crude oil basis swaps
—

 
—

 
(6.2
)
 
(6.2
)
 
—

 
—

 
(1.3
)
 
(1.3
)
Total derivative assets
$
—


$
—


$
26.5


$
26.5

 
$
—

 
$
—

 
$
0.9

 
$
0.9

Pension plan investments
29.7

 
—

 
—

 
29.7

 
32.5

 
—

 
—

 
32.5

Total recurring assets at fair value
$
29.7


$
—


$
26.5


$
56.2


$
32.5


$
—


$
0.9


$
33.4

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Inventory financing obligation
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(7.2
)
 
$
(7.2
)
WCS crude oil basis swaps
—

 
—

 
(1.2
)
 
(1.2
)
 
—

 
—

 
—

 
—

Total derivative liabilities
—

 
—

 
(1.2
)
 
(1.2
)
 
—

 
—

 
(7.2
)
 
(7.2
)
RINs Obligation
—

 
(30.6
)
 
—

 
(30.6
)
 
—

 
(13.0
)
 
—

 
(13.0
)
Precious Metals leases
(4.3
)
 
—

 
—

 
(4.3
)
 
(5.8
)
 
—

 
—

 
(5.8
)
Liability Awards
(3.6
)
 
—

 
—

 
(3.6
)
 
(7.4
)
 
—

 
—

 
(7.4
)
Total recurring liabilities at fair value
$
(7.9
)
 
$
(30.6
)
 
$
(1.2
)
 
$
(39.7
)
 
$
(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):
 
Three Months Ended March 31,
 
2020
 
2019
Fair value at January 1,
$
(6.3
)
 
$
19.8

Realized gain on derivative instruments
(6.9
)
 
(11.7
)
Unrealized gain (loss) on derivative instruments
31.6

 
(2.6
)
Settlements
6.9

 
11.7

Fair value at March 31,
$
25.3

 
$
17.2

Total gain (loss) included in net income (loss) attributable to changes in unrealized gain (loss) relating to financial assets and liabilities held as of March 31,
$
31.6

 
$
(2.6
)
All settlements from derivative instruments not designated as hedges are recorded in Gain on derivative instruments in the unaudited condensed consolidated statements of operations. Please read Note 9 - “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. Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition.
The Company reviews for goodwill impairment annually on October 1 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

27

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 unaudited condensed consolidated financial statements.
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, the Company was required to measure and record such assets at fair value within its unaudited condensed consolidated financial statements.
Estimated Fair Value of Financial Instruments
Cash and cash equivalents
The carrying value of cash and cash equivalents is each considered to be representative of its fair value.
Debt
The estimated fair value of long-term debt at March 31, 2020 and December 31, 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 8 - “Long-Term Debt” for further information on long-term debt.
The Company’s carrying and estimated fair value of the Company’s financial instruments, carried at adjusted historical cost were as follows (in millions):
 
 
March 31, 2020
 
December 31, 2019
 
Level
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Financial Instrument:
 
 
 
 
 
 
 
 
2022 Notes and 2023 Notes
1
$
487.6

 
$
668.7

 
$
676.4

 
$
668.1

2025 Notes
2
$
398.4

 
$
541.0

 
$
598.8

 
$
540.5

Revolving credit facility
3
$
147.2


$
147.2


$
—


$
—

Finance lease and other obligations
3
$
7.3

 
$
7.3

 
$
6.5

 
$
6.5


28

11. 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):
 
Three Months Ended March 31,
 
2020
 
2019
Numerator for basic and diluted earnings per limited partner unit:
 
 
 
Net income (loss)
$
(14.4
)
 
$
16.4

Less:
 
 
 
General partner’s interest in net income (loss)
(0.3
)
 
0.3

Non-vested share-based payments
—

 
0.1

Net income (loss) available to limited partners
$
(14.1
)
 
$
16.0

 
 
 
 
Denominator for earnings per limited partner unit:
 
 
 
Basic weighted average limited partner units outstanding
78,399,314

 
78,111,551

Effect of dilutive securities:
 
 
 
Incremental Units
—

 
63,456

Diluted weighted average limited partner units outstanding (1)
78,399,314

 
78,175,007

Limited partners’ interest basic and diluted net income (loss) per unit:
 
 
 
Limited partners’ interest
$
(0.18
)
 
$
0.20

 
(1) 
Total diluted weighted average limited partner units outstanding excludes a de-minimis amount of unvested phantom units for the three months ended March 31, 2020.
12. Segments and Related Information
a. 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 industrial, consumer and automotive 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.
During the third quarter of 2019, the CODM changed how the Company assesses performance, allocates resources, and allocates certain costs. In response to those changes, a corporate segment was added. Prior to the third quarter of 2019, various pricing models were used in determining the calculation of inter-segment sales. Beginning in the third quarter of 2019, all inter-segment sales are calculated using market-based transfer pricing. Further, cost allocations were modified to conform to the new segment alignments. This change in management reporting has resulted in an increase in the inter-segment sales reported by the Company’s specialty products operating segment. Prior period amounts have been recast to conform with the current presentation. These changes in management reporting had no impact on consolidated revenue, segment reporting of external sales or consolidated Adjusted EBITDA.
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.

29

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,” of the Company’s 2019 Annual Report on Form 10-K, 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 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.

30

Reportable segment information for the three months ended March 31, 2020 and 2019, is as follows (in millions):
Three Months Ended March 31, 2020
Specialty
Products
 
Fuel
Products
 
Corporate
 
Eliminations
 
Consolidated
Total
Sales:
 
 
 
 
 
 
 
 
 
External customers
$
326.9

 
$
365.7

 
$
—

 
$
—

 
$
692.6

Inter-segment sales
17.4

 
8.0

 
—

 
(25.4
)
 
—

Total sales
$
344.3

 
$
373.7

 
$
—

 
$
(25.4
)
 
$
692.6

Income from unconsolidated affiliates
$
—

 
$
—

 
$
—