Dear Fellow Unitholders,
I am proud to say that in 2019 our Partnership delivered solid financial results, as we executed against our strategic
priorities, improved our operational performance, and drove meaningful margin and free cash flow growth. For the year,
Calumet:
• Generated our highest free cash flow since 2012,
• Significantly expanded our margins in our Specialty Products portfolio,
• Drove strong utilizations, setting numerous records across the portfolio,
• Set personal and process safety records,
• Launched Phase II of our Self-Help program,
• Reduced inventories and completed debottleneck projects at multiple facilities,
• Successfully refinanced our 2021 notes, lowering annual interest payments by over $21 million vs. 2018,
• Significantly lowered our total debt by $391 million,
• Reduced our leverage ratio(2) to 4.0x,
• Completed the divestiture of the San Antonio fuels refinery, and
• Transitioned the CFO position to Keith Jennings, who brings significant specialty chemicals experience.
While I’m proud of the hard work our employees have demonstrated this year, we remain focused on continuing
Calumet’s transition to a more focused specialty-centric business. I am pleased to report that the momentum we generated
in 2019 has positioned us for future long-term growth in our core Specialty Products business, as we work to become the
premier specialty products company in the world.
Fiscal 2019 In Review
On a GAAP basis, the Partnership’s net loss of $43.6 million, or $0.55 per common unit, improved versus a net
loss of $55.1 million or $0.69 per unit in 2018. We delivered $263 million in Adjusted EBITDA(1) between our two operating
segments. In particular, our Specialty Products segment contributed $208 million of Adjusted EBITDA(1), an increase of
24% versus last year, driven by strong sales volume growth across several of our key Specialty Product categories.
Similarly, our Fuels business segment contributed $153 million in Adjusted EBITDA(1), reflecting the positive impact of
improved throughput and capacity utilization across our portfolio. These improvements were offset by a turnaround at our
Shreveport facility and weaker fuels market fundamentals, most notably the WCS/WTI differential, which tightened
meaningfully compared to the year prior.
In the beginning of the year we launched Phase II of our Self-Help program, which has a three-year goal to deliver
an additional $100 million of Adjusted EBITDA(1) by the end of 2021. This program delivered $30 million in incremental
Calumet Specialty Products Partners, L.P. | 2780 Waterfront Pkwy. E. Dr. Indianapolis, IN 46214 | Phone: 317-328-5660 | Fax: 317-328-5668
www.calumetspecialty.com
profitability in 2019, with significant contributions from operational improvements at our Shreveport and San Antonio
refineries. These structural improvements allowed us to recognize increased production capacity, improved margin capture
and lower operating costs. After four years of successfully improving our profitability and cost structure, Self-Help is firmly
embedded within our culture.
2019 was a year of significant improvements on our balance sheet as well, with a number of key successes on
the financing side of our business. First, we reduced our debt by $391 million, primarily through repurchasing our
unsecured notes in the open market. This debt reduction lowered our interest expense by over $21 million during the year.
Our lower debt, combined with multiple years of improving our profitability, allowed our Partnership to de-lever meaningfully
across the year. We exited 2019 with a leverage ratio(2) of 4.0x, which was down from 5.6x at the end of 2018. Next, we
successfully completed the refinancing of the Partnership’s 2021 notes, extending the maturity to 2025. This improved
debt maturity ladder, in conjunction with the overall reduction in leverage, represented significant progress in Calumet’s
ongoing balance sheet improvement goals. Our stronger balance sheet was recognized by ratings agencies and as a
result, Calumet secured multiple credit rating upgrades to both the securities and the corporate family credit rating. These
upgrades allowed our Company to not only obtain improved trade credit terms with our vendors, but also expanded the
capacity on our credit facility.
Last year was an important year in our transformational efforts to grow our core Specialty Products portfolio, and
we achieved a number of improvements that will further facilitate long-term growth in our core business. The
implementation and deployment of our ERP system, and the ongoing rationalization of low-margin products from our
business, has better positioned Calumet’s portfolio to not only grow earnings, but also increase the predictability and
stability of our financial results. That was evident in the 320-basis point improvement we saw in our Adjusted EBITDA(1)
margin, which ended the year at 15.4%. As we move forward, we have set a long-term goals to achieve a $40 per barrel
gross margin and maintain a 15% Adjusted EBITDA(1) margin for our Specialty Products portfolio.
We also continued to move toward our long-term vision to focus on our Specialty Products business through
additional portfolio optimization. This included the strategic divestiture of our San Antonio fuels refinery in November for
$63 million, plus adjustments for net working capital, inventories and post-closing amounts. Then in early 2020, we
launched a formal review of strategic options for our fuels refinery in Great Falls, Montana and separately completed a
small acquisition of Paralogics, LLC, which expands our presence in the wax formulating, blending and packaging market.
Finally, we transitioned our executive management team by adding Keith Jennings as Chief Financial Officer,
which reflects our ongoing transition to becoming the premier company in the specialty products market. In addition to his
years of direct experience in the specialty chemicals business, Keith brings to Calumet deep corporate finance and the
capital markets skillset that will be vital in our growth efforts over the coming years. Lastly, in early 2020 we announced
the promotion of Scott Obermeier to Executive Vice President Commercial, to bring even further focus and leadership to
our high-value, core specialty business. Scott brings over 20 years of experience in sales and marketing as well as general
2
management roles focused on the specialty chemicals market, and I am excited to see him execute against our growth
strategy for the portfolio over the next few years.
2020 Priorities
For those of you that have been part of the fundamental changes the Partnership has undergone over the last few
years, we thank you for the continued support. And for those that have recently gained interest in our story, we welcome
you. We are excited about the future of our Partnership and are fortunate enough to have such a devoted group of
individuals that have continued to help shape and strengthen our business to what it is today. 2020 has brought new
challenges related to the global COVID-19 pandemic, but the hard work we’ve done over the last few years has significantly
enhanced our liquidity position, balance sheet flexibility, and cash flow generation capabilities, all of which have truly built
a stronger Calumet.
In 2020, we will remain focused on strengthening our core Specialty Products portfolio, improving the operational
performance of our manufacturing assets, executing against our self-help goals, and further improving our balance sheet.
While my time with Calumet comes to a close, it’s important to reflect on the journey that Calumet has undergone to
transform itself. With Steve Mawer coming on board as Chief Executive Officer in April of 2020, I can confidently say that
the Company is in good hands and is well poised to achieve its strategic goals. I am very grateful for having the opportunity
to lead this organization for the last four years, and I am incredibly proud of our employees and the accomplishments we
have made. I’d like to thank you, our unitholders, for your continued support and wish all of you a safe and healthy 2020.
Tim Go
Chief Executive Officer
(1) EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, and Pro forma Adjusted EBITDA are non-GAAP financial measures provided in this
presentation. For reconciliations to the nearest GAAP financial measures please see the Partnership’s filings with the Securities and Exchange
Commission ("SEC"), including the latest Annual Report on Form 10-K. These non-GAAP financial measures are not defined by GAAP and
should not be considered in isolation or as an alternative to net income (loss) or other financial measures prepared in accordance with GAAP.
We do not provide reconciliation of non-GAAP financial measures on a forward-looking basis as it is impractical to do so without
unreasonable effort.
(2) Leverage ratio defined as Net Debt to trailing twelve-month Adjusted EBITDA
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☑
☐
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-51734
Calumet Specialty Products Partners, L.P.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
35-1811116
(I.R.S. Employer
Identification Number)
2780 Waterfront Parkway East Drive, Suite 200
Indianapolis, Indiana 46214
(317) 328-5660
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☑ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐ Yes ☑ No
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 ☐ 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 ☐ 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
Non-accelerated filer
☐
☐
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 Act). ☐ Yes ☑ No
The aggregate market value of the common units held by non-affiliates of the registrant was approximately $256.0 million on June 28, 2019, based on $4.19
per unit, the closing price of the common units as reported on the NASDAQ Global Select Market on such date.
On March 4, 2020, there were 77,831,691 common units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
Table of Contents
Items 1 and 2.
Business and Properties
Item 1A.
Item 1B.
Item 3.
Risk Factors
Unresolved Staff Comments
Legal Proceedings
Item 4.
Mine Safety Disclosures
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
FORM 10-K — 2019 ANNUAL REPORT
Table of Contents
PART I
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART II
Market for Registrant’s Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers of Our General Partner and Corporate Governance
Executive and Director Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits
PART IV
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Table of Contents
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual 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,” or other similar words. The statements
regarding (i) estimated capital expenditures as a result of required audits or required operational changes or other environmental and regulatory liabilities, (ii)
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, (iii) 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”), (iv) our ability to meet our financial commitments, debt service obligations, debt instrument
covenants, contingencies and anticipated capital expenditures, (v) 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, (vi) our access to inventory financing under our supply and offtake agreements, (vii) our
ability to remediate the identified material weakness and further strengthen the overall controls surrounding information systems (viii) the future effectiveness
of our enterprise resource planning (“ERP”) system to further enhance operating efficiencies and provide more effective management of our business
operations (ix) potential acquisitions or divestitures, including the possible disposition of the Great Falls refinery or any other asset and (x) potential costs and
savings associated with our cost reduction plan to reduce overall operating expenses, as well as other matters discussed in this Annual Report that are not
purely historical data, are forward-looking statements. These forward-looking statements are based on our current 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 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 Part I, Item 1A “Risk Factors” of this Annual
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 Annual 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 to “Predecessor” in this Annual Report refer to Calumet Lubricants Co., Limited
Partnership and its subsidiaries, the assets and liabilities of which were contributed to Calumet Specialty Products Partners, L.P. and its subsidiaries upon the
completion of our initial public offering in 2006. References in this Annual Report to “our general partner” refer to Calumet GP, LLC, the general partner of
Calumet Specialty Products Partners, L.P.
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Items 1 and 2. (cid:0)
Overview
PART I
We are a leading independent producer of high-quality, specialty hydrocarbon products in North America. We are headquartered in Indianapolis, Indiana,
and own specialty and fuel products facilities primarily located in northwest Louisiana, northern Montana, western Pennsylvania, Texas, New Jersey and
eastern Missouri. We own and lease additional facilities, primarily related to production and distribution of specialty and fuel products, throughout the United
States (“U.S.”). Our business is organized into three segments: our core specialty products segment, fuel products segment and corporate segment. In our
specialty products segment, we process crude oil and other feedstocks into a wide variety of customized lubricating oils, solvents, waxes, synthetic lubricants,
and other products. Our specialty products are sold to domestic and international customers who purchase them primarily as raw material components for
basic industrial, consumer and automotive goods. We also blend and market specialty products through our Royal Purple, Bel-Ray and TruFuel brands. In our
fuel products segment, we process crude oil into a variety of fuel and fuel-related products, including gasoline, diesel, jet fuel, asphalt and other products, and
from time to time resell purchased crude oil to third-party customers. Our corporate segment, which was added during the third quarter of 2019, primarily
consists of general and administrative expenses not allocated to the specialty products or fuel products segments. Please read Note 20 - “Segments and
Related Information” for further information under Part II, Item 8 “Financial Statements and Supplementary Data.” As a result of the sale of Anchor Drilling
Fluids USA, LLC (“Anchor”) in November 2017, we classified its results of operations for all periods presented to reflect Anchor as a discontinued operation
and classified the assets and liabilities of Anchor as discontinued operations. Prior to being reported as discontinued operations, Anchor was included as its
own reportable segment as oilfield services. For the year ended December 31, 2019, approximately 72% of our continuing operations gross profit was
generated from our specialty products segment and approximately 28% of our continuing operations gross profit was generated from our fuel products
segment.
Our Primary Operating Assets
Our primary operating assets consist of:
Refinery/Facility
Location
Year Acquired
Current Feedstock Throughput
Capacity in Barrels Per Day
(“bpd”)
Shreveport
Great Falls
Louisiana
Montana
Cotton Valley
Louisiana
Princeton
Louisiana
Karns City
Pennsylvania
Dickinson
Calumet
Packaging
Texas
Louisiana
Royal Purple
Texas
Bel-Ray
Missouri
New Jersey
Missouri
2001
2012
1995
1990
2008
2008
2012
2012
2013
2012
60,000
30,000
13,600
10,000
3,000
1,300
N/A
N/A
N/A
N/A
Products
Specialty lubricating oils and waxes, gasoline, diesel, jet fuel and
asphalt
Gasoline, diesel, jet fuel and asphalt
Specialty solvents used principally in the manufacture of paints,
cleaners, automotive products and drilling fluids
Specialty
transformer oils and refrigeration oils, and asphalt
lubricating oils,
including process oils, base oils,
Specialty white mineral oils, solvents, petrolatums, gelled
hydrocarbons, cable fillers and natural petroleum sulfonates
Specialty white mineral oils, compressor
petroleum sulfonates and biodiesel
lubricants, natural
Specialty products including premium industrial and consumer
synthetic lubricants, fuels and solvents
Specialty products including premium industrial and consumer
synthetic lubricants
Specialty products including premium industrial and consumer
synthetic lubricants and greases
Specialty products including polyolester-based synthetic lubricants
Storage, Distribution and Logistics Assets. We own and operate a product terminal in Burnham, Illinois (“Burnham”) with aggregate storage capacities of
approximately 150,000 barrels. The Burnham terminal, as well as additional owned and leased facilities throughout the U.S., facilitate the distribution of
products in the Upper Midwest, West Coast and Mid-Continent regions of the U.S. and Canada.
3
%
(cid:0)
X
(cid:0)
V
(cid:0)
L
(cid:0)
Q
(cid:0)
H
(cid:0)
V
(cid:0)
V
(cid:0)
(cid:3)
(cid:0)
D
(cid:0)
Q
(cid:0)
G
(cid:0)
(cid:3)
(cid:0)
3
(cid:0)
U
(cid:0)
R
(cid:0)
S
(cid:0)
H
(cid:0)
U
(cid:0)
W
(cid:0)
L
(cid:0)
H
(cid:0)
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Table of Contents
We also use approximately 2,200 leased railcars to receive crude oil or distribute our products throughout the U.S. and Canada. In total, we have
approximately 7.7 million barrels of aggregate storage capacity at our facilities and leased storage locations.
Business Strategies
Our management team is dedicated to improving our operations by executing the following strategies:
•
Enhance Profitability of Our Existing Assets. We have increased our focus on identifying opportunities to improve our existing asset base and to
increase our throughput, profitability and cash flows. Historical examples include projects designed to maximize the profitability of our acquired
assets, such as the increase of production capacity at our Great Falls refinery from 10,000 bpd to 30,000 bpd, which was completed in 2016, the
expansion of our TruFuel packaging line through the installation of a new filler line dedicated to filling gallon containers completed in 2017; the
conversion of idle aromatic saturation unit to a naphtha isomerization unit at our San Antonio refinery completed in 2018; and debottlenecking of
our Shreveport refinery to increase economically available capacity by 7,000 bpd completed in 2019. We intend to continue increasing the
profitability of our existing asset base through various low capital requirement measures which may include changing the product mix of our
processing units, debottlenecking units as necessary to increase throughput, restarting idle assets and reducing costs by improving operations. We
also are increasing our focus on optimizing current operations through self-help initiatives and organic growth projects including improving
reliability, product quality enhancements, product yield improvements and energy savings initiatives.
• Maintain Sufficient Levels of Liquidity. We are actively focused on maintaining sufficient liquidity to fund our operations and business strategies. As
part of a broader effort to maintain an adequate level of liquidity, the board of directors of our general partner unanimously voted to suspend cash
distributions, effective beginning the quarter ended March 31, 2016.
•
•
•
Concentrate on Stable Cash Flows. We intend to continue to focus on operating assets and businesses that generate stable cash flows. Approximately
72% of our continuing operations gross profit in 2019 were generated by our specialty products, a segment of our business which is characterized by
stable customer relationships due to our customers’ requirements for the specialized products we provide. In addition, we manage our exposure to
crude oil price fluctuations in this segment by passing on incremental feedstock costs to our specialty products customers. In our fuel products
segment, which accounted for approximately 28% of our continuing operations gross profit in 2019. We will sometimes hedge crude oil basis
differentials and fuel product crack spreads with the intent of capturing spreads that are favorable to the Company, while reducing fuel product
margin volatility. In the future, we intend to shift more of our focus to our specialty products business to further reduce our exposure to commodity
price volatility.
Develop and Expand Our Customer Relationships. Due to the specialized nature of, and the long lead-time associated with, the development and
production of many of our specialty products, our customers are incentivized to continue their relationships with us. We believe that our larger
competitors do not work with customers as we do from product design to delivery for smaller volume specialty products like ours. We intend to
continue to assist our existing customers in their efforts to expand their product offerings, as well as marketing specialty product formulations and
services to new customers. By striving to maintain our long-term relationships with our broad base of existing customers and by adding new
customers, we seek to limit our dependence on any one portion of our customer base.
Disciplined Approach to Strategic and Complementary Acquisitions. Our senior management team is focused on acquiring assets where we can
enhance operations and improve profitability and product lines that will complement and expand our specialty product offerings. In the future, we
intend to continue pursuing prudent, accretive acquisitions that will benefit our company over the long term. We intend to continue to reduce our
leverage over time, maintain a capital structure that facilitates access to the capital markets and maintain sufficient liquidity to execute our
acquisition strategy. We also may pursue strategic acquisitions of assets or agreements with third parties that offer the opportunity for operational
efficiencies, the potential for increased utilization and expansion of facilities, or the expansion of product offerings principally in our specialty
products segment.
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Competitive Strengths
We believe that we are well positioned to execute our business strategies successfully based on the following competitive strengths:
• We Offer Our Customers a Diverse Range of Specialty Products. We offer a wide range of over 2,400 specialty products. We believe that our ability
to provide our customers with a more diverse selection of products than most of our competitors gives us an advantage in competing for new
business. We believe that we are the only specialty products manufacturer that produces all four of naphthenic lubricating oils, paraffinic lubricating
oils, waxes and solvents. Our ability to produce numerous specialty products allows us to ship products between our facilities for product upgrading
in order to meet customer specifications.
• We Have Strong Relationships with a Broad Customer Base. We have long-term relationships with many of our customers and we believe that we
will continue to benefit from these relationships. Many of these relationships involve lengthy approval processes or certifications that may make
switching to a different supplier more difficult. In fiscal year 2019, we sold our fuel and specialty products to approximately 2,300 customers and we
are continually seeking new customers. No single customer accounted for more than 10% of our consolidated sales in any of the three years ended
December 31, 2019, 2018 and 2017.
•
Our Facilities Have Advanced Technology. Our facilities are equipped with advanced, flexible technology that allows us to produce high-grade
specialty products and to produce fuel products that comply with low sulfur fuel regulations. For example, our fuel products refineries have the
capability to make ultra-low sulfur diesel and gasoline that meet federally mandated low sulfur standards and the Mobile Source Air Toxic Rule II
standards (“MSAT II Standards”) set by the EPA requiring the reduction of benzene levels in gasoline. Also, unlike larger refineries which lack some
of the equipment necessary to achieve the narrow distillation ranges associated with the production of specialty products, our operations are capable
of producing a wide range of products tailored to our customers’ needs.
• We Have an Experienced Management Team. Our team’s extensive experience and contacts within the refining and specialty chemical industries
provide a strong foundation and focus for managing and enhancing our operations, accessing strategic asset portfolio opportunities and constructing
and enhancing the profitability of new assets.
Potential Acquisition and Divestiture Activities
Consistent with our business growth strategy, we are continuously engaged in discussions with potential sellers regarding the possible purchase of assets
and operations that are strategic and complementary to our existing operations. These acquisition efforts may involve participation by us in processes that
have been made public and involve a number of potential buyers, commonly referred to as “auction” processes, as well as situations in which we believe we
are the only potential buyer or one of a limited number of potential buyers in negotiations with the potential seller. These acquisition efforts often involve
assets and operations which, if acquired, could have a material effect on our financial condition and results of operations and require special financing.
Our acquisition program targets properties that management believes will be financially accretive, and we intend to focus in particular on strategic
acquisitions of specialty products assets that leverage existing core competencies and/or that have an identifiable competitive advantage we can exploit as the
new owner.
As part of our portfolio strategy, we continuously evaluate our portfolio which allows an objective assessment of potential divestiture candidates that are
non-core to our business and/or worth more to a buyer than to us. However in our drive to delever unsolicited offers for core assets that are above our intrinsic
value will be considered. The combination of acquisition and divestment activity intends to maximize our return on invested capital by creating and
maintaining a portfolio of core assets with significant potential to generate more stable and growing cash flows, optimize our assets, improve our operating
efficiency and capture increased feedstock advantages.
As we continue to seek to optimize our asset portfolio, which may include the divestiture of certain non-core assets, we intend to redeploy capital into
projects to develop assets that are better suited to our core specialty products business strategy.
During 2019, 2018 and 2017, we completed the following divestitures:
•
•
In November 2019, we sold the San Antonio, Texas refinery (“San Antonio Refinery”) and related assets, including associated hydrocarbon
inventories and crude oil terminal and pipeline for total consideration of $59.1 million. Please read Note 5 “Divestitures” under Part II, Item 8
“Financial Statements and Supplementary Data” for additional information.
In March 2019, we sold our interest in Biosynthetic Technologies, a startup company which developed an intellectual property portfolio for the
manufacture of renewable-based and biodegradable esters. We received proceeds of $5.0 million for the sale. Please read Note 6 “Investment in
Unconsolidated Affiliates” under Part II, Item 8 “Financial Statements and Supplementary Data” for additional information.
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Table of Contents
•
•
•
In May 2018, Pacific New Investment Limited (“PACNIL”), an entity formed by Calumet and The Heritage Group for the purpose of investing in a
joint venture with Shandong Hi-Speed Hainan Development Co., Ltd. (“Hi-Speed”), sold its equity interest in Hi-Speed to other owners. We
received proceeds of $9.9 million for the sale. Please read Note 6 “Investment in Unconsolidated Affiliates” under Part II, Item 8 “Financial
Statements and Supplementary Data” for additional information.
In November 2017, we sold the Superior, Wisconsin refinery (“Superior Refinery”) and associated inventories, the Superior Refinery’s wholesale
marketing business and related assets, including certain owned and leased product terminals, and certain crude gathering assets and line space in
North Dakota for total consideration of $533.1 million, excluding revenues related to the Transitional Service Agreement. Please read Note 5
“Divestitures” under Part II, Item 8 “Financial Statements and Supplementary Data” for additional information.
In November 2017, we sold Anchor, for initial total consideration of approximately $89.6 million. We have classified the results of operations for
Anchor as discontinued operations for all periods presented. Please read Note 4 “Discontinued Operations” under Part II, Item 8 “Financial
Statements and Supplementary Data” for additional information.
Going forward, we intend to tailor our approach toward owning businesses with stable cash flows and growing end markets. As a result, we may pursue
potential arrangements with third parties to divest certain assets to enable us to further reduce the amount of our required capital commitments and potential
capital expenditures. For example, while we continue to evaluate our entire asset portfolio, we have started the process of evaluating strategic options for our
remaining standalone fuels refinery in Great Falls, Montana, which could occur as early as this year. We expect that any potential divestitures of assets could
provide us with cash to reinvest in our business and repay debt. However, as we develop our strategy with respect to our assets, any changes in our key
assumptions regarding such assets may require us to record an impairment charge.
We typically do not announce a transaction until we have executed a definitive agreement. However, in certain cases in order to protect our business
interests or for other reasons, we may defer public announcement of an acquisition or divestiture until closing or a later date. Past experience has
demonstrated that discussions and negotiations regarding a potential acquisition or divestiture can advance or terminate in a short period of time. Moreover,
the closing of any transaction for which we have entered into a definitive agreement will be subject to customary and other closing conditions, which may not
ultimately be satisfied or waived. Accordingly, we can give no assurance that our current or future acquisition or divestiture efforts will be successful.
Although we expect the acquisitions we make to be accretive in the long term, we can provide no assurance that our expectations will ultimately be realized.
Partnership Structure and Management
Calumet Specialty Products Partners, L.P. is a Delaware limited partnership formed on September 27, 2005. Our general partner is Calumet GP, LLC, a
Delaware limited liability company. As of March 4, 2020, we have 77,831,691 common units and 1,588,401 general partner units outstanding. Our general
partner owns 2% of Calumet Specialty Products, L.P. and all incentive distribution rights and has sole responsibility for conducting our business and
managing our operations. For more information about our general partner’s board of directors and executive officers, please read Part III, Item 10 “Directors,
Executive Officers of Our General Partner and Corporate Governance.”
6
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Our Operating Assets and Contractual Arrangements
The following table sets forth information about our continuing operations. Facility production volume differs from sales volume due to changes in
inventories and the sale of purchased fuel product blendstocks, such as ethanol and biodiesel, and the resale of crude oil in our fuel products segment. The
historical results of operations of the San Antonio Refinery and the Superior Refinery are included through the effective date of the disposition of each,
November 10, 2019 and November 7, 2017, respectively.
Total sales volume (1)
Total feedstock runs (2)
Facility production: (3)
Specialty products:
Lubricating oils
Solvents
Waxes
Packaged and synthetic specialty products (4)
Other
Total specialty products
Fuel products:
Gasoline
Diesel
Jet fuel
Asphalt, heavy fuel oils and other
Total fuel products
Total facility production (3)
Year Ended December 31,
2019
2018
% Change
2018
2017
% Change
(In bpd)
(In bpd)
104,734
103,603
97,104
94,137
7.9 %
10.1 %
97,104
94,137
132,082
128,624
(26.5)%
(26.8)%
11,506
11,931
7,526
1,315
1,540
1,764
7,649
1,279
2,129
2,113
23,651
25,101
22,877
28,709
4,506
20,286
76,378
100,029
20,323
27,367
2,895
19,612
70,197
95,298
(3.6)%
(1.6)%
2.8 %
(27.7)%
(16.5)%
(5.8)%
12.6 %
4.9 %
55.6 %
3.4 %
8.8 %
5.0 %
11,931
14,606
7,649
1,279
2,129
2,113
7,761
1,423
2,206
1,811
25,101
27,807
20,323
27,367
2,895
19,612
70,197
95,298
35,713
33,277
5,368
29,396
103,754
131,561
(18.3)%
(1.4)%
(10.1)%
(3.5)%
16.7 %
(9.7)%
(43.1)%
(17.8)%
(46.1)%
(33.3)%
(32.3)%
(27.6)%
(1) Total sales volume includes sales from the production at our facilities and certain third-party facilities pursuant to supply and/or processing
agreements, sales of inventories and the resale of crude oil to third-party customers. Total sales volume also includes the sale of purchased fuel
product blendstocks, such as ethanol and biodiesel, as components of finished fuel products in our fuel products segment sales.
(2) Total feedstock runs represent the barrels per day of crude oil and other feedstocks processed at our facilities and at certain third-party facilities
pursuant to supply and/or processing agreements.
(3) Total facility production represents the barrels per day of specialty products and fuel products yielded from processing crude oil and other feedstocks
at our facilities and at certain third-party facilities pursuant to supply and/or processing agreements. The difference between total facility production
and total feedstock runs is primarily a result of the time lag between the input of feedstocks and the production of finished products and volume loss.
(4) Represents production of finished lubricants and specialty chemicals products, including the products from our Royal Purple, Bel-Ray and Calumet
Packaging facilities.
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The following table sets forth information about our sales of principal products by segment:
Sales of specialty products:
Lubricating oils
Solvents
Waxes
Packaged and synthetic specialty products (1)
Other (2)
Total
Sales of fuel products:
Gasoline
Diesel
Jet fuel
Asphalt, heavy fuel oils and other (3)
Total
Consolidated sales
2019
2018
2017
(In millions)
% of Sales
(In millions)
% of Sales
(In millions)
% of Sales
Year Ended December 31,
$
$
593.1
325.9
119.3
230.8
85.0
17.2% $
9.4%
3.4%
6.7%
2.5%
600.1
331.9
117.0
256.8
76.6
17.2% $
9.5%
3.3%
7.3%
2.2%
584.2
274.4
117.2
260.7
63.9
1,354.1
39.2%
1,382.4
39.5%
1,300.4
679.6
859.1
134.6
425.2
2,098.5
3,452.6
19.7%
24.9%
3.9%
12.3%
60.8%
100.0% $
683.1
910.0
100.1
421.9
2,115.1
3,497.5
19.5%
26.0%
2.9%
12.1%
60.5%
100.0% $
948.5
877.9
135.0
502.0
2,463.4
3,763.8
15.5%
7.3%
3.1%
6.9%
1.7%
34.5%
25.2%
23.4%
3.6%
13.3%
65.5%
100.0%
(1) Represents finished lubricants and chemicals specialty products at our Royal Purple, Bel-Ray and Calumet Packaging facilities.
(2) Represents (a) by-products, including fuels and asphalt, produced in connection with the production of specialty products at the Princeton and Cotton
Valley refineries and Dickinson and Karns City facilities and (b) polyolester synthetic lubricants produced at the Missouri facility.
(3) Represents asphalt, heavy fuel oils and other products produced in connection with the production of fuels at the Shreveport, San Antonio, Superior
and Great Falls refineries and crude oil sales from the Montana and San Antonio refineries to third-party customers.
Please read Note 20 “Segments and Related Information” in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report for
additional financial information about each of our segments and the geographic areas in which we conduct business.
The Shreveport refinery (“Shreveport”), located on a 240 acre site in Shreveport, Louisiana, currently has aggregate crude oil throughput capacity of
60,000 bpd and processes paraffinic crude oil and associated feedstocks into fuel products, paraffinic lubricating oils, waxes, asphalt and by-products.
The Shreveport refinery consists of seventeen major processing units including hydrotreating, catalytic reforming and dewaxing units and approximately
3.3 million barrels of storage capacity in 130 storage tanks and related loading and unloading facilities and utilities. Since our acquisition of the Shreveport
refinery in 2001, we have expanded the refinery’s capabilities by adding additional processing and blending facilities, adding a second reactor to the high
pressure hydrotreater, resuming production of gasoline, diesel and other fuel products and adding both 18,000 bpd of crude oil throughput capacity and the
capability to run up to 25,000 bpd of sour crude oil with an expansion project completed in May 2008.
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The following table sets forth historical information about production at our Shreveport refinery:
Crude oil throughput capacity
Total feedstock runs (1) (2)
Total refinery production (2) (3)
Shreveport Refinery
Year Ended December 31,
2019
2018
(In bpd)
2017
60,000
41,216
41,704
60,000
34,596
35,771
60,000
37,853
40,741
(1) Total feedstock runs represent the barrels per day of crude oil and other feedstocks processed at our Shreveport refinery. Total feedstock runs do not
include certain interplant feedstocks supplied by our Cotton Valley and Princeton refineries.
(2) Total refinery production represents the barrels per day of specialty products and fuel products yielded from processing crude oil and other
feedstocks. The difference between total refinery production and total feedstock runs is primarily a result of the time lag between the input of
feedstocks and production of finished products and volume loss.
(3) Total refinery production includes certain interplant feedstock supplied to our Cotton Valley and Princeton refineries and Karns City facility.
The Shreveport refinery has a flexible operational configuration and operating personnel that facilitate development of new product opportunities.
Product mix may fluctuate from one period to the next to capture market opportunities. The refinery has an idle residual fluid catalytic cracking unit and a
number of idle towers that can be utilized for future project needs.
The Shreveport refinery receives crude oil via tank truck, railcar and a common carrier pipeline system that is operated by a subsidiary of Plains All
American Pipeline, L.P. (“Plains”) and is connected to the Shreveport refinery’s facilities. The Plains pipeline system delivers local supplies of crude oil and
condensates from north Louisiana and east Texas. The Plains pipeline also connects to a Plains terminal in Longview, TX, which gives the refinery access to
crude oil in west Texas and access to the Cushing, Oklahoma storage hub. Crude oil is also purchased from various suppliers, including local producers, who
deliver crude oil to the Shreveport refinery via tank truck.
The Shreveport refinery also has direct pipeline access to the Enterprise Products Partners L.P. pipeline (“TEPPCO pipeline”), on which it can ship
certain grades of gasoline, diesel and jet fuel. Further, the refinery has direct access to the Red River Terminal facility, which provides the refinery with barge
access, via the Red River, to major feedstock and petroleum products logistics networks on the Mississippi River and Gulf Coast inland waterway system.
The Shreveport refinery also ships its finished products throughout the U.S. through both truck and railcar service.
The Great Falls refinery (“Great Falls”), located on an 86 acre site in Great Falls, Montana, currently has aggregate crude oil throughput capacity of
30,000 bpd and processes light and heavy crude oil from Canada into fuel and asphalt products. In February 2016, we completed an expansion project which
increased permitted capacity to 30,000 bpd of crude throughput.
The Great Falls refinery consists of fifteen major processing units including hydrotreating, catalytic reforming, hydrocracking, fluid catalytic cracking
and alkylation units, approximately 1.1 million barrels of storage capacity in 75 tanks and related loading and unloading facilities and utilities.
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The following table sets forth historical information about production at the Great Falls refinery:
Crude oil throughput capacity
Total feedstock runs (1) (2)
Total refinery production (2)
Great Falls Refinery
Year Ended December 31,
2019
2018
(In bpd)
2017
30,000
25,066
25,690
25,000
24,684
24,781
25,000
24,511
24,948
(1) Total feedstock runs represent the barrels per day of crude oil and other feedstocks processed at our Great Falls refinery.
(2) Total refinery production represents the barrels per day of specialty products and fuel products yielded from processing crude oil and other
feedstocks. The difference between total refinery production and total feedstock runs is primarily a result of the time lag between the input of
feedstocks and the production of finished products and volume loss.
Currently, the Great Falls refinery produces naphtha, gasoline, diesel, jet fuel and asphalt. The Great Falls refinery ships finished fuel and asphalt by
railcar and truck service. Finished fuel and asphalt sales are primarily made through spot agreements and short-term contracts.
The Great Falls refinery purchases crude oil from various suppliers and receives crude oil through the Interprovincial Bow River South and Rangeland
pipeline systems, providing reliable access to high quality crude oil from western Canada.
In February 2016, we completed an expansion project that increased production capacity at our Great Falls refinery to 30,000 bpd. This project allows us
to further capitalize on local access to cost-advantaged Canadian crude oil, while producing additional fuels and refined products for delivery into the regional
market. The scope of this project included the installation of a new crude unit that can process up to 30,000 bpd of crude oil and other feedstocks, a hydrogen
plant and a 18,000 bpd mild hydrocracker.
The Cotton Valley refinery (“Cotton Valley”), located on a 77 acre site in Cotton Valley, Louisiana, currently has aggregate crude oil throughput capacity
of 13,600 bpd, hydrotreating capacity of 6,500 bpd and processes crude oil into specialty solvents and residual fuel oil. The residual fuel oil is an important
feedstock for the production of specialty products at our Shreveport refinery. We believe the Cotton Valley refinery produces the most complete, single-
facility line of paraffinic solvents in the U.S.
The Cotton Valley refinery consists of three major processing units that include a crude unit, a hydrotreater and a fractionation train, approximately
625,000 barrels of storage capacity in 74 storage tanks and related loading and unloading facilities and utilities. Since our acquisition of the Cotton Valley
refinery in 1995, we have expanded the refinery’s capabilities by installing a hydrotreater that removes aromatics, increased the crude unit processing
capability to 13,600 bpd and reconfigured the refinery’s fractionation train to improve product quality, enhance flexibility and lower utility costs.
The following table sets forth historical information about production at our Cotton Valley refinery:
Crude oil throughput capacity
Total feedstock runs (1) (2)
Total refinery production (2) (3)
Cotton Valley Refinery
Year Ended December 31,
2019
2018
(In bpd)
2017
13,600
9,284
6,001
13,500
6,871
5,859
13,500
6,920
6,466
(1) Total feedstock runs do not include certain interplant solvent feedstocks supplied by our Shreveport refinery.
(2) Total refinery production represents the barrels per day of specialty products yielded from processing crude oil and other feedstocks. The difference
between total refinery production and total feedstock runs is primarily a result of the time lag between the input of feedstocks and the production of
finished products and volume loss.
(3) Total refinery production includes certain interplant feedstocks supplied to our Shreveport refinery.
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The Cotton Valley refinery has a flexible operational configuration and operating personnel that facilitate development of new product opportunities.
Product mix may fluctuate from one period to the next to capture market opportunities, which allows us to respond to market changes and customer demands
by modifying the refinery’s product mix. The reconfigured fractionation train also allows the refinery to satisfy demand fluctuations efficiently without large
finished product inventory requirements.
The Cotton Valley refinery receives crude oil via tank truck. The Cotton Valley refinery’s feedstock is primarily low sulfur and paraffinic crude oil
originating from north Louisiana and is purchased from various marketers and gatherers. In addition, the Cotton Valley refinery receives interplant feedstocks
for solvent production from the Shreveport refinery. The Cotton Valley refinery ships finished products by both truck and railcar service.
The Princeton refinery (“Princeton”), located on a 208 acre site in Princeton, Louisiana, currently has aggregate crude oil throughput capacity of
10,000 bpd and processes naphthenic crude oil into lubricating oils and asphalt. In addition, feedstock is made for the Shreveport refinery for further
processing into ultra-low sulfur diesel. The asphalt produced at Princeton may be further processed or blended for coating and roofing product applications at
the Princeton refinery or transported to the Shreveport refinery for further processing into bright stock.
The Princeton refinery consists of seven major processing units, approximately 650,000 barrels of storage capacity in 200 storage tanks and related
loading and unloading facilities and utilities. Since our acquisition of the Princeton refinery in 1990, we have debottlenecked the crude unit to increase
production capacity to 10,000 bpd, increased the hydrotreater’s capacity to 7,000 bpd and upgraded the refinery’s fractionation unit, which has enabled us to
produce higher value specialty products.
The following table sets forth historical information about production at our Princeton refinery:
Crude oil throughput capacity
Total feedstock runs (1)
Total refinery production (1) (2)
Princeton Refinery
Year Ended December 31,
2019
2018
(In bpd)
2017
10,000
6,580
4,259
10,000
6,051
4,950
10,000
6,606
5,396
(1) Total refinery production represents the barrels per day of specialty products yielded from processing crude oil and other feedstocks. The difference
between total refinery production and total feedstock runs is primarily a result of the time lag between the input of feedstocks and the production of
finished products and volume loss.
(2) Total refinery production includes certain interplant feedstocks supplied to our Shreveport refinery.
The Princeton refinery has a hydrotreater and significant fractionation capability enabling the refining of high quality naphthenic lubricating oils at
numerous distillation ranges. The Princeton refinery’s processing capabilities consist of atmospheric and vacuum distillation, hydrotreating, asphalt oxidation
processing and clay/acid treating. In addition, we have the necessary tankage and technology to process our asphalt into higher value product applications
such as coatings, road paving and specialty applications.
The Princeton refinery receives crude oil via tank truck, railcar and the Plains pipeline system. Its crude oil supply primarily originates from east Texas,
south Texas and north Louisiana, purchased directly from third-party suppliers under month-to-month evergreen supply contracts and on the spot market. The
Princeton refinery ships its finished products throughout the U.S. via truck, barge and railcar service.
The Missouri facility (“Missouri”), located on a 22 acre site in Louisiana, Missouri, develops and produces polyolester synthetic lubricants for use in
refrigeration compressors, commercial aviation and polyolester base stocks. In December 2015, we completed a project to double the production capacity of
the facility from 35 million pounds to 75 million pounds per year. The facility has approximately 35,000 barrels of storage capacity in 64 tanks and related
loading and unloading facilities and utilities. The facility receives its fatty acids and alcohol feedstocks and additives by truck and railcar under supply
agreements or spot agreements with various suppliers.
The Missouri facility utilizes the latest batch esterification processes designed to ensure blending accuracy while maintaining production flexibility to
meet customer needs.
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The Calumet Packaging facility (“Calumet Packaging”), located on a 10 acre site in Shreveport, Louisiana, develops, blends and packages high
performance synthetic lubricants, fuels and solvent products for use in industrial, commercial and automotive applications. The Calumet Packaging facility’s
processing capability includes state-of-the-art blending and packaging equipment. The facility has approximately 75,000 barrels of storage capacity and
related loading and unloading facilities. The facility receives its base oil feedstocks and additives by truck under supply agreements or spot agreements with
various suppliers.
The Royal Purple facility (“Royal Purple”), located on a 28 acre site in Porter, Texas, develops, blends and packages high performance synthetic
lubricants and fluid additive products for use in industrial, commercial and automotive applications. The Royal Purple facility’s processing capability includes
10 in-house packaging and production lines. Outsourced packaging services for specific products are also used. The facility has approximately 30,500 barrels
of storage capacity in 91 tanks and related loading and unloading facilities. The facility receives its base oil feedstocks and additives by truck under supply
agreements or spot agreements with various suppliers.
The Bel-Ray facility (“Bel-Ray”), located on a 32 acre site in Wall Township, New Jersey, blends and packages high performance synthetic lubricants
and greases for use primarily in aerospace, automotive, energy, food, marine, military, mining, motorcycle, powersports, steel and textiles applications. The
Bel-Ray facility’s processing capability includes 25 blending tanks and packaging production lines. In addition, the Bel-Ray facility has approximately
13,000 barrels of storage capacity in 63 tanks and related loading and unloading facilities and utilities. The Bel-Ray facility receives its base oil feedstocks
and additives by truck under supply agreements or spot agreements with various suppliers.
The Bel-Ray facility is designed with batch processing technology and is also designed to maximize blending flexibility to meet customer needs. The
packaging operations utilize both in-house packaging equipment and outsourced packaging services for specific products.
The Karns City facility (“Karns City”), located on a 225 acre site in Karns City, Pennsylvania, has aggregate base oil throughput capacity of 3,000 bpd
and processes white mineral oils, solvents, petrolatums, gelled hydrocarbons, cable fillers and natural petroleum sulfonates. The Karns City facility’s
processing capability includes hydrotreating, fractionation, acid treating, filtering, blending and packaging. In addition, the facility has approximately 817,000
barrels of storage capacity in 250 tanks and related loading and unloading facilities and utilities.
The Dickinson facility (“Dickinson”), located on a 28 acre site in Dickinson, Texas, has aggregate base oil throughput capacity of 1,300 bpd and
processes white mineral oils, compressor lubricants and natural petroleum sulfonates. The Dickinson facility’s processing capability includes acid treating,
filtering and blending, approximately 183,000 barrels of storage capacity in 186 tanks and related loading and unloading facilities and utilities.
These facilities each receive their base oil feedstocks by railcar and truck under supply agreements or spot purchases with various suppliers, the most
significant of which is a long-term supply agreement with Phillips 66. Please read “— Our Crude Oil and Feedstock Supply” below for further discussion of
the long-term supply agreement with Phillips 66.
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The following table sets forth the combined historical information about production at our Karns City, Dickinson and certain other facilities:
Feedstock throughput capacity (1)
Total feedstock runs (2) (3)
Total production (3)
Combined Karns City, Dickinson and Other Facilities
Year Ended December 31,
2019
2018
(in bpd)
2017
11,300
5,392
5,510
11,300
5,684
5,749
11,300
5,896
5,932
(1)
(2)
Includes Karns City, Dickinson and certain other facilities.
Includes feedstock runs at our Karns City and Dickinson facilities as well as throughput at certain third-party facilities pursuant to supply and/or
processing agreements and includes certain interplant feedstocks supplied from our Shreveport refinery. For more information regarding our
purchase commitments related to these supply and/or processing agreements, please read Part II, Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Contractual Obligations and Commitments.”
(3) Total production represents the barrels per day of specialty products yielded from processing feedstocks at our Karns City and Dickinson facilities
and certain third-party facilities pursuant to supply and/or processing agreements. The difference between total production and total feedstock runs is
primarily a result of the time lag between the input of feedstocks and the production of finished products.
Terminals are complementary to our refineries and play a key role in moving our products to end-user markets by providing services including
distribution and blending to achieve specified products and storage and inventory management. In addition to the below terminal, we own and lease additional
facilities, primarily related to distribution of finished products, throughout the U.S. We operate the following terminal:
Burnham Terminal: We own and operate a terminal located on an 11 acre site, in Burnham, Illinois. The Burnham terminal receives specialty products
from certain of our refineries primarily by railcar and distributes them by truck and railcar to our customers in the Upper Midwest and East Coast regions of
the U.S. and in Canada. The terminal includes a tank farm with 90 tanks having aggregate storage capacity of approximately 150,000 barrels, supplying lube
base oils, food grade white oils and aliphatic solvents, as well as viscosity index additives and tackifiers.
We use approximately 2,200 railcars leased from various lessors. This fleet of railcars enables us to receive and ship crude oil and distribute various
specialty products and fuel products throughout the U.S. and Canada to and from each of our facilities.
Our Crude Oil and Feedstock Supply
We purchase crude oil and other feedstocks from major oil companies as well as from various crude oil gatherers and marketers in Texas, north Louisiana
and Canada. Crude oil supplies at our refineries are as follows:
Refinery
Shreveport
Cotton Valley
Great Falls
Princeton
West Texas Intermediate (“WTI”), local crude oils from East Texas, North Louisiana,
Arkansas and Light Louisiana Sweet (“LLS”)
Crude Oil Slate
Local paraffinic crude oil
Canadian Heavy (e.g. Bow River) and Canadian Light Sour
Local naphthenic crude oil
Mode of Transportation
Tank truck, railcar and Plains Pipeline
Tank truck
Front Range Pipeline
Tank truck, railcar and Plains Pipeline
In 2019, subsidiaries of Plains supplied us with approximately 56.3% of our total crude oil supply under term contracts and month-to-month evergreen
crude oil supply contracts. In 2019, BP Products North America Inc. (“BP”) supplied us with approximately 5.9% of our total crude oil supply under a crude
oil supply agreement. Each of our refineries is dependent on one or more key suppliers and the loss of any of these suppliers would adversely affect our
financial results to the extent we were unable to find another supplier of this substantial amount of crude oil.
We have short-term and long-term contracts with our crude oil suppliers. For example, a majority of our crude oil supply contracts with Plains are
currently month-to-month and terminable upon 90 days’ notice. Additionally, our crude oil supply agreement with BP was amended and restated in December
2016 for a term ending March 2020, which is expected to be extended
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to March 2021 and automatically renews for successive one-year terms unless terminated by either party upon 90 days’ notice (“BP Purchase Agreement”).
We also purchase foreign crude oil when its spot market price is attractive relative to the price of crude oil from domestic sources.
We have various long-term feedstock supply agreements with Phillips 66, with some agreements operating under the option to continue on a month-to-
month basis thereafter, for feedstocks that are key to the operations of our Karns City and Dickinson facilities. In addition, certain products of our refineries
can be used as feedstocks by these facilities.
We believe that adequate supplies of crude oil and feedstocks will continue to be available to us.
Our cost to acquire crude oil and feedstocks and the prices for which we ultimately can sell refined products depend on a number of factors beyond our
control, including regional and global supply of and demand for crude oil, other feedstocks and specialty and fuel products. These, in turn, are dependent
upon, among other things, the availability of imports, overall economic conditions, production levels of domestic and foreign suppliers, U.S. relationships
with foreign governments, political affairs and the extent of governmental regulation. We have historically been able to pass on the costs associated with
increased crude oil and feedstock prices to our specialty products customers, although the increase in selling prices for specialty products typically lags the
rising cost of crude oil. From time to time, we use a hedging program to manage a portion of our commodity price risk. Please read Part II, Item 7A
“Quantitative and Qualitative Disclosures About Market Risk — Commodity Price Risk — Derivative Instruments” for a discussion of our hedging program.
Our Products, Markets and Customers
We produce a full line of specialty products, including lubricating oils, solvents, waxes, packaged and synthetic specialty products and other products, as
well as a variety of fuel and fuel related products, including asphalt and heavy fuel oils. Our customers purchase specialty products primarily as raw material
components for basic industrial, consumer and automotive goods.
The following table depicts a representative sample of the diversity of end-use applications for the products we produce:
Representative Sample of End-Use Applications by Product (1)
Lubricating Oils
17%
Solvents
10%
Waxes
3%
Packaged and Synthetic Specialty
Products
7%
Other
2%
• Waterless hand cleaners
• Alkyd resin diluents
• Automotive products
• Calibration fluids
• Charcoal lighter fluids
• Chemical processing
• Drilling fluids
• Printing inks
• Water treatment
• Paint and coatings
• Stains
• Paraffin waxes
• FDA compliant products
• Candles
• Adhesives
• Crayons
• Floor care
• PVC
• Paint strippers
• Skin & hair care
• Timber treatment
• Waterproofing
• Pharmaceuticals
• Cosmetics
•
Hydraulic oils
•
Passenger car motor oils
•
Railroad engine oils
Cutting oils
•
Compressor oils
•
•
Metalworking fluids
•
Transformer oils
•
Rubber process oils
•
Industrial lubricants
•
Gear oils
Grease
•
Automatic transmission fluid
•
•
Animal feed dedusting
•
Baby oils
•
Bakery pan oils
•
Catalyst carriers
•
Gelatin capsule lubricants
Sunscreen
•
• Roofing
• Paving
• Refrigeration
compressor oils
• Positive displacement
and roto-dynamic
compressor oils
• Refrigeration compressor oils
• Positive displacement and roto-
dynamic compressor oils
• Commercial and military jet
engine oil
• Lubricating greases
• Gear oils
• Aviation hydraulic oils
• High performance small engine
fuels
• Two cycle and four stroke engine
oils
• High performance automotive
engine oils
• High performance industrial
lubricants
• High temperature chain lubricants
• Food contact grade lubricants
• Charcoal lighter fluids and other
solvents
• Engine treatment additives
Fuels & Fuel Related
Products
61%
• Gasoline
• Diesel
• Jet fuel
• Marine fuel
• Biodiesel
• Ethanol
• Ethanol free fuels
• Fluid catalytic cracking
feedstock
• Asphalt vacuum residuals
• Mixed butanes
• Roofing
• Paving
• Heavy fuel oils
(1) Based on the percentage of total sales for the year ended December 31, 2019. Except for the listed fuel products and certain packaged and synthetic
specialty products, we do not produce any of these end-use products.
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Our salespeople regularly visit customers, and our marketing department works closely with both the laboratories at our production facilities and our
technical services department to help create specialized blends that will work optimally for our customers.
Specialty Products. The specialty products market represents a small portion of the overall petroleum refining industry in the U.S. Of the nearly 130
refineries currently in operation in the U.S., only a small number of the refineries are considered specialty products producers and only a few compete with us
in terms of the number of products produced.
Our specialty products are utilized in applications across a broad range of industries, including:
•
•
•
industrial goods such as metalworking fluids, belts, hoses, sealing systems, batteries, hot melt adhesives, pressure sensitive tapes, electrical
transformers, refrigeration compressors and drilling fluids;
consumer goods such as candles, petroleum jelly, creams, tonics, lotions, coating on paper cups, chewing gum base, automotive aftermarket car-care
products (e.g., fuel injection cleaners, tire shines and polishes), paints and coatings, charcoal lighter fluids and various aerosol products; and
automotive goods such as motor oils, greases, transmission fluid and tires.
We have the capability to ship our specialty products worldwide. In the U.S., we ship our specialty products via railcars, trucks and barges. We use our
fleet of leased railcars to ship our specialty products and a majority of our specialty products sales are shipped in trucks owned and operated by several
different third-party carriers. For international shipments, which accounted for less than 10% of our consolidated sales in 2019, we ship via railcars and trucks
to several ports where the product is loaded onto vessels for shipment to customers abroad.
Fuel Products. The fuel products market represents a large portion of the overall petroleum refining industry in the U.S. Of the nearly 130 refineries
currently in operation in the U.S., a large number of the refineries are fuel products producers; however, only a few compete with us in our local markets.
Gulf Coast Market (PADD 3)
Fuel products produced at our Shreveport refinery can be sold locally or to the Midwest region of the U.S. through the TEPPCO pipeline. Local sales are
made from the TEPPCO terminal in Bossier City, Louisiana, located approximately 15 miles from the Shreveport refinery, as well as from our own
Shreveport refinery terminal.
Gasoline, diesel and jet fuel from the Shreveport refinery are sold primarily into the Louisiana, Texas and Arkansas markets, and any excess volumes are
sold to marketers further up the TEPPCO pipeline. Should the appropriate market conditions arise, we have the capability to redirect and sell additional
volumes into the Louisiana, Texas and Arkansas markets rather than transport them to the Midwest region via the TEPPCO pipeline.
The Shreveport refinery has the capacity to produce about 9,000 bpd of commercial jet fuel that can be marketed to the U.S. Department of Defense, sold
as Jet-A locally or sold via the TEPPCO pipeline, or occasionally transferred to the Cotton Valley refinery to be processed further as a feedstock to produce
solvents.
Additionally, we produce a number of fuel-related products including fluid catalytic cracking (“FCC”) feedstock, vacuum residuals and mixed butanes.
FCC feedstock is sold to other refiners as a feedstock for their FCC units to make fuel products. Vacuum residuals are blended or processed further to make
asphalt products. Volumes of vacuum residuals which we cannot process are sold locally into the fuel oil market or sold via railcar to other refiners. Mixed
butanes are primarily available in the summer months and are primarily sold to local marketers. If the mixed butanes are not sold, they are blended into our
gasoline production.
Northwest Market (PADD 4)
Fuel products produced at our Great Falls refinery can be sold locally and in Missouri, Oklahoma, Texas, Arizona, North Dakota, South Dakota, Idaho,
Oregon, Utah, Wyoming, Nevada, California and Canada. Seasonally, the Great Falls refinery transports fuel products to terminals in Washington and Utah.
Specialty Products. We have a diverse customer base for our specialty products. In fiscal year 2019, we sold our specialty products to approximately
2,300 customers. Many of our customers are long-term customers who use our products in specialty applications, after an approval process ranging from six
months to two years. No single customer in our specialty products segment accounted for 10% or greater of consolidated sales in any of the three years ended
December 31, 2019, 2018 and 2017.
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Fuel Products. We have a diverse customer base for our fuel products. In fiscal year 2019, we sold our fuel products to approximately 300 customers.
Our diverse customer base includes wholesale distributors and retail chains. We are able to sell the majority of the fuel products we produce at the Shreveport
refinery to the local markets of Louisiana, Texas and Arkansas. We also have the ability to ship additional fuel products from the Shreveport refinery to the
Midwest region through the TEPPCO pipeline should the need arise. The majority of our fuel products produced at our Great Falls refinery are sold to local
markets in Montana and Idaho as well as in Canada. No single customer in our fuel products segment represented 10% or greater of consolidated sales in any
of the three years ended December 31, 2019, 2018 and 2017.
Competition
Competition in our markets is from a combination of large, integrated petroleum companies, independent refiners and wax production companies. Many
of our competitors are substantially larger than us and are engaged on a national or international basis in many segments of the petroleum products business,
including exploration and production, refining, transportation and marketing. These competitors may have greater flexibility in responding to or absorbing
market changes occurring in one or more of these business segments. We distinguish our competitors according to the products that they produce. Set forth
below is a description of our significant competitors according to product category.
Naphthenic Lubricating Oils. Our primary competitors in producing naphthenic lubricating oils include Ergon Refining, Inc., Cross Oil Refining and
Marketing, Inc., San Joaquin Refining Co., Inc. and Martin Midstream Partners L.P.
Paraffinic Lubricating Oils. Our primary competitors in producing paraffinic lubricating oils include Exxon Mobil Corporation, Motiva Enterprises,
LLC, Phillips 66, Petro-Canada, HollyFrontier Corporation, Chevron Corporation, Sonneborn Refined Products and Royal Dutch Shell plc.
Paraffin Waxes. Our primary competitors in producing paraffin waxes include Exxon Mobil Corporation, HollyFrontier Corporation, The International
Group Inc. and Sonneborn Refined Products.
Solvents. Our primary competitors in producing solvents include CITGO Petroleum Corporation, ExxonMobil Chemical Company, Phillips 66, Total
S.A. and Royal Dutch Shell plc.
Polyolester-Based Specialty Products. Our primary competitors in producing polyolester-based specialty products include LANXESS, ExxonMobil
Corporation, BASF Corporation, Croda International plc, Nyco Products Corporation and Zschimmer & Schwartz, Inc.
Packaged and Synthetic Specialty Products. Our primary competitors in retail and commercial packaged and synthetic specialty products include Exxon
Mobil Corporation (Mobil 1), Valvoline, Inc. and other independent lubricant manufacturers. Our primary competitors in industrial packaged and synthetic
specialty products include Exxon Mobil Corporation, Royal Dutch Shell plc, Fuchs and other independent lubricant manufacturers.
Fuel Products and By-Products. Our primary competitors in producing fuel products in the local markets in which we operate include Delek US
Holdings, Flint Hills Resources, Marathon Petroleum Corporation (including Andeavor before its merger with Marathon), Exxon Mobil Corporation, Valero
Energy Corporation, Phillips 66 and Cenex.
Our ability to compete effectively depends on our responsiveness to customer needs and our ability to maintain competitive prices and product and
service offerings. We believe that our flexibility and customer responsiveness differentiates us from many of our larger competitors. However, it is possible
that new or existing competitors could enter the markets in which we operate, which could negatively affect our financial performance.
Governmental Regulation
From time to time, we are a party to certain claims and litigation incidental to our business, including claims made by various taxation and regulatory
authorities, such as the Internal Revenue Service (“IRS”), 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 our business. In addition, we have
property, business interruption, general liability and various other insurance policies that may result in certain losses or expenditures being reimbursed to us.
Environmental and Occupational Health and Safety Matters
We conduct crude oil and specialty hydrocarbon refining, blending and terminal operations, which activities are subject to stringent federal, regional,
state and local laws and regulations governing worker health and safety, the discharge of materials into the environment and environmental protection. These
laws and regulations impose legal standards and obligations that are applicable to our operations, such as requiring the acquisition of permits to conduct
regulated activities, restricting the manner in which we may release materials into the environment, requiring remedial activities to mitigate pollution from
former or current operations that may include incurring capital expenditures to limit or prevent unauthorized releases from our equipment and facilities,
requiring
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the application of specific health and safety criteria addressing worker protection and imposing substantial liabilities for pollution resulting from our
operations. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil and criminal penalties;
the imposition of investigatory, remedial or corrective action obligations or the incurrence of capital expenditures; the occurrence of restrictions, delays or
cancellations in the permitting, development or expansion of projects; and the issuance of injunctive relief limiting or prohibiting our activities in a particular
area. 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 disposed of or released. In addition, new laws and regulations, amendment of existing laws and regulations,
reinterpretation of legal requirements, increased governmental enforcement or other developments could significantly increase our operational or compliance
expenditures, as discussed below in more detail.
Remediation of subsurface contamination continues at certain of our refinery sites and is being overseen by the appropriate state agencies. Based on
current investigative and remedial activities, we believe that the cost to control or remediate the soil and groundwater contamination at these refineries will
not have a material adverse effect on our financial condition. However, such costs are often unpredictable and, therefore, there can be no assurance that the
future costs of these remedial projects will not become material.
Great Falls Refinery
In connection with the acquisition of the Great Falls refinery from Connacher Oil and Gas Limited (“Connacher”), we became a party to an existing 2002
Refinery Initiative Consent Decree (the “Great Falls Consent Decree”) with the EPA and the Montana Department of Environmental Quality (the “MDEQ”).
The material obligations imposed by the Great Falls Consent Decree have been completed. On September 27, 2012, Montana Refining Company, Inc.,
received a final Corrective Action Order on Consent, replacing the refinery’s previously held hazardous waste permit. This Corrective Action Order on
Consent governs the investigation and remediation of contamination at the Great Falls refinery. We believe the majority of damages related to such
contamination at the Great Falls refinery are covered by a contractual indemnity provided by a subsidiary of HollyFrontier Corporation (“the Seller”), the
owner and operator of the Great Falls refinery prior to its acquisition by Connacher, under an asset purchase agreement between the Seller and Connacher,
pursuant to which Connacher acquired the Great Falls refinery. Under this asset purchase agreement, the Seller agreed to indemnify Connacher and Montana
Refining Company, Inc., subject to timely notification, certain conditions and certain monetary baskets and caps, for environmental conditions arising under
the Seller’s ownership and operation of the Great Falls refinery and existing as of the date of sale to Connacher. During 2014, HollyFrontier Corporation
(“Holly”) provided us a notice challenging our position that the Seller is obligated to indemnify our remediation expenses for environmental conditions to the
extent arising under Holly’s ownership and operation of the refinery and existing as of the date of sale to Connacher. On September 22, 2015, we initiated a
lawsuit against Holly and the Sellers. On November 24, 2015, Holly and the Sellers filed a motion to dismiss the case pending arbitration. On February 10,
2016, the court ordered that all of the claims be addressed in arbitration. The arbitration panel conducted the first phase of the arbitration in July 2018 and
issued its ruling on September 13, 2018. In its ruling, the arbitration panel confirmed that the sellers of the Great Falls refinery retained the liability for all
pre-closing contamination with respect to third-party claims indefinitely and with respect to first party claims for which the sellers received notice within five
years after the sale of the refinery, which claims are subject to the requirements otherwise set forth in the asset purchase agreement. The second phase of the
arbitration regarding damages began in April 2019. The arbitration panel issued its final ruling on August 25, 2019. Among other things, the panel denied the
Company’s demands for reimbursement for costs already incurred by the Company but left open the Company’s ability to make future claims. The Company
expects that it may incur costs to remediate other environmental conditions at the Great Falls refinery. The Company currently believes that these other costs
it may incur will not be material to its financial position or results of operations.
Cotton Valley, Princeton and Shreveport Refineries
Since 2013, the Louisiana Department of Environmental Quality (the “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 various orders and has submitted a consolidated proposal to the LDEQ in December 2018 to resolve all of the applicable matters and it is
likely a resolution of this matter will result in a penalty in excess of $0.1 million. The company is awaiting a response from LDEQ on the Company’s
proposal. The company expects that the amount of the penalty will not be material to its financial position or results of operations and any conditions
established by the LDEQ on the Company’s operations will not be material to the Company’s operations.
Our operations are subject to the federal Clean Air Act, as amended (“CAA”), and comparable state and local laws. Amendments made to the CCA in
1990 require most industrial operations in the U.S. to incur capital expenditures to meet the air emission control standards that are developed and
implemented by the EPA and state environmental agencies. Under the CAA, facilities that emit regulated air pollutants are subject to stringent regulations,
including requirements to install various levels of control technology on sources of pollutants. In addition, in recent years, the petroleum refining sector has
become subject to stringent federal regulations that impose maximum achievable control technology (“MACT”) on refinery equipment emitting certain listed
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hazardous air pollutants. Some of our facilities have been included within the categories of sources regulated by MACT rules. Our refining and terminal
operations that emit regulated air pollutants are also subject to air emissions permitting requirements that incorporate stringent control technology
requirements for which we may incur significant capital expenditures. Any renewal of those air emissions permits or a need to modify existing or obtain new
air emissions permits has the potential to delay the development of our projects. We can provide no assurance that future compliance with existing or any new
laws, regulations or permit requirements will not have a material adverse effect on our business, financial position or results of operations. For example, in
2015, the EPA issued a final rule under the CAA lowering the National Ambient Air Quality Standard (“NAAQS”) for ground-level ozone to 70 parts per
billion under both the primary and secondary standards to provide requisite protection of public health and welfare, respectively. Since that time, the EPA has
issued area designations with respect to ground-level ozone and final requirements that apply to state, local and tribal air agencies for implementing the 2015
NAAQS for ground-level ozone. States are expected to implement more stringent requirements as a result of this new final rule, which could apply to our
operations. Also, in 2015, the EPA published a final rule that amended three refinery standards already in effect, imposing additional or, in some cases, new
emission control requirements on subject refineries. The final rule requires, among other things, the monitoring of air concentrations of benzene around the
refinery fence line perimeter and submittal of the fence line monitoring data to the EPA on a quarterly basis; upgraded emissions controls for storage tanks,
including controls for smaller capacity storage vessels and storage vessels storing materials with lower vapor pressures than previously regulated; enhanced
performance requirements for flares including the use of a minimum of three pollution prevention measures, continuous monitoring of flares and pressure
release devices and analysis and remedy of flare release events; and compliance with emissions standards for delayed coking units. These final rules and any
other future air emissions rulemakings could impact us by requiring installation of new emission controls on some of our equipment, resulting in longer
permitting timelines, and significantly increasing our capital expenditures and operating costs, which could adversely impact our business.
From time to time the CAA authorizes the EPA to require modifications in the formulation of the refined transportation fuel products we manufacture in
order to limit the emissions associated with the fuel product’s final use. For example, in February 2000, the EPA published regulations limiting the sulfur
content allowed in gasoline. These regulations, referred to as “Tier 2 Standards,” required the phase-in of gasoline sulfur standards beginning in 2004, with
special provisions for small refiners and for refiners serving those western U.S. states exhibiting lesser air quality problems. Similarly, the EPA published
regulations that limit the sulfur content of highway diesel beginning in 2006 from its former level of 500 parts per million (“ppm”) to 15 ppm (the “ultra-low
sulfur standard”). Our Shreveport and Great Falls refineries have implemented the sulfur standard with respect to produced gasoline and produced diesel
meeting the ultra-low sulfur standard. In 2014, the EPA published more stringent sulfur standards, referred to as “Tier 3 Standards,” including requiring that
motor gasoline will not contain more than 10 ppm of sulfur on an annual average basis by January 1, 2017, except in those instances where refineries receive
a “small refinery” exemption, in which event the deadline is extended to January 1, 2020. Our Shreveport and Great Falls refineries are fully compliant with
the 10 ppm sulfur standard with respect to produced gasoline. In addition, we are required to meet the MSAT II Standards adopted by the EPA to reduce the
benzene content of motor gasoline produced at our facilities and have completed capital projects at our Shreveport and Great Falls refineries to comply with
those fuel quality requirements.
The EPA has issued RFS mandates, requiring refiners such as us to blend renewable fuels into the petroleum fuels they produce and sell in the United
States. We, and other refiners subject to RFS, may meet the RFS requirements by blending the necessary volumes of renewable transportation fuels produced
by us or purchased from third parties. To the extent that refiners will not or cannot blend renewable fuels into the products they produce in the quantities
required to satisfy their obligations under the RFS program, those refiners must purchase renewable credits, referred to as RINs, to maintain compliance. To
the extent that we exceed the minimum volumetric requirements for blending of renewable transportation fuels, we generate our own RINs for which we have
the option of retaining the RINs for current or future RFS compliance or selling those RINs on the open market. It is possible we could find ourselves unable
to blend sufficient quantities of ethanol and biodiesel to meet our requirements and would, therefore, have to purchase an increasing number of RINs. It is not
possible at this time to predict with certainty what those volumes or costs may be. Existing laws and regulations could change, and the minimum volumes of
renewable fuels that must be blended with refined petroleum fuels may increase. For more information on the RFS program, our participation in the program
and risks associated with the program, see the following Risk Factor under Part I, Item 1A of this Form 10-K: “Renewable transportation fuels mandates may
reduce demand for the petroleum fuels we produce, which could have a material adverse effect on our results of operations and financial condition and our
ability to make distributions to our unitholders.”
Climate change continues to attract considerable public, governmental and scientific attention in the U.S. and foreign countries. As a result, numerous
proposals have been made and are likely to continue to be made at the international, national, regional and state levels of government to monitor and limit
emissions of greenhouse gases (“GHG”) as well as to eliminate such future emissions. Consequently our operations as well as the operations of our fossil-fuel
producing customers are subject to a series of regulatory, political, litigation and financial risks associated with the production and processing of fossil fuels
and emissions of GHGs.
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At the federal level, no comprehensive climate change legislation has been implemented to date. However, the EPA has determined that GHG emissions
present a danger to public health and the environment and has adopted regulations under existing provisions of the federal CAA that, among other things,
establish Prevention of Significant Deterioration (“PSD”) construction and Title V operating permit program requiring reviews for GHG emissions from
certain large stationary sources that are also potential major sources of criteria pollutant emissions, require the monitoring and annual reporting of GHG
emissions from certain petroleum and natural gas system sources, implement CAA emission performance standards directing the reduction of methane from
certain new, modified or reconstructed facilities in the oil and natural gas sector, and together with the U.S. Department of Transportation (“DOT”),
implement GHG emissions limits on vehicles manufactured for operation in the United States. Additionally, various states and groups of states have adopted
or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas as GHG cap and trade programs, carbon taxes,
reporting and tracking programs, and restriction of emissions. At the international level, there exists the United Nations-sponsored “Paris Agreement,” which
is a non-binding agreement for nations to limit their GHG emissions through individually-determined reduction goals every five years after 2020, although
the United States has announced its withdrawal from such agreement, effective November 4, 2020.
Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in federal political risks in the
United States in the form of pledges made by certain candidates seeking the office of the President of the United States in 2020. Critical declarations made by
one or more presidential candidates include proposals to ban hydraulic fracturing of oil and natural gas wells and ban new leases for production of minerals
on federal properties, including onshore lands and offshore waters. Other actions to oil and natural gas production activities that could be pursued by
presidential candidates may include more restrictive requirements for the establishment of pipeline infrastructure or the permitting of liquified natural gas
export facilities, as well as the rescission of the United States’ withdrawal from the Paris Agreement in November 2020. Litigation risks are also increasing,
as a number of cities, local governments and other plaintiffs have sought to bring suit against the largest oil and natural gas exploration and production
companies in state or federal court, alleging, among other things, that such companies created public nuisances by producing fuels that contributed to global
warming effects, such as rising sea levels, and therefore are responsible for roadway and infrastructure damages as a result, or alleging that the companies
have been aware of the adverse effects of climate change for some time but defrauded their investors by failing to adequately disclose those impacts.
There are also increasing financial risks for fossil fuel producers as stockholders and bondholders currently invested in fossil-fuel energy companies
concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-fossil fuel energy related
sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices and
some of them may elect not to provide funding for fossil fuel energy companies. Additionally, the lending and investment practices of institutional lenders
have been the subject of intensive lobbying efforts in recent years, oftentimes public in nature, by environmental activists, proponents of the international
Paris Agreement, and foreign citizenry concerned about climate change not to provide funding for fossil fuel producers. Limitation of investments in and
financings for fossil fuel energy companies could result in the restriction, delay or cancellation of drilling programs or development or production activities.
The adoption of any international, federal, regional or state legislation or regulations or other regulatory initiatives that impose more stringent standards
for GHG emissions from the oil and natural gas sector or otherwise restrict the area in which this sector may produce oil and natural gas or generate GHG
emissions could require us to incur increased compliance costs or costs of consuming fossil fuels. Such legislation or regulations could, consequently, reduce
demand for, oil and natural gas, which could reduce demand for our products and services. Additionally, political, financial and litigation risks may result in
our oil and natural gas customers restricting or canceling production activities, incurring liability for infrastructure damages as a result of climatic changes, or
impairing the ability to continue to operate in an economic manner, which also could reduce demand for our products and services. The occurrence of one or
more of these developments could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
It should be noted that some scientists have concluded that increasing concentrations of GHG in the earth’s atmosphere may produce climate changes that
have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events; if any such effects were to occur, they
could have an adverse effect on our operations.
The Comprehensive Environmental Response, Compensation and Liability Act, as amended (“CERCLA”), also known as the “Superfund” law, and
comparable state laws impose liability without regard to fault or the legality of the original conduct, on certain classes of persons who are considered to be
responsible for the release of a hazardous substance into the environment. Such classes of persons include the current and past owners and operators of sites
where a hazardous substance was released and companies that disposed or arranged for disposal of hazardous substances at offsite locations, such as landfills.
Under CERCLA, these “responsible persons” may be subject to joint and several, strict liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources, and for the costs of certain health studies. It is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances into the
environment. In the course of our operations, we generate wastes or handle
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substances that may be regulated as hazardous substances, and we could become subject to liability under CERCLA and comparable state laws.
We also may incur liability under the Resource Conservation and Recovery Act, as amended (“RCRA”), and comparable state laws, which impose
requirements related to the handling, storage, treatment and disposal of hazardous and non-hazardous wastes. In the course of our operations, we generate
petroleum product wastes and ordinary industrial wastes that may be regulated as hazardous wastes. In addition, our operations also generate non-hazardous
solid wastes, which are regulated under RCRA and state laws. Historically, our environmental compliance costs under the existing requirements of RCRA and
similar state and local laws have not had a material adverse effect on our results of operations, and the cost involved in complying with these requirements is
not material.
We currently own or operate, and have in the past owned or operated, properties that for many years have been used for refining and terminal activities.
These properties have in the past been operated by third parties whose treatment and disposal or release of petroleum hydrocarbons and wastes were not under
our control. Although we used operating and disposal practices that were standard in the industry at the time, petroleum hydrocarbons or wastes have been
released on or under the properties owned or operated by us. These properties and the materials disposed or released on them may be subject to CERCLA,
RCRA and analogous state laws. Under such laws, we could be required to remove or remediate previously disposed wastes or property contamination or to
perform remedial activities to prevent future contamination.
In addition, new laws and regulations, amendment of existing laws and regulations, reinterpretation of legal requirements, increased governmental
enforcement or other developments could significantly increase our operational or compliance expenditures.
The Federal Water Pollution Control Act of 1972, as amended, also known as the federal Clean Water Act, and analogous state laws impose restrictions
and stringent controls on the discharge of pollutants, including oil, into regulated waters. Such discharges are prohibited, except in accordance with the terms
of a permit issued by the EPA or the appropriate state agencies. Any unpermitted release of pollutants, including crude oil or hydrocarbon specialty oils as
well as refined products, could result in penalties, as well as significant remedial obligations. Spill prevention, control, and countermeasure requirements of
federal laws require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum
hydrocarbon tank spill, rupture, or leak. In 2017, the EPA issued a questionnaire soliciting data from nine petroleum refining companies related to their
wastewater characteristics. The request pertains to the types of processing units, wastewater treatment technologies, and related information. It is our
understanding that the EPA is expected to use the data collected in this request to evaluate water use, wastewater generation, pollution prevention, and
wastewater management, treatment, and disposal. Historically, our environmental compliance costs under the existing requirements of the federal Clean Water
Act and similar state laws have not had a material adverse effect on our results of operations but these laws and their implementing regulations are subject to
change and there can be no assurance that such future costs will not be material.
The primary federal law for oil spill liability is the Oil Pollution Act of 1990, as amended (“OPA”), which addresses three principal areas of oil
pollution — prevention, containment and cleanup. The OPA applies to vessels, offshore facilities and onshore facilities, including refineries, terminals and
associated facilities that may affect waters of the U.S. Under the OPA, responsible parties, including owners and operators of onshore facilities, may be
subject to oil cleanup costs and natural resource damages as well as a variety of public and private damages from oil spills. Historically, our past
environmental compliance costs under the existing requirements of the OPA have not had a material adverse effect on our results of operations but this law
and its implementing regulations are subject to change and there can be no assurance that such future costs will not be material.
We are 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 CERCLA and similar state statutes require that we
maintain information about hazardous materials used or produced in our operations and provide this information to employees, contractors, state and local
government authorities and customers. We maintain safety and training programs as part of our ongoing efforts to ensure compliance with applicable laws and
regulations. We conduct periodic audits of Process Safety Management (“PSM”) systems at each of our locations subject to the PSM standard. Our
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.
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We perform preventive and normal maintenance on most, if not all, of our refining and terminal assets and make repairs and replacements when
necessary or appropriate. We also conduct inspections of these assets as required by law or regulation.
Insurance
Our operations are subject to certain hazards of operations, including fire, explosion and weather-related perils. We maintain insurance policies, including
business interruption insurance for each of our facilities, with insurers in amounts and with coverage and deductibles that we, with the advice of our insurance
advisors and brokers, believe are reasonable and prudent. We cannot, however, ensure that this insurance will be adequate to protect us from all material
expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical
prices. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do
not justify such expenditures.
Seasonality
The operating results for the fuel products segment, including the selling prices of asphalt products we produce, generally follow seasonal demand trends.
Asphalt demand is generally lower in the first and fourth quarters of the year, as compared to the second and third quarters, due to the seasonality of the road
construction and roofing industries we supply. Demand for gasoline and diesel is generally higher during the summer months than during the winter months
due to seasonal increases in highway traffic. In addition, our natural gas costs can be higher during the winter months, as demand for natural gas as a heating
fuel increases during the winter. As a result, our operating results for the first and fourth calendar quarters may be lower than those for the second and third
calendar quarters of each year due to seasonality related to these and other products that we produce and sell.
Properties
We own and lease the principal properties which are listed below. The principal properties which we own, as well as others not listed below, are pledged
as collateral under our Collateral Trust Agreement as discussed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Liquidity and Capital Resources — Debt and Credit Facilities.” We believe that all properties are suitable for their intended purpose, are
being efficiently utilized and provide adequate capacity to meet demand for the next several years.
Property
Shreveport refinery
Great Falls refinery
Princeton refinery
Cotton Valley refinery
Burnham terminal
Karns City facility
Dickinson facility
Missouri facility
Calumet Packaging facility
Royal Purple facility
Bel-Ray facility
Business Segment(s)
Acres
Owned / Leased
Location
Fuels and Specialty
Fuels
Specialty
Specialty
Specialty
Specialty
Specialty
Specialty
Specialty
Specialty
Specialty
240
86
208
77
11
225
28
22
10
28
32
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Shreveport, Louisiana
Great Falls, Montana
Princeton, Louisiana
Cotton Valley, Louisiana
Burnham, Illinois
Karns City, Pennsylvania
Dickinson, Texas
Louisiana, Missouri
Shreveport, Louisiana
Porter, Texas
Wall Township, New Jersey
In addition to the items listed above, we lease or own a number of storage tanks, railcars, warehouses, equipment, land, crude oil loading facilities and
precious metals.
Intellectual Property
Our patents relating to our refining operations are not material to us as a whole. Our products consist of composition patents which are integral to the
formulas of our products. We own, have registered or applied for registration of a variety of tradenames, service marks and trademarks for us in our
business. The trademarks, tradenames and design marks under which we conduct our branded business (including Royal Purple, Bel-Ray and TruFuel) and
other trademarks employed in the marketing of our products are integral to our marketing operations. We also license intellectual property rights from third
parties. We are not aware of any facts as of the date of this filing which would negatively impact our continuing use of our tradenames, service marks or
trademarks.
Office Facilities
In addition to our principal properties discussed above, as of December 31, 2019, we were a party to a number of cancelable and noncancelable leases for
certain properties, including our corporate headquarters in Indianapolis, Indiana, and administrative
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offices in Houston, Texas. The corporate headquarters lease is for 58,501 square feet of office space. The lease term expires in August 2024. The Houston
facility lease is for 24,025 square feet of office space. The lease term expires in August 2022. Please read Note 8 “Commitments and Contingencies” in Part
II, Item 8 “Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements” of this Annual Report for additional information
regarding our leases.
While we may require additional office space as our business expands, we believe that our existing facilities are adequate to meet our needs for the
immediate future and that additional facilities will be available on commercially reasonable terms as needed.
Employees
As of March 5, 2020, our general partner employs approximately 1,500 people who provide direct support to our operations. Of these employees,
approximately 500 are covered by collective bargaining agreements.
Employees at the following locations are covered by the following separate collective bargaining agreements:
Facility/ Refinery
Union
Cotton Valley
Princeton
Dickinson
Shreveport
Missouri
Karns City
Great Falls
International Union of Operating Engineers
International Union of Operating Engineers
International Union of Operating Engineers
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers
International Union
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers
International Union
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy Allied-Industrial and Service Workers
International Union
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy Allied-Industrial and Service Workers
International Union
Expiration Date
January 15, 2023
October 31, 2020
December 12, 2021
April 30, 2022
April 30, 2022
January 31, 2023
July 31, 2022
None of the employees at the Royal Purple facility, Bel-Ray facility or at the Burnham terminal are covered by collective bargaining agreements. Our
general partner considers its employee relations to generally be good, with no history of work stoppages.
Address, Internet Website and Availability of Public Filings
Our principal executive offices are located at 2780 Waterfront Parkway East Drive, Suite 200, Indianapolis, Indiana, 46214 and our telephone number is
(317) 328-5660. Our website is located at http://www.calumetspecialty.com.
Our Securities and Exchange Commission (“SEC”) filings are available on our website as soon as reasonably practicable after we electronically file such
material with, or furnish such material to, the SEC. We make available, free of charge on our website, our Annual Reports on Form 10-K, our Quarterly
Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). These documents are located on our website at http://www.calumetspecialty.com by
selecting the “Investor Relations” link, and then selecting the Financial Reporting” link and then selecting the “SEC Filings” link. We also make available,
free of charge on our website, our Charters for the Audit, Compensation and Conflicts Committees, Related Party Transactions Policy and Code of Business
Conduct and Ethics. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers from any provision of
either of the Code of Business Conduct and Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer and
other persons performing similar functions by posting such information on our website. These documents are located on our website at
http://www.calumetspecialty.com by selecting the “Investor Relations” link and then selecting the “Corporate Governance” link. All reports and documents
filed with the SEC are also available via the SEC website, http://www.sec.gov.
The above information is available to anyone who requests it and is free of charge either in print from our website or upon request by contacting Investor
Relations using the contact information listed above. Information on our website is not incorporated into this Annual Report or our other securities filings and
is not a part of them.
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Risks Relating to our Business
In April 2016, we announced suspension of our quarterly cash distribution to unitholders and have not paid any quarterly distributions since. We may not
have sufficient available cash from operations in the future to enable us to resume payment of a distribution to unitholders. The amount of cash we can
distribute on our common units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter
based on, among other things:
•
•
•
•
•
•
•
•
overall demand for specialty hydrocarbon products, fuel and other refined products;
the level of foreign and domestic production of crude oil and refined products;
our ability to produce fuel products and specialty products that meet our customers’ unique and precise specifications;
the marketing of alternative and competing products;
the extent of government regulation;
results of our hedging activities;
global or national health concerns; and
overall economic and local market conditions.
In addition, the actual amount of cash we have available for distribution will depend on other factors, some of which are beyond our control, including:
•
•
•
•
•
•
the level of capital expenditures we make, including those for acquisitions, if any;
our debt service requirements;
fluctuations in our working capital needs;
our ability to borrow funds and access capital markets;
restrictions on distributions and on our ability to make working capital borrowings for distributions contained in our debt instruments; and
the amount of cash reserves established by our general partner for the proper conduct of our business.
If we generate insufficient cash from our operations for a sustained period of time and/or forecasts demonstrate expectations of continued future
insufficiencies, the board of directors of our general partner may determine not to reinstate our distribution to unitholders. Any such continued suspension or
elimination of distributions may cause the trading price of our units to decline.
Unitholders should be aware that the amount of cash we have available for distribution depends primarily upon our cash flow from operating activities,
cash on hand and working capital borrowings, and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash
distributions during periods when we record net losses and may not make cash distributions during periods when we record net income.
We had approximately $1.2 billion of outstanding indebtedness as of December 31, 2019, and availability for borrowings of approximately $359.4
million under our senior secured revolving credit facility. We have the ability to incur additional debt, including the ability to borrow up to an aggregate
principal amount of $600.0 million at any time, subject to borrowing base limitations, under our revolving credit facility. A tranche of the revolving credit
facility includes a $25.0 million senior secured first loaned in and last to be repaid out (“FILO”) revolving credit facility. Our substantial indebtedness could
adversely affect our results of operations, business and financial condition, and our ability to meet our debt obligations and resume payment of distributions to
our unitholders. In addition, our level of indebtedness could have important consequences to us, including the following:
•
our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired, or
such financing may not be available on favorable terms;
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Table of Contents
•
•
•
•
covenants contained in our existing and future credit and debt arrangements will require us to meet financial tests that may affect our flexibility in
planning for and reacting to changes in our business, including possible acquisition opportunities;
we will need a substantial portion of our cash flow to make principal and interest payments on our indebtedness, reducing the funds that would
otherwise be available for operations, future business opportunities and payments of our debt obligations;
our ability to execute our acquisition and divestiture strategy; and
our debt level will make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the
economy in general.
Any of these factors could result in a material adverse effect on our business, financial conditions, results of operations, business prospects and ability to
satisfy our obligations under our senior notes and revolving credit facility.
Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not
sufficient to service our current or future indebtedness, we will be forced to take actions such as continuing the suspension of distributions to our unitholders,
reducing or delaying our business activities, acquisitions, investments and/or capital expenditures, selling assets, restructuring or refinancing our
indebtedness, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms, or at all.
Please read Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources —
Debt and Credit Facilities” for additional information regarding our indebtedness.
Our financial results are primarily affected by the relationship, or margin, between our specialty products prices and fuel products prices and the prices
for crude oil and other feedstocks. The costs to acquire our feedstocks and the prices at which we can ultimately sell our refined products depend upon
numerous factors beyond our control. When the margin between refined product prices and crude oil and other feedstock prices tightens, our earnings,
profitability and cash flows are negatively impacted.
A widely used benchmark in the fuel products industry to measure market values and margins is the Gulf Coast 2/1/1 crack spread (“Gulf Coast crack
spread”), which represents the approximate gross margin resulting from refining crude oil, assuming that two barrels of a benchmark crude oil are converted,
or cracked, into one barrel of gasoline and one barrel of diesel. The Gulf Coast crack spread ranged from a high of $22.05 per barrel to a low of $12.72 per
barrel during 2019 and averaged $18.06 per barrel during 2019 compared to an average of $16.76 in 2018 and $12.33 in 2017.
Our actual refining margins vary from the Gulf Coast crack spread due to the actual crude oil used and products produced, transportation costs, regional
differences, and the timing of the purchase of the feedstock and sale of the refined products, but we use the Gulf Coast crack spread as an indicator of the
volatility and general levels of fuels refining margins.
The prices at which we sell specialty products are strongly influenced by the commodity price of crude oil. If crude oil prices increase, our specialty
products segment margins will fall unless we are able to pass through these price increases to our customers. Increases in selling prices for specialty products
typically lag behind the rising cost of crude oil and may be difficult to implement quickly enough when crude oil costs increase dramatically over a short
period of time. It is possible we may not be able to pass through all or any portion of increased crude oil costs to our customers. In addition, although we
hedge a portion of our commodity price risk, it is not our intent to completely eliminate our commodity risk through our hedging activities.
Refining margins are volatile, and we have experienced fluctuations in our refining margins. There can be no assurance that our refining margins will not
deteriorate. If our refining margins deteriorate, it will adversely affect the amount of cash we have available for funding operations, for distributions to our
unitholders and for payments of our debt obligations.
As of December 31, 2019, we have identified a material weakness in internal control over financial reporting that pertains to the untimely and insufficient
operation of controls in the financial statement close process, including lack of timely account reconciliation, analysis and review related to all financial
statement accounts. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim consolidated financial statements may not be prevented or detected on a timely
basis.
Although we have developed and implemented a plan to remediate the material weakness and believe, based on our evaluation to date, that the material
weakness will be remediated in a timely fashion, we cannot assure you that this will occur within a specific timeframe. The material weakness will not be
remediated until all necessary internal controls have been designed, implemented,
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tested and determined to be operating effectively. In addition, we may need to take additional measures to address the material weakness or modify the
planned remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to
address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weakness will not result in a material
misstatement of our consolidated financial statements. Moreover, we cannot assure you that we will not identify additional material weaknesses in our
internal control over financial reporting in the future.
If we are unable to remediate the material weakness, our ability to record, process and report financial information accurately, and to prepare financial
statements within the time periods specified by the rules and forms of the SEC, could be adversely affected. This failure could negatively affect the market
price and trading liquidity of our common units, cause investors to lose confidence in our reported financial information, subject us to civil and criminal
investigations and penalties and generally materially and adversely impact our business and financial condition.
We are exposed to fluctuations in the price of crude oil, fuel products, natural gas and interest rates. From time to time, we utilize derivative financial
instruments related to the future price of crude oil, natural gas, fuel products and their relationship with each other with the intent of reducing volatility in our
cash flows due to fluctuations in commodity prices and spreads. Historically, we have utilized derivative instruments related to interest rates for future periods
with the intent of reducing volatility in our cash flows due to fluctuations in interest rates. We are not able to enter into derivative financial instruments to
reduce the volatility of the prices of the specialty products we sell as there is no established derivative market for such products.
The extent of our commodity price exposure is related largely to the effectiveness and scope of our hedging activities. The derivative instruments we
utilize are based on posted market prices, which may differ significantly from the actual crude oil prices, natural gas prices or fuel products prices that we
incur or realize in our operations. For example, excluding our crude oil basis swaps, all of the crude oil derivatives in our hedge portfolio are based on the
market price of New York Mercantile Exchange (“NYMEX”) WTI and the fuel products derivatives are all based on U.S. Gulf Coast market prices. In recent
periods, the spread between NYMEX WTI and other crude oil indices (specifically Light Louisiana Sweet, Western Canadian Select and Brent, on which a
portion of our crude oil purchases are priced) has changed period to period, which has reduced the effectiveness of certain crude oil hedges. Accordingly, our
commodity price risk management policy may not protect us from significant and sustained increases in crude oil or natural gas prices or decreases in fuel
products prices. Conversely, our policy may limit our ability to realize cash flows from crude oil and natural gas price decreases.
We have a policy to enter into derivative transactions related to only a portion of the volume of our expected purchase and sales requirements and, as a
result, we will continue to have direct commodity price exposure to the unhedged portion of our expected purchase and sales requirements. Thus, we could be
exposed to significant crude oil cost increases on a portion of our purchases. Please read Part II, Item 7A “Quantitative and Qualitative Disclosures About
Market Risk.”
Our actual future purchase and sales requirements may be significantly higher or lower than we estimate at the time we enter into derivative transactions
for such period. If the actual amount is higher than we estimate, we will have greater commodity price exposure than we intended. If the actual amount is
lower than the amount that is subject to our derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions
without the benefit of the cash flow from our sale or purchase of the underlying physical commodity, which may result in a substantial diminution of our
liquidity. As a result, our hedging activities may not be as effective as we intend in reducing the volatility of our cash flows. In addition, our hedging activities
are subject to the risks that a counterparty may not perform its obligations under the applicable derivative instrument, the terms of the derivative instruments
are imperfect, and our hedging policies and procedures are not properly followed. It is possible that the steps we take to monitor our derivative financial
instruments may not detect and prevent violations of our risk management policies and procedures, particularly if deception or other intentional misconduct is
involved.
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The operating and financial restrictions and covenants in our financing arrangements, including our revolving credit facility, indentures governing each
series of our outstanding senior notes and master derivative contracts, do currently restrict, and any future financing agreements could restrict, our ability to
finance future operations or capital needs or to engage, expand or pursue our business activities, including restrictions on our ability to, among other things:
•
•
•
•
sell assets, including equity interests in our subsidiaries;
pay distributions on or redeem or repurchase our units or redeem or repurchase any subordinated debt;
incur or guarantee additional indebtedness or issue preferred units;
create or incur certain liens;
• make certain acquisitions and investments;
•
•
•
•
•
•
•
redeem or repay other debt or make other restricted payments;
enter into transactions with affiliates;
enter into agreements that restrict distributions or other payments from our restricted subsidiaries to us;
create unrestricted subsidiaries;
enter into sale and leaseback transactions;
enter into a merger, consolidation or transfer or sale of assets, including equity interests in our subsidiaries; and
engage in certain business activities.
Our revolving credit facility also contains a springing financial covenant which provides that, if availability under the revolving credit facility falls below
the sum of the amount of FILO loans outstanding plus the greater of (i) 10.0% of the Borrowing Base (as defined in the Credit Agreement) then in effect, or
15% while the Great Falls, MT refinery is included in the borrowing base, and (ii) $35.0 million (which amount is subject to increase in proportion to
revolving commitment increases), 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.
Our existing indebtedness imposes, and any future indebtedness may impose, a number of covenants on us regarding collateral maintenance and
insurance maintenance. As a result of these covenants and restrictions, we will be limited in the manner in which we conduct our business, and we may be
unable to engage in favorable business activities or finance future operations or capital needs.
Our ability to comply with the covenants and restrictions contained in our financing arrangements may be affected by events beyond our control. If
market or other economic conditions deteriorate, our ability to comply with these covenants and restrictions may be impaired. A failure to comply with the
covenants, ratios or tests in our financing arrangements or any future indebtedness could result in an event of default under these financing arrangements,
which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. Among other things, in the
event of any default on our indebtedness, our debt holders and lenders:
•
•
•
will not be required to lend any additional amounts to us;
could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable;
could elect to require that all obligations accrue interest at the default rate, if such rate has not already been imposed;
• may have the ability to require us to apply all of our available cash to repay these borrowings;
• may prevent us from making debt service payments under our other agreements, any of which could result in an event of default under our other
financing arrangements; or
•
in the case of our revolving credit facility, foreclose on the collateral pledged pursuant to the terms of the revolving credit facility.
If our existing indebtedness were to be accelerated, there can be no assurance that we would have, or be able to obtain, sufficient funds to repay such
indebtedness in full. Even if new financing were available, it may be on terms that are less attractive to us than our then existing indebtedness or it may not be
on terms that are acceptable to us. In addition, our obligations under our revolving credit facility are secured by a first-priority lien on our accounts receivable,
inventory and substantially all of our cash; and our obligations under our master derivative contracts are secured by a first-priority lien on our and our
subsidiaries’ real
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property, plant and equipment, fixtures, intellectual property, certain financial assets, certain investment property, commercial tort claims, chattel paper,
documents, instruments and proceeds of the forgoing (including proceeds of hedge agreements), and if we are unable to repay our indebtedness under the
revolving credit facility or master derivative contracts, the lenders under our revolving credit facility and the counterparties to our master derivative contracts
could seek to foreclose on these assets. Please read Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations
— Liquidity and Capital Resources — Debt and Credit Facilities,” “— Short-Term Liquidity,” “— Long-Term Financing” and “— Master Derivative
Contracts” for additional information regarding our long-term debt.
We rely on borrowings and letters of credit under our revolving credit facility to purchase crude oil or other feedstocks for our facilities, lease certain
precious metals for use in our refinery operations and enter into derivative instruments of crude oil and natural gas purchases and fuel products sales. From
time to time, we also rely on our ability to issue letters of credit to enter into certain hedging arrangements in an effort to reduce our exposure to adverse
fluctuations in the prices of crude oil, natural gas and crack spreads. The borrowing base under our revolving credit facility is determined weekly or monthly
depending upon availability levels or the existence of a default or event of default. Reductions in the value of our inventories as a result of lower crude oil
prices could result in a reduction in our borrowing base, which would reduce the amount of financial resources available to meet our capital requirements.
Furthermore, our borrowing base may be subject to decreases due to the sale of inventories and accounts as part of a divestiture. If, under certain
circumstances, our available capacity under our revolving credit facility falls below certain threshold amounts, or a default or event of default exists, then our
cash balances in a dominion account established with the administrative agent will be applied on a daily basis to our outstanding obligations under our
revolving credit facility. In addition, decreases in the price of crude oil or increases in crack spreads may require us to post substantial amounts of cash
collateral to our hedging counterparties in order to maintain our derivative instruments. If, due to our financial condition or other reasons, the borrowing base
under our revolving credit facility decreases, we are limited in our ability to issue letters of credit or we are required to post substantial amounts of cash
collateral to our hedging counterparties, our liquidity, financial condition and our ability to resume distributions of cash to our unitholders could be materially
and adversely affected. Please read Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources — Debt and Credit Facilities” for additional information.
Delays or cost increases related to the engineering, procurement and construction of new facilities, or improvements and repairs to our existing facilities
and equipment, could have a material adverse effect on our business, financial condition, results of operations or our ability to make distributions to our
unitholders and payments on our debt obligations. Such delays or cost increases may arise as a result of unpredictable factors in the marketplace, many of
which are beyond our control, including:
•
•
•
•
•
denial or delay in obtaining regulatory approvals and/or permits;
unplanned increases in the cost of equipment, materials or labor;
disruptions in transportation of equipment and materials;
severe adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our
facilities, or those of our vendors and suppliers;
shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages;
• market-related increases in a project’s debt or equity financing costs; and/or
•
nonperformance or declarations of force majeure by, or disputes with, our vendors, suppliers, contractors or sub-contractors.
Our refineries have been in operation for many years. Equipment, even if properly maintained, may require significant capital expenditures and expenses
to keep it operating at optimum efficiency.
Any one or more of these occurrences noted above could have a significant impact on our business. If we were unable to make up the delays or to recover
the related costs, or if market conditions change, it could materially and adversely affect our financial position, results of operations or cash flows and, as a
result, our ability to make distributions and payments on our debt obligations.
27
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Table of Contents
We purchase crude oil and other feedstocks from major oil companies as well as from various crude oil gatherers and marketers primarily in Texas, north
Louisiana and Canada. In 2019, subsidiaries of Plains supplied us with approximately 56.3% of our total crude oil supplies under term contracts and month-
to-month evergreen crude oil supply contracts. In 2019, BP supplied us with approximately 5.9% of our total crude oil supplies under the BP Purchase
Agreement. Each of our facilities is dependent on one or more of these suppliers and the loss of any of these suppliers would adversely affect our financial
results to the extent we were unable to find another supplier of this substantial amount of crude oil on acceptable terms. We maintain short-term and long-term
contracts with our suppliers. For example, the majority of our contracts with Plains are currently month-to-month and terminable upon 90 days’ notice, and
our contract with BP was amended and restated in December 2016 for a term ending March 2020, which is expected to be extended to March 2021 and will
automatically renew for successive one-year terms unless terminated by either party upon 90 days’ notice.
We purchase all of our crude oil supply directly from third-party suppliers, generally under month-to-month evergreen supply contracts and on the spot
market. Evergreen contracts are generally terminable upon 30 days’ notice and purchases on the spot market may expose us to changes in commodity prices.
For additional discussion regarding our crude oil and feedstock supply, please read Items 1 and 2 “Business and Properties — Our Crude Oil and Feedstock
Supply.”
To the extent that our suppliers reduce the volumes of crude oil and other feedstocks that they supply us as a result of our existing credit ratings or
perception of our creditworthiness or declining production or competition or otherwise, our sales, net income and cash available for distribution to unitholders
and payments of our debt obligations would decline unless we were able to acquire comparable supplies of crude oil and other feedstocks on comparable
terms from other suppliers. Finding comparable suppliers may not be possible in areas where the supplier that reduces its volumes is the primary supplier in
the area. Fluctuations in crude oil prices can greatly affect production rates and investments by third parties in the development of new oil reserves. Drilling
activity generally decreases as crude oil prices decrease. We have no control over the level of drilling activity in the fields that supply our refineries, the
amount of reserves underlying the wells in these fields, the rate at which production from a well will decline or the production decisions of producers. A
material decrease in either the crude oil production from or the drilling activity in the fields that supply our refineries, as a result of depressed commodity
prices, natural gas production declines, governmental moratoriums on drilling or production activities, the availability and the cost of capital or otherwise,
could result in a decline in the volume of crude oil we refine.
The domestic and global financial markets and economic conditions are disrupted and volatile from time to time due to a variety of factors, including low
consumer confidence, high unemployment, geoeconomic and geopolitical issues, weak economic conditions and uncertainty in the financial services sector.
In addition, the fixed-income markets have experienced periods of extreme volatility, which negatively impacted market liquidity conditions. In recent years,
the equity and debt markets for many energy industry companies have been adversely affected by low oil prices. As a result, the cost of raising money in the
debt and equity capital markets has increased substantially at times while the availability of funds from these markets diminished significantly. In particular,
as a result of concerns about the stability of financial markets generally and the solvency of lending counterparties specifically, the cost of obtaining money
from the credit markets may increase as many lenders and institutional investors increase interest rates, enact tighter lending standards, refuse to refinance
existing debt on similar terms or at all and reduce, or in some cases cease to provide, funding to borrowers. In addition, lending counterparties under any
existing revolving credit facility and other debt instruments may be unwilling or unable to meet their funding obligations, or we may experience a decrease in
our capacity to issue debt or obtain commercial credit or a deterioration in our credit profile, including a rating agency lowering or withdrawing of our credit
ratings if, in its judgment, the circumstances warrant. Due to these factors, we cannot be certain that new debt or equity financing will be available on
acceptable terms. If funding is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come
due or we may be required to sell assets. Moreover, without adequate funding, we may be unable to execute our growth strategy, complete future acquisitions
or construction projects, take advantage of other business opportunities or respond to competitive pressures, comply with regulatory requirements, or meet our
short-term or long-term working capital requirements, any of which could have a material adverse effect on our revenues and results of operations. Failure to
comply with regulatory requirements in a timely manner or meet our short-term or long-term working capital requirements could subject us to regulatory
action.
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Table of Contents
As demonstrated in 2017 with the dispositions of the Superior Refinery and Anchor, in 2018 with the disposition of our 23.8% equity interest in PACNIL
and in 2019 with the dispositions of the San Antonio Refinery and our 50% equity interest in Biosyn, we may continue to dispose of portions of our current
business or assets, based on a variety of factors and strategic considerations, consistent with our strategy of preserving liquidity and streamlining our business
to better focus on the advancement of our core business. These dispositions, together with any other future dispositions we make, may involve risks and
uncertainties, including disruption to other parts of our business, potential loss of employees, customers or revenue, exposure to unanticipated liabilities or
result in ongoing obligations and liabilities to us following any such divestiture. For example, in connection with a disposition, we may enter into transition
services agreements or other strategic relationships, which may result in additional expense. In addition, in connection with a disposition, we may be required
to make representations about the business and financial affairs of the business or assets. We may also be required to indemnify the purchasers to the extent
that our representations turn out to be inaccurate or with respect to certain potential liabilities. These indemnification obligations may require us to pay money
to the purchasers as satisfaction of their indemnity claims. It may also take us longer than expected to fully realize the anticipated benefits of these
transactions, and those benefits may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and
operating results. Further, such divestitures may result in proceeds to us in an amount less than we expect or less than our assessment of the value of those
assets. Any of the foregoing could adversely affect our financial condition and results of operations. Please read Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Key Matters, Claims and Legal Proceedings” for additional information.
Our Shreveport refinery is interconnected to a pipeline that supplies a portion of its crude oil and a pipeline that ships a portion of its refined fuel
products to customers, such as pipelines operated by subsidiaries of Enterprise Products Partners L.P. and Plains. Our Great Falls refinery receives crude oil
through the Front Range pipeline system via the Bow River Pipeline in Canada. Since we do not own or operate any of these pipelines, their continuing
operation is not within our control. In addition, any of these third-party pipelines could become unavailable to transport crude oil or our refined fuel products
because of acts of God, accidents, earthquakes or hurricanes, government regulation, terrorism or other third-party events. The unavailability of any of these
third-party pipelines for the transportation of crude oil or our refined fuel products, because of acts of God, accidents, earthquakes or hurricanes, government
regulation, terrorism or other third-party events, could lead to disputes or litigation with certain of our suppliers or a decline in our sales, net income and cash
available for distributions to our unitholders and payments of our debt obligations.
The volatility in costs of fuel, principally natural gas, and other utility services, principally electricity, used by our refinery and other operations affect our
net income and cash flows. Fuel and utility prices are affected by factors outside of our control, such as supply and demand for fuel and utility services in
both local and regional markets. Natural gas prices have historically been volatile.
For example, daily prices for natural gas as reported on the NYMEX ranged between $3.59 and $2.07 per million British thermal unit (“MMBtu”) in
2019, and between $4.84 and $2.55 per MMBtu in 2018. Typically, electricity prices fluctuate with natural gas prices. Future increases in fuel and utility
prices may have a material adverse effect on our results of operations. Fuel and utility costs constituted approximately 12.1% and 14.7% of our total operating
expenses included in cost of sales for the years ended December 31, 2019 and 2018, respectively. If our natural gas costs rise, they will adversely affect the
amount of cash available for distribution to our unitholders and payments of our debt obligations.
Our refineries, blending and packaging sites, terminals and related facility operations are subject to certain operating hazards, and our cash flow from
those operations could decline if any of our facilities experience a major accident, pipeline rupture or spill, explosion or fire, is damaged by severe weather or
other natural disaster, or otherwise is forced to curtail its operations or shut down. These operating hazards could result in substantial losses due to personal
injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage and may result in
significant curtailment or suspension of our related operations.
Although we maintain insurance policies, including personal and property damage and business interruption insurance for each of our facilities, we
cannot ensure that this insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage
or significant interruption of operations. Our business interruption
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Table of Contents
insurance will not apply unless a business interruption exceeds 60 days. Furthermore, we may be unable to maintain or obtain insurance of the type and
amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and
could escalate further. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. In addition, we are
not fully insured against all risks incident to our business because certain risks are not fully insurable, coverage is unavailable, or premium costs, in our
judgment, do not justify such expenditures. For example, we are not insured for all environmental liabilities, including, but not limited to, product spills and
other releases at all of our facilities. If we were to incur a significant liability for which we were not fully insured, it could affect our financial condition and
diminish our ability to make distributions to our unitholders and payments of our debt obligations.
The operation of our refineries, blending and packaging sites, terminals, and related facilities subject us to the risk of incurring significant environmental
costs and liabilities due to our handling of petroleum hydrocarbons and wastes, because of air emissions and water discharges related to our operations and
activities, and as a result of historical operations and waste disposal practices at our facilities or in connection with our activities, some of which may have
been conducted by prior owners or operators. We currently own or operate properties that for many years have been used for industrial or oilfield activities,
including refining and blending operations or terminal storage operations, sometimes by third parties over whom we had or continue to have no control with
respect to their operations or waste disposal activities. We could incur significant remedial costs in the cleanup of any petroleum hydrocarbons or wastes that
may have been released on, under or from the properties owned or operated by us. For example, we are investigating and remediating, in some cases pursuant
to government order, soil and groundwater contamination at our Great Falls refinery arising from a predecessor operators’ handling of petroleum
hydrocarbons and wastes. While we believe our costs in pursuing these investigatory and remedial activities are subject to reimbursement under a contractual
indemnification right we received from the predecessor operator in the share purchase agreement transferring ownership of this refinery, this predecessor
operator is currently disputing responsibility for reimbursement of certain of these remedial costs being incurred at our Great Falls refinery, which dispute had
resulted in the filing of a suit by us against the predecessor operator and the matter is currently in arbitration. An arbitration panel conducted the first phase of
the arbitration in July 2018 and issued its ruling on September 13, 2018, in which the panel confirmed that the sellers of the Great Falls refinery retained the
liability for all pre-closing contamination with respect to third-party claims indefinitely and with respect to first party claims for which the sellers received
notice within five years after the sale of the refinery, which claims are subject to the requirements otherwise set forth in the asset purchase agreement. The
second phase of the arbitration regarding damages occurred in April 2019. The arbitration panel issued its final ruling on August 25, 2019. Among other
things, the panel denied the Company’s demands for reimbursement for costs incurred and left open the Company’s ability to make future claims. The
Company expects that it may incur costs to remediate other environmental conditions at the Great Falls refinery. The Company currently believes that these
other costs it may incur will not be material to its financial position or results of operations.
Some environmental laws may impose joint and several, strict liability for releases of petroleum hydrocarbons and wastes, which means in some
situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior
operators or other third parties. Private parties, including the owners of properties adjacent to our operations and facilities where our petroleum hydrocarbons
or wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-
compliance with environmental laws and regulations or for personal injury or property damage. We may not be able to recover some or any of these costs
from insurance or other sources of indemnity. To the extent that the costs associated with meeting any or all of these requirements are significant and not
adequately secured or indemnified for, there could be a material adverse effect on our business, financial condition, and results of operations.
Our refining, blending and packaging site, terminal and related facility operations are subject to stringent federal, regional, state and local laws and
regulations governing worker health and safety, the discharge of materials into the environment and environmental protection. These laws and regulations
impose legal standards and numerous obligations that are applicable to our operations, including the obligation to obtain permits to conduct regulated
activities, the incurrence of significant capital expenditures for air pollution control equipment to otherwise limit or prevent releases of pollutants from our
refineries, blending and packaging sites, terminals, and related facilities, the expenditure of significant monies in the application of specific health and safety
criteria addressing worker protection, the requirement to maintain information about hazardous materials used or produced in our operations and to provide
this information to employees, state and local government authorities, and local residents and the incurrence of significant costs and liabilities for pollution
resulting from our operations or from those of prior owners or operators of our facilities. Numerous federal governmental authorities, such as the EPA and
OSHA as well as state agencies, such as the LDEQ, the Texas Commission on Environmental Quality and the MDEQ, have the power to enforce compliance
with these laws and regulations and the permits issued under them, often requiring difficult and costly actions. Failure to comply with these laws
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and regulations as well as any issued permits and orders may result in the assessment of administrative, civil, and criminal sanctions, including monetary
penalties, restrictions, the imposition of remedial obligations or corrective actions or the incurrence of capital expenditures, the occurrence of delays or
cancellations in the permitting, development or expansion of projects, and the issuance of injunctions limiting or preventing some or all of our operations.
On occasion, we receive notices of violation, other enforcement proceedings and regulatory inquiries from governmental agencies alleging non-
compliance with applicable environmental and occupational health and safety laws and regulations. For example, we have pending proceedings with the
LDEQ involving a series of alleged unauthorized emissions of pollutants from equipment at the Shreveport refinery, as described in a draft “Consolidated
Compliance Order and Notice of Potential Penalty” issued in April 2013, for which a penalty of more than $0.1 million may result.
New worker safety and environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement or
other developments could require us to make additional unforeseen expenditures. Many of these laws and regulations are becoming increasingly stringent,
and the cost of compliance with these requirements can be expected to increase. For example, in 2015, the EPA issued a final rule under the CAA lowering
the NAAQS for ground-level ozone to 70 parts per billion under both the primary and secondary standards. Since that time, the EPA issued area designations
with respect to ground-level ozone and issued final requirements that apply to state, local and tribal air agencies for implementing the 2015 NAAQS for
ground-level ozone. States are expected to implement more stringent requirements as a result of this new final rule, which could apply to our and our
customers’ operations. The adoption of more stringent environmental laws or regulations could impact us by requiring installation of new emission controls
on some of our equipment, resulting in longer permitting timelines, and significantly increasing our capital expenditures and operating costs, which could
adversely impact our business, cash flows and results of operation. Please read Items 1 and 2 “Business and Properties — Environmental and Occupational
Health and Safety Matters” for additional information.
The EPA has issued RFS mandates, requiring refiners such as us to blend renewable fuels into the petroleum fuels they produce and sell in the United
States. We, and other refiners subject to RFS, may meet the RFS requirements by blending the necessary volumes of renewable transportation fuels produced
by us or purchased from third parties. To the extent that refiners will not or cannot blend renewable fuels into the products they produce in the quantities
required to satisfy their obligations under the RFS program, those refiners must purchase renewable credits, referred to as RINs, to maintain compliance.
Under RFS, the volume of renewable fuels that obligated parties are required to blend into their finished petroleum fuels increases annually over time
until 2022. Each year until 2022, the EPA sets mandates for the production of cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable
fuel volume that applies to all gasoline and diesel produced or imported during the applicable year. Most recently, the EPA has established final volume
mandates for RFS program year 2020 under final rules published in December 2019 (establishing 2020 calendar year volumes for cellulosic biofuel, advanced
biofuel and total renewable fuel) and December 2018 (establishing 2020 calendar year volumes for biomass-based diesel). The EPA’s 2020 final volume
mandates maintain the conventional (i.e., corn ethanol) renewable fuel volume at 15 billion gallons, the same as the level for 2019. Also for RFS program
year 2020, the EPA increased from program year 2019 the final volumes of advanced biofuels , cellulosic biofuels and biomass-based diesels. Additionally,
the EPA’s December 2019 final rule made changes in how the renewable fuel standards are calculated beginning in the 2020 calendar year for certain of the
volumes of gasoline and diesel that the EPA projects will be exempted from the renewable fuel obligations (due to the EPA’s granting of “small refinery
exemptions” under the RFS). The result of this change is that there is an expected net increase in the blending by “obligated parties” under the RFS (including
non-exempt refiners) of renewable fuels under the RFS mandates beginning with the 2020 calendar year in comparison to how such renewable fuel standards
were calculated in prior calendar years.
Our Shreveport, Great Falls and (through October 31, 2019) San Antonio refineries are normally subject to compliance with the RFS mandates. However,
the EPA granted certain of our refineries the “small refinery exemption” under the RFS in past years including, most recently, in the 2018 calendar year, as
provided under the CAA. Under these exemptions granted by the EPA, such exempt refineries were not subject to the requirements of RFS as an “obligated
party” for fuels produced at these “small” refineries for those calendar years. While we received a small refinery exemption for certain of our refineries in
past years, there is no assurance that such an exemption will be obtained for any of our refineries in future years, which would result in the need for more
RINs for the applicable calendar year. Our gross 2019 annual RINs Obligation, which includes RINs that were required to be secured through either our own
blending or through the purchase of RINs in the open market, was approximately 87 million RINs for the 2019 calendar year including our San Antonio
refinery.
The EPA’s implementation of the RFS program has been subject to numerous court challenges in the recent past, including with respect to selection of the
final volume mandates, movement of the point of compliance, and the granting of small refinery exemptions. On January 24, 2020, the Federal Court of
Appeals for the 10th Circuit vacated EPA orders granting the small refinery
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exemption to three refineries that petitioned for the exemption in 2016, finding that those three refineries had failed to receive exemptions in prior years, and
remanded the matter to the EPA for further proceedings. This decision currently applies in the 10th Circuit but could be appealed and thus the final outcome
of this decision is yet to be determined, but any application of this decision more broadly beyond the 10th Circuit by the courts of the EPA could have a
material adverse effect on our business, financial condition and results of operations. tension.
We cannot predict the outcome of these matters or whether they may result in increased RFS program compliance costs. Moreover, the price of RINs
remains subject to extreme volatility, with the potential for significant increases in price. There also continues to be a shortage of advanced biofuel production
resulting in increased difficulties meeting RFS program mandates. It is possible we could find ourselves unable to blend sufficient quantities of ethanol and
biodiesel to meet our requirements and would, therefore, have to purchase an increasing number of RINs. It is not possible at this time to predict with
certainty what those volumes or costs may be, but given the potential increase in volumes and the volatile price of RINs, increases in renewable volume
requirements could have an adverse impact on our results of operations.
Existing laws, regulations or regulatory initiatives could change and, notwithstanding that the EPA’s volume mandates for recent years 2019 may be
relatively lower than the statutory mandates, such volume mandates could be increased in the future. The inability to receive an exemption under the RFS
program for one or more of our refineries, any increase in the final minimum volumes of renewable fuels that must be blended with refined petroleum fuels,
and/or any increase in the cost to acquire RINs may, individually or in the aggregate, have the potential to result in significant costs in connection with RIN
compliance, which costs could be material. Finally, there is no current regulatory standard that authenticates RINs that may be purchased on the open market
from third parties and, while we believe that the RINs we purchase are from reputable sources, are valid and serve to demonstrate compliance with applicable
RFS requirements, if any such RINs purchased by us on the open market are subsequently found to be invalid, then we may incur significant costs, penalties
or other liabilities in connection with replacing such invalid RINs.
In March 2017, we entered into several agreements with Macquarie Energy North America Trading Inc. (“Macquarie”) to support the operations of the
Great Falls refinery (the “Great Falls Supply and Offtake Agreements”). In June 2017, we 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”). Pursuant to the Supply and Offtake Agreement, Macquarie has agreed to intermediate crude oil supplies and refined
product inventories at our Great Falls and Shreveport refineries. Macquarie will own all of the crude oil in our tanks and substantially all of our refined
product inventories prior to our sale of the inventories. Upon termination of the Supply and Offtake Agreements, which may be terminated by Macquarie with
nine months’ notice any time prior to expiration of the agreements in June 2023, we are obligated in certain scenarios to repurchase all crude oil and refined
product inventories then owned by Macquarie and located at the specified storage facilities at then current market prices. The repurchase obligations under the
Supply and Offtake Agreements may be at a substantially higher cost than which we sold the inventory. Relying on Macquarie’s ability to honor its supply
and offtake obligations exposes us to Macquarie’s credit and business risks. An adverse change in Macquarie’s business, results of operations, liquidity or
financial condition could adversely affect its ability to perform its obligations, which could consequently have a material adverse effect on our business,
results of operations or liquidity and, as a result, our business and operating results. In addition, we may be required to use substantial capital to repurchase
crude oil and refined product inventories from Macquarie upon termination of the Supply and Offtake Agreements, which could have a material adverse
effect on our business, results of operations or financial condition.
The repurchase obligations under the Supply and Offtake Agreements may be at substantially higher cost than which we sold the inventory.
Our refineries and facilities consist of many processing units, a number of which have been in operation for a long time. One or more of the units may
require additional unscheduled downtime for unanticipated maintenance or repairs that are more frequent than our scheduled turnaround for each unit every
one to five years. Scheduled and unscheduled maintenance reduce our revenues and increase our operating expenses during the period of time that our
processing units are not operating and could limit our ability to resume making distributions to our unitholders and payments of our debt obligations.
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Table of Contents
We continually monitor our business, the business environment and the performance of our operations to determine if an event has occurred that indicates
that an equity method investment, a long-lived asset or goodwill may be impaired. If an event occurs, which is a determination that involves judgment, we
may be required to utilize cash flow projections to assess our ability to recover the carrying value based on the ability to generate future cash flows. During
the year ended December 31, 2019, we recorded impairment of $25.4 million of our equity method investment in Fluid Holding Corp. In 2017, we recorded
impairment on long-lived assets primarily at our San Antonio refinery and Missouri facility totaling $206.6 million. Our equity method investments, long-
lived assets and goodwill impairment analyses are sensitive to changes in key assumptions used in our analysis, such as expected future cash flows, the degree
of volatility in equity and debt markets and our unit price. If the assumptions used in our analysis are not realized, it is possible a material impairment charge
may need to be recorded in the future. We cannot accurately predict the amount and timing of any impairment of long-lived assets or goodwill. Further, as we
continue to develop our strategy regarding certain of our non-core assets, we will need to continue to evaluate the carrying value of those assets. Any
additional impairment charges that we may take in the future could be material to our results of operations and financial condition.
Historically we have grown our business in part through the reconfiguration and enhancement of our existing refinery assets. For example, we completed
an expansion project at our Shreveport refinery to increase throughput capacity and crude oil processing flexibility in May 2008. Additionally, in April 2016
we completed an expansion project that increased production capacity at our Great Falls refinery to 30,000 bpd. These expansion projects and the
construction of other additions or modifications to our existing refineries have involved and will continue to involve numerous regulatory, environmental,
political, legal, labor and economic uncertainties beyond our control, which could cause delays in construction or require the expenditure of significant
amounts of capital, and which we may finance with additional indebtedness or by issuing additional equity securities. Our forecasted internal rates of return
on such projects are also based on our projections of future market fundamentals, which are not within our control, including changes in general economic
conditions, available alternative supply and customer demand. For example, the total cost of the Shreveport refinery expansion project completed in 2008 was
approximately $375.0 million and was significantly over budget due primarily to increased construction labor costs. Future reconfiguration and enhancement
projects may not be completed at the budgeted cost, on schedule, or at all due to the risks described above which could significantly affect our cash flows and
financial condition.
The refining industry is highly competitive. Our competitors include large, integrated, major or independent oil companies that, because of their more
diverse operations, larger refineries or stronger capitalization, may be better positioned than we are to withstand volatile industry conditions, including
shortages or excesses of crude oil or refined products or intense price competition at the wholesale level. If we are unable to compete effectively, we may lose
existing customers or fail to acquire new customers. For example, if a competitor attempts to increase market share by reducing prices, our operating results
and cash available for distribution to our unitholders and payments of our debt obligations could be reduced.
Changes in our customers’ products or processes may enable our customers to reduce consumption of the specialty products that we produce or make our
specialty products unnecessary. Should a customer decide to use a different product due to price, performance or other considerations, we may not be able to
supply a product that meets the customer’s new requirements. In addition, the demand for our customers’ end products could decrease, which could reduce
their demand for our specialty products. Our specialty products customers are primarily in the industrial goods, consumer goods and automotive goods
industries and we are therefore susceptible to overall economic conditions, which may change demand patterns and products in those industries.
Consequently, it is important that we develop and manufacture new products to replace the sales of products that mature and decline in use. If we are unable
to manage successfully the maturation of our existing specialty products and the introduction of new specialty products, our revenues, net income and cash
available for distribution to our unitholders and payments of our debt obligations could be reduced.
Any sustained decrease in demand for fuel products in the markets we serve could result in a significant reduction in our cash flows, reducing our ability
to make distributions to unitholders and payments of our debt obligations. Factors that could lead to a decrease in market demand include, among others:
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Table of Contents
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a recession, global or national health crisis or other adverse economic condition that results in lower spending by consumers on gasoline, diesel and
travel;
higher fuel taxes or other governmental or regulatory actions that increase, directly or indirectly, the cost of fuel products;
an increase in fuel economy or the increased use of alternative fuel sources;
an increase in the market price of crude oil that leads to higher refined product prices, which may reduce demand for fuel products;
competitor actions; and
availability of raw materials.
Substantially all of our operating personnel at our Shreveport, Great Falls, Princeton, Cotton Valley, Karns City, Dickinson, Calumet Packaging and
Missouri facilities are employed under collective bargaining agreements. If we are unable to renegotiate these agreements as they expire, any work stoppages
or other labor disturbances at these facilities could have an adverse effect on our business and impact our ability to make distributions to our unitholders and
payments of our debt obligations. In addition, employees who are not currently represented by labor unions may seek union representation in the future, and
any renegotiation of current collective bargaining agreements may result in terms that are less favorable to us.
The nature of our business requires us to maintain substantial quantities of crude oil and refined product inventories. Because crude oil and refined
products are essentially commodities, we have no control over the changing market value of these inventories. Because our inventory is valued at the lower of
cost or market (“LCM”) value, if the market value of our inventory were to decline to an amount less than our cost, we would record a write-down of
inventory and a non-cash charge to cost of sales. In a period of decreasing crude oil or refined product prices, our inventory valuation methodology may result
in decreases in net income. For example, due to the decrease in crude oil prices in the fourth quarter of ended 2018, we recorded a unfavorable LCM
inventory adjustment of $30.6 million.
If our cash flow and capital resources are insufficient to fund our obligations, we may be forced to reduce our capital expenditures, seek additional equity
or debt capital or restructure our indebtedness. We cannot assure you that any of these remedies could, if necessary, be transacted on commercially reasonable
terms, or at all. Our liquidity is constrained by our need to satisfy our obligations under our senior notes, credit agreement and our Supply and Offtake
Agreements. The availability of capital when the need arises will depend upon a number of factors, some of which are beyond our control. These factors
include general economic and financial market conditions, the crack spread, natural gas and crude oil prices, our credit ratings, interest rates, market
perceptions of us or the industries in which we operate, our market value and our operating performance. We may be unable to execute our long-term
operating strategy if we cannot obtain capital from these or other sources when the need arises.
The operating results for our fuel products segment, including the selling prices of asphalt products we produce, can be seasonal. Asphalt demand is
generally lower in the first and fourth quarters of the year as compared to the second and third quarters due to the seasonality of road construction. Demand
for gasoline is generally higher during the summer months than during the winter months due to seasonal increases in highway traffic. In addition, our natural
gas costs can be higher during the winter months. Our operating results for the first and fourth calendar quarters may be lower than those for the second and
third calendar quarters of each year as a result of this seasonality.
34
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Table of Contents
When we executed the Supply and Offtake Agreements, the inventories associated with such agreements were taken out of our revolving credit facility
borrowing base. As such, these inventories are not part of our revolving credit facility. Should Macquarie choose to exercise its option to terminate the
Supply and Offtake Agreements by giving nine months’ notice any time prior to June 2023 of such termination, we would need to seek alternative sources of
financing, including putting the inventory back into our revolving credit facility, to meet our obligation to repurchase the inventory at then current market
prices. In addition, the cost of repurchasing the inventory may be at higher prices than we sold the inventory. If the price of crude oil is well above the price
at which we sold the inventory, we would have to pay more for the inventory than the price we sold the inventory for. If this is the case at the time of
termination and we are unable to include the inventory in our borrowing base, we could suffer significant reductions in liquidity when Macquarie terminates
the Supply and Offtake Agreements and we have to repurchase the inventories.
We rely primarily on sales generated from products processed at the facilities we own. Furthermore, the majority of our assets and operations are located
in Louisiana, Montana and Texas. Due to our lack of diversification in asset type and location, an adverse development in these businesses or areas, including
adverse developments due to catastrophic events or weather, decreased supply of crude oil and feedstocks and/or decreased demand for refined petroleum
products, would have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets in more
diverse locations, which in turn could impact our ability to make distributions to our unitholders and payments of our debt obligations.
The threat of climate change continues to attract considerable attention in the United States and foreign countries. As a result, numerous proposals have
been made and are likely to continue to be made at the international, national, regional and state levels of government to monitor and limit emissions of
GHGs as well as to eliminate such future emissions. As a result, our operations as well as the operations of our fossil-fuel producing customers are subject to
a series of regulatory, political, litigation and financial risks associated with the production and processing of fossil fuels and emissions of GHGs.
In the United States, no comprehensive climate change legislation has been implemented at the federal level. However, with the U.S. Supreme Court
finding that GHG emissions constitute a pollutant under the CAA, the EPA the EPA has adopted rules that, among other things, establish construction and
operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from
certain petroleum and natural gas system sources, implement CAA emission performance standards directing the reduction of methane from certain new,
modified, or reconstructed facilities in the oil and natural gas sector, and together with the U.S. Department of Transportation, implement GHG emissions
limits on vehicles manufactured for operation in the United States. Additionally, various states and groups of states have adopted or are considering adopting
legislation, regulations or other regulatory initiatives that are focused on such areas as GHG cap and trade programs, carbon taxes, reporting and tracking
programs, and restriction of emissions. At the international level, there exists the United Nations-sponsored "Paris Agreement," which is a non-binding
agreement for nations to limit their GHG emissions through individually-determined reduction goals every five years after 2020, although the United States
has announced its withdrawal from such agreement, effective November 4, 2020.
Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in federal political risks in the
United States in the form of pledges made by certain candidates seeking the office of the President of the United States in 2020. Critical declarations made by
one or more presidential candidates include proposals to ban hydraulic fracturing of oil and natural gas wells and ban new leases for production of minerals
on federal properties, including onshore lands and offshore waters. Other actions to oil and natural gas production activities that could be pursued by
presidential candidates may include more restrictive requirements for the establishment of pipeline infrastructure or the permitting of liquified natural gas
export facilities, as well as the rescission of the United States’ withdrawal from the Paris Agreement in November 2020. Litigation risks are also increasing,
as a number of cities, local governments and other plaintiffs have sought to bring suit against the largest oil and natural gas exploration and production
companies in state or federal court, alleging, among other things, that such companies created public nuisances by producing fuels that contributed to global
warming effects, such as rising sea levels, and therefore are responsible for roadway and infrastructure damages as a result, or alleging that the companies
have been aware of the adverse effects of climate change for some time but defrauded their investors by failing to adequately disclose those impacts.
There are also increasing financial risks for fossil fuel producers as stockholders and bondholders currently invested in fossil-fuel energy companies
concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-fossil fuel energy related
sectors. Institutional lenders who provide financing to fossil-fuel energy companies
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Table of Contents
also have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies.
Additionally, the lending and investment practices of institutional lenders have been the subject of intensive lobbying efforts in recent years, oftentimes public
in nature, by environmental activists, proponents of the international Paris Agreement, and foreign citizenry concerned about climate change not to provide
funding for fossil fuel producers. Limitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or
cancellation of drilling programs or development or production activities.
The adoption and implementation of any international, federal, regional or state legislation, regulations or other regulatory initiatives that impose more
stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas
or generate GHG emissions could result in increased compliance costs or costs of consuming fossil fuels. Such legislation or regulations could, consequently,
reduce demand for, oil and natural gas, which could reduce demand for our products and services. Additionally, political, financial and litigation risks may
result in our oil and natural gas customers restricting or canceling production activities, incurring liability for infrastructure damages as a result of climatic
changes, or impairing the ability to continue to operate in an economic manner, which also could reduce demand for our products and services. The
occurrence of one or more of these developments could have a material adverse effect on our business, financial condition, results of operations and cash
flows. Finally, increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as
increased frequency and severity of storms, droughts, floods, rising sea levels and other climactic events. If any such climate changes were to occur, they
could have an adverse effect on our financial condition and results of operations and the financial condition and operations of our customers.
Our operations involve the purchasing of crude oil and shipping it by rail on railcars that we lease. Past derailments of trains transporting crude oil in the
United States and Canada have caused various regulatory agencies and industry organizations, as well as federal, state and municipal governments, to focus
attention on transportation of flammable materials by rail. In May 2015, the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) adopted a
final rule that, among other things, imposes a new tank car design standard, new operational protocols for trains transporting large volumes of flammable
liquids, and a phase out by as early as October 2017 for older DOT-111 tank cars that are not retrofitted. In 2016, PHMSA released a final rule mandating a
phase-out schedule for all DOT-111 tank cars used to transport Class 3 flammable liquids, including crude oil and ethanol, between 2018 and 2029 and, more
recently in February 2019, PHMSA published a final rule requiring railroads to develop and submit comprehensive oil spill response plans for specific route
segments traveled by a single train carrying 20 or more loaded tanks of liquid petroleum oil in a continuous block or a single train carrying 35 or more loaded
tank cars of liquid petroleum oil throughout the train. Additionally, the February 2019 final rule requires railroad to establish geographic response zones along
various rail routes, ensure that both personnel and equipment are staged and prepared to respond in the event of an accident, and share information about
high-hazard flammable train operations with the state and tribal emergency response commissions.
In addition to these other actions taken or proposed by federal agencies, a number of states proposed or enacted laws in recent years that encourage safer
rail operations, urge the federal government to strengthen requirements for these operations, or otherwise seek to impose more stringent standards on rail
transport of crude oil. For example, in the absence of a current federal standard on the vapor pressure of crude oil transported by rail, the State of Washington
passed a law that became effective on July 28, 2019, prohibiting the loading or unloading of crude oil from a rail car in the state unless the crude oil vapor
pressure is lower than 9 pounds per square inch. In response, the States of North Dakota and Montana filed a preemption application with PHMSA in July
2019, in which the states seek to have PHMSA make an administrative determination and override the Washington State vapor pressure limits. In July 2019,
PHMSA published an invitation for public comments on the preemption application, which comment period closed in the latter half of 2019, with no
administrative determination yet being released.
Safety improvements or updates to existing tank cars together with more stringent requirements relating to response planning, equipment and personnel
staging preparedness, and establishment of geographic response zones that are imposed under PHMSA’s 2015 final rules requirements could drive up the cost
of transport and lead to shortages in availability of tank cars. We do not currently own or operate rail transportation facilities or rail cars; however, we cannot
assure that costs incurred by the railroad industry to comply with these enhanced standards resulting from PHMSA’s final rules or that restrictions on rail
transport of crude oil due to state crude oil volatility standards, if not preempted by PHMSA, will not increase our costs of doing business or limit our ability
to transport and sell our crude oil at favorable prices, the consequences of which could be material to our business, financial condition or results of operations.
However, we believe that any such consequences would not affect our operations in any way that is of material difference from those of our competitors who
are similarly situated.
Efforts are likewise underway in Canada to assess and address risks from the transport of crude oil by rail. For example, in 2014, Transport Canada
issued a protective order prohibiting oil shippers from using 5,000 of the DOT 111 tank cars and imposing a three year phase out period for approximately
65,000 tank cars that do not meet certain safety requirements. Transport Canada also imposed a 50 mile per hour speed limit on trains carrying hazardous
materials and required all crude oil shipments in Canada
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Table of Contents
to have an emergency response plan. At the same time that PHMSA released its 2015 rule, Canada’s Minister of Transport announced Canada’s new tank car
standards, which largely align with the requirements in the PHMSA rule. Likewise, Transport Canada’s rail car retrofitting and phase out timeline largely
aligns with the timeline introduced under the 2015 and 2016 PHMSA rules. Transport Canada has also introduced new requirements that railways carry
minimum levels of insurance depending on the quantity of crude oil or dangerous goods that they transport as well as a final report recommending additional
practices for the transportation of dangerous goods. Both Transport Canada and PHMSA issued final rules in 2018 that further harmonize their respective tank
car standards, including with respect to tank car approvals and design requirements.
We cannot assure that costs incurred to comply with any new standards and regulations, including those finalized by PHMSA or by Transport Canada
between 2015 and 2018 will not be material to our business, financial condition or results of operations. In addition, any derailment involving crude oil that
we have purchased or are shipping may result in claims being brought against us that may involve significant liabilities. Although we believe that we are
adequately insured against such events, we cannot provide assurance that our policies will cover the entirety of any damages that may arise from such an
event.
Our operations require numerous permits and authorizations under various laws and regulations. These authorizations and permits are subject to
revocation, renewal or modification and can require operational changes to limit impacts or potential impacts on the environment and/or health and safety. A
violation of authorization or permit conditions or other legal or regulatory requirements could result in substantial fines, criminal sanctions, permit
revocations, injunctions and/or facility shutdowns. Any or all of these matters could have a negative effect on our business, results of operations and cash
flow available for distribution to our unitholders.
Our specialty products provide precise performance attributes for our customers’ products. If a product fails to perform in a manner consistent with the
detailed quality specifications required by the customer, the customer could seek replacement of the product or damages for costs incurred as a result of the
product failing to perform as guaranteed. A successful claim or series of claims against us could result in a loss of one or more customers and impact our
ability to make distributions to unitholders and payments of our debt obligations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), enacted on July 21, 2010, established federal oversight and regulation of
the over-the-counter derivatives market and entities, such as us, that participate in that market. The Act requires the Commodity Futures Trading Commission
(“CFTC”) and the SEC to promulgate rules and regulations implementing the Act. Although the CFTC has finalized certain regulations, others remain to be
finalized or implemented and it is not possible at this time to predict when this will be accomplished.
In its rulemaking under the Act, the CFTC has re-proposed rules to set position limits for certain futures and option contracts in the major energy markets
and for swaps that are their economic equivalents, subject to exceptions for certain bona fide hedging transactions. As these new position limit rules are not
yet final, their impact on us is uncertain at this time.
The CFTC has designated certain interest rate swaps and credit default swaps for mandatory clearing and the associated rules also require us, in
connection with covered derivative activities, to comply with clearing and trade-execution requirements or take steps to qualify for an exemption to such
requirements. Although we believe that we qualify for the end-user exceptions to the mandatory clearing and trade execution requirements with respect to
those swaps entered to hedge our commercial risks, the application of such requirements to other market participants, such as swap dealers, may change the
cost and availability of the swaps that we use for hedging. In addition, certain banking regulators and the CFTC have adopted final rules establishing
minimum margin requirements for uncleared swaps. Although we expect to qualify for the end-user exception from such margin requirements for swaps
entered into to hedge our commercial risks, the application of such requirements to other market participants, such as swap dealers, may change the cost and
availability of the swaps that we use for hedging. If any of our swaps do not qualify for the commercial end-user exception, posting of collateral could impact
liquidity and reduce cash available to us for capital expenditures, therefore reducing our ability to execute hedges to reduce risk and protect cash flow.
The Act and any new regulations could significantly increase the cost of derivative instruments, materially alter the terms of derivative instruments,
reduce the availability of derivatives to protect against risks we encounter and reduce our ability to monetize or restructure our existing derivatives contracts.
An increase in the cost of derivatives contracts would affect our results of operations and cash available for distribution to our unitholders and payments of
our debt obligations. If we reduce our use of derivatives as a result of the Act and regulations, our results of operations may become more volatile and our
cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures and make distributions to our
unitholders and
37
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Table of Contents
payments of our debt obligations. Finally, the Act was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed
to speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could therefore be adversely affected if a
consequence of the Act and regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on our business, our
financial condition and our results of operations.
In addition, the European Union and other non-U.S. jurisdictions are implementing regulations with respect to the derivatives market. To the extent we
transact with counterparties in foreign jurisdictions, we may become subject to such regulations.
The loss of the services of any member of senior management or key employee could have an adverse effect on our business and reduce our ability to
resume making distributions to our unitholders and payments of our debt obligations. We may not be able to locate or employ on acceptable terms qualified
replacements for senior management or other key employees if their services were no longer available. We have employment agreements in place with respect
to Timothy Go and F. William Grube. We do not maintain any key-man life insurance.
Borrowings under our revolving credit facility bear interest at a rate equal to prime plus a basis points margin or the London Interbank Offered Rate
(“LIBOR”) plus a basis points margin, at our option. As of December 31, 2019, we had no outstanding borrowings under our revolving credit facility and
$42.5 million in standby letters of credit were issued under our revolving credit facility. The interest rate is subject to adjustment based on fluctuations in
LIBOR or the prime rate, as applicable. An increase in the interest rates associated with our floating-rate debt would increase our debt service costs and affect
our results of operations and cash flow available for distribution to our unitholders. In addition, an increase in interest rates could adversely affect our future
ability to obtain financing or materially increase the cost of any additional financing.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop
persuading or requiring banks to submit rates for the calculation of LIBOR after 2021. This announcement, in conjunction with financial benchmark reforms
more generally and changes in the interbank lending markets, have resulted in uncertainty about the future of LIBOR and certain other rates or indices which
have historically been used as interest rate “benchmarks” in our borrowings as well as our derivatives. Accordingly, the use of an alternative rate on these debt
obligations could result in increased interest expense, in addition to costs to amend the agreements and other applicable arrangements to a new reference rate.
At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and we are unable to predict the effect of any such
alternatives on our business, results of operations or financial condition.
Certain events relating to a change of control of our general partner, our partnership and our operating subsidiaries would constitute an event of default
under our revolving credit facility, the indentures governing our senior notes, our Collateral Trust Agreement and our Supply and Offtake Agreements. In
addition, an event of default under our revolving credit facility would likely constitute an event of default under our master derivatives contracts and the BP
Purchase Agreement. As a result, upon a change of control event, we may be required immediately to repay the outstanding principal, any accrued interest on
and any other amounts owed by us under our revolving credit facility, the senior notes and Supply and Offtake Agreements and the outstanding payment
obligations under our master derivatives contracts and the BP Purchase Agreement. The source of funds for these repayments would be our available cash or
cash generated from other sources and there can be no assurance that we would have, or be able to obtain, sufficient funds to repay such indebtedness and
other payment obligations in full.
In addition, our obligations under our revolving credit facility are secured by a first-priority lien on our accounts receivable, inventory and substantially
all of our cash; and our obligations under our master derivatives contracts and the BP Purchase Agreement are secured by a first-priority lien on our and our
subsidiaries’ real property, plant and equipment, fixtures, intellectual property, certain financial assets, certain investment property, commercial tort claims,
chattel paper, documents, instruments and proceeds of the forgoing (including proceeds of hedge agreements). If we are unable to repay our indebtedness
under the revolving credit facility, satisfy the payment obligations under our master derivative contracts or the payment obligations under the BP Purchase
Agreement or obtain waivers of such defaults, then the lenders under our revolving credit facility, the derivative counterparties under our master derivative
contracts and BP, respectively, would have the right to foreclose on those assets, which would have a material adverse effect on us. There is no restriction in
our partnership agreement on the ability of our general partner to enter into a transaction which would trigger the change of control provisions of our
revolving credit facility agreement, the indentures governing our senior notes, our Collateral Trust Agreement or our Supply and Offtake Agreements.
38
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Table of Contents
Threats to information technology systems associated with cybersecurity risks and cyber incidents or attacks continue to grow. We depend on information
technology systems. In addition, our use of the internet, cloud services and other public networks exposes our business and that of other third parties with
whom we do business to cyber-attacks that attempt to gain unauthorized access to data and systems, intentional or inadvertent releases of confidential
information, corruption of data and disruption of critical systems and operations. Despite the security measures we have in place and any additional measures
we may implement in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer
viruses, lost or misplaced data, programming errors, human errors, acts of vandalism or other events. Any disruption of our systems or security breach or
event resulting in the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us directly or our third-party service
providers, could damage our reputation, expose us to the risks of litigation and liability, disrupt our business or otherwise affect our results of operations. In
addition, as cyber-attacks continue to evolve in magnitude and sophistication, and our reliance on digital technologies continues to grow, we may be required
to expend additional resources in order to continue to enhance our cybersecurity measures and to investigate and remediate any digital systems, related
infrastructure, technologies and network security vulnerabilities.
We are exposed to risks of loss in the event of nonperformance by our customers and by counterparties of our derivative instruments. Some of our
customers and counterparties may be highly leveraged and subject to their own operating and regulatory risks. Even if our credit review and analysis
mechanisms work properly, we may experience financial losses in our dealings with other parties. Any increase in the nonpayment or nonperformance by our
customers and/or counterparties could reduce our ability to make distributions to our unitholders and payments of our debt obligations.
Risks Inherent in an Investment in Us
At March 4, 2020, the families of our chairman, executive vice chairman, The Heritage Group and certain of their affiliates own an approximate 21.0%
limited partner interest in us. In addition, The Heritage Group and the families of our chairman and executive vice chairman own our general partner. In May
2018, The Heritage Group disclosed in a Schedule 13D filing that it is considering various alternatives with respect to its investment in us, including potential
consolidation, acquisitions or sales of our assets or common units, as well as potential changes to our capital structure. The Heritage Group also disclosed that
it may make formal proposals to us, holders of our common units or other third parties regarding such strategic alternatives.
Conflicts of interest may arise between our general partner and its affiliates, on the one hand, and us and our unitholders, on the other hand. As a result of
these conflicts, the general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include,
among others, the following situations:
•
•
•
•
•
•
our general partner is allowed to take into account the interests of parties other than us, such as its affiliates, in resolving conflicts of interest, which
has the effect of limiting its fiduciary duty to our unitholders;
our general partner has limited its liability and reduced its fiduciary duties under our partnership agreement and has also restricted the remedies
available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty. As a result of purchasing common
units, unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under
Delaware law;
our general partner determines the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities, and
reserves, each of which can affect the amount of cash that is distributed to unitholders;
our general partner determines which costs incurred by it and its affiliates are reimbursable by us;
our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is a maintenance capital
expenditure, which reduces operating surplus, or a capital expenditure for acquisitions or capital improvements, which does not. This determination
can affect the amount of cash that is available for distribution to our unitholders;
our general partner has the flexibility to cause us to enter into a broad variety of derivative transactions covering different time periods, the net cash
receipts or payments from which will increase or decrease operating surplus and adjusted operating surplus, with the result that our general partner
may be able to shift the recognition of operating surplus and adjusted operating surplus between periods to increase the distributions it and its
affiliates receive on their incentive distribution rights; and
39
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Table of Contents
•
in some instances, our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or
effect of the borrowing is to make incentive distributions.
Pursuant to the omnibus agreement we entered into in connection with our initial public offering, The Heritage Group and its controlled affiliates have
agreed not to engage in, whether by acquisition or otherwise, the business of refining or marketing specialty lubricating oils, solvents and wax products as
well as gasoline, diesel and jet fuel products in the continental U.S. for so long as it controls us. This restriction does not apply to certain assets and businesses
which are more fully described under Part III, Item 13 “Certain Relationships and Related Transactions and Director Independence — Omnibus Agreement.”
Although Mr. Grube is prohibited from competing with us pursuant to the terms of his employment agreement, the owners of our general partner, other
than The Heritage Group, are not prohibited from competing with us, except to the extent described above. Currently, The Heritage Group is an active
marketer of asphalt products and has been engaged in this business for much longer than us. In certain geographical areas, there can be overlap where both
The Heritage Group and we market asphalt.
Our partnership agreement limits our general partner’s fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions
taken by our general partner that might otherwise constitute breaches of fiduciary duty.
•
•
•
•
permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles
our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest
of, or factors affecting, us, our affiliates or any limited partner. Examples include the exercise of its limited call right, its voting rights with respect to
the units it owns, its registration rights and its determination whether or not to consent to any merger or consolidation of our partnership or
amendment of our partnership agreement;
provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as
it acted in good faith, meaning it believed the decision was in the best interests of our partnership;
generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors
of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or
available from unrelated third parties or be “fair and reasonable” to us. In determining whether a transaction or resolution is “fair and reasonable,”
our general partner may consider the totality of the relationships between the parties involved, including other transactions that may be particularly
advantageous or beneficial to us; and
provides that our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners for any acts or
omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general
partner or those other persons acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge
that such person’s conduct was criminal.
By purchasing a common unit, a unitholder agrees to be bound by the provisions in the partnership agreement, including the provisions discussed above.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited
ability to influence management’s decisions regarding our business. Unitholders do not elect our general partner or its board of directors, and have no right to
elect our general partner or its board of directors on an annual or other continuing basis. The board of directors of our general partner is chosen by the
members of our general partner. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, the vote of the holders of at least
66 2/3% of all outstanding units voting together as a single class is required to remove the general partner. At March 4, 2020, the owners of our general partner
and certain of their affiliates own approximately 21.0% of our common units. As a result of these limitations, the price at which the common units trade could
be diminished because of the absence or reduction of a takeover premium in the trading price.
Unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more
of any class of units then outstanding, other than our general partner, its affiliates, their transferees, and persons who acquired such units with the prior
approval of the board of directors of our general partner, cannot vote on any matter. Our partnership agreement also contains provisions limiting the ability of
unitholders to call meetings or to acquire
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Table of Contents
information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the
consent of the unitholders. Furthermore, our partnership agreement does not restrict the ability of the members of our general partner from transferring their
respective membership interests in our general partner to a third party. The new members of our general partner would then be in a position to replace the
board of directors and officers of our general partner with their own choices and thereby control the decisions taken by the board of directors.
We do not have our own officers and employees and rely solely on the officers and employees of our general partner and its affiliates to manage our
business and affairs. We can provide no assurance that our general partner will continue to provide us the officers and employees that are necessary for the
conduct of our business nor that such provision will be on terms that are acceptable to us. If our general partner fails to provide us with adequate personnel,
our operations could be adversely impacted and our cash available for distribution to unitholders and payments of our debt obligations could be reduced.
We may issue an unlimited number of limited partner interests of any type without the approval of our unitholders. Our partnership agreement does not
give our unitholders the right to approve our issuance of common units or equity securities ranking junior to the common units at any time. In addition, our
partnership agreement does not prohibit the issuance by our subsidiaries of equity securities, which may effectively rank senior to the common units. The
issuance of additional common units or other equity securities of equal or senior rank to the common units will have the following effects:
•
•
•
•
•
our unitholders’ proportionate ownership interest in us may decrease;
the amount of cash available for distribution on each unit may decrease;
the relative voting strength of each previously outstanding unit may be diminished;
the market price of the common units may decline; and
the ratio of taxable income to distributions, if any may increase.
Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that it establishes are necessary to fund our future
operating expenditures. In addition, our partnership agreement also permits our general partner to reduce available cash by establishing cash reserves for the
proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners.
These reserves will affect the amount of cash available for distribution to unitholders.
We are a holding company, and our subsidiaries conduct all of our operations and own all of our operating assets. We have no significant assets other than
the equity interests in our subsidiaries. As a result, our ability to distribute cash to our unitholders and make payments of debt obligations depends on the
performance of our subsidiaries and their ability to distribute funds to us. The ability of our subsidiaries to make distributions to us is restricted by our
revolving credit facility and the indentures governing our senior notes and may be restricted by, among other things, applicable state laws and other laws and
regulations. If we are unable to obtain the funds necessary to distribute cash to our unitholders or make payments of debt obligations, we may be required to
adopt one or more alternatives, such as a refinancing our indebtedness or incurring borrowings under our revolving credit facility. We cannot assure
unitholders that we would be able to refinance our indebtedness or that the terms on which we could refinance our indebtedness would be favorable.
41
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Table of Contents
Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all expenses they incur on our behalf.
Any such reimbursement will be determined by our general partner and will reduce the cash available for distribution to unitholders and payments of our debt
obligations. These expenses will include all costs incurred by our general partner and its affiliates in managing and operating us. Please read Part III, Item 13
“Certain Relationships and Related Transactions and Director Independence.”
If at any time our general partner and its affiliates own more than 80% of the issued and outstanding common units, our general partner will have the
right, but not the obligation, which right it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by
unaffiliated persons at a price not less than their then-current market price. As a result, unitholders may be required to sell their common units to our general
partner, its affiliates or us at an undesirable time or price and may not receive any return on their investment. Unitholders may also incur a tax liability upon a
sale of their common units. At March 4, 2020, our general partner and its affiliates own approximately 21.0% of our common units.
A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the
partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law and we conduct business in a
number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly
established in some of the other states in which we do business. Unitholders could be liable for any and all of our obligations as if they were a general partner
if:
•
•
a court or government agency determined that we were conducting business in a state but had not complied with that particular state’s partnership
statute; or
unitholders’ right to act with other unitholders to remove or replace the general partner, to approve some amendments to our partnership agreement
or to take other actions under our partnership agreement constitute “control” of our business.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware
Revised Uniform Limited Partnership Act, which we call the Delaware Act, we may not make a distribution to our unitholders if the distribution would cause
our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution,
limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited
partnership for the distribution amount. Purchasers of units who become limited partners are liable for the obligations of the transferring limited partner to
make contributions to the partnership that are known to the purchaser of the units at the time it became a limited partner and for unknown obligations if the
liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-
recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
42
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Table of Contents
Our common units are traded publicly on the NASDAQ Global Select Market under the symbol “CLMT.” However, our common units have a low
average daily trading volume compared to many other units representing limited partner interests quoted on the NASDAQ Global Select Market.
The market price of our common units may continue to be volatile and may also be influenced by many factors, some of which are beyond our control,
including:
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our quarterly distributions or failure to provide such distributions;
our quarterly or annual earnings or those of other companies in our industry;
changes in commodity prices or refining margins;
loss of a large customer;
announcements by us or our competitors of significant contracts or acquisitions;
changes in accounting standards, policies, guidance, interpretations or principles;
general economic conditions;
the failure of securities analysts to cover our common units or changes in financial estimates by analysts;
future sales of our common units; and
the other factors described in Item 1A “Risk Factors” of this Annual Report.
Tax Risks to Common Unitholders
The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for U.S. federal
income tax purposes.
Despite the fact that we are organized as a limited partnership under Delaware law, we would be treated as a corporation for federal income tax purposes
unless we satisfy a “qualifying income” requirement. We have requested and obtained a favorable private letter ruling from the IRS to the effect that, based on
facts presented in the private letter ruling request, our income from refining, blending, processing, packaging, marketing and distribution of lubricants will
constitute “qualifying income” within the meaning of Section 7704 of the Code. Based upon our current operations and private letter rulings we have received
with respect to certain aspects of our business, we believe we satisfy the qualifying income requirement. However, no ruling has been or will be requested
regarding our treatment as a partnership for U.S. Federal income tax purposes. Failing to meet the qualifying income requirement or a change in current law
could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate.
Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow
through to our unitholders. Because a tax would be imposed upon us as a corporation, our cash available for distribution to our unitholders could be
substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the
unitholders, likely causing a substantial reduction in the value of our common units.
Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a
corporation or otherwise subjects us to a material amount of entity-level taxation for federal, state or local income tax purposes, the anticipated quarterly
distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law or interpretation on us. At the state level, several
states have been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise, or other forms of taxation.
Imposition of a similar tax on us in the jurisdictions in which we operate or in other jurisdictions to which we may expand could substantially reduce our cash
available for distribution to our unitholders.
The present U.S. federal income tax treatment of publicly-traded partnerships, including us, or an investment in our common units may be modified by
administrative, legislative or judicial changes or differing interpretations at any time. From time to time,
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Table of Contents
members of Congress have proposed and considered substantive changes to the existing U.S. federal income tax laws that affect publicly-traded partnerships.
For example, the “Clean Energy for America Act,” which is similar to legislation that was commonly proposed during the Obama Administration, was
introduced in the Senate on May 2, 2019. If enacted, this proposal would, among other things, repeal the qualifying income exception within Section 7704(d)
(1)(E) of the Code upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. Moreover, the Treasury Department has
issued, and in the future may issue, regulations interpreting those laws that affect publicly-traded partnerships.
In addition, on January 24, 2017, final regulations regarding which activities give rise to qualifying income within the meaning of Section 7704 of the
Code (the “Final Regulations”) were published in the Federal Register. Although we are still studying the application of the Final Regulations to portions of
our business, the Final Regulations reflect a number of changes from the proposed regulations that are responsive to our requests for clarifications to the
proposed regulations. Although we anticipate that the vast majority of our income will qualify under new standards adopted by the Final Regulations, because
of our private letter rulings portions of our income that may not qualify under the Final Regulations can be treated as qualifying throughout a ten-year
transition period. However, there can be no assurance that there will not be further changes to the IRS’s interpretation of the qualifying income rules that
could impact our ability to qualify as a partnership in the future.
Any modification to the U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the
exception for certain publicly-traded partnerships to be treated as partnerships for U.S. federal income tax purposes. We are unable to predict whether any of
these changes or other proposals will ultimately be enacted. Any similar or future legislative changes could negatively impact the value of an investment in
our common units. Unitholders are encouraged to consult with their tax advisor with respect to the status of legislative, regulatory and administrative
developments and proposals and any potential effect on an investment in our common units.
The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some
or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest by the IRS may materially and adversely impact
the market for our common units and the price at which they trade. Our costs of any contest by the IRS will be borne indirectly by our unitholders and our
general partner because the costs will reduce our cash available for distribution.
Pursuant to the Bipartisan Budget Act of 2015, for tax years beginning after December 31, 2017, if the IRS makes audit adjustments to our income tax
returns, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustments directly
from us. To the extent possible under the new rules, our general partner may elect to either pay the taxes (including any applicable penalties and interest)
directly to the IRS or, if we are eligible, issue a revised information statement to each unitholder with respect to an audited and adjusted return. Although our
general partner may elect to have our unitholders take such audit adjustment into account in accordance with their interests in us during the tax year under
audit, there can be no assurance that such election will be practical, permissible or effective in all circumstances. As a result, our current unitholders may bear
some or all of the tax liability resulting from such audit adjustment, even if such unitholders did not own units in us during the tax year under audit. If, as a
result of any such audit adjustment, we are required to make payments of taxes, penalties and interest, our cash available for distribution to our unitholders
might be substantially reduced and our current and former unitholders may be required to indemnify us for any taxes (including any applicable penalties and
interest) resulting from such audit adjustments that were paid on such unitholders’ behalf. These rules are not applicable for tax years beginning on or prior to
December 31, 2017.
Unitholders will be required to pay federal income taxes and, in some cases, state and local income taxes on their share of our taxable income, whether or
not they receive any cash distributions from us. During periods in which the partnership suspends or suppresses cash distributions or reinvests cash in its
business, the ratio of the partnership’s allocable taxable income to cash distributions will increase. Unitholders may not receive cash distributions from us
equal to their share of our taxable income or even equal to the actual tax liability which results from that income.
Additionally, in response to current market conditions, we may engage in transactions to de-lever and manage our liquidity, which may result in income
and gain to our unitholders without a corresponding cash distribution. For example, if we sell assets
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Table of Contents
and use the proceeds to repay existing debt or fund capital expenditures, you may be allocated taxable income and gain resulting from the sale without
receiving a cash distribution. Further, taking advantage of opportunities to reduce our existing debt, such as debt exchanges, debt repurchases or modifications
of our existing debt, could result in “cancellation of indebtedness income” (also referred to as “COD income”) being allocated to our unitholders as taxable
income. Unitholders may be allocated COD income, and income tax liabilities arising therefrom may exceed cash distributions. The ultimate effect of any
such allocations will depend on the unitholder’s individual tax position with respect to its units. Unitholders are encouraged to consult their tax advisors with
respect to the consequences to them of COD income.
The Heritage Group, which along with the families of our chairman and executive vice chairman and certain of their affiliates owns an approximate
21.0% limited partnership interest in us and control our general partner, has stated publicly that it is considering, and may, from time to time, formulate plans
or proposals for various alternatives with respect to their investment in us, including, without limitation, potential consolidation, acquisitions or sales of assets
or common units or changes to our capital structure, and hold discussions with or make formal proposals to us, other holders of common units or other third
parties regarding such matters. If we were to convert to a corporation, we would pay federal income tax on our taxable income at the corporate tax rate.
Distributions would generally be taxed again to our shareholders as dividends to the extent of our current and accumulated earnings and profits, and no
income, gains, losses, deductions or credits would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, our cash
available for distribution could be substantially reduced. Please read “Our tax treatment depends on our status as a partnership for U.S. federal income tax
purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us as a corporation for
federal income tax purposes, or if we become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for
distribution to our unitholders would be substantially reduced.” In addition, a conversion transaction could in some circumstances itself be a taxable event for
our unitholders.
If our unitholders sell their common units, they will recognize a gain or loss equal to the difference between the amount realized and their tax basis in
those common units. Because distributions in excess of a unitholder’s allocable share of our net taxable income result in a decrease in such unitholder’s tax
basis in their common units, the amount, if any, of such prior excess distributions with respect to the units they sell will, in effect, become taxable income to
our unitholders if they sell such units at a price greater than their tax basis in those units, even if the price they receive is less than their original cost. In
addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if unitholders sell their units, they may incur a tax liability in
excess of the amount of cash they receive from the sale.
Furthermore, a substantial portion of the amount realized from the sale of common units, whether or not representing gain, may be taxed as ordinary
income due to potential recapture of depreciation and deductions and certain other items. Thus, our unitholders may recognize both ordinary income and
capital loss from the sale of their units if the amount realized on a sale of such units is less than their adjusted basis in the units. Net capital loss may only
offset capital gains and, in the case of individuals, up to $3,000 of ordinary income per year. In the taxable period in which our unitholders sell their units,
they may recognize ordinary income from our allocations of income and gain to them prior to the sale and from recapture items that generally cannot be offset
by any capital loss recognized upon the sale of units.
In general, our unitholders are entitled to a deduction for the interest we have paid or accrued on indebtedness properly allocable to our trade or business
during our taxable year. However, under the Tax Cuts and Jobs Act, for taxable years beginning after December 31, 2017, our deduction for “business
interest” is limited to the sum of our business interest income and 30% of our “adjusted taxable income.” For the purposes of this limitation, our adjusted
taxable income is computed without regard to any business interest expense or business interest income, and in the case of taxable years beginning before
January 1, 2022, any deduction allowable for depreciation, amortization, or depletion to the extent such depreciation, amortization, or depletion is not
capitalized into cost of goods sold with respect to inventory. If our “business interest” is subject to limitation under these rules, our unitholders will be limited
in their ability to deduct their share of any interest expense that has been allocated to them. As a result, unitholders may be subject to limitation on their
ability to deduct interest expense incurred by us.
Pending further guidance specific to this issue, we have not yet determined the impact the limitation could have on our unitholders’ ability to deduct our
interest expense, but it is possible that our unitholders’ interest expense deduction will be limited.
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Table of Contents
Investment in our common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs) raises issues
unique to them. For example, virtually all of our income allocated to organizations that are exempt from U.S. federal income tax, including IRAs and other
retirement plans, will be unrelated business taxable income and will be taxable to them. Further, with respect to taxable years beginning after December 31,
2017, subject to the proposed aggregation rules issued by the Treasury Department for certain similarly situated businesses or activities, a tax-exempt entity
with more than one unrelated trade or business (including by attribution from investment in a partnership such as ours that is engaged in one or more
unrelated trade or business) is required to compute the unrelated business taxable income of such tax-exempt entity separately with respect to each such trade
or business (including for purposes of determining any net operating loss deduction). As a result, for years beginning after December 31, 2017, it may not be
possible for tax-exempt entities to utilize losses from an investment in our partnership to offset unrelated business taxable income from another unrelated
trade or business and vice versa. Tax-exempt entities should consult a tax advisor before investing in our common units.
Non-U.S. unitholders are generally taxed and subject to income tax filing requirements by the United States on income effectively connected with a U.S.
trade or business (“effectively connected income”). Income allocated to our unitholders and any gain from the sale of our units will generally be considered to
be “effectively connected” with a U.S. trade or business. As a result, distributions to a Non-U.S. unitholder will be subject to withholding at the highest
applicable effective tax rate and a Non-U.S. unitholder who sells or otherwise disposes of a unit will also be subject to U.S. federal income tax on the gain
realized from the sale or disposition of that unit.
The Tax Cuts and Jobs Act imposes a withholding obligation of 10% of the amount realized upon a Non-U.S. unitholder’s sale or exchange of an interest
in a partnership that is engaged in a U.S. trade or business. Because the “amount realized” includes a partner’s share of the partnership’s liabilities, 10% of the
amount realized could exceed the total cash purchase price for the units. However, due to the challenges of administering a withholding obligation applicable
to open market trading and other complications, the IRS has temporarily suspended the application of this withholding rule to open market transfers of
interests in publicly traded partnerships pending the issuance of final regulations. If recently promulgated regulations are finalized as proposed, such
regulations would provide, with respect to transfers of publicly-traded interests in publicly-traded partnerships effected through a broker, that the obligation to
withhold is imposed on the transferor’s broker and that a partner’s “amount realized” does not include a partner’s share of a publicly-traded partnership’s
liabilities for purposes of determining the amount subject to withholding. However, it is not clear when such regulations will be finalized and if they will be
finalized in their current form. Non-U.S. unitholders should consult a tax advisor before investing in our common units.
Even though we (as a partnership for U.S. federal income tax purposes) are not subject to U.S. federal income tax, some of our operations are currently
conducted through subsidiaries that are organized as corporations for U.S. federal income tax purposes. The taxable income, if any, of such subsidiaries are
subject to corporate-level U.S. federal income taxes, which may reduce the cash available for distribution to us and, in turn, to our unitholders. If the IRS or
other state or local jurisdictions were to successfully assert that these corporations have more tax liability than we anticipate or legislation was enacted that
increased the corporate tax rate, the cash available for distribution could be further reduced. The income tax return filings positions taken by these corporate
subsidiaries require significant judgment, use of estimates, and the interpretation and application of complex tax laws. Significant judgment is also required in
assessing the timing and amounts of deductible and taxable items. Despite our belief that the income tax return positions taken by these subsidiaries is fully
supportable, certain positions may be successfully challenged by the IRS, state or local jurisdictions.
Because we cannot match transferors and transferees of common units and because of other reasons, we have adopted depreciation and amortization
positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the
amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain from unitholders’ sale of
common units and could have a negative impact on the value of our common units or result in audit adjustments to their tax returns.
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Table of Contents
We generally prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the
ownership of our common units on the first day of each month (the “Allocation Date”), instead of on the basis of the date a particular common unit is
transferred. Similarly, we generally allocate gain or loss realized on a sale or other disposition of our assets or, in the discretion of the general partner, any
other extraordinary item of income, gain, loss or deduction on the Allocation Date. Nonetheless, we allocate certain deductions for depreciation of capital
additions based upon the date the underlying property is placed in service. The U.S. Department of the Treasury adopted final Treasury Regulations allowing
a similar monthly simplifying convention, but such regulations do not specifically authorize all aspects of our proration method. If the IRS were to
successfully challenge our proration method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain,
loss, and deduction among our unitholders.
In determining the items of income, gain, loss and deduction allocable to our unitholders, we must routinely determine the fair market value of our
respective assets. Although we may from time to time consult with professional appraisers regarding valuation matters, we make many fair market value
estimates using a methodology based on the market value of our common units as a means to measure the fair market value of our respective assets. The IRS
may challenge these valuation methods and the resulting allocations of income, gain, loss and deduction.
A successful IRS challenge to these methods or allocations could adversely affect the amount, character, and timing of taxable income or loss being
allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value
of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.
Because there are no specific rules governing the U.S. federal income tax consequences of loaning a partnership interest, a unitholder whose common
units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, the unitholder may no longer be treated for tax
purposes as a partner with respect to those common units during the period of the loan and the unitholder may recognize gain or loss from such disposition.
Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the
unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Unitholders desiring to
assure their status as partners and avoid the risk of gain recognition from a loan to a short seller should modify any applicable brokerage account agreements
to prohibit their brokers from borrowing their common units.
In addition to U.S. federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business
taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the
future, even if they do not live in any of those jurisdictions. We own assets and conduct business in most states. Our unitholders may be required to file
foreign, state and local income tax returns and pay state and local income taxes in any state in which we now or may conduct business in the future. Further,
they may be subject to penalties for failure to comply with those requirements. As we make acquisitions or expand our business, we may own assets or
conduct business in additional states or foreign jurisdictions that impose a personal income tax. It is the responsibility of our unitholders to file all
U.S. federal, foreign, state and local tax returns and pay any taxes due in these jurisdictions. Unitholders should consult with their own tax advisors regarding
the filing of such tax returns, the payment of such taxes and the deductibility of any taxes paid.
Item 1B.(cid:0)
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Table of Contents
Item 3. (cid:0)
We are not a party to, and our property is not the subject of, any pending legal proceedings other than ordinary routine litigation incidental to our
business. Our operations are subject to a variety of risks and disputes normally incident to our business. As a result, we may, at any given time, be a defendant
in various legal proceedings and litigation arising in the ordinary course of business. Please read Items 1 and 2 “Business and Properties — Environmental
and Occupational Health and Safety Matters” for a description of our current regulatory matters related to the environment, health and safety. Additionally,
the information provided under Note 8 “Commitments and Contingencies” in Part II, Item 8 “Financial Statements and Supplementary Data — Notes to
Consolidated Financial Statements” is incorporated herein by reference.
Item 4.(cid:0)
Not applicable.
48
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Table of Contents
Item 5. (cid:0)
Market Information
PART II
Our common units are quoted and traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “CLMT.” As of March 4, 2020, there
were approximately 32 unitholders of record of our common units. The actual number of unitholders is greater than the number of holders of record. As of
March 4, 2020, there were 77,831,691 common units outstanding. The last reported sale price of our common units by NASDAQ on March 4, 2020, was
$3.71.
Cash Distribution Policy
General. Within 45 days after the end of each quarter, we distribute our available cash (as defined in our partnership agreement), if any, to unitholders of
record on the applicable record date.
Available Cash. Available cash generally means, for any quarter, all cash on hand at the end of the quarter:
•
less the amount of cash reserves established by our general partner to:
•
•
•
provide for the proper conduct of our business;
comply with applicable law, any of our debt instruments or other agreements; and
provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters.
•
plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of
the quarter for which the determination is being made. Working capital borrowings are generally borrowings that will be made under our revolving
credit facility and in all cases are used solely for working capital purposes or to pay distributions to partners.
Cash Distribution Policy. We distribute to the holders of common units on a quarterly basis at least the minimum quarterly distribution of $0.45 per unit,
or $1.80 in aggregate per year, to the extent we have sufficient cash from our operations after establishment of cash reserves and payment of fees and
expenses, including payments to our general partner. However, since April 2016, we have not paid, and there is no guarantee that we will pay the minimum
quarterly distribution on the units in any quarter. Please read “— Distribution Suspension.” Even if our cash distribution policy is not modified or revoked,
the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner, taking into consideration the
terms of our partnership agreement. We will be prohibited from making any distributions to unitholders if it would cause an event of default, or an event of
default exists, under our debt instruments, including our Credit Agreement and the indentures governing our 2022 Notes, 2023 Notes and 2025 Notes. Please
read Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Debt
and Credit Facilities” for a discussion of the restrictions in our debt instruments that restrict our ability to make distributions.
General Partner Interest and Incentive Distribution Rights. Our general partner is entitled to 2% of all quarterly distributions since inception that we
make prior to our liquidation. This general partner interest is represented by 1,588,401 general partner units. Our general partner has the right, but not the
obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. The general partner’s 2% interest in these
distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to
maintain its 2% general partner interest. Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages,
up to a maximum of 50%, of the cash we distribute from operating surplus (as defined in our partnership agreement) in excess of $0.495 per unit. The
maximum distribution of 50% includes distributions paid to our general partner on its 2% general partner interest, and assumes that our general partner
maintains its general partner interest at 2%. The maximum distribution of 50% does not include any distributions that our general partner may receive on units
that it owns. Our general partner earned no incentive distribution rights for the years ended December 31, 2019 and 2018.
49
0
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Table of Contents
Our general partner is entitled to incentive distributions if the amount we distribute to unitholders with respect to any quarter exceeds specified target
levels shown below:
Minimum Quarterly Distribution
First Target Distribution
Second Target Distribution
Third Target Distribution
Thereafter
Distribution Suspension
Total Quarterly
Distribution
Target Amount
Per Common Unit
$0.45
up to $0.495
above $0.495 up to $0.563
above $0.563 up to $0.675
above $0.675
Marginal Percentage
Interest in Distributions
Unitholders
General Partner
98%
98%
85%
75%
50%
2%
2%
15%
25%
50%
In April 2016 and effective beginning the first quarter 2016, the board of directors of our general partner suspended payment of our quarterly cash
distribution. The board of directors of our general partner will continue to evaluate our ability to reinstate the distribution.
Equity Compensation Plans
The equity compensation plan information required by Item 201(d) of Regulation S-K in response to this Item 5 is incorporated by reference from Part
III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters” of this Annual Report.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Item 6. (cid:0)
The following table shows selected historical consolidated financial and operating data of the Company. The selected historical consolidated financial
and operating data for the years ended December 31, 2019, 2018 and 2017 and the balance sheet data as of December 31, 2019 and 2018 are derived from our
audited consolidated financial statements included in Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. The
selected historical consolidated financial and operations data for the years ended December 31, 2016 and 2015 and the balance sheet data as of December 31,
2017, 2016 and 2015 are derived from our audited consolidated financial statements not included in Item 8 of this Annual Report on Form 10-K.
The selected historical consolidated financial and operating data contains the historical results of (i) the San Antonio Refinery through the effective date
of its sale, November 10, 2019, (ii) the Superior Refinery through the effective date of its sale, November 7, 2017, and (iii) Anchor through the completion of
its sale on November 21, 2017. The classification of Anchor’s results of operations and assets and liabilities for all periods presented reflect Anchor as a
discontinued operation in accordance with U.S. generally accepted accounting principles (“GAAP”).
The following table includes the non-GAAP financial measures EBITDA, Adjusted EBITDA and Distributable Cash Flow. For a reconciliation of
EBITDA, Adjusted EBITDA and Distributable Cash Flow to [Net loss and Net cash provided by (used in) operating activities, our most directly comparable
financial performance and liquidity measures calculated in accordance with GAAP, please read “— Non-GAAP Financial Measures.”
50
6
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H
(cid:0)
O
(cid:0)
H
(cid:0)
F
(cid:0)
W
(cid:0)
H
(cid:0)
G
(cid:0)
(cid:3)
(cid:0)
)
(cid:0)
L
(cid:0)
Q
(cid:0)
D
(cid:0)
Q
(cid:0)
F
(cid:0)
L
(cid:0)
D
(cid:0)
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(cid:0)
(cid:3)
(cid:0)
’
(cid:0)
D
(cid:0)
W
(cid:0)
D
Table of Contents
The information in the following table should be read together with, and is qualified in its entirety by reference to, the historical consolidated financial
statements and the accompanying notes included in Part II, Item 8 “Financial Statements and Supplementary Data” except for operating data, such as sales
volume, feedstock runs and facility production. The following table also should be read together with Part II, Item 7 “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
2019
2018
2017
2016
2015
Year Ended December 31,
(In millions)
Statement of Operations Data:
Sales
Cost of sales
Gross profit
Operating costs and expenses:
Selling
General and administrative
Transportation
Taxes other than income taxes
Loss on impairment and disposal of assets
(Gain) loss on sale of business, net
Other
Operating income (loss)
Other income (expense):
Interest expense
Debt extinguishment costs
Gain (loss) on derivative instruments
Gain (loss) from unconsolidated affiliates
Gain (loss) on sale of unconsolidated affiliates
Other
Total other expense
Net loss from continuing operations before income taxes
Income tax expense (benefit) from continuing operations
Net loss from continuing operations
Net loss from discontinued operations, net of income taxes
$
3,452.6 $
3,497.5 $
3,763.8 $
3,474.3 $
3,000.9
451.7
3,060.8
436.7
3,265.6
498.2
3,088.0
386.3
53.1
136.7
122.9
20.5
37.0
8.7
(3.5)
76.3
(134.6)
(2.2)
9.0
3.8
1.2
3.4
(119.4)
(43.1)
0.5
(43.6)
—
58.2
122.5
137.2
18.1
—
(4.8)
(17.4)
122.9
(155.5)
(58.8)
33.8
(3.7)
0.2
10.8
(173.2)
(50.3)
0.7
(51.0)
(4.1)
65.7
138.7
137.1
24.1
207.3
(236.0)
3.3
158.0
(183.1)
—
(9.6)
—
—
3.3
(189.4)
(31.4)
(0.1)
(31.3)
(72.5)
69.8
105.8
154.3
19.3
35.7
—
1.7
(0.3)
(161.7)
—
(4.1)
(18.3)
(113.4)
1.2
(296.3)
(296.6)
0.2
(296.8)
(31.8)
Net loss
$
(43.6) $
(55.1) $
(103.8) $
(328.6) $
51
3,930.3
3,393.9
536.4
71.8
125.9
153.6
17.1
—
—
10.8
157.2
(104.9)
(46.6)
(31.4)
(61.1)
—
1.6
(242.4)
(85.2)
0.2
(85.4)
(54.0)
(139.4)
Table of Contents
Weighted average limited partner units outstanding:
Basic and diluted
78,212,136
77,943,992
77,598,950
77,043,935
74,896,096
Limited partners’ interest basic and diluted net loss per unit:
Year Ended December 31,
2019
2018
2017
2016
2015
(In millions, except unit, per unit and operating data)
From continuing operations
From discontinued operations
Limited partners’ interest
Cash distributions declared per limited partner
Balance Sheet Data (at period end):(1)
Property, plant and equipment, net
Total assets
Accounts payable
Total long-term debt
Total partners’ capital
Cash Flow Data:(5)
Net cash flow provided by (used in):
Operating activities
Investing activities
Financing activities
Other Financial Data:(5)
EBITDA
Adjusted EBITDA
Distributable Cash Flow
Operating Data (bpd): (1)
Total sales volume (2)
Total feedstock runs (3)
Total facility production (4)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(0.55) $
—
(0.55) $
— $
973.5 $
1,857.8 $
230.2 $
1,211.3 $
21.6 $
191.9 $
14.5 $
(343.0) $
201.6 $
304.6 $
104.0 $
104,734
103,603
100,029
(0.64) $
(0.05)
(0.69) $
— $
1,098.1 $
2,087.5 $
200.6 $
1,604.5 $
65.7 $
75.2 $
8.3 $
(442.1) $
219.2 $
263.9 $
67.0 $
97,104
94,137
95,298
(0.40) $
(0.91)
(1.31) $
— $
1,159.2 $
2,688.8 $
282.3 $
1,992.3 $
119.9 $
(26.5) $
453.4 $
83.2 $
246.7 $
317.2 $
89.3 $
(3.77) $
(0.41)
(4.18) $
0.69 $
1,632.4 $
2,571.3 $
275.9 $
1,997.2 $
218.7 $
4.1 $
(154.2) $
148.7 $
(3.5) $
158.2 $
(5.7) $
132,082
128,624
131,561
140,180
134,163
134,929
(1.34)
(0.71)
(2.05)
2.74
1,665.0
2,752.6
300.0
1,773.4
603.9
376.4
(389.0)
9.7
82.5
257.7
161.9
126,216
123,051
122,795
(1) Balance sheet and operating data exclude discontinued operations.
(2) Total sales volume includes sales from the production at our facilities and certain third-party facilities pursuant to supply and/or processing
agreements, sales of inventories and the resale of crude oil to third-party customers. Total sales volume also includes the sale of purchased fuel
product blendstocks, such as ethanol and biodiesel, as components of finished fuel products in our fuel products segment sales.
(3) Total feedstock runs represent the barrels per day of crude oil and other feedstocks processed at our facilities and at certain third-party facilities
pursuant to supply and/or processing agreements.
(4) Total facility production represents the barrels per day of specialty products and fuel products yielded from processing crude oil and other feedstocks
at our facilities and at certain third-party facilities pursuant to supply and/or processing agreements. The difference between total facility production
and total feedstock runs is primarily a result of the time lag between the input of feedstocks and the production of finished products and volume loss.
(5) Cash flow and other financial data are reflective of continuing and discontinued operations.
52
Table of Contents
Non-GAAP Financial Measures
We include in this Annual Report the non-GAAP financial measures EBITDA, Adjusted EBITDA and Distributable Cash Flow. We provide
reconciliations of EBITDA, Adjusted EBITDA and Distributable Cash Flow to Net loss, our most directly comparable financial performance measure. We
also provide a reconciliation of Distributable Cash Flow, Adjusted EBITDA and EBITDA to Net cash provided by (used in) operating activities, our most
directly comparable liquidity measure. Both Net loss and Net cash provided by (used in) operating activities are calculated and presented in accordance with
GAAP.
EBITDA, Adjusted EBITDA and Distributable Cash Flow are used as supplemental financial measures by our management and by external users of our
financial statements, such as investors, commercial banks, research analysts and others, to assess:
•
•
•
•
the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness;
our operating performance and return on capital as compared to those of other companies in our industry, without regard to financing or capital
structure; and
the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities.
Management believes that these non-GAAP measures are useful to analysts and investors as they exclude transactions not related to our core cash
operating activities and provide metrics to analyze our ability to pay interest costs and distributions. However, the indentures governing our senior notes
contain covenants that, among other things, restrict our ability to pay distributions. We believe that excluding these transactions allows investors to
meaningfully analyze trends and performance of our core cash operations.
We define EBITDA for any period as net income (loss) plus interest expense (including debt issuance costs), income taxes and depreciation and
amortization.
We define Adjusted EBITDA for any period as EBITDA adjusted for (a) impairment; (b) unrealized gains and losses from mark to market accounting for
hedging activities; (c) realized gains and losses under derivative instruments excluded from the determination of net income (loss); (d) non-cash equity-based
compensation expense and other non-cash items (excluding items such as accruals of cash expenses in a future period or amortization of a prepaid cash
expense) that were deducted in computing net income (loss); (e) debt refinancing fees, premiums and penalties; (f) any net loss realized in connection with an
asset sale that was deducted in computing net income (loss) and (g) all extraordinary, unusual or non-recurring items of gain or loss, or revenue or expense.
We define Distributable Cash Flow for any period as Adjusted EBITDA less replacement and environmental capital expenditures, turnaround costs, cash
interest expense (consolidated interest expense less non-cash interest expense), income (loss) from unconsolidated affiliates, net of cash distributions and
income tax expense (benefit).
We define Adjusted EBITDA Margin as Adjusted EBITDA divided by sales.
The definition of Adjusted EBITDA presented in this Annual Report is consistent with the calculation of “Consolidated Cash Flow” contained in the
indentures governing our 2022, 2023 and 2025 Notes (as defined in this Annual Report). We are required to report Consolidated Cash Flow to the holders of
our 2022, 2023 and 2025 Notes and Adjusted EBITDA to the lenders under our revolving credit facility, and these measures are used by them to determine
our compliance with certain covenants governing those debt instruments. Please read Part II, Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and Capital Resources — Debt and Credit Facilities” for additional details regarding the covenants
governing our debt instruments.
EBITDA, Adjusted EBITDA and Distributable Cash Flow should not be considered alternatives to Net income (loss), Operating income (loss), Net cash
provided by (used in) operating activities or any other measure of financial performance presented in accordance with GAAP. In evaluating our performance
as measured by EBITDA, Adjusted EBITDA and Distributable Cash Flow, management recognizes and considers the limitations of these measurements.
EBITDA and Adjusted EBITDA do not reflect our obligations for the payment of income taxes, interest expense or other obligations such as capital
expenditures. Accordingly, EBITDA, Adjusted EBITDA and Distributable Cash Flow are only three of several measurements that management utilizes.
Moreover, our EBITDA, Adjusted EBITDA and Distributable Cash Flow may not be comparable to similarly titled measures of another company because all
companies may not calculate EBITDA, Adjusted EBITDA and Distributable Cash Flow in the same manner.
The following tables present a reconciliation of Net loss to EBITDA, Adjusted EBITDA and Distributable Cash Flow; Distributable Cash Flow, Adjusted
EBITDA and EBITDA to Net cash provided by (used in) operating activities and Segment Adjusted EBITDA to EBITDA and Net loss, and our most directly
comparable GAAP financial performance and liquidity measures, for each of the periods indicated.
53
Table of Contents
Reconciliation of Net loss to EBITDA, Adjusted EBITDA and Distributable Cash Flow:
Net loss
Add:
Interest expense
Depreciation and amortization
Income tax expense (benefit)
EBITDA
Add:
Unrealized (gain) loss on derivative instruments
Debt extinguishment costs
Amortization of turnaround costs
Loss on impairment and disposal of assets (3)
Gain on sale of unconsolidated affiliate
(Gain) loss on sale of business, net
Other non-recurring expenses
Equity based compensation and other items
Adjusted EBITDA (4)
Less:
Replacement and environmental capital expenditures (1)
Cash interest expense (2)
Turnaround costs
Gain (loss) from unconsolidated affiliates
Income tax expense (benefit)
Distributable Cash Flow
54
Year Ended December 31,
2019
2018
(In millions)
2017
(43.6) $
(55.1) $
(103.8)
134.6
110.1
0.5
201.6 $
155.5
118.1
0.7
219.2 $
26.1 $
(30.2) $
2.2
19.3
37.0
(1.2)
8.7
3.5
7.4
58.8
12.8
—
—
(0.7)
—
4.0
304.6 $
263.9 $
50.0 $
128.5
17.8
3.8
0.5
104.0 $
24.4 $
147.6
27.9
(3.7)
0.7
67.0 $
183.1
168.5
(1.1)
246.7
(3.6)
—
24.3
207.3
—
(173.4)
—
15.9
317.2
42.0
172.9
14.5
(0.4)
(1.1)
89.3
$
$
$
$
$
$
Table of Contents
Reconciliation of Distributable Cash Flow, Adjusted EBITDA and EBITDA to Net cash provided by (used in) operating activities:
Year Ended December 31,
2019
2018
(In millions)
2017
Distributable Cash Flow
Add:
Replacement and environmental capital expenditures (1)
Cash interest expense (2)
Turnaround costs
Gain (loss) from unconsolidated affiliates
Income tax expense (benefit)
Adjusted EBITDA (4)
Less:
Unrealized (gain) loss on derivative instruments
Debt extinguishment costs
Amortization of turnaround costs
Loss on impairment and disposal of assets (3)
Gain on sale of unconsolidated affiliate
(Gain) loss on sale of business, net
Other non-recurring expenses
Equity based compensation and other items
EBITDA
Add:
Unrealized (gain) loss on derivative instruments
Cash interest expense (2)
(Gain) loss on sale of business, net
Loss on impairment and disposal of assets (3)
Lower of cost or market inventory adjustment
Equity-based compensation
(Gain) loss from unconsolidated affiliates
Gain on sale of unconsolidated affiliate
Amortization of turnaround costs
Income tax (expense) benefit
Debt extinguishment costs
Changes in assets and liabilities:
Accounts receivable
Inventories
Other current assets
Turnaround costs
Derivative activity
Other assets
Accounts payable
Accrued interest payable
Other liabilities
Other
$
$
$
$
$
104.0 $
67.0 $
50.0
128.5
17.8
3.8
0.5
24.4
147.6
27.9
(3.7)
0.7
304.6 $
263.9 $
26.1 $
(30.2) $
2.2
19.3
37.0
(1.2)
8.7
3.5
7.4
58.8
12.8
—
—
(0.7)
—
4.0
201.6 $
219.2 $
26.1 $
(128.5)
8.7
37.0
(35.6)
5.9
(3.8)
(1.2)
19.3
(0.5)
2.2
(37.0)
16.3
4.5
(17.8)
(0.3)
(0.1)
71.3
1.5
22.6
(0.3)
(30.2) $
(147.6)
(0.7)
—
30.6
(1.2)
3.7
—
12.8
(0.7)
58.8
109.8
(0.3)
(4.5)
(27.9)
(0.5)
—
(78.2)
(21.8)
(51.9)
5.8
Net cash provided by (used in) operating activities
$
191.9 $
75.2 $
55
89.3
42.0
172.9
14.5
(0.4)
(1.1)
317.2
(3.6)
—
24.3
207.3
—
(173.4)
—
15.9
246.7
(3.6)
(172.9)
(173.4)
207.3
(30.6)
11.6
0.4
—
24.3
1.1
—
(200.7)
(18.1)
(0.5)
(14.5)
(0.5)
(0.5)
94.1
0.9
(5.3)
7.7
(26.5)
Table of Contents
2019
2018
2017
2016
2015
Year Ended December 31,
(In millions)
Reconciliation of Segment Adjusted EBITDA to EBITDA and Net loss:
Total segment Adjusted EBITDA(4)
Less:
Unrealized (gain) loss on derivative instruments
Realized loss on derivatives, not included in net loss or settled in
a prior period
Debt extinguishment costs
Amortization of turnaround costs
Loss on impairment and disposal of assets (3)
(Gain) loss on sale of unconsolidated affiliate
(Gain) loss on sale of business, net
Other non-recurring expenses
Equity-based compensation and other items
EBITDA
Less:
Interest expense
Depreciation and amortization
Income tax expense (benefit)
Net loss
$
$
$
$
$
304.6 $
263.9 $
317.2 $
158.2 $
257.7
26.1 $
(30.2) $
(3.6) $
(19.9) $
—
2.2
19.3
37.0
(1.2)
8.7
3.5
7.4
—
58.8
12.8
—
—
(0.7)
—
4.0
—
—
24.3
207.3
—
(173.4)
—
15.9
(6.4)
—
33.2
35.9
113.9
—
—
5.0
201.6 $
219.2 $
246.7 $
(3.5) $
134.6 $
155.5 $
183.1 $
161.7 $
110.1
0.5
118.1
0.7
168.5
(1.1)
171.1
(7.7)
(43.6) $
(55.1) $
(103.8) $
(328.6) $
39.5
(10.0)
46.6
29.0
58.1
—
—
—
12.0
82.5
104.9
145.4
(28.4)
(139.4)
(1) Replacement capital expenditures are defined as those capital expenditures which do not increase operating capacity or reduce operating costs and
exclude turnaround costs. Environmental capital expenditures include asset additions to meet or exceed environmental and operating regulations.
(2) Represents consolidated interest expense less non-cash interest expense.
(3)
Impairment charges for 2019 primarily relate to $25.4 million of impairment charges related to an equity method investment.
Impairment charges for 2017 primarily relate to $59.2 million of long-lived asset impairment charges related to the specialty products segment and
$147.0 million of long-lived asset impairment charges related to the fuel products segment.
Impairment charges for 2016 include $34.8 million of goodwill impairment charges related to the specialty products and fuel products segments,
$0.9 million of long-lived assets impairment charges related to the specialty products and fuel products segments, and a $0.2 million impairment
charge related to one of our equity method investments.
Impairment charges for 2015 include a $33.8 million goodwill impairment charge related to the prior oilfield services segment and a $24.3 million
impairment charge related to our investment in Juniper GTL LLC.
(4) Total segment Adjusted EBITDA includes the non-cash impact of the following LCM inventory adjustments and losses related to the liquidation of
LIFO inventory layers.
LCM Impact
LIFO Impact
2019
2018
2017
2016
2015
(In millions)
$
$
35.8 $
6.0 $
56
(30.6) $
(6.3) $
30.6 $
(3.7) $
50.6 $
(28.5) $
(67.0)
(25.1)
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Item 7. (cid:0)
The historical consolidated financial statements included in this Annual Report reflect all of the assets, liabilities and results of operations of Calumet
Specialty Products Partners, L.P. and its consolidated subsidiaries (“Calumet,” the “Company,” “we,” “our,” or “us”). The following discussion analyzes
the financial condition and results of operations of the Company for the years ended December 31, 2019, 2018 and 2017. In addition, as discussed in Note 4
and Note 5 to the Consolidated Financial Statements, we closed the San Antonio Transaction, Superior Transaction and the Anchor Transaction on November
10, 2019; November 8, 2017 and November 21, 2017, respectively. The historical results of operations of the San Antonio Refinery and the Superior Refinery
are contained in our financial position and results through November 10, 2019 and November 7, 2017, respectively. As a result of the Anchor Transaction, we
classified its results of operations and the assets and liabilities of Anchor for all periods presented to reflect Anchor as a discontinued operation. Prior to
being reported as discontinued operations, Anchor was included as its own reportable segment as oilfield services. Unitholders should read the following
discussion and analysis of the financial condition and results of operations of the Company in conjunction with the historical consolidated financial
statements and notes of the Company included elsewhere in this Annual Report.
Overview
We are a leading independent producer of high-quality, specialty hydrocarbon products in North America. We are headquartered in Indianapolis, Indiana,
and own specialty and fuel products facilities primarily located in northwest Louisiana, northern Montana, western Pennsylvania, Texas, New Jersey and
eastern Missouri. We own and lease additional facilities, primarily related to production and distribution of specialty and fuel products, throughout the United
States (“U.S.”). Our business is organized into three segments: our core specialty products segment, fuel products segment and corporate segment. In our
specialty products segment, we process crude oil and other feedstocks into a wide variety of customized lubricating oils, solvents, waxes, synthetic lubricants,
and other products. Our specialty products are sold to domestic and international customers who purchase them primarily as raw material components for
basic industrial, consumer and automotive goods. We also blend and market specialty products through our Royal Purple, Bel-Ray and TruFuel brands. In our
fuel products segment, we process crude oil into a variety of fuel and fuel-related products, including gasoline, diesel, jet fuel, asphalt and other products, and
from time to time resell purchased crude oil to third-party customers. Our corporate segment, which was added during the third quarter of 2019, primarily
consists of general and administrative expenses not allocated to the specialty products or fuel products segments. Please read Note 20 - “Segments and
Related Information” under Part II, Item 8 “Financial Statements and Supplementary Data” for further information.
2019 Update
Commodity markets and corresponding refined product margins were volatile during 2019 and 2018, with the average price per barrel of New York
Mercantile Exchange West Texas Intermediate (“NYMEX WTI”) crude oil decreasing approximately 12% during 2019 versus increasing approximately 28%
during 2018. We expect this volatility to continue into 2020. Below are factors that have impacted our results of operations during 2019:
•
Specialty product margins improved in 2019 as a result of better asset performance from the Shreveport and Princeton refineries and the
rationalization of low margin products in the lubricating oils and packaged and synthetic specialty products divisions. We expect our specialty
product margins to remain stable in the near term. We continue to consider our specialty products segment our core business over the long term, and
we plan to seek appropriate ways to further invest in our specialty products segment. Accordingly, we continue to evaluate opportunities to divest
non-core businesses and assets in line with our strategy of preserving liquidity and streamlining our business to better focus on the advancement of
our core business. However, we may also consider the disposition of certain core assets or businesses, to the extent such a transaction would improve
our capital structure or otherwise be accretive to the Company. There can be no assurance as to the timing or success of any such potential
transaction, or any other transaction, or that we will be able to sell these assets or businesses on satisfactory terms, if at all. In addition, our
acquisition program targets assets that management believes will be financially accretive, and we intend to focus on targeted strategic acquisitions of
specialty products assets that leverage our existing core competency and that have an identifiable competitive advantage we can exploit as the new
owner.
• We continue to focus on improving operations. Our average feedstock runs were 103,603 barrels per day (“bpd”) in 2019, compared to 94,137 bpd in
2018. The increase is primarily attributable to the Shreveport crude and propane deasphalting unit debottlenecking projects completed at the end of
2018, higher utilization rates across Shreveport, Cotton Valley and Princeton refineries and less turnaround activity across the assets. We anticipate
seeing improvement in our utilization rates in 2020 as we continue to seek to minimize unplanned downtime at our facilities which negatively
affected our current year earnings.
•
Refined fuel product margins tightened in 2019 as compared to 2018 predominately driven by the decrease in the Western Canadian Select (“WCS”)
discount versus NYMEX WTI decreasing to approximately $14 per barrel on average below
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NYMEX WTI in comparison to $27 per barrel on average below NYMEX WTI in 2018. Late in the fourth quarter of 2018, the government of
Alberta issued mandated oil production cuts of 325,000 bpd, which caused the WCS discount to decline. The price of domestically produced mid-
continent crude is expected to continue to trade at a discount relative to internationally produced crude reflecting increased domestic production
combined with transportation constraints in the United States. Processing heavy sour crude at our Great Falls refinery resulted in delivering a lower
overall cost of crude oil in 2019 than 2018. Late in the fourth quarter of 2019, the Canadian heavy sour crude oil discounts began to widen to the
highest discount of 2019, but overall remained significantly tighter in 2019.
Environmental regulations continue to affect our margins in the form of RINs. To the extent we are unable to blend biofuels, we must purchase RINs
in the open market to satisfy our annual requirement. The approximate 63% decrease in the price of RINs in 2019 favorably affected our results of
operations. It is not possible to predict what future volumes or costs may be, but given the volatile price of RINs, we continue to anticipate that RINs
have the potential to remain a significant expense for our fuel products segment, assuming current market prices for RINs continue, inclusive of the
favorable impact of any exemptions received from the EPA.
On January 21, 2020, the Company committed to a cost reduction plan to reduce overall operating expenses, including the reduction of outside
services, facility fixed costs and corporate staffing costs (the “Cost Reduction Plan”). These cost reductions are designed to right-size general and
administrative spending. The Company expects to incur approximately $10 million in one-time costs over the course of 2020 to implement the Cost
Reduction Plan, a significant portion of which are expected to result in cash expenditures.
The Company has taken the next step in our portfolio transformation and started the process of reviewing strategic options for our remaining fuels
refinery in Great Falls, Montana and expect to execute upon an option, which could occur as early as this year.
•
•
•
On October 31, 2018, the Company received an indemnity claim notice (the “Claim Notice”) from Husky Superior Refining Holding Corp. (“Husky”)
under the Membership Interest Purchase Agreement, dated August 11, 2017 (“MIPA”), which was entered into in connection with the Superior
Transaction. The Claim Notice relates to alleged losses Husky incurred in connection with a fire at the Husky Superior refinery on April 26, 2018, over five
months after Calumet sold Husky 100% of the membership interests in the entity that owns the Husky Superior refinery. Based on public reports, Calumet
understands the fire occurred during a turnaround of the Husky Superior refinery at a time when Husky owned, operated, and supervised the refinery. Calumet
was not involved with the turnaround. The U.S. Chemical Safety and Hazard Investigation Board (“CSB”) is currently investigating the fire, but has not
contacted Calumet in connection with that investigation or suggested that Calumet is responsible for the fire. Husky’s Claim Notice alleges that Husky “has
become aware of facts which may give rise to losses” for which it reserved the right to seek indemnification at a later date. The Claim Notice further alleges
breaches of certain representations, warranties, and covenants contained in the MIPA. The information currently available about the fire and the CSB
investigation does not support Husky’s threatened claims, and Husky has not filed a lawsuit against Calumet. If Husky were to assert such claims, they would
be subject to certain limits on indemnification liability under the MIPA that may reduce or eliminate any potential indemnification liability.
On May 4, 2018, the SEC requested that the Company and certain of its executives voluntarily produce certain communications and documents prepared
or maintained from January 2017 to May 2018 and generally related to the Company’s finance and accounting staff, financial reporting, public disclosures,
accounting policies, disclosure controls and procedures and internal controls. Beginning on July 11, 2018, the SEC issued several subpoenas formally
requesting the same documents previously subject to the voluntary production requests by the SEC as well as additional, related documents and information.
The SEC has also interviewed and taken testimony from current and former Company employees and other individuals. The Company has, from the outset,
cooperated with the SEC’s requests. In November 2019, the Company and the SEC settled the matter. The matter was settled without the Company admitting
or denying any charges arising from the SEC’s investigation and the Company paid a penalty of less than $0.3 million.
We reported a net loss from continuing operations of $43.6 million in 2019, versus a net loss from continuing operations of $51.0 million in 2018. We
reported Adjusted EBITDA from continuing operations (as defined in Item 6 “Selected Financial Data — Non-GAAP Financial Measures”) of $304.6 million
in 2019, versus $263.9 million in 2018.
Our net loss from continuing operations and Adjusted EBITDA for the full-year 2019 includes the impact of a favorable LCM inventory adjustment of
$35.8 million and $6.0 million of gains related to liquidation of last-in, first-out (“LIFO”) inventory layers while our net loss from continuing operations and
Adjusted EBITDA for the full year 2018 included the impact of an unfavorable LCM inventory adjustment of $30.6 million and $6.3 million of losses related
to liquidation of LIFO inventory layers.
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Please read Item 6 “Selected Financial Data — Non-GAAP Financial Measures” for a reconciliation of EBITDA and Adjusted EBITDA to Net Loss, our
most directly comparable financial performance measure calculated and presented in accordance with GAAP.
Commodity markets remained volatile in 2019, contributing to fluctuations in refined product margins. The average price of NYMEX WTI crude oil
averaged approximately $57 per barrel in 2019 compared to approximately $65 per barrel in 2018. With respect to the average price differential per barrel
between WCS and NYMEX WTI, WCS averaged approximately $14 per barrel below NYMEX WTI in 2019 compared to approximately $27 per barrel
below NYMEX WTI in 2018. Given our access to cost-advantaged, heavy Canadian crude oil in our Great Falls refinery, we have embarked on a multi-year
plan to increase our ability to process this crude oil grade. In the full-year 2019, we processed 24,800 bpd of heavy Canadian crude oil, versus 24,700 bpd in
the full-year 2018. The increase from 2018 to 2019 was primarily attributed to less unplanned downtime in 2019.
Gross profit per barrel for our specialty products segment was $35.74 in 2019, versus $31.41 in the prior year. Specialty products segment Adjusted
EBITDA was $220.2 million in 2019 compared to $162.2 million in the prior year. Specialty products segment Adjusted EBITDA Margin was 16.3% in
2019, compared to 11.7% in 2018. Specialty products segment results for fiscal year 2019 benefited from higher production volumes at our Shreveport
refinery and higher sales volumes at our Princeton refinery, strong performance from our solvents products, and the rationalization of low margin products
within both lubricating oils and packaged and synthetic specialty products. Results were also impacted by a $9.3 million favorable LCM inventory adjustment
in 2019 compared to a $3.4 million unfavorable LCM inventory adjustment in 2018 and $2.8 million of gains related to the liquidation of LIFO inventory
layers in 2019 compared to $2.7 million of losses in 2018. Specialty products represented approximately 24% of total production in 2019, compared to 26.3%
in 2018.
Gross profit per barrel for our fuel products segment was $4.35 per barrel in 2019, versus $6.07 per barrel in the prior year. Fuel products segment
Adjusted EBITDA was $182.0 million in 2019 compared to $199.2 million in 2018. Fuel products segment Adjusted EBITDA Margin was 8.7% in 2019
compared to 9.4% in 2018. Fuel products segment results for fiscal year 2019 were impacted by lower margins, predominately driven by the decrease in the
WCS discount versus NYMEX WTI. Results were also impacted by a $26.3 million favorable LCM inventory adjustment in 2019 compared to a $27.2
million unfavorable LCM inventory adjustment in 2018 and $3.2 million of gains related to the liquidation of LIFO inventory layers in 2019 compared to
$3.6 million of losses in 2018. Fuel products represented approximately 76% of total production during the year, compared to 73.7% in 2018.
For benchmarking purposes, we compare our per barrel refined fuel products margin to the Gulf Coast crack spread. The Gulf Coast crack spread
represents the approximate gross margin per barrel that results from processing two barrels of crude oil into one barrel of gasoline and one barrel of ultra-low
sulfur diesel fuel. The Gulf Coast crack spread is calculated using the near-month futures price of NYMEX WTI crude oil, the price of U.S. Gulf Coast
Pipeline 87 Octane Conventional Gasoline and the price of U.S. Gulf Coast Pipeline Ultra-Low Sulfur Diesel (“ULSD”).
During 2019, the Gulf Coast crack spread averaged $18 per barrel as compared to averaging approximately $17 per barrel in the prior year. The Gulf
Coast ULSD crack spread averaged approximately $22 per barrel during 2019, compared to approximately $21 per barrel in the prior year. The Gulf Coast
gasoline crack spread remained flat during 2019, and averaged approximately $14 per barrel. The average WCS discount versus NYMEX WTI averaged
approximately $14 per barrel during 2019, compared to approximately $27 per barrel during 2018.
Included within our fuel products segment gross profit per barrel calculation are the realized cost of crude oil and other feedstocks and other production-
related expenses, the most significant portion of which includes labor, plant fuel, utilities, contract services, maintenance, depreciation and process materials.
Our gross profit per barrel calculation may not be comparable to similar calculations published by our competitors.
There are several factors that impact our refined product margin when compared to the benchmark crack spread. For example, several of our fuel
products refineries produce asphalt and other residual products that may carry an average per barrel sales price below that of U.S. Gulf Coast gasoline or U.S.
Gulf Coast ULSD. Alternatively, many of our fuel products refineries purchase select quantities of crude oil at a discount to NYMEX WTI, which helps
support a higher capture rate, relative to the crack spread benchmark. Finally, our Shreveport refinery produces both fuel and specialty products; given that
our specialty products facilities generally operate at lower utilization rates than our fuel products facilities, facilities producing specialty products may incur
higher operating expenses when compared to refineries that produce fuels exclusively, such as our Great Falls refinery. Based on our system-wide crude
purchasing behaviors and overall production slate, we believe the Gulf Coast crack spread remains a meaningful indicator in tracking directional shifts in our
refined product margins.
In March 2019, we sold our interest in Biosyn Holdings, LLC (“Biosyn”) to The Heritage Group, a related party, for total proceeds of $5.0 million which
was recorded in the “other” component of other income (expense) on the consolidated statements of operations.
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In November 2019, we completed the sale of all of the issued and outstanding membership interests in Calumet San Antonio Refining, LLC, which
owned the San Antonio Refinery. The sale included the refinery and related assets, including associated hydrocarbon inventories, a crude oil terminal and
pipeline to Starlight Relativity Acquisition Company LLC (“Starlight”), a Delaware limited liability company (the “San Antonio Transaction”). Total
consideration received was $59.1 million, which consisted of a base sales price of $63.0 million minus an adjustment of $3.9 million for net working capital,
inventories and reimbursement of certain transaction costs. The San Antonio refinery was included in the Company’s fuel products segment. The Company
recognized a net loss of $8.7 million in Gain (loss) on sale of business in the consolidated statements of operations for the year ended December 31, 2019,
related to the San Antonio Transaction. In February 2020, the Company and Starlight agreed to the final purchase price adjustment payment related to net
working capital and inventory to Starlight of $ 4.5 million, which has been reflected in the net loss recognized by the Company.
In connection with the San Antonio Transaction, the Partnership, Calumet San Antonio, TexStar Midstream Logistics, L.P. (“TexStar”) , TexStar
Midstream Logistics Pipeline, LP and Tailwater Capital, LLC entered into a Settlement and Release Agreement (the “Settlement Agreement”), pursuant to
which the Partnership agreed to pay TexStar and its affiliates a cash payment of $1.0 million and the parties mutually agreed to dismiss the litigation and
release each other with respect to the legal dispute relating to the termination of the Throughput and Deficiency Agreement (the “Pipeline Agreement”). As a
result of the Settlement Agreement, we included the $38.1 million liability related to the Pipeline Agreement in the Gain (loss) on sale of business calculation
for the San Antonio Transaction.
In November 2017, we completed the sale of all of the issued and outstanding membership interests in Calumet Superior, LLC, which owns the Superior,
Wisconsin refinery (“Superior Refinery”). The sale included the associated working capital, the Superior Refinery’s wholesale marketing business and related
assets, including certain owned or leased product terminals, and certain crude gathering assets and line space in North Dakota to Husky (the “Superior
Transaction”). Total consideration received was $533.1 million which consisted of a base price of $435.0 million and $98.1 million for net working capital
and reimbursement of certain capital spending. The Superior Refinery was included in our fuel products segment. For the years ended December 31, 2018 and
2017, we recognized a net gain of $4.8 million and $236.0 million, respectively, in Gain (loss) on sale of business in the consolidated statements of operations
related to the Superior Transaction. Please read Note 5 — “Divestitures” under Part II, Item 8 “Financial Statements and Supplementary Data — Notes to
Consolidated Financial Statements.”
In November 2017, we completed the sale to a subsidiary of Q’Max Solutions Inc. (“Q’Max”) of all of the issued and outstanding membership interests
in Anchor , for total consideration of approximately $89.6 million including a base price of $50.0 million, $14.2 million for net working capital and other
items and a 10% equity interest in Fluid Holding Corp. (“FHC”), the parent company of Q’Max (the “Anchor Transaction”). Effective in the fourth quarter of
2017, we classified its results of operations for all periods presented to reflect Anchor as a discontinued operation and classified the assets and liabilities of
Anchor as discontinued operations. Prior to being reported as discontinued operations, Anchor was included as its own reportable segment as oilfield services.
As of December 31, 2019, we had total liquidity of $378.5 million comprised of $19.1 million of cash and availability under our revolving credit facility
of $359.4 million. As of December 31, 2019, our revolving credit facility had a $401.9 million borrowing base, $42.5 million in outstanding standby letters of
credit and no outstanding borrowings. We believe we will continue to have sufficient liquidity from cash on hand, cash flow from operations, borrowing
capacity and other means by which to meet our financial commitments, debt service obligations, anticipated capital expenditures and contingencies. On a
continuous basis, we will focus on various initiatives, including working capital initiatives, to further enhance our liquidity over time, given current market
conditions.
In 2019, we redeemed $900 million in aggregate principal amount of our 6.5% Notes due April 2021 (“2021 Notes”) with the net proceeds from the
issuance of $550.0 million of 11.00% senior notes due 2025 (“2025 Notes”), together with borrowings under our revolving credit facility and cash on hand. In
conjunction with the redemption, we incurred net, debt extinguishment costs of $2.2 million.
We, along with the broader refining industry, remain subject to compliance costs under the RFS. Under the regulation of the EPA, the RFS provides
annual requirements for the total volume of renewable transportation fuels which are mandated to be blended into finished petroleum fuels. If a refiner does
not meet its required annual Renewable Volume Obligation, the refiner can purchase blending credits in the open market, referred to as RINs.
For the year ended December 31, 2019, our RINs gain was $6.0 million, as compared to a RINs gain for the year ended December 31, 2018 of $31.4
million. Our gross RINs Obligation, which includes RINs that are required to be secured through either blending or through the purchase of RINs in the open
market, was approximately 87 million RINs in 2019 including our San Antonio refinery (through October 31, 2019). For the full-year 2020, we anticipate our
gross RINs obligation will be approximately 83.1 million RINs.
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During 2019 and 2018, the EPA granted our fuel product refineries a “small refinery exemption” under the RFS for the 2018 calendar year and the 2017
calendar year, respectively, as provided for under the CAA. In granting this exemption, the EPA determined that for the 2018 calendar year and the 2017
calendar year, compliance with the RFS would represent a “disproportionate economic hardship” for these refineries. Because we generally maximize ethanol
blending, the effect of a small refinery exemption is to allow us to bank RINs that we generated against future obligations for up to one year, or to sell them.
We continue to anticipate that expenses related to RFS compliance have the potential to remain a significant expense for our fuel products segment,
assuming current market prices for RINs. Estimated RINs obligations remain subject to fluctuations in both fuels production volumes and RINS prices during
the 2020 calendar year.
Key Performance Measures
Our sales and net loss are principally affected by the price of crude oil, demand for specialty products and fuel products, prevailing crack spreads for fuel
products, the price of natural gas used as fuel in our operations and our results from derivative instrument activities.
Our primary raw materials are crude oil and other specialty feedstocks, and our primary outputs are specialty petroleum products and fuel products. The
prices of crude oil, specialty products and fuel products are subject to fluctuations in response to changes in supply, demand, market uncertainties and a
variety of factors beyond our control. We monitor these risks and from time-to-time enter into derivative instruments designed to help mitigate the impact of
commodity price fluctuations on our business. The primary purpose of our commodity risk management activities is to economically hedge our cash flow
exposure to commodity price changes so that we can meet our debt service and capital expenditure requirements despite fluctuations in crude oil and fuel
products prices. We also may hedge when market conditions exist that we believe to be out of the ordinary and particularly supportive of our financial goals.
We enter into derivative contracts for future periods for quantities that do not exceed our projected purchases of crude oil and sales of fuel products. Please
read Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk — Commodity Price Risk” and Note 11 — “Derivatives” under Part II,
Item 8 “Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.”
Our management uses several financial and operational measurements to analyze our performance. These measurements include the following:
•
•
•
•
sales volumes;
segment gross profit;
segment Adjusted EBITDA; and
selling, general and administrative expenses.
Sales volumes. We view the volumes of specialty products and fuel products sold as an important measure of our ability to effectively utilize our
operating assets. Our ability to meet the demands of our customers is driven by the volumes of crude oil and feedstocks that we run through our facilities.
Higher volumes improve profitability both through the spreading of fixed costs over greater volumes and the additional gross profit achieved on the
incremental volumes.
Segment gross profit. Specialty products and fuel products gross profit are important measures of our ability to maximize the profitability of our specialty
products and fuel products segments. We define gross profit as sales less the cost of crude oil and other feedstocks and other production-related expenses, the
most significant portion of which includes labor, plant fuel, utilities, contract services, maintenance, depreciation and processing materials. We use gross
profit as an indicator of our ability to manage our business during periods of crude oil and natural gas price fluctuations, as the prices of our specialty
products and fuel products generally do not change immediately with changes in the price of crude oil and natural gas. The increase or decrease in selling
prices typically lags behind the rising or falling costs, respectively, of crude oil feedstocks for specialty products. Other than plant fuel, production-related
expenses generally remain stable across broad ranges of specialty products and fuel products throughput volumes but can fluctuate depending on maintenance
activities performed during a specific period.
Our fuel products segment gross profit per barrel may differ from standard U.S. Gulf Coast, PADD 4 Billings, Montana or 3/2/1 and 2/1/1 market crack
spreads due to many factors, including our fuel products mix as shown in our production table being different than the ratios used to calculate such market
crack spreads, LCM and LIFO inventory adjustments reflected in gross profit, operating costs including fixed costs, actual crude oil costs differing from
market indices and our local market pricing differentials for fuel products in the Shreveport, Louisiana and Great Falls, Montana vicinities as compared to
U.S. Gulf Coast and PADD 4 Billings, Montana postings.
Segment Adjusted EBITDA. We believe that specialty products and fuel products segment Adjusted EBITDA measures are useful as they exclude
transactions not related to our core cash operating activities and provide metrics to analyze our ability to pay distributions to our unitholders and pay interest
to our noteholders as Adjusted EBITDA is a component in the calculation of Distributable Cash Flow and allows us to meaningfully analyze the trends and
performance of our core cash operations as well as
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to make decisions regarding the allocation of resources to segments. The corporate segment Adjusted EBITDA primarily reflects general and administrative
costs not related to our core cash operating activities.
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Results of Operations
The following table sets forth information about our continuing operations. Facility production volume differs from sales volume due to changes in
inventories and the sale of purchased fuel product blendstocks, such as ethanol and biodiesel, and the resale of crude oil in our fuel products segment. The
historical results of operations of the San Antonio Refinery and the Superior Refinery are included through the effective date of the disposition of each,
November 10, 2019 and November 7, 2017, respectively.
Total sales volume (1)
Total feedstock runs (2)
Total facility production: (3)
Specialty products:
Lubricating oils
Solvents
Waxes
Packaged and synthetic specialty products (4)
Other
Total specialty products
Fuel products:
Gasoline
Diesel
Jet fuel
Asphalt, heavy fuel oils and other
Total fuel products
Total facility production (3)
Year Ended December 31,
2019
2018
(In bpd)
2017
104,734
103,603
11,506
7,526
1,315
1,540
1,764
23,651
22,877
28,709
4,506
20,286
76,378
100,029
97,104
94,137
11,931
7,649
1,279
2,129
2,113
25,101
20,323
27,367
2,895
19,612
70,197
95,298
132,082
128,624
14,606
7,761
1,423
2,206
1,811
27,807
35,713
33,277
5,368
29,396
103,754
131,561
(1) Total sales volume includes sales from the production at our facilities and certain third-party facilities pursuant to supply and/or processing
agreements, sales of inventories and the resale of crude oil to third-party customers. Total sales volume also includes the sale of purchased fuel
product blendstocks, such as ethanol and biodiesel, as components of finished fuel products in our fuel products segment sales.
The increase in total sales volume in 2019 compared to 2018 is primarily due to increased production at the Shreveport Refinery and Princeton
Refinery in the current year as a result of the successful completion of maintenance activities in 2018, partially offset by the divestiture of the San
Antonio Refinery in November 2019.
The decrease in total sales volume in 2018 compared to 2017 is due primarily to the divestiture of the Superior Refinery in November 2017 and
decreased production due to increased maintenance activities at our facilities during 2018.
(2) Total feedstock runs represent the barrels per day of crude oil and other feedstocks processed at our facilities and at certain third-party facilities
pursuant to supply and/or processing agreements.
The increase in total feedstock runs in 2019 compared to 2018 is primarily due to increased production at the Shreveport Refinery and Princeton
Refinery in the current year as a result of the successful completion of maintenance activities in 2018, partially offset by the divestiture of the San
Antonio Refinery in November 2019.
The decrease in total feedstock runs in 2018 compared to 2017 is primarily due to the divestiture of the Superior Refinery in November 2017 and
decreased production due to maintenance activities at our facilities during 2018.
(3) Total facility production represents the barrels per day of specialty products and fuel products yielded from processing crude oil and other feedstocks
at our facilities and at certain third-party facilities pursuant to supply and/or processing agreements. The difference between total facility production
and total feedstock runs is primarily a result of the time lag between the input of feedstocks and the production of finished products and volume loss.
The changes in total facility production in 2019 over 2018 and 2018 over 2017 are due primarily to the operational items discussed above in
footnotes 2 and 3 of this table.
(4) Represents production of finished lubricants and specialty chemicals products, including the products from our Royal Purple, Bel-Ray and Calumet
Packaging facilities.
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The following table reflects our consolidated results of operations and includes the non-GAAP financial measures EBITDA, Adjusted EBITDA and
Distributable Cash Flow. For a reconciliation of EBITDA, Adjusted EBITDA and Distributable Cash Flow to Net loss and Net cash provided by (used in)
operating activities, our most directly comparable financial performance and liquidity measures calculated and presented in accordance with GAAP, please
read Item 6 “Selected Financial Data — Non-GAAP Financial Measures.”
Sales
Cost of sales
Gross profit
Operating costs and expenses:
Selling
General and administrative
Transportation
Taxes other than income taxes
Loss on impairment and disposal of assets
(Gain) loss on sale of business, net
Other operating (income) expense
Operating income
Other income (expense):
Interest expense
Debt extinguishment costs
Gain (loss) on derivative instruments
Gain (loss) from unconsolidated affiliates
Gain on sale of unconsolidated affiliates
Other
Total other expense
Net loss from continuing operations before income taxes
Income tax expense (benefit) from continuing operations
Net loss from continuing operations
Net loss from discontinued operations, net of income taxes
Net loss
EBITDA
Adjusted EBITDA
Distributable Cash Flow
2019
$
Year Ended December 31,
2018
(In millions)
2017
3,452.6 $
3,000.9
451.7
3,497.5 $
3,060.8
436.7
53.1
136.7
122.9
20.5
37.0
8.7
(3.5)
76.3
(134.6)
(2.2)
9.0
3.8
1.2
3.4
(119.4)
(43.1)
0.5
(43.6)
—
(43.6) $
201.6 $
304.6 $
104.0 $
58.2
122.5
137.2
18.1
—
(4.8)
(17.4)
122.9
(155.5)
(58.8)
33.8
(3.7)
0.2
10.8
(173.2)
(50.3)
0.7
(51.0)
(4.1)
(55.1) $
219.2 $
263.9 $
67.0 $
$
$
$
$
64
3,763.8
3,265.6
498.2
65.7
138.7
137.1
24.1
207.3
(236.0)
3.3
158.0
(183.1)
—
(9.6)
—
—
3.3
(189.4)
(31.4)
(0.1)
(31.3)
(72.5)
(103.8)
246.7
317.2
89.3
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Sales. Sales from continuing operations decreased $44.9 million, or 1.3%, to $3,452.6 million in 2019 from $3,497.5 million in 2018. Sales for each of
our principal product categories in these periods were as follows:
Year Ended December 31,
2019
2018
% Change
(In millions, except barrel and per barrel data)
Sales by segment:
Specialty products:
Lubricating oils
Solvents
Waxes
Packaged and synthetic specialty products (1)
Other (2)
Total specialty products
Total specialty products sales volume (in barrels)
Average specialty products sales price per barrel
Fuel products:
Gasoline
Diesel
Jet fuel
Asphalt, heavy fuel oils and other (3)
Total fuel products
Total fuel products sales volume (in barrels)
Average fuel products sales price per barrel
Total sales
$
$
$
$
$
$
$
593.1 $
325.9
119.3
230.8
85.0
1,354.1 $
9,087,000
149.02 $
679.6 $
859.1
134.6
425.2
2,098.5 $
29,141,000
72.01 $
3,452.6 $
600.1
331.9
117.0
256.8
76.6
1,382.4
8,742,000
158.13
683.1
910.0
100.1
421.9
2,115.1
26,701,000
79.21
3,497.5
Total specialty and fuel products sales volume (in barrels)
38,228,000
35,443,000
(1.2)%
(1.8)%
2.0 %
(10.1)%
11.0 %
(2.0)%
3.9 %
(5.8)%
(0.5)%
(5.6)%
34.5 %
0.8 %
(0.8)%
9.1 %
(9.1)%
(1.3)%
7.9 %
(1) Represents finished lubricants and chemicals specialty products at our Royal Purple, Bel-Ray and Calumet Packaging facilities.
(2) Represents (a) by-products, including fuels and asphalt, produced in connection with the production of specialty products at the Princeton and Cotton
Valley refineries and Dickinson and Karns City facilities and (b) polyolester synthetic lubricants produced at the Missouri facility.
(3) Represents asphalt, heavy fuel oils and other products produced in connection with the production of fuels at the Shreveport, San Antonio, Superior
and Great Falls refineries and crude oil sales from the Montana and San Antonio refineries to third-party customers.
The components of the $28.3 million specialty products segment sales decrease in 2019 were as follows:
Sales price
Volume
Dollar Change
(In millions)
$
Total Specialty Products segment sales decrease $
(82.7)
54.4
(28.3)
Specialty products segment sales for 2019 decreased $28.3 million, or 2.0%, primarily due to a decrease in the average selling price per barrel, partially
offset by higher sales volume. The average selling price per barrel decreased by $9.11, or 5.8%, resulting in an $82.7 million decrease in sales. The decrease
in the average selling price per barrel was driven by the 12% decrease in NYMEX WTI, which is a proxy for the cost of crude oil per barrel for the period.
Average selling price per barrel decreased in each of our product lines, with the exception of packaged and synthetic specialty products, the least
commoditized products of the specialty products segment. The increase in sales volume is due to higher production rates from the Shreveport, Princeton and
Cotton Valley refineries.
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The components of the $16.6 million fuel products segment sales decrease in 2019 were as follows:
Sales price
Divestiture impact
Volume
Dollar Change
(In millions)
$
Total Fuel Products segment sales decrease $
(227.3)
(55.8)
266.5
(16.6)
Fuel products segment sales for 2019 decreased $16.6 million, or 0.8%, due primarily to the sale of the San Antonio Refinery in November 2019 and the
change in the overall price of commodity fuel products as a result of the decrease in NYMEX WTI. The average selling price per barrel decreased $7.20,
or 9.1%, the impact of which resulted in a $227.3 million decrease in sales. The impact of the increase in sales volume of $266.5 million is primarily the
result of debottlenecking projects at the Shreveport refinery and less downtime across all of our fuel segment refineries.
Gross Profit. Gross profit from continuing operations increased $15.0 million, or 3.4%, to $451.7 million in 2019 from $436.7 million in 2018. Gross
profit for our specialty and fuel products segments was as follows:
Year Ended December 31,
2019
2018
% Change
(Dollars in millions, except per barrel data)
Gross profit by segment:
Specialty products:
Gross profit excluding hedging activities
Hedging activities
Gross profit
Percentage of sales
Specialty products gross profit per barrel
Specialty products gross profit per barrel (including hedging
activities)
Fuel products:
Gross profit
Percentage of sales
Fuel products gross profit per barrel
Fuel products gross profit per barrel (including hedging activities)
Total gross profit
Percentage of sales
$
$
$
$
$
$
325.0
$
(0.2)
324.8
24.0%
35.77
$
35.74
126.9
$
6.0%
4.35
4.35
451.7
$
$
$
13.1%
274.6
—
274.6
19.9%
31.41
31.41
162.1
7.7%
6.07
6.07
436.7
12.5%
The components of the $50.2 million increase in the specialty products segment gross profit for 2019 were as follows:
2018 reported gross profit
Sales price
Operating costs
LCM / LIFO inventory adjustments
Volume
Cost of materials
2019 reported gross profit
18.4 %
— %
18.3 %
4.1 %
13.9 %
13.8 %
(21.7)%
(1.7)%
(28.3)%
(28.3)%
3.4 %
0.6 %
Dollar Change
(In millions)
274.6
(82.7)
1.9
18.2
19.2
93.6
324.8
$
$
The increase in specialty products segment gross profit of $50.2 million year-over-year was primarily due to decreased cost of materials, increased sales
volumes, a $18.2 million favorable LCM / LIFO inventory impact and decreased operating costs, partially offset by a decrease in the average selling price per
barrel. Sales price and cost of materials net, increased gross profit by $10.9 million. The $1.9 million decrease in operating costs were primarily due to
decreases in depreciation and amortization, repairs and maintenance and incentive compensation costs, partially offset by increases in utility costs. The
increase in sales volume
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is primarily due to higher sales volumes in all product lines except packaged and synthetic specialty products as a result of debottlenecking projects at the
Shreveport refinery and less downtime at the Shreveport and Princeton refineries.
The components of the $35.2 million decrease in the fuel products segment gross profit for 2019 were as follows:
2018 reported gross profit
Sales price
RINs
Operating costs
Divestiture impact
Volume
LCM / LIFO inventory adjustments
Cost of materials
2019 reported gross profit
Dollar Change
(In millions)
162.1
(227.3)
(25.4)
(3.2)
2.4
53.0
60.3
103.6
125.5
$
$
The decrease in fuel products segment gross profit of $35.2 million year-over-year was primarily due to a decrease in the average selling price per barrel
and a lower RINs benefit in 2019 vs. 2018 as a result of the RINs exemption we received in 2018 for the Superior Refinery, absent the RINs exemption we
received in 2019. The impact of the aforementioned items were partially offset by decreases in cost of materials from the change in NYMEX WTI, a $60.3
million favorable LCM / LIFO inventory impact, increased sales volumes, and a $3.2 million decrease in operating costs.
Selling. Selling expenses from continuing operations decreased $5.1 million, or 8.8%, to $53.1 million in 2019 from $58.2 million in 2018. The decrease
was due primarily to a $3.1 million decrease in depreciation and amortization, a $1.6 million decrease in bad debt expense and a $1.6 million decrease in
professional services fees, partially offset by a $1.0 million increase in labor and benefits and a $0.6 million increase in commissions.
General and administrative. General and administrative expenses from continuing operations increased $14.2 million, or 11.6%, to $136.7 million in
2019 from $122.5 million in 2018. The increase was due primarily to an $7.2 million increase in incentive compensation costs, driven by phantom unit
amortization and a 65.2% increase in our unit price during the year, a $6.0 million increase in professional services fees, and a $5.0 million increase in labor
and benefits, partially offset by a $2.8 million decrease in other expenses, mostly for information technology costs, a $1.0 million decrease in depreciation
and amortization, a $2.8 million decrease in maintenance costs, and a $0.5 million decrease in utilities costs.
Transportation. Transportation decreased $14.3 million, or 10.4%, to $122.9 million in 2019 from $137.2 million in 2018. Transportation expense in
2019 benefited from favorable trucking rates, increased rail efficiencies, and decreased reliance on direct pipeline sales at the Shreveport refinery.
Taxes other than income taxes. Taxes other than income taxes increased $2.4 million, or 13.3%, to $20.5 million in 2019 from $18.1 million in 2018. The
increase is due primarily to 2018 benefiting from lower than anticipated 2017 excise tax liabilities as well as an increase in property taxes at our Shreveport
refinery in 2019.
Loss on impairment and disposal of assets. Loss on impairment and disposal of assets increased to $37.0 million in 2019 due primarily to the $25.4
million impairment charge of our FHC investment and the write-off of the TexStar finance lease asset in the first quarter of 2019. There was no comparable
activity in 2018. For a further discussion regarding the factors underlying these impairments, please read Item 8. “Financial Statements and Supplementary
Data, Notes 6 and 8.”
(Gain) loss on sale of business, net. (Gain) loss on sale of business, net from continuing operations decreased $13.5 million, or 281.3%, to a loss of $8.7
million in 2019, compared to a gain of $4.8 million in 2018. The loss in the current year is the result of our divestment of the refinery in San Antonio, Texas.
We did not complete any business divestitures in the prior year and the small gain recognized in 2018 related to finalization of the remaining post-close
working capital adjustments associated with the Superior transaction.
Other operating income. Other operating income from continuing operations decreased $13.9 million to $3.5 million in 2019 compared to $17.4 million
in 2018. The change was primarily due to a 2018 operating income benefit from the reduction of the RINs liability associated with the sale of the Superior
Refinery, absent in the current year.
Interest expense. Interest expense from continuing operations decreased $20.9 million, or 13.4%, to $134.6 million in 2019 from $155.5 million in 2018.
The decrease is due primarily to the redemption of our 2021 Notes in 2019 and decreased revolving credit facility borrowings, partially offset by an increase
in interest related to our Supply and Offtake Agreements.
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Debt extinguishment costs. We recognized a net loss on debt extinguishment costs from continuing operations of $2.2 million during 2019 related to the
redemption of the 2021 Notes in 2019, compared to a net loss on debt extinguishment costs from continuing operations of $58.8 million in 2018 related to the
redemption of the 11.50% Secured Notes due January 15, 2021 (“2021 Secured Notes”) in the prior year.
Other Income. Other income from continuing operations decreased $7.4 million, or 68.5%, to $3.4 million in 2019 from $10.8 million in 2018. The
decrease is primarily due to the expiration of a transaction services agreement related to the Superior Transaction as well as reductions in tolling agreement
income.
Net loss from discontinued operations. There was no net loss from discontinued operations in 2019 compared to net loss of $4.1 million in 2018. In
November 2017, we completed the divestiture of Anchor. Prior to being reported as discontinued operations, Anchor was included as its own reportable
segment as oilfield services. As a result, effective in the fourth quarter of 2017, we classified our results of operations for all periods presented to reflect
Anchor as a discontinued operation. The prior year activity is related to the finalization of the remaining post-closing adjustments related to the Anchor
Transaction. Please read Note 4 — “Discontinued Operations” in Part II, Item 8 “Financial Statements and Supplementary Data” for additional information.
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Sales. Sales from continuing operations decreased $266.3 million, or 7.1%, to $3,497.5 million in 2018 from $3,763.8 million in 2017. Sales for each of
our principal product categories in these periods were as follows:
Sales by segment:
Specialty products:
Lubricating oils
Solvents
Waxes
Packaged and synthetic specialty products (1)
Other (2)
Total specialty products
Total specialty products sales volume (in barrels)
Average specialty products sales price per barrel
Fuel products:
Gasoline
Diesel
Jet fuel
Asphalt, heavy fuel oils and other (3)
Total fuel products
Total fuel products sales volume (in barrels)
Average fuel products sales price per barrel
Total sales
Total specialty and fuel products sales volume (in barrels)
Year Ended December 31,
2018
2017
% Change
(In millions, except barrel and per barrel data)
$
$
$
$
$
$
$
600.1
331.9
117.0
256.8
76.6
1,382.4
8,742,000
158.13
683.1
910.0
100.1
421.9
2,115.1
26,701,000
79.21
3,497.5
35,443,000
$
$
$
$
$
$
$
584.2
274.4
117.2
260.7
63.9
1,300.4
9,407,000
138.24
948.5
877.9
135.0
502.0
2,463.4
38,803,000
63.48
3,763.8
48,210,000
2.7 %
21.0 %
(0.2)%
(1.5)%
19.9 %
6.3 %
(7.1)%
14.4 %
(28.0)%
3.7 %
(25.9)%
(16.0)%
(14.1)%
(31.2)%
24.8 %
(7.1)%
(26.5)%
(1) Represents finished lubricants and chemicals specialty products at the Royal Purple, Bel-Ray and Calumet Packaging.
(2) Represents (a) by-products, including fuels and asphalt, produced in connection with the production of specialty products at the Princeton and Cotton
Valley refineries and Dickinson and Karns City facilities and (b) polyolester synthetic lubricants produced at the Missouri facility.
(3) Represents asphalt, heavy fuel oils and other products produced in connection with the production of fuels at the Shreveport, Superior, San Antonio
and Great Falls refineries and crude oil sales from the Montana and San Antonio refinery to third-party customers.
The components of the $82.0 million specialty products segment sales increase in 2018 were as follows:
Sales price
Volume
Total specialty products segment sales increase
Dollar Change
(In millions)
$
$
174.0
(92.0)
82.0
Specialty products segment sales for 2018 increased $82.0 million, or 6.3%, primarily due to an increase in the average selling price per barrel, partially
offset by lower sales volume. The average selling price per barrel increased by $19.89, or 14.4%, the impact of which resulted in a $174.0 million increase to
sales. The increase in the average selling price per barrel was driven by a nearly $15.00 increase in the average cost of crude oil per barrel over the period.
Average selling prices per barrel increased in all our product lines except for packaged and synthetic specialty products due to market conditions. The
decrease in sales volume is due to lower sales volume in all product lines except for packaged and synthetic specialty products as a result of market conditions
and maintenance activities at our Shreveport and Princeton refineries during the prior year.
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The components of the $348.3 million fuel products segment sales decrease in 2018 were as follows:
Sales price
Divestiture impact
Volume
Total fuel products segment sales decrease
Dollar Change
(In millions)
408.7
(669.1)
(87.9)
(348.3)
$
$
Fuel products segment sales for 2018 decreased $348.3 million, or 14.1%, due primarily to lower sales volumes as a result of the Superior Transaction in
November 2017, partially offset by an increase in the average selling price per barrel. The average selling price per barrel increased $15.73, or 24.8%,
resulting in a $408.7 million increase in sales. The increase in the average selling price per barrel was driven by an over $11.00 increase in the average cost of
crude oil per barrel over the period.
Gross Profit. Gross profit from continuing operations decreased $61.5 million, or 12.3%, to $436.7 million in 2018 from $498.2 million in 2017. Gross
profit for our specialty and fuel products segments was as follows:
Gross profit by segment:
Specialty products:
Gross profit
Percentage of sales
Specialty products gross profit per barrel
Fuel products:
Gross profit
Percentage of sales
Fuel products gross profit per barrel
Total gross profit
Percentage of sales
Year Ended December 31,
2018
2017
% Change
(Dollars in millions, except per barrel data)
$
$
$
$
$
291.1
$
21.1%
33.30
$
145.6
$
6.9%
5.45
436.7
$
$
12.5%
319.2
24.5%
33.93
179.0
7.3%
4.61
498.2
13.2%
(8.8)%
(13.9)%
(1.9)%
(18.7)%
(5.5)%
18.2 %
(12.3)%
(5.3)%
The components of the $28.1 million decrease in the specialty products segment gross profit for 2018 were as follows:
2017 reported gross profit
Cost of materials
Volume
LCM inventory adjustment
Operating costs
LIFO inventory layer adjustment
Sales price
2018 reported gross profit
Dollar Change
(In millions)
319.2
(147.5)
(37.1)
(14.3)
(3.5)
0.3
174.0
291.1
$
$
The decrease in specialty products segment gross profit of $28.1 million year-over-year was primarily due to increased cost of materials, decreased sales
volume, a $14.3 million unfavorable LCM inventory impact and increased operating costs, partially offset by an increase in the average selling price per
barrel and a positive impact of $0.3 million related to the liquidation of LIFO inventory layers. Sales price and cost of materials net, increased gross profit by
$26.5 million, as the average selling price per barrel increased $19.89, which outpaced the increase in the average cost of materials. The $3.5 million increase
in operating costs were primarily due to increases in depreciation and amortization, repairs and maintenance and incentive compensation costs, partially offset
by decreases in utility costs. The decrease in sales volume is primarily due to lower sales volumes in all product lines except packaged and synthetic specialty
products as a result of market conditions and maintenance activities at our Shreveport and Princeton refineries during the year.
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The components of the $33.4 million decrease in the fuel products segment gross profit for 2018 were as follows:
2017 reported gross profit
Cost of materials
Divestiture impact
LCM inventory adjustment
Volume
Operating costs
LIFO inventory layer adjustment
RINs
Sales price
2018 reported gross profit
Dollar Change
(In millions)
179.0
(281.5)
(110.0)
(40.3)
(17.5)
(8.8)
(2.9)
18.9
408.7
145.6
$
$
The decrease in fuel products segment gross profit of $33.4 million year-over-year was primarily due to increased cost of materials, the sale of the
refinery in Superior, Wisconsin, a $40.3 million decrease in the favorable LCM impact, decreased sales volume, and increased operating costs. Decreased
sales volumes and the reduced operating costs were the result of the Superior Transaction in 2017. The decrease in RINs of $18.9 million primarily resulted
from a reduction of the RINs liability as a result of an approval from the EPA of the small refinery exemption, decreased RINs market pricing and decreased
production.
Selling. Selling expenses from continuing operations decreased $7.5 million, or 11.4%, to $58.2 million in 2018 from $65.7 million in 2017. The
decrease was due primarily to a $4.9 million decrease in bad debt expense, a $4.7 million decrease in depreciation and amortization, a $0.7 million decrease
in commissions and a $0.5 million decrease in subscription fees, partially offset by a $2.9 million increase in labor and benefits and a $0.3 million increase in
professional fees.
General and administrative. General and administrative expenses from continuing operations decreased $16.2 million, or 11.7%, to $122.5 million in
2018 from $138.7 million in 2017. The decrease was due primarily to a $23.9 million decrease in incentive compensation costs primarily driven by a
reduction in bonus costs and phantom unit amortization due to the decline in our unit price during the year, a $0.9 million decrease in communication costs
and a $0.6 million decrease in insurance costs, partially offset by a $5.0 million increase in depreciation and amortization, a $3.8 million increase in
information technology costs and a $0.3 million increase in professional fees.
Taxes and other than income taxes. Taxes other than income taxes decreased $6.0 million, or 24.9%, to $18.1 million in 2018 from $24.1 million in 2017.
The decrease is due primarily to reductions in property, excise and other taxes which were driven by the sale of the Superior Refinery in 2017.
Loss on impairment and disposal of assets. There were no asset impairment charges in 2018 compared to $207.3 million in asset impairment charges in
2017. In the prior year, we recorded impairment charges primarily related to long-lived assets including property, plant and equipment on the Missouri
reporting unit of $59.2 million and on the San Antonio reporting unit of $147.0 million as a result of lowered projections of future cash flows. In addition, in
2017 an impairment charge of $0.7 million for goodwill related to the specialty products segment was recorded based on updated financial projections on our
Dickinson reporting unit. For a further discussion regarding the factors underlying these impairments, please read Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — “Critical Accounting Policies and Estimates” and Item 8. “Financial Statements and
Supplementary Data, Note 2.”
Gain on sale of business, net. Gain on sale of business, net from continuing operations decreased $231.2 million, or 98.0%, to a gain of $4.8 million in
2018 from a gain of $236.0 million in 2017. In the prior year, we completed the sale of the Superior Refinery. We did not complete any business divestitures
in 2018, and the small gain recognized relates to finalizing the remaining post-close working capital adjustments associated with the Superior transaction.
Other operating (income) expense. Other operating (income) expense from continuing operations increased $20.7 million to income of $17.4 million in
2018 from expense of $3.3 million in 2017. This increase was primarily due to a reduction of the RINs liability associated with the Superior Refinery, which
was sold in November 2017, as a result of an approval from the EPA of the small refinery exemption for our fuel product refineries from the requirements of
the RFS for the 2017 calendar year, decreased RINs pricing and decreased environmental reserves.
Interest expense. Interest expense from continuing operations decreased $27.6 million, or 15.1%, to $155.5 million in 2018 from $183.1 million in 2017.
The decrease is due primarily to the redemption of the 2021 Secured Notes in April 2018 and decreased revolving credit facility borrowings, partially offset
by an increase in interest related to the Supply and Offtake Agreements and decreased capitalized interest.
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Debt extinguishment costs. We incurred debt extinguishment costs from continuing operations of $58.8 million during 2018 primarily related to the
redemption of the 2021 Secured Notes which were redeemed in April 2018. There was no comparable activity in 2017.
Loss from unconsolidated affiliates. Loss from unconsolidated affiliates from continuing operations was $3.7 million in 2018, which primarily related to
us incurring expenses related to our investment in Biosynthetic Technologies, LLC (“Biosynthetic Technologies”). There was no comparable activity in 2017.
Please read Note 6 - “Investment in Unconsolidated Affiliates” in Part II, Item 8 “Financial Statements and Supplementary Data” for additional information.
Other income. Other income from continuing operations increased $7.5 million, or 227.3%, to $10.8 million in 2018 from $3.3 million in 2017. The
increase is primarily due to the receipt of favorable negotiated legal settlements.
Net loss from discontinued operations. Net loss from discontinued operations was $4.1 million in 2018 compared to $72.5 million in 2017. In November
2017, we completed the divestiture of Anchor. Prior to being reported as discontinued operations, Anchor was included as its own reportable segment as
oilfield services. As a result, effective in the fourth quarter of 2017, we classified our results of operations for all periods presented to reflect Anchor as a
discontinued operation. We recorded a net loss on the sale of Anchor of $62.6 million. Current year activity related to the finalization of the remaining post-
closing adjustments related to the Anchor Transaction. Please read Note 4 — “Discontinued Operations” in Part II, Item 8 “Financial Statements and
Supplementary Data” for additional information.
Liquidity and Capital Resources
Our principal sources of cash have historically included cash flow from operations, proceeds from public equity offerings, proceeds from notes offerings
and bank borrowings. Principal uses of cash have included capital expenditures, acquisitions, distributions to our limited partners and general partner and debt
service. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open
market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In addition, in May 2018 The
Heritage Group disclosed in a Schedule 13D filing that it is considering various alternatives with respect to its investment in us, including potential
consolidation, acquisitions or sales of our assets or common units, as well as potential changes to our capital structure. The Heritage Group also disclosed that
it may make formal proposals to us, holders of our common units or other third parties regarding such strategic alternatives.
In general, we expect that our short-term liquidity needs, including debt service, working capital, replacement and environmental capital expenditures
and capital expenditures related to internal growth projects, will be met primarily through projected cash flow from operations, borrowings under our
revolving credit facility and asset sales.
In 2019, we redeemed all of the 2021 Notes with the net proceeds from the issuance of the 2025 Notes, together with borrowings under the Company’s
revolving credit facility and cash on hand. In conjunction with the redemption, the Company incurred debt extinguishment costs of $2.2 million, net. Also in
2019, we sold our interest in Biosyn to The Heritage Group, a related party, for total proceeds of $5.0 million. Lastly, in 2019, we received $59.1 million in
cash for the San Antonio Transaction in 2019.
We expect to fund planned capital expenditures in 2020 of approximately $80 million to $90 million primarily with cash on hand and cash flows from
operations. Future internal growth projects or acquisitions may require expenditures in excess of our then-current cash flow from operations and borrowing
availability under our revolving credit facility and may require us to issue debt or equity securities in public or private offerings or incur additional
borrowings under bank credit facilities to meet those costs.
The borrowing base on our revolving credit facility increased from approximately $330.8 million as of December 31, 2018, to approximately $401.9
million at December 31, 2019, resulting in a corresponding increase in our borrowing availability from approximately $295.7 million at December 31, 2018,
to approximately $359.4 million at December 31, 2019. Total liquidity, consisting of unrestricted cash and available funds under our revolving credit facility,
decreased from $451.4 million at December 31, 2018 to $378.5 million at December 31, 2019.
We believe that we have sufficient liquid assets, cash flow from operations, borrowing capacity and adequate access to capital markets to meet our
financial commitments, debt service obligations and anticipated capital expenditures. We continue to seek to lower our operating costs, selling expenses and
general and administrative expenses as a means to further improve our cash flow from operations with the objective of having our cash flow from operations
support all of our capital expenditures and interest payments. However, we are subject to business and operational risks that could materially adversely affect
our cash flows. A material decrease in our cash flow from operations including a significant, sudden decrease in crude oil prices would likely produce a
corollary material adverse effect on our borrowing capacity under our revolving credit facility and potentially our ability to comply with the covenants under
our revolving credit facility. A significant, sudden increase in crude oil prices, if sustained, would
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likely result in increased working capital requirements which would be funded by borrowings under our revolving credit facility. In addition, our cash flow
from operations may be impacted by the timing of settlement of our derivative activities. Gains and losses from derivative instruments that do not qualify as
cash flow hedges are recorded in unrealized gain (loss) on derivative instruments until settlement and will impact operating cash flow in the period settled.
The following table summarizes our primary sources and uses of cash in each of the most recent three years:
Net Cash provided by (used in) operating activities
Net Cash provided by investing activities
Net Cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Year Ended December 31,
2019
2018
(In millions)
2017
$
$
191.9 $
14.5
(343.0)
(136.6) $
75.2 $
8.3
(442.1)
(358.6) $
(26.5)
453.4
83.2
510.1
Operating Activities. Operating activities provided cash of $191.9 million during 2019 compared to providing cash of $75.2 million during 2018. The
increase in cash provided by operating activities is due to a reduction in working capital requirements of $136.5 million, lower year-over-year cash paid for
interest of $36.8 million, and decreased operating losses, partially offset by a $27.9 million decrease in operating cash flow other than working capital
adjustments and other adjustment items. The decrease in working capital requirements was primarily driven by the divestment of the San Antonio Refinery,
and its associated working capital. The decrease in operating cash flow for other than working capital adjustments was primarily driven by a favorable LCM /
LIFO inventory adjustment in the current year, which was unfavorable in the prior year.
Operating activities provided cash of $75.2 million during 2018 compared to a net use of cash of $26.5 million during 2017. The increase in cash
provided by operating activities is primarily due to a reduction working capital requirements of $44.8 million, a $54.1 million increase in operating cash flow
other than working capital adjustments and decreased net cash used in discontinued operations of $22.5 million, offset by an increase in net loss from
continuing operations of $19.7 million. Working capital decreases were primarily driven by the sale of the Superior Refinery in November 2017 and
decreased accounts receivable due to timing of payments as a result of the stabilization of our ERP system, partially offset by decreased accounts payable due
to timing of payments as a result of the stabilization of our ERP system, decreased accrued interest receivable due to timing of payments, increased
turnaround activity in the 2018 fiscal year and a decrease in other liabilities predominately driven by a reduction in our RINs liability. The increase in
operating cash flow other than working capital adjustments was primarily driven by reductions in depreciation and amortization, an increase in unrealized
gains on derivatives and a decrease in asset impairment charges, partially offset by debt extinguishment costs, a decrease in the gain on sale of business and
an unfavorable change in the LCM inventory adjustment.
Investing Activities. Cash provided by investing activities increased to $14.5 million in 2019 compared to cash provided of $8.3 million in 2018. The
increase is primarily due to increased proceeds on sale of business of $10.3 million in 2019 vs. 2018, as well as increased proceeds from the sale of property,
plant and equipment of $3.3 million in 2019 vs. 2018.
Cash provided by investing activities decreased to $8.3 million in 2018 compared to cash provided of $453.4 million in 2017. The decrease is primarily
due to a reduction in proceeds from the Superior Transaction of $439.7 million, a reduction in cash provided by discontinued operations as a result of
proceeds from the Anchor Transaction of $31.8 million and expenditures of $3.8 million related to the acquisition of Biosynthetic Technologies in 2018,
partially offset by $9.9 million of cash received for the sale of PACNIL and a decrease in capital expenditures of $20.2 million in 2018.
Financing Activities. Financing activities used cash of $343.0 million during 2019 compared to using cash of $442.1 million during 2018. The decrease is
primarily due to the cash proceeds of the 2025 Notes of $550.0 million, off-set by the $498.5 million net effect of the redemption of $898.5 million in
aggregate principal amount of the 2021 Notes in 2019 and $400.0 million in aggregate principal amount of the 2021 Secured Notes 2018, as well as the
absence of the $46.6 million cash payment for debt extinguishment costs made 2018 in conjunction with the retirement of the 2021 Secured Notes.
Financing activities used cash of $442.1 million during 2018 compared to providing cash of $83.2 million during 2017. This decrease is primarily due to
the payment of $446.6 million for the redemption of the 2021 Secured Notes (including debt extinguishment costs) in 2018, decreased net proceeds from the
Supply and Offtake Agreements of $93.1 million and increased debt issuance costs of $0.8 million, partially offset by decreased payments on revolving credit
facility borrowings of $9.8 million, increased net proceeds from other financing obligations of $4.5 million, and decreased payments on capital lease
obligations of $0.9 million.
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In connection with the Anchor Transaction in November 2017, we received an equity investment in FHC as part of the total consideration for Anchor.
FHC provides oilfield services and products to customers globally. Our investment in FHC is a non-marketable equity security without a readily determinable
fair value. We record this investment using a measurement alternative which values the security at cost less impairment, if any, plus or minus changes
resulting from qualifying observable price changes with a same or similar security from the same issuer.
During the year ended December 31, 2019, we determined the fair value of our investment in FHC was less than its December 31, 2018 carrying value of
$25.4 million after evaluating indicators of impairment and valuing the investment using projected future cash flows and other Level 3 inputs. Utilizing an
income approach, value indications were 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 company. As a result, we recorded an impairment charge of $25.4 million
in loss on impairment and disposal of assets in the consolidated statements of operations for the period ended December 31, 2019.
On March 31, 2017, we entered into several agreements with Macquarie to support the operations of the Great Falls refinery. On July 27, 2017, we
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 we have the option to terminate with ninety
days’ notice at any time. On May 9, 2019, we 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, we entered into several agreements with Macquarie to support the operations of the Shreveport refinery. 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 we have the option to
terminate with ninety days’ notice at any time. On May 9, 2019, we 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 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. Following expiration or termination of the agreements,
Macquarie has the option to require us 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. Our obligations under the agreements are secured by the inventory included in these agreements.
Our property, plant and equipment capital expenditure requirements consist of capital improvement expenditures, replacement capital expenditures,
environmental capital expenditures and turnaround capital expenditures. Capital improvement expenditures include expenditures to acquire assets to grow our
business, to expand existing facilities, such as projects that increase operating capacity, or to reduce operating costs. Replacement capital expenditures replace
worn out or obsolete equipment or parts. Environmental capital expenditures include asset additions to meet or exceed environmental and operating
regulations. Turnaround capital expenditures represent capitalized costs associated with our periodic major maintenance and repairs.
The following table sets forth our capital improvement expenditures, replacement capital expenditures, environmental capital expenditures and
turnaround capital expenditures in each of the periods shown (including capitalized interest):
Capital improvement expenditures
Replacement capital expenditures
Environmental capital expenditures
Turnaround capital expenditures
Total
Year Ended December 31,
2019
2018
(In millions)
2017
$
$
15.1 $
34.9
15.1
24.1
89.2 $
19.7 $
16.9
7.5
30.8
74.9 $
23.4
30.5
11.5
14.5
79.9
The increase in capital improvement, replacement and environmental capital expenditures from 2018 to 2019 was primarily due to completion of certain
2018 forecasted projects that were delayed until 2019. The decrease in capital expenditures from 2017 to 2018 was primarily driven by our allocation of
additional resources to turnaround activities and moving certain capital projects forecasted for 2018 to 2019 based on timing and priority of existing projects.
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We are forecasting total capital expenditures of approximately $80 million to $90 million in 2020. We anticipate that capital expenditure requirements
will be provided primarily through cash flow from operations, cash on hand, available borrowings under our revolving credit facility and by accessing capital
markets as necessary. If future capital expenditures require expenditures in excess of our then-current cash flow from operations and borrowing availability
under our revolving credit facility, we may be required to issue debt or equity securities in public or private offerings or incur additional borrowings under
bank credit facilities to meet those costs.
As of December 31, 2019, our primary debt and credit instruments consisted of:
•
•
•
•
$600.0 million senior secured revolving credit facility maturing in February 2023, subject to borrowing base limitations, with a maximum letter of
credit sub-limit equal to $300.0 million, which amount may be increased to 90% of revolver commitments in effect with the consent of the Agent (as
defined in the Credit Agreement) (“revolving credit facility”);
$350.0 million of 7.625% senior notes due 2022 (“2022 Notes”);
$325.0 million of 7.75% senior notes due 2023 (“2023 Notes”); and
$550.0 million of 11.00% senior notes due 2025 (“2025 Notes”).
In 2019, we redeemed $900 million in aggregate principal amount of the 2021 Notes with the net proceeds from the issuance of the 2025 Notes, together
with borrowings under our revolving credit facility and cash on hand. In conjunction with the redemption, we incurred debt extinguishment costs, net of $2.2
million.
We were in compliance with all covenants under our debt instruments in place as of December 31, 2019, and believe we have adequate liquidity to
conduct our business.
Short-Term Liquidity
As of December 31, 2019, our principal sources of short-term liquidity were (i) approximately $359.4 million of availability under our revolving credit
facility, (ii) inventory financing agreements related to our Great Falls and Shreveport refineries and (iii) $19.1 million of cash on hand. Borrowings under our
revolving credit facility can be used for, among other things, working capital, capital expenditures, and other lawful partnership purposes including
acquisitions.
On February 23, 2018, we entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”), which provided for our $600.0
million senior secured revolving credit facility maturing in February 2023. The revolving credit facility is subject to a borrowing base limitation, with a
maximum letter of credit sub-limit of $300.0 million, which amount may be increased to 90% of revolver commitments in effect with the consent of the
Agent (as defined in the Credit Agreement).
On September 4, 2019, we entered into the First Amendment to the Credit Agreement. The amendment expands the borrowing base by $99.6 million on
the Effective Date of October 11, 2019, by adding the fixed assets of our Great Falls, MT refinery as collateral to the borrowing base. The $99.6 million
expansion amortizes to zero on a straight-line basis over ten quarters starting in the first quarter of 2020. Additionally, while the fixed assets of the Great
Falls, MT refinery are included in the borrowing base, the first amendment provides for a 25 basis points increase in the applicable margin for loans, as well
as increases the minimum availability under the revolving credit facility required for our Company to be able to perform certain actions, including to make
restricted payments of other distributions, sell or dispose of certain assets, make acquisitions or investments, or prepay other indebtedness. Among other
conditions precedent that were required to be satisfied before the Effective Date, we were required to consummate an offering of at least $450.0 million
aggregate principal amount of senior unsecured notes. The conditions precedent were satisfied on October 11, 2019.
Borrowings under the revolving credit facility are limited to a borrowing base that is determined based on advance rates of percentages of Eligible
Accounts and Eligible Inventory (each as defined in the Credit Agreement). As such, the borrowing base can fluctuate based on changes in selling prices of
our products and our current material costs, primarily the cost of crude oil. The borrowing base is calculated in accordance with the terms of the Credit
Agreement and agreed upon by us and the Agent (as defined in the revolving credit facility agreement). On December 31, 2019, we had availability on our
revolving credit facility of approximately $359.4 million, based on a borrowing base of approximately $401.9 million, $42.5 million in outstanding standby
letters of credit and no outstanding borrowings. The borrowing base cannot exceed the revolving credit facility commitments then in effect. The lender group
under our revolving credit facility is comprised of a syndicate of nine lenders with total commitments of $600.0 million. The lenders under our revolving
credit facility have a first priority lien on our accounts receivable, certain inventory, the fixed assets of the Great Falls, MT refinery and substantially all of our
cash.
Amounts outstanding under our revolving credit facility fluctuate materially during each quarter mainly due to cash flow from operations, normal
changes in working capital, capital expenditures and debt service costs. Specifically, the amount borrowed
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under our revolving credit facility is typically at its highest level after we pay for the majority of our crude oil supply on the 20th day of every month per
standard industry terms. The maximum revolving credit facility borrowings during the year ended December 31, 2019, were $125.0 million. Our availability
on our revolving credit facility during the peak borrowing days of the year has been ample to support our operations and service upcoming requirements.
During the year ended December 31, 2019, availability for additional borrowings under our revolving credit facility was $228.7 million at its lowest point.
The revolving credit facility currently bears interest at a rate equal to prime plus a basis points margin or LIBOR plus a basis points margin, at our option
which margin ranges between 50 basis points and 100 basis points for base rate loans and 150 basis points to 200 basis points for LIBOR loans, depending on
our average availability for additional borrowings for the preceding quarter. The margin applicable to loans under the FILO tranche of the revolving credit
facility range from 150 to 200 basis points for base rate FILO loans and 250 to 300 basis points for LIBOR based FILO loans. The 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. We have met this test consistently since the fiscal quarter ended June 30, 2019. As a result, our applicable margin for the quarter ended and including
December 31, 2019, was 50 basis points for prime, 150 basis points for LIBOR, 150 basis points for prime rate based FILO loans and 250 basis points for
LIBOR based FILO loans; however, the margin can fluctuate quarterly based on our average availability for additional borrowings under the revolving credit
facility in the preceding calendar quarter. 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 on outstanding borrowings under the revolving credit facility, we are 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 either 0.250% or 0.375% per annum depending on the
average daily available unused borrowing capacity for the preceding month. We also pay 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.
Our revolving credit facility contains various covenants that limit, among other things, our 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. The revolving credit facility generally permits us to make cash
distributions to our unitholders as long as, after giving effect to such a cash distribution, we have availability under the revolving credit facility totaling at
least equal to the sum of the amount of FILO loans outstanding plus the greater of (i) 15% of the Aggregate Borrowing Base (as defined in the revolving
credit facility agreement) then in effect, or 25% while the Great Falls, MT refinery is included in the borrowing base, and (ii) $60.0 million (which amount is
subject to increase in proportion to revolving commitment increases) plus the amount of FILO loans outstanding. Further, the revolving credit facility
contains one springing financial covenant which provides that only if our availability under the revolving credit facility falls below the greater of (a) 10% of
the Borrowing Base (as defined in the credit agreement) then in effect, or 15% while the Great Falls, MT refinery is included in the borrowing base, and
(b) $35.0 million (which amount is subject to increase in in proportion to revolving commitment increases) plus the amount of FILO loans outstanding, we
will be required to maintain as of the end of each fiscal quarter a Fixed Charge Coverage Ratio (as defined in the revolving credit facility agreement) of at
least 1.0 to 1.0.
If an event of default exists under the revolving credit facility, the lenders will be able to accelerate the maturity of the revolving credit facility and
exercise other rights and remedies. An event of default includes, among other things, the nonpayment of principal, interest, fees or other amounts; failure of
any representation or warranty to be true and correct when made or confirmed; failure to perform or observe covenants in the revolving credit facility or other
loan documents, subject, in limited circumstances, to certain grace periods; cross-defaults in other indebtedness if the effect of such default is to cause, or
permit the holders of such indebtedness to cause, the acceleration of such indebtedness under any material agreement; bankruptcy or insolvency events;
monetary judgment defaults; asserted invalidity of the loan documentation; and a change of control (as defined in the Credit Agreement).
As of December 31, 2019, we were in compliance with all covenants under the revolving credit facility.
For additional information regarding our revolving credit facility, please read Note 10 “Long-Term Debt” in Part II, Item 8 “Financial Statements and
Supplementary Data.”
Long-Term Financing
In addition to our principal sources of short-term liquidity listed above, subject to market conditions, we may meet our cash requirements (other than
distributions of Available Cash (as defined in our partnership agreement) to our common unitholders) through the issuance of long-term notes or additional
common units.
From time to time, we issue long-term debt securities referred to as our senior notes. All of our outstanding senior notes are unsecured obligations that
rank equally with all of our other senior debt obligations to the extent they are unsecured. As of December 31, 2019, we had $350.0 million in 2022 Notes,
$325.0 million in 2023 Notes and $550.0 million in 2025 Notes
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outstanding. On December 31, 2018, we had $900.0 million in 2021 Notes, $350.0 million in 2022 Notes and $325.0 million in 2023 Notes outstanding. For
more information regarding our senior notes, please read Note 10 — “Long-Term Debt” under Part II, Item 8 “Financial Statements and Supplementary Data”
in this Annual Report.
The indentures governing our senior notes contain covenants that, among other things, restrict our ability and the ability of certain of our subsidiaries to:
(i) sell assets; (ii) pay distributions on or redeem or repurchase our common units or redeem or repurchase our 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 our restricted subsidiaries to us; (vii) consolidate, merge or transfer all or substantially all of our 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’s 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 December 31, 2019,
our Fixed Charge Coverage Ratio (as defined in the indentures governing the 2022, 2023 and 2025 Notes) was 2.3.
Upon the occurrence of certain change of control events, each holder of the senior notes will have the right to require that we repurchase all or a portion
of such holder’s senior notes in cash at a purchase price equal to 101% of the principal amount thereof, plus any accrued and unpaid interest to the date of
repurchase.
To date, our debt balances have not adversely affected our operations, our ability to repay or refinance our indebtedness. Based on our historical record,
we believe that our capital structure will continue to allow us to achieve our business objectives.
We are subject, however, to conditions in the equity and debt markets for our common units and long-term senior notes, and there can be no assurance we
will be able or willing to access the public or private markets for our common units and/or senior notes in the future. If we are unable or unwilling to issue
additional common units, we may be required to either restrict capital expenditures and/or potential future acquisitions or pursue debt financing alternatives,
some of which could involve higher costs or negatively affect our credit ratings. Furthermore, our ability to access the public and private debt markets is
affected by our credit ratings. For additional information regarding our credit ratings, see “Credit Ratings” below.
For additional information regarding our senior notes, please read Note 10 “Long-Term Debt” in Part II, Item 8 “Financial Statements and Supplementary
Data.”
Master Derivative Contracts and Collateral Trust Agreement
Under our credit support arrangements, our payment obligations under all of our master derivatives contracts for commodity hedging generally are
secured by a first priority lien on our and our subsidiaries’ real property, plant and equipment, fixtures, intellectual property, certain financial assets, certain
investment property, commercial tort claims, chattel paper, documents, instruments and proceeds of the foregoing (including proceeds of hedge
arrangements). We had no additional letters of credit or cash margin posted with any hedging counterparty as of December 31, 2019. Our master derivatives
contracts and Collateral Trust Agreement (as defined below) continue to impose a number of covenant limitations on our operating and financing activities,
including limitations on liens on collateral, limitations on dispositions of collateral and collateral maintenance and insurance requirements. For financial
reporting purposes, we do not offset the collateral provided to a counterparty against the fair value of our obligation to that counterparty. Any outstanding
collateral is released to us upon settlement of the related derivative instrument liability.
Our various hedging agreements contain language allowing our hedge counterparties to request additional collateral if a specified credit support threshold
is exceeded. However, these credit support thresholds are set at levels that would require a substantial increase in hedge exposure to require us to post
additional collateral. As a result, we do not expect further increases in fuel products crack spreads or interest rates to significantly impact our liquidity due to
requirements to post additional collateral.
Additionally, we have a collateral trust agreement (the “Collateral Trust Agreement”) which governs how secured hedging counterparties share collateral
pledged as security for the payment obligations owed by us to the secured hedging counterparties under their respective master derivatives contracts. The
Collateral Trust Agreement limits to $150.0 million the extent to which forward purchase contracts for physical commodities are covered by, and secured
under, the Collateral Trust Agreement and the Parity Lien Security Documents (as defined in the Collateral Trust Agreement). There is no such limit on
financially settled derivative instruments used for commodity hedging. Subject to certain conditions set forth in the Collateral Trust Agreement, we have the
ability to add secured hedging counterparties from time to time.
Credit Ratings
In May 2018, our senior unsecured notes ratings were upgraded by S&P to B- from CCC+, while the Company rating of B- and stable outlook remained
unchanged from the prior year. In September 2019, concurrent with the issuance of our 2025 Notes, S&P revised the rating outlook to positive. In July 2019,
Moody’s upgraded our Company rating from Caa1 to B3, and our senior
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unsecured bond rating from Caa2 to Caa1, with a stable outlook. In October 2018, Fitch initiated coverage and assigned a rating of B- for the Company and
our senior unsecured notes, bringing it in line with S&P’s current ratings.
In April 2016, the board of directors of our general partner suspended payment of our quarterly cash distribution. The board of directors of our general
partner will continue to evaluate our ability to reinstate the distribution.
The operating results for the fuel products segment, including the selling prices of asphalt products we produce, generally follow seasonal demand trends.
Asphalt demand is generally lower in the first and fourth quarters of the year, as compared to the second and third quarters, due to the seasonality of the road
construction and roofing industries we supply. Demand for gasoline and diesel is generally higher during the summer months than during the winter months
due to seasonal increases in highway traffic. In addition, our natural gas costs can be higher during the winter months, as demand for natural gas as a heating
fuel increases during the winter. As a result, our operating results for the first and fourth calendar quarters may be lower than those for the second and third
calendar quarters of each year due to seasonality related to these and other products that we produce and sell.
Contractual Obligations and Commercial Commitments
A summary of our total contractual cash obligations as of December 31, 2019, at current maturities is as follows:
Payments Due by Period
Total
Less Than
1 Year
1–3
Years
(In millions)
3–5
Years
More Than
5 Years
Operating Activities:
Interest on long-term debt at contractual rates and maturities (1)
$
496.9 $
116.2 $
216.1 $
134.3 $
Operating lease obligations (2)
Letters of credit (3)
Purchase commitments (4)
Throughput contract (5)
Employment agreements (6)
Financing Activities:
Obligations under inventory financing agreements
Finance lease obligations
Long-term debt obligations, excluding finance lease obligations
102.6
42.5
315.1
27.7
1.6
134.3
2.7
1,228.8
65.0
42.5
170.8
2.6
1.0
134.3
0.3
1.5
Total obligations
$
2,352.2 $
534.2 $
23.5
—
60.2
7.8
0.6
—
0.6
352.3
661.1 $
10.8
—
42.1
7.9
—
—
0.8
325.0
520.9 $
30.3
3.3
—
42.0
9.4
—
—
1.0
550.0
636.0
(1)
Interest on long-term debt at contractual rates and maturities relates primarily to interest on our senior notes, revolving credit facility interest and
fees, and interest on our finance lease obligations, which excludes the adjustment for the interest rate swap agreement.
(2) We have various operating leases primarily for railcars, the use of land, storage tanks, compressor stations, equipment, precious metals and office
facilities that extend through July 2055.
(3) Letters of credit primarily supporting crude oil and feedstock purchases.
(4) Purchase commitments consist primarily of obligations to purchase fixed volumes of crude oil, other feedstocks and finished products for resale from
various suppliers based on current market prices at the time of delivery.
(5) Throughput commitments consist primarily of obligations to transport a minimum volume of crude oil through a pipeline.
(6) Certain employment agreements may be terminated under certain circumstances or at certain dates prior to expiration. We expect those agreements
will be renewed or replaced with similar agreements upon their expiration. Amounts due under those agreements assume they are not terminated
prior to their expiration.
For additional information regarding our expected capital and turnaround expenditures, for which we are not contractually committed, refer to “Capital
Expenditures” above.
Off-Balance Sheet Arrangements
We did not enter into any material off-balance sheet transactions during fiscal year 2019.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements for the years ended
December 31, 2019, 2018 and 2017. These consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different
assumptions and conditions given the level of complexity and subjectivity involved in forming these estimates.
We consider an accounting estimate to be critical if:
•
The accounting estimate requires us to make assumptions about matters that are highly uncertain at the time the accounting estimate is made; and
• We reasonably could have used different estimates in the current period, or changes in these estimates are reasonably likely to occur from period to
period as new information becomes available, and a change in these estimates would have a material impact on our financial condition or results
from operations.
We continually evaluate the estimates and judgments used to prepare the consolidated financial statements. Our estimates are based on historical
experience, information from third-party professionals and various other assumptions that we believe to be reasonable under the circumstances. There are
other items within our consolidated financial statements that require estimation, but are not deemed critical based on the above criteria. Changes in estimates
used in these and other items could have a material impact on our consolidated financial statements in any one period.
Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 2 “Summary of
Significant Accounting Policies” in Part II, Item 8 “Financial Statements and Supplementary Data.” We believe that the following are the more critical
judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.
Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. If the estimated undiscounted future cash flows related to the asset are less than the carrying
value, we recognize a loss equal to the difference between the carrying value and the estimated fair value, usually determined by the estimated discounted
future cash flows of the asset. When a decision has been made to dispose of property, plant and equipment prior to the end of the previously estimated useful
life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life.
Significant Estimates and Assumptions
Estimated undiscounted future cash flows are used for the purpose of testing our definite long-lived assets for impairment. Fair values calculated for the
purpose of measuring impairments on definite long-lived assets are estimated using the expected present value of future cash flows method and comparative
market prices when appropriate. Significant judgment is involved in estimating undiscounted future cash flows and performing these fair value estimates
since the results are based on forecasted assumptions. Significant assumptions include:
•
•
•
Future margins on products produced and sold. Our estimates of future product margins are based on our analysis of various supply and demand
factors, which include, among other things, industry-wide capacity, our planned utilization rate, end-user demand, capital expenditures and economic
conditions. Such estimates are consistent with those used in our planning and capital investment reviews.
Future capital requirements. These are based on authorized spending and internal forecasts.
Discount rate commensurate with the risks involved. We apply a discount rate to our cash flows based on a variety of factors, including market and
economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions,
if possible. A higher discount rate decreases the net present value of cash flows.
We base our estimated undiscounted future cash flows and fair value estimates on projected financial information which we believe to be reasonable.
However, actual results may differ from these projections.
2017 Impairment Charge
During the fourth quarter of 2017, we identified impairment indicators that suggested the carrying values of long-lived assets at the San Antonio and
Missouri asset groups within the fuel products and specialty products segments, respectively, may not be recoverable. The primary impairment indicators
included projections of future cash flows and the associated impact on the long-range strategic plan forecasts, lower than expected cash flows attributed to
these asset groups and poor local market conditions. Undiscounted cash flow tests performed for these asset groups indicated that the long-lived assets were
not recoverable. The fair value of the asset groups was established using a discounted cash flow method which utilized Level 3 inputs in the fair value
hierarchy. The principal parameters used to establish fair values included estimates of future margins on products produced and sold, future commodity
prices, future capital expenditures and discount rates. As a result of the long-lived asset impairment assessment performed, we recorded property, plant and
equipment impairment charges on our San Antonio asset group of $147.0 million and on our Missouri asset group of $59.2 million.
The discount rates used for our San Antonio and Missouri asset groups were 14.5% and 12.5%, respectively, per year. Revenue growth rates assumed
for our San Antonio asset group was 42.2% for 2018 and 2.0% to 6.0% for 2019 and beyond. Revenue growth rates assumed for our Missouri asset group was
12.6% for 2018 and 2.0% to 6.0% for 2019 and beyond.
Sensitivity Analysis
An estimate of the sensitivity to net income resulting from impairment calculations is not practicable, given the numerous assumptions (e.g., pricing,
volumes and discount rates, etc.) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be
offset by favorable adjustments in other assumptions.
We review goodwill for impairment annually on October 1 and whenever events or changes in circumstances indicate its carrying value may not be
recoverable in accordance with ASC 350, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). Under ASU
2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that
it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an
entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is
unnecessary.
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In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
we assess relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events
and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgment and assumptions. The judgment
and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and
Company specific events and the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of
any such impact.
If our qualitative assessment concludes that it is probable that an impairment exists or we skip the qualitative assessment, then we need to perform a
quantitative assessment. In the first step of the quantitative assessment, our assets and liabilities, including existing goodwill and other intangible assets, are
assigned to the identified reporting units to determine the carrying value of the reporting units. If the carrying value of a reporting unit is in excess of its fair
value, an impairment may exist, and we must perform an impairment analysis, in which the implied fair value of the goodwill is compared to its carrying
value to determine the impairment charge, if any.
When performing the quantitative assessment, as required in the impairment test, the fair value of the reporting unit is determined using the income
approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present
value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by
discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation,
and risks associated with the reporting unit. If the carrying value of a reporting unit is in excess of its fair value, an impairment would be recognized in an
amount equal to the excess that the carrying value exceeded the estimated fair value, limited to the carrying value of goodwill.
Inputs used to estimate the fair value of the Company’s reporting units are considered Level 3 inputs of the fair value hierarchy and include the
following:
• The Company’s financial projections for its reporting units are based on its analysis of various supply and demand factors which include, among
other things, industry-wide capacity, planned utilization rates, end-user demand, crack spreads, capital expenditures and economic conditions. Such
estimates are consistent with those used in the Company’s planning and capital investment reviews and include recent historical prices and published
forward prices.
• The discount rate used to measure the present value of the projected future cash flows is based on a variety of factors, including market and
economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions,
if possible.
For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a
significantly lower or higher fair value measurement.
Significant Estimates and Assumptions
Fair values calculated for the purpose of testing our goodwill for impairment are estimated using the expected present value of future cash flows method
and comparative market prices when appropriate. Significant judgment is involved in performing these fair value estimates since the results are based on
forecasted assumptions. Significant assumptions include:
• Future margins on products produced and sold. Our estimates of future product margins are based on our analysis of various supply and demand
factors, which include, among other things, industry-wide capacity, our planned utilization rate, end-user demand, crack spreads, capital expenditures
and economic conditions. Such estimates are consistent with those used in our planning and capital investment reviews and include recent historical
prices and published forward prices.
• Discount rate commensurate with the risks involved. We apply a discount rate to our cash flows based on a variety of factors, including market and
economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions,
if possible. A higher discount rate decreases the net present value of cash flows.
• Future capital requirements. These are based on authorized spending and internal forecasts.
We base our fair value estimates on projected financial information which we believe to be reasonable. However, actual results may differ from these
projections.
Sensitivity Analysis
An estimate of the sensitivity to net income resulting from impairment calculations is not practicable, given the numerous assumptions (e.g., pricing,
volumes and discount rates) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset
by favorable adjustments in other assumptions.
Recent Accounting Pronouncements
For a summary of recently issued and adopted accounting standards applicable to us, please read Note 2 “Summary of Significant Accounting Policies”
in Part II, Item 8 “Financial Statements and Supplementary Data.”
Item 7A. (cid:0)
Commodity Price Risk
We are exposed to price risks due to fluctuations in the price of crude oil, refined products (primarily in our fuel products segment) and precious metals.
We use various strategies to reduce our exposure to commodity price risk. We do not attempt to eliminate all of our risk as the costs of such actions are
believed to be too high in relation to the risk posed to our future cash flows, earnings and liquidity. The strategies we use to reduce our risk utilize both
physical forward contracts and financially settled derivative instruments, such as swaps, to attempt to reduce our exposure with respect to:
•
•
•
•
crude oil purchases and sales;
refined product sales and purchases;
precious metals; and
fluctuations in the value of crude oil between geographic regions and between the different types of crude oil such as NYMEX WTI, WCS, WTI
Midland, Mixed Sweet Blend and ICE Brent.
We manage our exposure to commodity markets, credit, volumetric and liquidity risks to manage our 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
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of our derivative instruments will affect our 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. We do not speculate with derivative instruments or other
contractual arrangements that are not associated with our business objectives. Speculation is defined as increasing our natural position above the maximum
position of our physical assets or trading in commodities, currencies or other risk bearing assets that are not associated with our business activities and
objectives. Our positions are monitored routinely by a risk management committee and discussed with the board of directors of our general partner quarterly
to ensure compliance with our stated risk management policy and documented risk management strategies. All strategies are reviewed on an ongoing basis by
our risk management committee,
79
Table of Contents
which will add, remove or revise strategies in anticipation of changes in market conditions and/or in risk profiles. These changes in strategies are to position
us in relation to our risk exposures in an attempt to capture market opportunities as they arise.
Please read Note 11 “Derivatives” in the notes to our consolidated financial statements under Part II, Item 8 “Financial Statements and Supplementary
Data” for a discussion of the accounting treatment for the various types of derivative instruments, for a further discussion of our hedging policies and for
more information relating to our implied crack spreads of crude oil, diesel, and gasoline derivative instruments.
Our derivative instruments and overall specialty products segment and fuel products segment hedging positions are monitored regularly by our risk
management committee, which includes executive officers. The risk management committee reviews market information and our hedging positions regularly
to determine if additional derivative activity is advised. A summary of derivative positions and a summary of hedging strategy are presented to our general
partner’s board of directors quarterly.
The following table illustrates how a change in market price (holding all other variables constant and excluding the impact of our current hedges) would
affect our sales and cost of sales in the consolidated statements of operations:
Sales
Cost of Sales
Year Ended December 31,
Year Ended December 31,
2019
2018
2019
2018
(In millions)
Specialty Products:
$1.00 change in per barrel price of crude oil (1)
$
— $
— $
9.1 $
Fuel Products:
$1.00 change in per barrel price of crude oil (1)
$1.00 change in per barrel selling price of gasoline, diesel and jet fuel (1)
—
21.4
—
20.1
21.4
—
8.7
20.1
—
(1) Based on our 2019 and 2018 sales volumes.
Borrowings under the revolving credit facility are limited by a borrowing base that is determined based on advance rates of percentages of Eligible
Accounts and Eligible Inventory (as defined in the Credit Agreement). As such, the borrowing base can fluctuate based on changes in inventory and accounts
receivable, as well as selling prices of our products and our current material costs, primarily the cost of crude oil. Our inventory is based on local crude oil
prices at period end, which can materially fluctuate period to period.
Our Pension Plan assets are also subject to volatility that can be caused by fluctuation in general economic conditions. Plan assets are invested by the
Plan’s fiduciaries, which direct investments according to specific policies. Our consolidated statements of operations is currently shielded from volatility in
plan assets due to the way accounting standards are applied for pension plans, although favorable or unfavorable investment performance over the long term
will impact our pension expense if it deviates from our assumption related to the future rate of return. Please read Note 15 “Employee Benefit Plans” under
Part II, Item 8 “Financial Statements and Supplementary Data” for a further discussion of our investment policies.
Compliance Price Risk
We are exposed to market risks related to the volatility in the price of credits needed to comply with governmental programs. 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, we are
required to blend biofuels into the fuel products we produce at a rate that will meet the EPA’s annual quota. To the extent we are unable to blend biofuels at
that rate, we must purchase RINs in the open market to satisfy the annual requirement. We have not entered into any derivative instruments to manage this
risk, but we have purchased RINs when the price of these instruments is deemed favorable.
Holding other variables constant (RINs requirements), a $1.00 change in the price of RINs as of December 31, 2019, would be expected to have an
impact on net income for 2019 of approximately $64.2 million.
Interest Rate Risk
Our exposure to interest rate changes is limited to the fair value of the debt issued, which would not have a material impact on our earnings or cash flows.
The following table provides information about the fair value of our fixed rate debt obligations as
80
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Table of Contents
of December 31, 2019 and 2018, which we disclose in Note 10 “Long-Term Debt” and Note 12 “Fair Value Measurements” under Part II, Item 8 “Financial
Statements and Supplementary Data.”
Financial Instrument:
2021 Unsecured Notes
2022 Unsecured Notes
2023 Unsecured Notes
2025 Unsecured Notes
December 31, 2019
December 31, 2018
Fair Value
Carrying Value
Fair Value
Carrying Value
$
$
$
$
— $
351.2 $
325.2 $
598.8 $
(In millions)
— $
347.1 $
321.0 $
540.5 $
755.7 $
279.4 $
252.3 $
— $
894.7
345.9
320.1
—
For our variable rate debt, if any, changes in interest rates generally do not impact the fair value of the debt instrument, but may impact our future
earnings and cash flows. We had a $600.0 million revolving credit facility as of December 31, 2019, with borrowings bearing interest at the prime rate or
LIBOR, at our option, plus the applicable margin. Borrowings under this facility are variable. We had no variable rate debt as of December 31, 2019. Holding
other variables constant (such as debt levels), a 100 basis point change in interest rates on our variable rate debt as of December 31, 2019, would be expected
to have no impact on net income and cash flows for 2019. We had no variable rate debt outstanding as of December 31, 2018.
Foreign Currency Risk
We have minimal exposure to foreign currency risk and as such the cost of hedging this risk is viewed to be in excess of the benefit of further reductions
in our exposure to foreign currency exchange rate fluctuations.
81
Table of Contents
Item 8. (cid:0)
To the Board of Directors of Calumet GP, LLC
General Partner and the Partners of Calumet Specialty Products Partners, L.P.
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Calumet Specialty Products Partners, L.P. (“the Company”) as of December 31, 2019 and
2018, and the related consolidated statements of operations, comprehensive loss, partners' capital and cash flows for each of the three years in the period
ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 5, 2020 expressed an adverse opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2002.
/s/ Ernst & Young LLP
Indianapolis, Indiana
March 5, 2020
82
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
Current assets:
Cash and cash equivalents
Accounts receivable, net:
ASSETS
Trade, less allowance for doubtful accounts of $0.9 million and $1.5 million, respectively
Other
Inventories
Derivative assets
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Investment in unconsolidated affiliates
Goodwill
Other intangible assets, net
Operating lease right-of-use assets
Other noncurrent assets, net
Total assets
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable
Accrued interest payable
Accrued salaries, wages and benefits
Other taxes payable
Obligations under inventory financing agreements
Other current liabilities
Current portion of operating lease liabilities
Current portion of long-term debt
Total current liabilities
Pension and postretirement benefit obligations
Other long-term liabilities
Long-term operating lease liabilities
Long-term debt, less current portion
Total liabilities
Commitments and contingencies
Partners’ capital:
Limited partners’ interest (77,560,355 units and 77,177,159 units, issued and outstanding at December 31, 2019
and 2018, respectively)
General partners’ interest
Accumulated other comprehensive loss
Total partners’ capital
Total liabilities and partners’ capital
Year Ended December 31,
2019
2018
(In millions, except unit data)
$
19.1 $
$
$
175.0
13.5
188.5
292.6
0.9
11.0
512.1
973.5
—
171.4
71.2
93.1
36.5
1,857.8 $
230.2 $
32.0
35.7
11.8
134.3
58.6
60.6
1.8
565.0
7.9
20.8
33.0
1,209.5
1,836.2
20.2
12.0
(10.6)
21.6
155.7
177.7
20.3
198.0
284.1
18.3
13.9
670.0
1,098.1
25.4
171.4
88.0
—
34.6
2,087.5
200.6
30.7
25.7
15.2
105.3
33.8
—
3.8
415.1
4.5
1.5
—
1,600.7
2,021.8
61.6
12.8
(8.7)
65.7
See accompanying notes to consolidated financial statements.
83
$
1,857.8 $
2,087.5
Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
Sales
Cost of sales
Gross profit
Operating costs and expenses:
Selling
General and administrative
Transportation
Taxes other than income taxes
Loss on impairment and disposal of assets
(Gain) loss on sale of business, net
Other operating (income) expense
Operating income
Other income (expense):
Interest expense
Debt extinguishment costs
Gain (loss) on derivative instruments
Gain (loss) from unconsolidated affiliates
Gain on sale of unconsolidated affiliates
Other
Total other expense
Net loss from continuing operations before income taxes
Income tax expense (benefit) from continuing operations
Net loss from continuing operations
Net loss from discontinued operations, net of income taxes
Net loss
Allocation of net loss:
Net loss
Less:
General partners’ interest in net loss
Net loss available to limited partners
Weighted average limited partner units outstanding:
Basic and diluted
Limited partners’ interest basic and diluted net loss per unit:
From continuing operations
From discontinued operations
Limited partners’ interest
Year Ended December 31,
2019
2018
2017
(In millions, except unit and per unit data)
3,452.6 $
3,000.9
451.7
3,497.5 $
3,060.8
436.7
3,763.8
3,265.6
498.2
53.1
136.7
122.9
20.5
37.0
8.7
(3.5)
76.3
(134.6)
(2.2)
9.0
3.8
1.2
3.4
(119.4)
(43.1)
0.5
(43.6)
—
58.2
122.5
137.2
18.1
—
(4.8)
(17.4)
122.9
(155.5)
(58.8)
33.8
(3.7)
0.2
10.8
(173.2)
(50.3)
0.7
(51.0)
(4.1)
(43.6)
$
(55.1)
$
(43.6) $
(55.1) $
(0.9)
(42.7) $
(1.1)
(54.0) $
65.7
138.7
137.1
24.1
207.3
(236.0)
3.3
158.0
(183.1)
—
(9.6)
—
—
3.3
(189.4)
(31.4)
(0.1)
(31.3)
(72.5)
(103.8)
(103.8)
(2.1)
(101.7)
78,212,136
77,943,992
77,598,950
(0.55) $
—
(0.55) $
(0.64) $
(0.05)
(0.69) $
(0.40)
(0.91)
(1.31)
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
84
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Net loss
Other comprehensive income (loss):
Cash flow hedges:
Cash flow hedge gain
Defined benefit pension and retiree health benefit plans
Foreign currency translation adjustment
Total other comprehensive income (loss)
Comprehensive loss attributable to partners’ capital
Year Ended December 31,
2019
2018
(In millions)
2017
(43.6) $
(55.1) $
(103.8)
0.2
(3.3)
1.2
(1.9)
—
(1.5)
—
(1.5)
—
1.1
—
1.1
(45.5) $
(56.6) $
(102.7)
$
$
See accompanying notes to consolidated financial statements.
85
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
Accumulated Other
Comprehensive
Income (Loss)
Partners’ Capital
General
Partner
Limited Partners
Total
Balance at December 31, 2016 $
(8.3) $
Other comprehensive income
Net loss
Settlement of tax withholdings on equity-based incentive compensation
Amortization of phantom units
Contributions from Calumet GP, LLC
Other comprehensive loss
Net loss
Balance at December 31, 2017 $
Settlement of tax withholdings on equity-based incentive compensation
Amortization of phantom units
Contributions from Calumet GP, LLC
Other comprehensive loss
Net loss
Balance at December 31, 2018 $
Settlement of tax withholdings on equity-based incentive compensation
Amortization of phantom units
Contributions from Calumet GP, LLC
1.1
—
—
—
—
(7.2) $
(1.5)
—
—
—
—
(8.7) $
(1.9)
—
—
—
—
(In millions)
15.8 $
—
(2.1)
—
—
0.1
211.2 $
—
(101.7)
(0.9)
4.7
—
13.8 $
113.3 $
—
(1.1)
—
—
0.1
—
(54.0)
(1.1)
3.4
—
12.8 $
61.6 $
—
(0.9)
—
—
0.1
—
(42.7)
(0.5)
1.8
—
Balance at December 31, 2019 $
(10.6) $
12.0 $
20.2 $
See accompanying notes to consolidated financial statements.
86
218.7
1.1
(103.8)
(0.9)
4.7
0.1
119.9
(1.5)
(55.1)
(1.1)
3.4
0.1
65.7
(1.9)
(43.6)
(0.5)
1.8
0.1
21.6
Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Year Ended December 31,
2019
2018
(In millions)
2017
$
(43.6)
$
(55.1) $
Net loss from discontinued operations
Depreciation and amortization
Amortization of turnaround costs
Non-cash interest expense
Debt extinguishment costs
Unrealized (gain) loss on derivative instruments
Loss on impairment and disposal of assets
Operating lease expense
Operating lease payments
Equity based compensation
Lower of cost or market inventory adjustment
(Gain) loss from unconsolidated affiliates
Gain on sale of unconsolidated affiliates
(Gain) loss on sale of business, net
Other non-cash activities
Changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Derivative activity
Turnaround costs
Other assets
Accounts payable
Accrued interest payable
Accrued salaries, wages and benefits
Other taxes payable
Other liabilities
Pension and postretirement benefit obligations
Net cash provided by (used in) discontinued operating activities
Net cash provided by (used in) operating activities
Net cash provided by investing activities
Investing activities
Additions to property, plant and equipment
Investment in unconsolidated affiliates
Proceeds from sale of unconsolidated affiliates
Proceeds from sale of property, plant and equipment
Proceeds from sale of business, net
Net cash provided by discontinued investing activities
Financing activities
Proceeds from borrowings — revolving credit facility
Repayments of borrowings — revolving credit facility
Proceeds from borrowings — senior notes
Repayments of borrowings — senior notes
Payments on finance lease obligations
Proceeds from inventory financing
Payments on inventory financing
Proceeds from other financing obligations
Payments on other financing obligations
Payments on extinguishment of debt
Debt issuance costs
Contributions from Calumet GP, LLC
—
110.1
19.3
6.1
2.2
26.1
37.0
78.2
(78.2)
5.9
(35.6)
(3.8)
(1.2)
8.7
(0.4)
(37.0)
16.3
4.5
(0.3)
(17.8)
(0.1)
71.3
1.5
5.3
2.5
14.8
0.1
—
191.9
(54.9)
—
5.0
3.7
55.1
5.6
14.5
508.5
(508.5)
550.0
(898.5)
(0.9)
1,076.5
(1,057.3)
—
(1.9)
—
(11.0)
0.1
4.1
118.1
12.8
7.9
58.8
(30.2)
—
—
—
(1.2)
30.6
3.7
(0.2)
(4.8)
6.8
109.8
(0.3)
(4.5)
(0.5)
(27.9)
—
(78.2)
(21.8)
(5.6)
(0.9)
(45.4)
(0.1)
(0.7)
75.2
(49.8)
(3.8)
9.9
0.4
44.8
6.8
8.3
174.5
(174.7)
—
(400.0)
(1.6)
1,135.3
(1,128.3)
4.7
(2.5)
(46.6)
(3.0)
0.1
(103.8)
72.5
154.8
24.3
10.2
—
(3.6)
207.3
—
—
11.6
(30.6)
—
—
(236.0)
10.2
(158.9)
(8.5)
(0.8)
(0.5)
(14.5)
(0.5)
70.6
0.9
18.0
0.9
(24.2)
(2.7)
(23.2)
(26.5)
(70.0)
—
—
0.3
484.5
38.6
453.4
901.2
(911.2)
—
—
(2.5)
671.6
(571.5)
—
(2.3)
—
(2.2)
0.1
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
Cash and cash equivalents
Restricted cash
Supplemental disclosure of cash flow information
Interest paid, net of capitalized interest
Income taxes paid
Supplemental disclosure of non-cash investing and financing activities
Non-cash consideration received for the sale of Anchor
$
$
$
$
$
$
(343.0)
(136.6)
155.7
19.1
19.1
$
$
— $
128.0
$
— $
— $
$
(442.1)
(358.6)
514.3
155.7 $
155.7 $
— $
170.8 $
0.4 $
— $
2.6 $
83.2
510.1
4.2
514.3
164.3
350.0
163.7
0.4
25.4
9.1
Non-cash property, plant and equipment additions
11.8
See accompanying notes to consolidated financial statements.
$
87
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1. Description of the Business
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Calumet Specialty Products Partners, L.P. (the “Company”) is a publicly-traded Delaware limited partnership listed on the NASDAQ Global Select
Market (“NASDAQ”) under the ticker symbol “CLMT.” The general partner of the Company is Calumet GP, LLC, a Delaware limited liability company. As
of December 31, 2019, the Company had 77,560,355 limited partner common units and 1,582,864 general partner equivalent units outstanding. The general
partner owns 2% of the Company and all of the incentive distribution rights (as defined in the Company’s partnership agreement, “IDRs”), while the
remaining 98% is owned by limited partners.
The Company is engaged in the production and marketing of crude oil-based specialty products including lubricating oils, white mineral oils, solvents,
petrolatums, waxes, and fuel and fuel related products including gasoline, diesel, jet fuel, asphalt and heavy fuel oils. The Company is based in Indianapolis,
Indiana and owns specialty and fuel products facilities. The Company owns and leases additional facilities, primarily related to production and marketing of
specialty and fuel products, throughout the United States. Subsequent to the sale of Anchor Drilling Fluids USA, LLC (“Anchor”) on November 21, 2017, the
Company managed its business in two reportable segments: specialty products and fuel products, until the third quarter of 2019 when a corporate segment
was added. Please read Note 20 - “Segments and Related Information” for further information.
2. Summary of Significant Accounting Policies
The consolidated financial statements reflect the accounts of the Company and its wholly-owned subsidiaries. All intercompany profits, transactions and
balances have been eliminated. Investments in significant non-controlled entities are accounted for either by using the equity method or cost method of
accounting.
Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the current year presentation.
The Company’s consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) which
require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash, cash equivalents and restricted cash include all highly liquid investments with a maturity of three months or less at the time of purchase.
The sale of the Superior Refinery resulted in restricted cash as of December 31, 2017 and was based upon the value of collateral under the Company’s
debt agreements. Under the indentures governing the Company’s senior notes, proceeds from Asset Sales (as defined in the indentures) can only be used for,
among other things, to repay, redeem or repurchase debt; to make certain acquisitions or investments; and to make capital expenditures. On April 9, 2018, the
Company redeemed all of the 2021 Secured Notes using both the restricted cash from the sale of the Superior Refinery and other unrestricted cash.
The Company performs periodic credit evaluations of customers’ financial condition and generally does not require collateral. Accounts receivable are
carried at their face amounts. The Company maintains an allowance for doubtful accounts for estimated losses in the collection of accounts receivable. The
Company makes estimates regarding the future ability of its customers to make required payments based on historical experience, the age of the accounts
receivable balances, credit quality of its customers, current economic conditions, expected future trends and other factors that may affect customers’ ability to
pay. Individual accounts are written off against the allowance for doubtful accounts after all reasonable collection efforts have been exhausted.
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The activity in the allowance for doubtful accounts was as follows (in millions):
Beginning balance
Provision
Write-offs, net
Ending balance
2019
December 31,
2018
2017
$
$
1.5 $
(0.5)
(0.1)
0.9 $
7.0 $
1.2
(6.7)
1.5 $
0.9
6.1
—
7.0
The cost of inventory is recorded using the last-in, first-out (“LIFO”) method. Costs include crude oil and other feedstocks, labor, processing costs and
refining overhead costs. Inventories are valued at the lower of cost or market value. The replacement cost of these inventories, based on current market
values, would have been $17.7 million higher and $7.8 million lower as of December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the
Company had $1.9 million and $1.0 million, respectively, of inventory consigned to others.
On March 31, 2017 and June 19, 2017, the Company sold inventory comprised of crude oil and refined products to Macquarie Energy North America
Trading Inc. (“Macquarie”) under Supply and Offtake Agreements as described in Note 9 — “Inventory Financing Agreements” related to the Great Falls and
Shreveport refineries, respectively. 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. 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 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):
Titled
Inventory
December 31, 2019
Supply & Offtake
Agreements (1)
Total
Titled
Inventory
December 31, 2018
Supply & Offtake
Agreements (1)
Raw materials
Work in process
Finished goods
$
$
48.3 $
35.0
124.8
208.1 $
11.6 $
29.1
43.8
84.5 $
59.9 $
64.1
168.6
292.6 $
30.2 $
39.7
128.9
198.8 $
22.2 $
19.2
43.9
85.3 $
Total
52.4
58.9
172.8
284.1
(1) Amounts represent LIFO value and do not necessarily represent the value at which the inventory was sold. Please read Note 9 - “Inventory Financing
Agreements” for further information.
Under the LIFO inventory method, the most recently incurred costs are charged to cost of sales and inventories are valued at the earliest acquisition costs.
For the year ended December 31, 2019, the Company recorded a decrease (exclusive of lower of cost or market (“LCM”) adjustments) of $6.0 million in cost
of sales in the consolidated statements of operations due to the liquidation of inventory layers. For the years ended December 31, 2018 and 2017, the
Company recorded increases (exclusive of LCM adjustments) of $6.3 million and $3.7 million, respectively, in cost of sales in the consolidated statements of
operations due to the liquidation of inventory layers.
In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the
result of charging cost of sales with LIFO inventory costs generated in prior periods. In periods of rapidly declining prices, LIFO inventories may have to be
written down to market value due to the higher costs assigned to LIFO layers in prior periods. During the year ended December 31, 2019, the Company
recorded a decrease in cost of sales in the consolidated statements of operations of $35.6 million due to the LCM valuation. During the year ended
December 31, 2018, the Company recorded an increase in cost of sales in the consolidated statements of operations of $30.6 million as compared to a
decrease of $30.6 million as of December 31, 2017, due to the sale of inventory previously adjusted through the LCM valuation.
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company is exposed to fluctuations in the price of numerous commodities, such as crude oil (its principal raw material), as well as the sales prices of
gasoline, diesel and jet fuel. Given the historical volatility of commodity prices, these fluctuations can significantly impact sales, gross profit and net income.
Therefore, the Company utilizes derivative instruments primarily to minimize its price risk and volatility of cash flows associated with the purchase of crude
oil and the sale of fuel products. The Company employs various hedging strategies and does not hold or issue derivative instruments for trading purposes. For
further information, please read Note 11.
On a regular basis, the Company enters into commodity contracts with counterparties for the purchase or sale of crude oil, blendstocks and various
finished products. These contracts usually qualify for the normal purchase / normal sale exemption under ASC 815 and, as such, are not measured at fair
value.
Property, plant and equipment are stated on the basis of cost. Depreciation is calculated using the straight-line method over the estimated useful lives.
Assets under finance leases are amortized over the lesser of the useful life of the asset or the term of the lease.
Property, plant and equipment, including depreciable lives, consisted of the following (in millions):
Land
Buildings and improvements (10 to 40 years)
Machinery and equipment (10 to 20 years)
Furniture, fixtures and software (5 to 10 years)
Assets under finance leases (1 to 7 years) (1)
Construction-in-progress
Less accumulated depreciation
December 31,
2019
2018
8.3 $
37.4
1,607.3
47.9
10.3
19.9
1,731.1
(757.6)
973.5 $
10.6
36.8
1,641.7
48.3
21.9
23.7
1,783.0
(684.9)
1,098.1
$
$
(1) Assets under finance leases consist of buildings and machinery and equipment. As of December 31, 2019 and 2018, finance lease assets are recorded
net of accumulated amortization of $7.1 million and $6.7 million, respectively.
Under the composite depreciation method, the cost of partial retirements of a group is charged to accumulated depreciation. However, when there are
dispositions of complete groups or significant portions of groups, the cost and related accumulated depreciation are retired, and any gain or loss is reflected in
earnings.
During 2019, 2018 and 2017, the Company incurred $135.1 million, $156.3 million and $185.2 million, respectively, of interest expense of which $0.5
million, $0.8 million and $2.1 million, respectively, was capitalized as a component of property, plant and equipment.
The Company periodically assesses its operations and legal requirements to determine if recognition of an asset retirement obligation is necessary. The
Company has not recorded an asset retirement obligation as of December 31, 2019 or 2018 given the timing of any retirement and related costs are currently
indeterminable.
During the years ended December 31, 2019, 2018 and 2017, the Company recorded $92.4 million, $98.1 million and $130.0 million, respectively, of
depreciation expense on its property, plant and equipment. Depreciation expense included $1.4 million, $2.3 million and $3.9 million for the years ended
2019, 2018 and 2017, respectively, related to the Company’s finance lease assets.
The Company capitalizes the cost of computer software developed or obtained for internal use. Capitalized software is amortized using the straight-line
method over five years. As of December 31, 2019 and 2018, the Company had $42.5 million and $42.6 million, respectively, of capitalized software costs. As
of December 31, 2019 and 2018, the Company had $23.1 million and $15.7 million, respectively, of accumulated depreciation related to the capitalized
software costs. During the years ended December 31, 2019, 2018 and 2017, the Company recorded $7.4 million, $8.0 million and $3.3 million, respectively,
of amortization expense on capitalized computer software.
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company accounts for its ownership in Biosyn Holdings, LLC (“Biosyn”) under the equity method of accounting. The initial cash investment made
by the Company in Biosyn was expensed given Biosyn’s operations were all related to research and development. In March 2019, the Company sold its
investment in Biosyn to The Heritage Group, a related party, for total proceeds of $5.0 million and recorded a gain of $1.2 million, which is recorded in Gain
on sale of unconsolidated affiliates in the consolidated statements of operations. Prior to the sale, the Company recorded a gain of $3.8 million for the year
ended December 31, 2019, which was recorded in the Gain (loss) from unconsolidated affiliates on the consolidated statements of operations.
The Company considers its ownership in Fluid Holding Corp. (“FHC”) a non-marketable equity security without a readily determinable fair value. The
Company records this investment using a measurement alternative which measures the security at cost minus impairment, if any, plus or minus changes
resulting from qualifying observable price changes with a same or similar security from the same issuer. The FHC investment, net of impairment, is recorded
in investments in unconsolidated affiliates in the consolidated balance sheets.
Prior to being sold in the second quarter of 2018, the Company accounted for its ownership in its Pacific New Investment Limited (“PACNIL”) joint
venture as an equity method investment in accordance with ASC 323, Investments — Equity Method and Joint Ventures and recorded the investment in
investments in unconsolidated affiliates in the consolidated balance sheets. The equity method of accounting is applied when the investor has an ownership
interest of less than 50% and/or has significant influence over the operating or financial decisions of the investee. Under the equity method, the Company’s
proportionate share of net income (loss) is reflected as a single-line item in the consolidated statements of operations and as increases or decreases, as
applicable, in the carrying value of the Company’s investment in the consolidated balance sheets. In addition, the proportionate share of net income (loss) is
reflected as a non-cash activity in operating activities in the consolidated statements of cash flows. Contributions increase the carrying value of the investment
and are reflected as an investing activity in the consolidated statements of cash flows.
Investments in unconsolidated affiliates are assessed for other-than-temporary impairment whenever changes in the facts and circumstances indicate an
other-than-temporary loss in value has occurred. During the year ended December 31, 2019, the Company recorded a $25.4 million impairment charge in loss
on impairment and disposal of assets in the consolidated statements of operations. During the years ended December 31, 2018 and 2017, the Company did not
report an impairment charge due to unconsolidated affiliates in loss on impairment and disposal of assets in the consolidated statements of operations. For
further information on the Company’s investment in unconsolidated affiliates, please read Note 6 - “Investment in Unconsolidated Affiliates.”
Goodwill represents the excess of purchase price over fair value of the net assets acquired in various acquisitions. Please read Note 7 - “Goodwill and
Other Intangible Assets” for more information. The Company reviews goodwill for impairment annually on October 1 and whenever events or changes in
circumstances indicate its carrying value may not be recoverable in accordance with ASC 350, Intangibles — Goodwill and Other (Topic 350) and ASU
2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Under ASC 350, an entity has the option to first assess
qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that
the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary.
In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of
relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgment and assumptions.
The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial
performance and Company specific events and making the assessment on whether each relevant factor will impact the impairment test positively or
negatively and the magnitude of any such impact.
If the Company’s qualitative assessment concludes that it is probable that an impairment exists or the Company skips the qualitative assessment, then the
Company needs to perform a quantitative assessment. In the first step of the quantitative assessment, the Company’s assets and liabilities, including existing
goodwill and other intangible assets, are assigned to the identified reporting units to determine the carrying value of the reporting units. Under ASU 2017-04,
goodwill impairment testing is done by comparing the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the
Company would recognize an impairment charge for the amount that the reporting unit's carrying value exceeds the fair value, not to exceed the total amount
of goodwill allocated to that reporting unit.
When performing the quantitative assessment, the fair value of the reporting units is determined using the income approach. The income approach
focuses on the income-producing capability of the reporting unit, measuring the current value of the reporting
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unit by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value
indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds,
the expected rate of inflation, and risks associated with the reporting unit. For more information, please read Note 7 - “Goodwill and Other Intangible Assets.”
Definite-lived intangible assets consist of intangible assets associated with customer relationships, tradenames, trade secrets, patents and royalty
agreements that were acquired in various acquisitions. The majority of these assets are being amortized using undiscounted estimated future cash flows over
the term of the related agreements. Intangible assets associated with customer relationships are being amortized using the undiscounted estimated future cash
flows method based upon assumed rates of annual customer attrition. For more information, please read Note 7 - “Goodwill and Other Intangible Assets.”
Other noncurrent assets include turnaround costs. Turnaround costs represent capitalized costs associated with the Company’s periodic major
maintenance and repairs and were $31.7 million and $31.4 million as of December 31, 2019 and 2018, respectively. The Company capitalizes these costs and
amortizes the costs on a straight-line basis over the lives of the turnaround assets which is generally two to five years. These amounts are net of accumulated
amortization of $51.9 million and $64.9 million at December 31, 2019 and 2018, respectively.
Other current liabilities consisted of the following (in millions):
RINs Obligation
Transition Services Agreement Payable
Net working capital adjustment liabilities
Other
Total other current liabilities
December 31,
2019
2018
13.0 $
19.8
6.9
18.9
58.6 $
15.8
—
—
18.0
33.8
$
$
The Company’s Renewable Identification Numbers (“RINs”) obligation (“RINs Obligation”) represents a liability for the purchase of RINs in order to
satisfy the U.S. Environmental Protection Agency’s (“EPA”) requirement to blend biofuels into the fuel products it produces pursuant to the EPA’s Renewable
Fuel Standard (“RFS”). RINs are assigned to biofuels produced in the U.S. as required by the EPA. The EPA sets annual quotas for the percentage of biofuels
that must be blended into transportation fuels consumed in the U.S. and, as a producer of motor fuels from petroleum, the Company is required to blend
biofuels into the fuel products it produces at a rate that will meet the Company’s prorated share of 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.
The Company uses the inventory model to account for RINs, measuring acquired RINs at weighted-average cost. The liability is calculated by
multiplying the RINs shortage (based on actual results) by the period end RINs spot price. In the event the Company has RINs in excess of the RINs
obligation, an asset is recognized on the balance sheet during that reporting period. The asset is initially recorded at cost at the time the Company acquires
them and are subsequently revalued at the lower of cost or market as of the last day of each reporting period and the resulting adjustments are reflected in
costs of sales for the period in the consolidated statements of operations. The value of RINs in excess of the RINs Obligation, if any, would be reflected in
other current assets on the consolidated balance sheets. RINs acquired in excess of the Company’s current RINs Obligation may be sold or held to offset
future RINs Obligations. RINs sold are charged to cost of sales with cash inflows recorded in the operating cash flow section of the consolidated statements
of cash flows. RINs acquired in a given year may be used for compliance purposes only in the year received or in the following year (current year RINs assets
can be used to offset no more than 20% of the subsequent year’s obligation), after which time they expire and can no longer be used for compliance purposes.
The liabilities associated with our RINs Obligation are considered recurring fair value measurements. Please read Note 8 for further information on the
Company’s RINs Obligation.
The Company entered into a Transaction Service Agreement (“TSA”) as a result of the San Antonio Transaction (read Note 5 - “Divestitures”). Under the
terms of the agreement, the Company continued to support many functions of the San Antonio facility including but not limited to purchasing, information
technology, accounts receivable and accounts payable support. Under the TSA, the Company continued to collect from customers and pay vendors. The
Company would net settle the cash activity with
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the buyer on a regular basis. At December 31, 2019, the Company owed the buyer $19.8 million as a result of supporting cash activity for the buyer.
The Company periodically evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets, when events or
circumstances warrant such a review. The carrying value of a long-lived asset to be held and used is considered impaired when the anticipated separately
identifiable undiscounted cash flows from such an asset are less than the carrying value of the asset. In such an event, a write-down of the asset would be
recorded through a charge to operations, based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is
determined primarily using anticipated cash flows assumed by a market participant discounted at a rate commensurate with the risk involved. Long-lived
assets to be disposed of other than by sale are considered held and used until disposal.
During the years ended December 31, 2019 and 2018, the Company did not identify any impairment indicators that suggested the carrying values of its
long-lived assets are not recoverable at the asset groups within the specialty products, fuel products and corporate segments. As a result of the long-lived asset
impairment assessment performed, no impairment charges were recorded for the years ended December 31, 2019 and 2018.
During the fourth quarter of 2017, the Company identified impairment indicators that suggested the carrying values long-lived assets including property,
plant and equipment at the San Antonio and Missouri asset groups within the fuel products and specialty products segments, respectively, may not be
recoverable. The primary impairment indicators included recently completed projections of future cash flows and the associated impact on the long-range
strategic plan forecasts, lower than expected cash flows attributed to these asset groups and poor local market conditions. Undiscounted cash flow tests
performed for these asset groups indicated that the long-lived assets were not recoverable. The fair value of the asset groups was established using a
discounted cash flow method which utilized Level 3 inputs in the fair value hierarchy. The principal parameters used to establish fair values included
estimates of future margins on products produced and sold, future commodity prices, future capital expenditures and discount rates. As a result of the long-
lived asset impairment assessment performed, the Company recorded impairment charges primarily on property, plant and equipment on its San Antonio asset
group of $147.0 million and on its Missouri asset group of $59.2 million for the year ended December 31, 2017.
The Company recognizes revenue in accordance with ASC 606, Revenue Recognition, which states that revenue is recognized when control of the
promised goods are transferred to the customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for
those goods. Please read Note 3 - “Revenue Recognition” for additional information on our revenue recognition accounting policies and elections.
Revenues associated with transactions commonly called buy/sell contracts, in which the purchase and sale of inventory with the same counterparty are
entered into “in contemplation” of one another, are combined and reported as a net purchase in cost of sales.
The Company performs periodic credit evaluations of its customers’ financial condition and in some instances requires cash in advance or letters of credit
prior to shipment for domestic orders. For international orders, letters of credit are generally required, and the Company maintains insurance policies which
cover certain export orders. The Company maintains an allowance for doubtful customer accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance for doubtful accounts is developed based on several factors including historical experience, the age of
the accounts receivable balances, credit quality of the Company’s customers, current economic conditions, expected future trends and other factors that may
affect customers’ ability to pay, which exist as of the balance sheet dates. If the financial condition of the Company’s customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances may be required. The Company has derivative positions with a limited number of
counterparties. The evaluation of these counterparties is performed quarterly in connection with the Company’s ASC 820-10, Fair Value Measurements and
Disclosures, valuations to determine the impact of the counterparty credit risk on the valuation of its derivative instruments.
The Company, as a partnership, is generally not liable for federal and state income taxes on the earnings of Calumet Specialty Products Partners, L.P. and
its wholly-owned subsidiaries. However, the Company conducts certain activities through wholly-owned subsidiaries that are corporations, which in certain
circumstances are subject to federal, state and local income taxes. Additionally, the Company is subject to franchise taxes in certain states. Income taxes on
the earnings of the Company, with the exception of the above-mentioned taxes, are the responsibility of its partners, with earnings of the Company included in
partners’ earnings.
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the event that the Company’s taxable income does not meet certain qualification requirements, the Company would be taxed as a corporation. Interest
and penalties related to income taxes, if any, would be recorded in income tax expense. Generally, tax returns remain subject to examination by taxing
authorities for three years.
The Company accounts for income taxes for its corporations under the asset and liability method. Under this method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in earnings in the
period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than
not to be realized.
The determination of the provision for income taxes requires significant judgment, use of estimates, and the interpretation and application of complex tax
laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax
positions. The benefits of uncertain tax positions are recorded in the Company’s financial statements only after determining a more-likely-than-not probability
that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, the Company reassesses these
probabilities and records any changes through the provision for income taxes.
The Company calculates earnings per unit under ASC 260-10, Earnings per Share. The Company treats incentive distribution rights (“IDRs”) as
participating securities for the purposes of computing earnings per unit in the period that the general partner becomes contractually obligated to receive IDRs.
Also, the undistributed earnings are allocated to the partnership interests based on the allocation of earnings to the Company’s partners’ capital accounts as
specified in the Company’s partnership agreement. When distributions exceed earnings, net income is reduced by the actual distributions with the resulting
net loss being allocated to capital accounts as specified in the Company’s partnership agreement.
For unit-based compensation equity awards granted, compensation expense is recognized in the Company’s consolidated financial statements on a
straight-line basis over the awards’ vesting periods based on their fair values on the dates of grant. The unit-based compensation awards vest over a period not
exceeding four years. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is
vested at that date. For more information, please read Note 13 - “Partners’ Capital.”
Unit-based compensation liability awards are awards that are currently expected to be settled in cash on their vesting dates, rather than in equity units
(“Liability Awards”). Liability Awards are recorded in accrued salaries, wages and benefits based on the vested portion of the fair value of the awards on the
balance sheet date. The fair value of Liability Awards is updated at each balance sheet date and changes in the fair value of the vested portions of the Liability
Awards are recorded as increases or decreases to compensation expense. The Company recognizes forfeitures as they occur. Please read Note 14 - “Unit-
Based Compensation” for more information on Liability Awards.
The Company complies with ASC 606, Revenue Recognition. ASC 606 requires the classification of shipping and handling costs billed to customers in
sales and the classification of shipping and handling costs incurred in cost of sales, or to be disclosed if classified elsewhere. The Company has reflected
$122.9 million, $137.2 million and $137.1 million, respectively, for the years ended December 31, 2019, 2018 and 2017, in transportation expense in the
consolidated statements of operations, the majority of which is billed to customers.
The Company expenses advertising costs as incurred which totaled $4.1 million, $4.3 million and $6.6 million in 2019, 2018 and 2017, respectively.
Advertising expenses are reported as selling expenses in the consolidated statements of operations.
Certain of the Company’s subsidiaries use a local currency as their functional currency. Assets and liabilities of subsidiaries with a local currency as their
functional currency are translated at period-end rates of exchange, and revenues and expenses are translated at average exchange rates prevailing for each
month. The resulting translation adjustments are made directly to a separate component of other comprehensive income (loss), which is reflected in partners’
capital in the Company’s consolidated balance sheets.
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Certain of the Company’s subsidiaries also enter into transactions and have monetary assets and liabilities that are denominated in a currency other than
such entity’s respective functional currency. Gains and losses from the revaluation of foreign currency transactions and monetary assets and liabilities are
included in other income (expense) in the consolidated statements of operations.
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and all the related amendments to its lease contracts
using the modified retrospective method. The effective date was used as the Company’s date of initial application with no restatement of prior periods. As
such, prior periods continue to be reported under the accounting standards in effect for those periods. Please read Note 22 - “Leases” for further information.
On January 1, 2019, the Company adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging
Activities, which improves the financial reporting of hedging relationships to better align risk management activities in financial statements and make certain
targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. Given the Company’s current risk management
strategy of not designating any of its derivative positions as hedges, the adoption of this guidance had no effect on our consolidated financial statements. If, in
the future, the Company decides to modify its hedging strategies, this new accounting guidance would become applicable and will be applied at that time.
On January 1, 2019, the Company adopted ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Non-employee Share-
Based Payment Accounting (“ASU 2018-07”). This update simplifies the guidance related to non-employee share-based payments by superseding ASC 505-
50 and expanding the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both non-
employees and employees. Prior to the issuance of this standard update, non-employee share-based payments were subject to ASC 505-50 requirements while
employee share-based payments were subject to ASC 718 requirements. ASU 2018-07 is effective for fiscal years (including interim periods) beginning after
December 15, 2018, with early adoption permitted. The adoption of ASU 2018-07 had no impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No 2016-13, Credit Losses-Measurement of Credit Losses on Financial Instruments, new guidance for the
accounting for credit losses on certain financial instruments. This guidance introduces a new approach to estimating credit losses on certain types of financial
instruments and modifies the impairment model for available-for-sale debt securities. This guidance becomes effective January 1, 2020 and is not expected to
have a material impact on the Company’s 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, the Company performs the following five
steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate
the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At
contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods promised within each contract and
determines the performance obligations and assesses whether each promised good is distinct. The Company then recognizes as revenue the amount of the
transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
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.
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V
Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 are deemed to be fulfillment activities rather than a separate distinct performance obligation.
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.
The following table reflects the disaggregation of revenue by major source (in millions):
Sales by major source
Standard specialty products
Packaged and synthetic specialty products
Total specialty products
Fuel and fuel related products
Asphalt
Total fuel products
Total sales
Year Ended December 31,
2019
2018
2017
$
$
$
1,123.2 $
230.9
1,354.1
1,864.7 $
233.8
2,098.5
3,452.6 $
1,125.6 $
256.8
1,382.4
1,885.7 $
229.4
2,115.1
3,497.5 $
1,039.7
260.7
1,300.4
2,115.7
347.7
2,463.4
3,763.8
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied; recognition generally occurs with the transfer of
control at a point in time. The contract with the customer states the final terms of the sale, including the description, quantity and price of each product or
service purchased. For fuel products, payment is typically due in full between 2 to 30 days of delivery or the start of the contract term, such that payment is
typically collected 2 to 30 days subsequent to the satisfaction of performance obligations. For specialty products, payment is typically due in full between 30
to 90 days of delivery or the start of the contract term, such that payment is typically collected 30 to 90 days subsequent to the satisfaction of performance
obligations. In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured. The expected costs
associated with a product assurance warranty continues to be recognized as expense when products are sold. The Company does not offer promised services
that could be considered warranties that are sold separately or provide a service in addition to assurance that the related product complies with agreed upon
specifications. The Company establishes provisions based on the methods described in ASC 606 for estimated returns and warranties as variable
consideration when determining the transaction price.
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 doubtful accounts, from contracts with customers as of December 31, 2019 and 2018 was $175.0 million and $177.7 million, respectively.
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.
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Discontinued Operations
On November 21, 2017, Calumet Operating, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company, completed the
sale to a subsidiary of Q’Max Solutions Inc. (“Q’Max”) of all of the issued and outstanding membership interests in Anchor, for total consideration of
approximately $89.6 million including a base price of $50.0 million, $14.2 million for net working capital and other items and a 10% equity interest in Fluid
Holding Corp. (“FHC”), the parent company of Q’Max (the “Anchor Transaction”). Effective in the fourth quarter of 2017, the Company classified its results
of operations for all periods presented to reflect Anchor as a discontinued operation and classified the assets and liabilities of Anchor as discontinued
operations. Prior to being reported as discontinued operations, Anchor was included as its own reportable segment as oilfield services. Following the
application of certain post-closing adjustments, the adjusted total consideration the Company received for the Anchor Transaction was $85.5 million as of
December 31, 2018. The Company recognized a net loss on sale of $4.1 million and $62.6 million in net loss from discontinued operations in the consolidated
financial statements of operations for the years ended December 31, 2018 and 2017, respectively. Prior to being reported as discontinued operations, Anchor
was included as its own reportable segment as oilfield services.
As of December 31, 2019 and 2018, the Company had a $5.5 million and $11.1 million receivable, respectively, in other accounts receivable. As of
December 31, 2019, $1.8 million was in Other noncurrent assets, net in the consolidated balance sheets for the remaining payment of the base price and
working capital. In October 2019, Q’Max and the Company agreed to restructure the receivable, which will be paid in monthly installment payments and
accrue interest at a rate of 6.0% per annum; the final payment is due June 2021.
The following table summarizes the results of discontinued operations for each of the periods presented (in millions):
Sales
Cost of sales
Selling
General and administrative
Loss on sale of business, net
Other
Net loss from discontinued operations before income taxes
Income tax benefit
Net loss from discontinued operations net of income taxes
5. Divestitures
Year Ended December 31,
2019
2018
2017
— $
— $
—
—
—
—
—
— $
—
— $
—
—
—
(4.1)
—
(4.1)
—
(4.1)
$
$
228.6
(168.1)
(45.9)
(4.5)
(62.6)
(21.0)
(73.5)
(1.0)
(72.5)
$
$
$
On November 10, 2019, Calumet Refining, LLC, a Delaware limited liability company (“Calumet Refining”) and a wholly-owned subsidiary of the
Company, completed the sale of all of the issued and outstanding membership interests in Calumet San Antonio Refining, LLC, a Delaware limited liability
company (“Calumet San Antonio”), which owned a refinery located in San Antonio, Texas and associated net working capital, and related assets, including
associated hydrocarbon inventories and a crude oil terminal and pipeline to Starlight Relativity Acquisition Company LLC, a Delaware limited liability
company (“Starlight”) (the “San Antonio Transaction”). Total consideration received was $59.1 million, which consisted of a base sales price of $63.0 million
minus an adjustment of $3.9 million for net working capital, inventories and reimbursement of certain transaction costs. In February 2020 the Company and
Starlight agreed to the final purchase price adjustment payment related to net working capital and inventory to Starlight of $6.9 million, which has been
reflected in the net loss recognized by the Company as of December 31, 2019. Additionally, in connection with the San Antonio Transaction, the Company,
Calumet San Antonio, TexStar Midstream Logistics, L.P. (“TexStar”), TexStar Midstream Logistics Pipeline, LP and Tailwater Capital, LLC entered into a
Settlement and Release Agreement (the “Settlement Agreement”), pursuant to which the Company agreed to pay TexStar and its affiliates a cash payment of
$1.0 million and the parties mutually agreed to dismiss the litigation and release each other with respect to the legal dispute relating to the termination of the
Throughput and Deficiency Agreement (the “Pipeline Agreement”). As a result of the Settlement Agreement, the Company included the $38.1 million
liability related to the Pipeline Agreement in the loss on sale of business calculation for the San Antonio Transaction. The San Antonio refinery was included
in the Company’s fuel products segment. The Company recognized a net loss of $8.7 million in Gain (loss) on sale of business, net in the consolidated
statements of operations for the year ended December 31, 2019, related to the San Antonio Transaction.
In 2018, the Company entered into a long-term commitment to be utilized by Calumet San Antonio in the form of a throughput and deficiency agreement
for future transportation of West Texas crude oil via third-party pipeline facilities that remained under construction as of December 31, 2019. The agreement
was not included in the sale of Calumet San Antonio. The Company is
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
pursuing alternatives in an effort to offset a significant amount of the costs expected under the agreement. However, there can be no assurance that the
Company will be successful in realizing the alternatives to reduce the costs. Consequently, in connection with the completion of the sale of Calumet San
Antonio, the Company recorded a liability of $21.1 million for the present value of the annual costs over the seven-year term of the agreement, of which
$19.6 million is recorded in other long-term liabilities in the consolidated balance sheets as of December 31, 2019.
In conjunction with the sale, the Company considered other qualitative and quantitative factors and concluded the San Antonio Transaction did not
represent a strategic shift in the business. However, the Company considered the San Antonio asset group to be an individually significant component of its
operations.
The following table presents the net loss before income taxes for Calumet San Antonio for the periods presented (in millions):
Sales
Gross profit
Net loss before income taxes
Year Ended December 31,
2019
2018
2017
$
$
403.4 $
16.2
(3.9) $
444.2 $
(4.5)
(23.7) $
347.1
(7.3)
(168.7)
On November 8, 2017, Calumet Refining completed the sale of all of the issued and outstanding membership interests in Calumet Superior, LLC, a
Delaware limited liability company (“Superior”), which owned the Superior Refinery and associated net working capital, the Superior Refinery’s wholesale
marketing business and related assets, including certain owned or leased product terminals, and certain crude gathering assets and pipeline space in North
Dakota to Husky Superior Refining Holding Corp., a Delaware corporation (“Husky”) (the “Superior Transaction”). Total consideration received was $533.1
million, which consisted of a base price of $435.0 million and $98.1 million for net working capital and reimbursement of certain capital spending. The
Superior Refinery was included in the Company’s fuel products segment. For the years ended December 31, 2018 and 2017, the Company recognized a net
gain of $4.8 million and $236.0 million, respectively, in Gain (loss) on sale of business, net in the consolidated statements of operations related to the
Superior Transaction.
In conjunction with the sale, the Company considered other qualitative and quantitative factors and concluded the Superior Transaction did not represent
a strategic shift in the business. However, the Company considered Superior to be an individually significant component of its operations. The following table
presents the net income before income taxes for Superior for the periods presented (in millions):
Sales
Gross profit
Net income before income taxes
6. Investment in Unconsolidated Affiliates
Year Ended December 31,
2019
2018
2017
$
$
— $
—
— $
— $
—
— $
669.1
110.0
99.3
In August 2015, the Company and The Heritage Group, a related party, formed PACNIL for the purpose of investing in a joint venture with Shandong
Hi-Speed Materials Group Corporation and China Construction Installation Engineering Co., Ltd. to construct, develop and operate a solvents refinery in
mainland China. The joint venture is named Shandong Hi-Speed Hainan Development Co., Ltd. (“Hi-Speed”). The Company invested $4.8 million in June
2016 and $4.8 million in October 2016. Through the Company’s ownership of an equity interest in PACNIL, the Company previously owned an equity
interest of approximately 6% in Hi-Speed. In the second quarter of 2018, PACNIL sold its investment in Hi-Speed to other owners. The Company received
proceeds of $9.9 million for the sale.
In February 2018, the Company and The Heritage Group formed Biosyn for the purpose of investing in Biosynthetic Technologies, LLC (“Biosynthetic
Technologies”), a startup company which developed an intellectual property portfolio for the manufacture of renewable-based and biodegradable esters. The
Company incurred approximately $4.0 million in related expenditures. The Company, through Biosyn, intended to explore a range of alternatives to maximize
the value of the acquired intellectual property. In March 2019, the Company sold its investment in Biosyn to The Heritage Group, a related party, for total
proceeds of $5.0 million and recorded a gain of $1.2 million, which is recorded in Gain on sale of unconsolidated affiliates in the
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consolidated statements of operations. Prior to the sale, the Company recorded a gain of $3.8 million for the year ended December 31, 2019, which was
recorded in Gain (loss) from unconsolidated affiliates on the consolidated statements of operations.
In connection with the Anchor Transaction completed in November of 2017, the Company received a 10% investment in FHC as part of the total
consideration for Anchor. Please read Note 4 - “Discontinued Operations” for further information on the Anchor Transaction. FHC provides oilfield services
and products to customers globally. The Company’s investment in FHC is a non-marketable equity security without a readily determinable fair value. The
Company recorded this investment using a measurement alternative which measures the security at cost minus impairment, if any, plus or minus changes
resulting from qualifying observable price changes with a same or similar security from the same issuer. As of December 31, 2018 and 2017, the Company
had an investment of $25.4 million in FHC.
During the year ended December 31, 2019, the Company determined the fair value of the investment in FHC was less than the December 31, 2018
carrying value of $25.4 million after evaluating indicators of impairment and valuing the investment using projected future cash flows and other Level 3
inputs. Utilizing an income approach, 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 company. As a result, the Company recorded an
impairment charge of $25.4 million in loss on impairment and disposal of assets in the consolidated statements of operations for the year ended December 31,
2019.
7. Goodwill and Other Intangible Assets
2019
The Company updated its financial projections in connection with its annual goodwill assessment and determined that the fair value of each of its
reporting units with goodwill exceeded its carrying value and thus no impairment charge for goodwill related to the specialty products segment was recorded
in the consolidated statements of operations within asset impairment. There is no reporting unit within the fuel products segment that has goodwill.
2018
The Company updated its financial projections in connection with its annual goodwill assessment and determined that the fair value of each of its
reporting units with goodwill exceeded its carrying value and thus no impairment charge for goodwill related to the specialty products segment was recorded
in the consolidated statements of operations within asset impairment.
2017
The Company updated its financial projections in connection with its annual goodwill assessment and determined that its Dickinson reporting unit’s fair
value was below its carrying value. An impairment charge of $0.7 million for goodwill related to the specialty products segment was recorded in the
consolidated statements of operations within loss on impairment and disposal of assets.
To derive the fair value of the reporting units, as required in step one of the impairment test, the Company used the income approach, specifically the
discounted cash flow method, to determine the fair value of each reporting unit and the associated amount of the impairment charge. The income approach
focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic
benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash
flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with
the reporting unit.
Inputs used to estimate the fair value of the Company’s reporting units are considered Level 3 inputs of the fair value hierarchy and include the
following:
•
•
The Company’s financial projections for its reporting units are based on its analysis of various supply and demand factors which include, among
other things, industry-wide capacity, its planned utilization rate, end-user demand, crack spreads, capital expenditures and economic conditions. Such
estimates are consistent with those used in the Company’s planning and capital investment reviews and include recent historical prices and published
forward prices.
The discount rate used to measure the present value of the projected future cash flows is based on a variety of factors, including market and
economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions,
if possible.
For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a
significantly lower or higher fair value measurement.
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in goodwill balances for the periods indicated below are as follows (in millions):
Net balance as of December 31, 2017
Impairment (1)
Net balance as of December 31, 2018
Impairment (1)
Net balance as of December 31, 2019
Specialty
Products
171.4
—
171.4
—
171.4
$
$
$
(1) Total accumulated goodwill impairment as of December 31, 2019 and 2018, is $35.5 million.
Other intangible assets consist of the following (in millions):
Customer relationships
Tradenames
Trade secrets
Patents
Royalty agreements
Weighted Average
Life (Years)
Gross Amount
Accumulated
Amortization
Gross Amount
Accumulated
Amortization
December 31, 2019
December 31, 2018
22
11
13
12
20
19
$
181.3 $
(130.6) $
181.3 $
26.8
52.7
1.6
6.1
(18.7)
(43.4)
(1.6)
(3.0)
26.8
52.7
1.6
6.1
$
268.5 $
(197.3) $
268.5 $
(120.1)
(16.4)
(39.7)
(1.6)
(2.7)
(180.5)
Tradenames, trade secrets, patents and royalty agreements are being amortized to properly match expenses with the undiscounted estimated future cash
flows over the terms of the related agreements or the period expected to be benefited. The costs of agreements with terms allowing for the potential extension
of such agreements are being amortized based on the initial term only. Customer relationships are being amortized to properly match expenses with the
undiscounted estimated future cash flows based upon assumed rates of annual customer attrition. For the years ended December 31, 2019, 2018 and 2017, the
Company recorded amortization expense of intangible assets of $16.8 million, $19.8 million and $24.6 million, respectively.
As of December 31, 2019, the Company estimates that amortization of intangible assets for the next five years will be as follows (in millions):
Year
2020
2021
2022
2023
2024
8. Commitments and Contingencies
Amortization Amount
$
$
$
$
$
14.0
11.5
9.5
7.7
6.5
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.
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 legal standards and obligations that are applicable to the Company’s operations, such as requiring the
acquisition of permits to conduct regulated activities,
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
restricting the manner in which the Company may release materials into the environment, requiring remedial activities to mitigate pollution from former or
current operations that may include incurring capital expenditures to limit or prevent unauthorized releases from our equipment and facilities, requiring the
application of specific health and safety criteria addressing worker protection and imposing substantial liabilities for pollution resulting from its operations.
Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil and criminal penalties; the
imposition of investigatory, remedial or corrective action obligations or the incurrence of capital expenditures; the occurrence of restrictions, delays or
cancellations in the permitting, development or expansion of projects; and the issuance of injunctive relief limiting or prohibiting Company activities.
Moreover, certain of these laws impose joint and several strict liability for costs required to remediate and restore sites where petroleum hydrocarbons, wastes
or other materials have been released or disposed. In addition, new laws and regulations, new interpretations of existing laws and regulations, reinterpretation
of legal requirements, increased governmental enforcement or other developments, some of which legal requirements are discussed below, could significantly
increase the Company’s operational or compliance expenditures.
Remediation of subsurface contamination continues at certain of the Company’s refinery sites and is being overseen by the appropriate state agencies.
Based on current investigative and remedial activities, the Company believes that the soil and groundwater contamination at these refineries can be controlled
or remediated without having a material adverse effect on the Company’s financial condition. However, such costs are often unpredictable and, therefore,
there can be no assurance that the future costs of these remedial projects will not become material. As of December 31, 2019 and 2018, the Company had
accrued $2.4 million and $2.8 million, respectively, for environmental liabilities recorded in the other current liabilities in the consolidated balance sheets.
Great Falls Refinery
In connection with the acquisition of the Great Falls refinery from Connacher Oil and Gas Limited (“Connacher”), the Company became a party to an
existing 2002 Refinery Initiative Consent Decree (the “Great Falls Consent Decree”) with the EPA and the Montana Department of Environmental Quality.
The material obligations imposed by the Great Falls Consent Decree have been completed. On September 27, 2012, Montana Refining Company, Inc.
received a final Corrective Action Order on Consent, replacing the refinery’s previously held hazardous waste permit. This Corrective Action Order on
Consent governs the investigation and remediation of contamination at the Great Falls refinery. The Company believes the majority of damages related to
such contamination at the Great Falls refinery are covered by a contractual indemnity provided by a subsidiary of HollyFrontier Corporation (the “Seller”),
the owner and operator of the Great Falls refinery prior to its acquisition by Connacher, under an asset purchase agreement between the Seller and Connacher,
pursuant to which Connacher acquired the Great Falls refinery. Under this asset purchase agreement, the Seller agreed to indemnify Connacher and Montana
Refining Company, Inc., subject to timely notification, certain conditions and certain monetary baskets and caps, for environmental conditions arising under
the Seller’s ownership and operation of the Great Falls refinery and existing as of the date of sale to Connacher. During 2014, the Seller provided the
Company a notice challenging the Company’s position that the Seller is obligated to indemnify the Company’s remediation expenses for environmental
conditions to the extent arising under the Seller’s ownership and operation of the refinery and existing as of the date of sale to Connacher, which expenditures
totaled in excess of $17.0 million as of December 31, 2019, of which $14.6 million was capitalized into the cost of the Company’s refinery expansion project
and the remainder was expensed. On September 22, 2015, the Company initiated a lawsuit against the Seller. On November 24, 2015, the Seller filed a motion
to dismiss the case pending arbitration. On February 10, 2016, the court ordered that all of the claims be addressed in arbitration. The arbitration panel
conducted the first phase of the arbitration in July 2018 and issued its ruling on September 13, 2018. In its ruling, the arbitration panel confirmed that the
Seller retained the liability for all pre-closing contamination with respect to third-party claims indefinitely and with respect to first party claims for which the
Seller received notice within five years after the sale of the refinery, which claims are subject to the requirements otherwise set forth in the asset purchase
agreement. The second phase of the arbitration regarding damages occurred in April 2019. The arbitration panel issued its final ruling on August 25, 2019.
Among other things, the panel denied the Company’s demands for reimbursement for costs incurred and left open the Company’s ability to make future
claims. The Company expects that it may incur costs to remediate other environmental conditions at the Great Falls refinery. The Company currently believes
that these other costs it may incur will not be material to its financial position or results of operations.
Cotton Valley, Princeton and Shreveport Refineries
Since 2013, the Louisiana Department of Environmental Quality (the “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 various orders and submitted a consolidated proposal to the LDEQ in December 2018 to resolve all of the applicable matters and it is likely
a resolution of this matter will result in a penalty in excess of $0.1 million. The Company is awaiting a response from the LDEQ on the Company’s proposal.
The Company expects that the amount of the penalty will not be material to its financial position or results of operations and any conditions established by the
LDEQ on the Company’s operations will not be material to the Company’s operations.
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s RINs Obligation represents a liability for the purchase of RINs to satisfy the EPA requirement to blend biofuels into the fuel products it
produces pursuant to the 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 Company’s prorated share of 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 net of amounts internally generated or purchased and the price of those RINs as of the balance sheet date.
In August 2019, the EPA granted certain of the Company’s refineries a “small refinery exemption” under the RFS for the 2018 calendar year, 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 2018 calendar year, compliance with the RFS would represent a “disproportionate economic hardship” for these small refineries.
In March 2018, the EPA granted certain of the Company’s refineries a “small refinery exemption” under the RFS for the 2017 calendar year, as provided
for under the CAA. In granting those exemptions, the EPA in consultation with the Department of Energy determined that for the 2017 calendar year,
compliance with the RFS would represent a “disproportionate economic hardship” for these small refineries.
In February 2017 and in May 2017, the EPA granted certain of the Company’s refineries a “small refinery exemption” under the RFS for the 2016
calendar year, as provided for under the CAA, as amended. In granting those exemptions, the EPA determined that for the 2016 calendar year, compliance
with the RFS would represent a “disproportionate economic hardship” for these refineries.
The RINs exemptions resulted in a decrease in the RINs obligation and is charged to cost of sales in the audited consolidated statements of operations
with the exception of the portion related to the Superior Refinery which is charged to other (income) expense within operating income in the audited
consolidated statements of operations.
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 CERCLA and similar state statutes require the
Company to maintain information about hazardous materials used or produced in the Company’s operations and provide this information to employees,
contractors, state and local government authorities and customers. The Company maintains safety and training programs as part of its ongoing efforts to
promote compliance with applicable laws and regulations. The Company conducts periodic audits of Process Safety Management systems at each of its
locations subject to this standard. The Company’s compliance with applicable health and safety laws and regulations has required, and continues to require,
substantial expenditures. Changes in occupational safety and health laws and regulations or a finding of non-compliance with current laws and regulations
could result in additional capital expenditures or operating expenses, as well as civil penalties and, in the event of a serious injury or fatality, criminal charges.
The Company has approximately 400 employees covered by various collective bargaining agreements, or approximately 27% of its total workforce of
approximately 1,500 employees. These agreements have expiration dates of October 31, 2020, December 12, 2021, April 30, 2022, July 31, 2022, January 15,
2023 and January 31, 2023. The Company has approximately 52 employees, or 3% of its total workforce, who are covered by a collective bargaining
agreement which will expire in less than one year and does not expect any work stoppages.
The Company was a party to a 2014 Throughput and Deficiency Agreement with TexStar pursuant to which TexStar delivered crude oil to the
Company’s San Antonio refinery through a crude oil pipeline system owned and operated by TexStar (the “Pipeline Agreement”). The Pipeline Agreement
had an initial term of 20 years and was accounted for as a finance lease on the Company’s consolidated balance sheets. TexStar and the Company have each
terminated the Pipeline Agreement for alleged breaches of the agreement. The Company ceased using the asset as of February 28, 2019, wrote off the
associated net book value of $10.7 million in Loss on impairment and disposal of assets and reclassified the $38.1 million present value of financing lease
obligation from current and long-term debt to Other current liabilities on the consolidated balance sheets. The Company was in a dispute with TexStar over
whether any additional monies were owed with TexStar claiming certain minimum amounts of $0.0 to $0.5 million a month continued to be owed through the
remainder of the original term of the Pipeline Agreement. The Company filed a lawsuit
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
against TexStar on May 17, 2019 in Bexar County, Texas, seeking a declaratory judgment that the Company properly terminated the Pipeline Agreement and
the Company is not obligated to make further payments under the Pipeline Agreement. On November 10, 2019, in connection with the San Antonio
Trasaction, the Company, TexStar, and related parties entered into a Settlement and Release Agreement with respect to the litigation. Please read Note 5 -
“Divestitures” for further information.
On October 31, 2018, the Company received an indemnity claim notice (the “Claim Notice”) from Husky Superior Refining Holding Corp. (“Husky”)
under the Membership Interest Purchase Agreement, dated August 11, 2017 (“MIPA”), which was entered into in connection with the Superior
Transaction. The Claim Notice relates to alleged losses Husky incurred in connection with a fire at the Husky Superior refinery on April 26, 2018, over five
months after Calumet sold Husky 100% of the membership interests in the entity that owns the Husky Superior refinery. Based on public reports, Calumet
understands the fire occurred during a turnaround of the Husky Superior refinery at a time when Husky owned, operated, and supervised the refinery. Calumet
was not involved with the turnaround. The U.S. Chemical Safety and Hazard Investigation Board (“CSB”) is currently investigating the fire, but has not
contacted Calumet in connection with that investigation or suggested that Calumet is responsible for the fire. Husky’s Claim Notice alleges that Husky “has
become aware of facts which may give rise to losses” for which it reserved the right to seek indemnification at a later date. The Claim Notice further alleges
breaches of certain representations, warranties, and covenants contained in the MIPA. The information currently available about the fire and the CSB
investigation does not support Husky’s threatened claims, and Husky has not filed a lawsuit against Calumet. If Husky were to assert such claims, they would
be subject to certain limits on indemnification liability under the MIPA that may reduce or eliminate any potential indemnification liability.
On July 9, 2019, Calumet Shreveport Refining, LLC entered into a Settlement Agreement and Mutual Release with Enterprise TE Products Pipeline
Company LLC and Enterprise Refined Products Company LLC to resolve disputes regarding transportation charges, product downgrades and transmix
recovery fee charges, and truck terminal loading charges that arose between the parties under the Transportation Agreement dated July 1, 2015. In July 2019,
the final settlement amount actually paid by the Company to Enterprise TE Products Pipeline Company LLC and Enterprise Refined Products Company LLC,
collectively, was $3.7 million.
On May 4, 2018, the SEC requested that the Company and certain of its executives voluntarily produce certain communications and documents prepared
or maintained from January 2017 to May 2018 and generally related to the Company’s finance and accounting staff, financial reporting, public disclosures,
accounting policies, disclosure controls and procedures and internal controls. Beginning on July 11, 2018, the SEC issued several subpoenas formally
requesting the same documents previously subject to the voluntary production requests by the SEC as well as additional, related documents and information.
The SEC has also interviewed and taken testimony from current and former Company employees and other individuals. The Company has, from the outset,
cooperated with the SEC’s requests. In November 2019, the Company and the SEC settled the matter. The matter was settled without the Company admitting
or denying any charges arising from the SEC’s investigation, and the Company paid a penalty of less than $0.3 million.
The Company is subject to other matters, claims and litigation incidental to its business. The Company has recorded accruals with respect to certain of its
matters, claims and litigation where appropriate, that are reflected in the audited consolidated financial statements but are not individually considered
material. For other matters, claims and litigation, the Company has not recorded accruals because it has not yet determined that a loss is probable or because
the amount of loss cannot be reasonably estimated. While the ultimate outcome of matters, claims and litigation currently pending cannot be determined, the
Company currently does not expect these outcomes, individually or in the aggregate (including matters for which the Company has recorded accruals), to
have a material adverse effect on its financial position, results of operations or cash flows. The outcome of any matter, claim or litigation is inherently
uncertain, however, and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the
Company may be subject to liability that could have a material adverse effect on its financial position, results of operations or cash flows.
The Company has agreements with various financial institutions for standby letters of credit which have been issued primarily to vendors. As of
December 31, 2019 and 2018, the Company had outstanding standby letters of credit of $42.5 million and $35.1 million, respectively, under its senior secured
revolving credit facility (the “revolving credit facility”). Please read Note 10 - “Long-Term Debt” for additional information regarding the Company’s
revolving credit facility. At December 31, 2019 and 2018, the maximum amount of letters of credit the Company could issue under its revolving credit facility
was subject to borrowing base limitations, with a maximum letter of credit sublimit equal to $300.0 million, which may be increased with consent of the
Agent (as defined in the Credit Agreement) to 90% of revolver commitments then in effect ($600.0 million at December 31, 2019 and 2018).
As of December 31, 2019 and 2018, the Company had availability to issue letters of credit of approximately $359.4 million and approximately $295.7
million, respectively, under its revolving credit facility.
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Purchase commitments consist primarily of obligations to purchase fixed volumes of crude oil, other feedstocks and finished products for resale from
various suppliers based on current market prices at the time of delivery. The Company is currently purchasing a majority of its crude oil under month-to-
month evergreen contracts or on a spot basis. Certain other feedstocks are purchased under long-term supply contracts.
As of December 31, 2019, the estimated minimum purchase commitments under the Company’s crude oil, other feedstock supply and finished product
agreements were as follows (in millions):
Year
2020
2021
2022
2023
2024
Thereafter
Total
Commitment
170.8
30.0
30.2
21.0
21.1
42.0
315.1
$
$
The Company has entered into a long-term agreement to transport crude oil at a minimum of 5,000 bpd through a pipeline yet to be constructed. The
agreement also contains a capital recovery charge that increases 2% per annum. The agreement is for seven years commencing once the pipeline is in service.
As of December 31, 2019, the estimated minimum unconditional purchase commitments under the agreement were as follows (in millions):
Year
2020
2021
2022
2023
2024
Thereafter
Total (1)
Commitment (1)
2.6
3.9
3.9
3.9
4.0
9.4
27.7
$
$
(1) As of December 31, 2019, the estimated minimum payments for the unconditional purchase commitments have been accrued and are included in
other current liabilities and other long-term liabilities in the consolidated balance sheets.
9. Inventory Financing Agreements
On March 31, 2017, the Company entered into several agreements with Macquarie to support the operations of the Great Falls refinery (the “Great Falls
Supply and Offtake Agreements”). On July 27, 2017, the Company amended the Great Falls Supply and Offtake Agreements to provide Macquarie the option
to terminate the Great Falls Supply and Offtake Agreements effective nine months after the end of the applicable calendar quarter in which Macquarie elects
to terminate and the Company has the option to terminate with ninety days’ notice at any time. On May 9, 2019, the Company entered into an amendment to
the Great Falls Supply and Offtake Agreements to, among other things, extend the Expiration Date (as defined in the Great Falls Supply and Offtake
Agreements) from September 30, 2019 to June 30, 2023.
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
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
after the end of the applicable calendar quarter in which Macquarie elects to terminate and the Company has the option to terminate with ninety days’ notice
at any time. On May 9, 2019, the Company entered into an amendment to the Shreveport Supply and Offtake Agreements to, among other things, extend the
Expiration Date (as defined in the Shreveport Supply and Offtake Agreements) from June 30, 2020 to June 30, 2023.
The Supply and Offtake Agreements allow the Company to purchase crude oil from Macquarie or one of its affiliates. Per the Supply and Offtake
Agreements, Macquarie will provide up to 30,000 barrels per day of crude oil to the Great Falls refinery and 60,000 barrels per day of crude oil to the
Shreveport refinery. The Company agreed to purchase the crude oil on a just-in-time basis to support the production operations at the Great Falls and
Shreveport refineries. Additionally, the Company agreed to sell, and Macquarie agreed to buy, at market prices, refined products produced at the Great Falls
and Shreveport refineries. For Shreveport, finished products consisting of finished fuel products (other than jet fuel), lubricants and waxes, Macquarie may
(but is not required to) sell such products to the sales intermediation party (“SIP”), and the SIP may (but is not required to) sell such products to Shreveport,
as applicable, for sale in turn to third parties. For jet fuel and certain intermediate products, Macquarie may (but is not required to) sell such products to
Shreveport for sale thereby to third parties. The Company will then repurchase the refined products from Macquarie or the SIP prior to selling the refined
products to third parties.
The Supply and Offtake Agreements are subject to minimum and maximum inventory levels. The agreements also provide for the lease to Macquarie of
crude oil and certain refined product storage tanks located at the Great Falls and Shreveport refineries and certain offsite locations. Following expiration or
termination of the agreements, Macquarie has the option to require the Company to purchase the crude oil and refined product inventories then owned by
Macquarie and located at the leased storage tanks at then current market prices. In addition, barrels owned by the Company are pledged as collateral to
support the Deferred Payment Arrangement (defined below) obligations under these agreements.
While title to certain inventories will reside with Macquarie, the Supply and Offtake Agreements are accounted for by the Company similar to a product
financing arrangement; therefore, the inventories sold to Macquarie will continue to be included in the Company’s consolidated balance sheets until processed
and sold to a third party. Each reporting period, the Company will record liabilities in an amount equal to the amount the Company expects to pay to
repurchase the inventory held by Macquarie based on market prices at the termination date included in obligations under inventory financing agreements in
the consolidated balance sheets. The Company has determined that the redemption feature on the initially recognized liabilities related to the Supply and
Offtake Agreements is an embedded derivative indexed to commodity prices. As such, the Company has accounted for these embedded derivatives at fair
value with changes in the fair value, if any, recorded in gain (loss) on derivative instruments in the Company’s consolidated statements of operations. For
more information on the valuation of the associated derivatives, please read Note 11 — “Derivatives” and Note 12 — “Fair Value Measurements.” The
embedded derivatives will be recorded in obligations under inventory financing agreements on the consolidated balance sheets. The cash flow impact of the
embedded derivatives will be classified as a change in inventory financing activity in the financing activities section in the consolidated statements of cash
flows.
For the year ended December 31, 2019 the Company incurred $15.3 million of financing costs related to the Supply and Offtake Agreements, which is
included in interest expense in the Company’s consolidated statements of operations. The Company incurred $17.0 million and $6.8 million of financing costs
for the years ended December 31, 2018 and 2017, respectively.
The Company has provided collateral of $8.7 million related to the initial purchase of the Great Falls and Shreveport inventory to cover credit risk for
future crude oil deliveries and potential liquidation risk if Macquarie exercises its rights and sells the inventory to third parties. The collateral was recorded as
a reduction to the obligations.
The Supply and Offtake Agreements also include a deferred payment arrangement (“Deferred Payment Arrangement”) whereby the Company can defer
payments on just-in-time crude oil purchases from Macquarie owed under the agreements up to the value of the collateral provided (90% of the collateral is
inventory). The deferred amounts under the Deferred Payment Arrangement will bear interest at a rate equal to the London Interbank Offered Rate
(“LIBOR”) plus 3.25% per annum for both Shreveport and Great Falls. Amounts outstanding under the Deferred Payment Arrangement are included
in obligations under inventory financing agreements in the Company’s consolidated balance sheets. Changes in the amount outstanding under the Deferred
Payment Arrangement are included within cash flows from financing activities on the consolidated statements of cash flows. As of the years ended
December 31, 2019 and December 31, 2018, the Company had $26.3 million and $20.4 million of deferred payments outstanding, respectively. In addition to
the Deferred Payment Arrangement, Macquarie has advanced the Company an additional $5.0 million which remains outstanding as of December 31, 2019.
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Long-Term Debt
Long-term debt consisted of the following (in millions):
December 31,
2019
December 31,
2018
Borrowings under amended and restated senior secured revolving credit agreement with third-party lenders, interest payments
quarterly, borrowings due February 2023, weighted average interest rates of 4.3% and 6.0% at December 31, 2019 and 2018,
respectively
$
Borrowings under 2021 Notes, interest at a fixed rate of 6.5%, interest payments semiannually, borrowings due April 2021,
effective interest rate of 6.8% for each year ended December 31, 2019 and 2018
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 year ended December 31, 2019 and December 31, 2018, respectively (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% and 8.0% for the year ended December 31, 2019 and December 31, 2018, respectively
Borrowings under 2025 Notes, interest at a fixed rate of 11.0%, interest payments semiannually, borrowings due April 2025,
effective interest rate of 11.2% for the year ended December 31, 2019
Other
Finance lease obligation, at a fixed interest rate, interest and principal payments monthly through January 2027
Less unamortized debt issuance costs (2)
Less unamortized discounts
Total long-term debt
Less current portion of long-term debt
— $
—
351.1
325.0
550.0
3.8
2.7
(18.4)
(2.9)
1,211.3
1.8
$
1,209.5 $
—
900.0
351.6
325.0
—
5.2
42.4
(15.8)
(3.9)
1,604.5
3.8
1,600.7
(1) The balance includes a fair value interest rate hedge adjustment, which increased the debt balance by $1.1 million and $1.6 million as of
December 31, 2019 and 2018, 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 $15.7 million and $23.5 million at December 31, 2019 and 2018, respectively.
11.00% Senior Notes (the “2025 Notes”)
On October 11, 2019, the Company issued and sold $550.0 million in aggregate principal amount of 11.00% Senior Notes due April 15, 2025, in a
private placement pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), to eligible purchasers at par. The Company
received net proceeds of $539.9 million net of initial purchasers’ fees and estimated expenses, which it used, along with revolver borrowings and cash on
hand, to fund the redemption of $761.2 million in aggregate principal amount of outstanding 6.50% Notes due 2021. Interest on the 2025 Notes is paid
semiannually in arrears on April 15 and October 15 of each year, beginning on April 15, 2020.
7.75% Senior Notes (the “2023 Notes”)
On March 27, 2015, the Company issued and sold $325.0 million in aggregate principal amount of 7.75% Senior Notes due April 15, 2023 in a private
placement pursuant to Section 4(a)(2) of the Securities Act, to eligible purchasers at a discounted price of 99.257 percent of par. The Company received net
proceeds of approximately $317.0 million net of discount, initial purchasers’ fees and expenses, which the Company used to fund the redemption of $178.8
million in aggregate principal amount of outstanding 9.625% senior notes due 2020 on April 28, 2015, to repay borrowings outstanding under its revolving
credit facility and for general partnership purposes, including planned capital expenditures at the Company’s facilities and working capital. Interest on the
2023 Notes is paid semiannually in arrears on April 15 and October 15 of each year, beginning on October 15, 2015.
On March 27, 2015, in connection with the issuance and sale of the 2023 Notes, the Company entered into a registration rights agreement with the initial
purchasers of the 2023 Notes obligating the Company to use reasonable best efforts to file an exchange offer registration statement with the SEC, so that
holders of the 2023 Notes can offer to exchange the 2023 Notes for registered notes having substantially the same terms as the 2023 Notes and evidencing the
same indebtedness as the 2023 Notes. On December
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11, 2015, the Company filed an exchange offer registration statement for the 2023 Notes with the SEC, which was declared effective on January 28, 2016.
The exchange offer was completed on March 7, 2016, thereby fulfilling all of the requirements of the 2023 Notes registration rights agreement.
6.50% Senior Notes (the “2021 Notes”)
On March 31, 2014, the Company issued and sold $900.0 million in aggregate principal amount of 6.50% Senior Notes due April 15, 2021 in a private
placement pursuant to Section 4(a)(2) of the Securities Act, to eligible purchasers at par. The Company received net proceeds of approximately $884.0
million, net of initial purchasers’ fees and expenses, which the Company used to fund the purchase price of ADF Holdings, Inc., the parent company of
Anchor Drilling Fluids USA, Inc. (subsequently converted to ADF Holdings, LLC and Anchor Drilling Fluids USA, LLC), the redemption of $500.0 million
in aggregate principal amount outstanding of 9.375% Senior Notes due 2019 and for general partnership purposes, including planned capital expenditures at
the Company’s facilities. Interest on the 2021 Notes was paid semiannually in arrears on April 15 and October 15 of each year, beginning on October 15,
2014.
On March 31, 2014, in connection with the issuance and sale of the 2021 Notes, the Company entered into a registration rights agreement with the initial
purchasers of the 2021 Notes obligating the Company to use reasonable best efforts to file an exchange offer registration statement with the SEC, so that
holders of the 2021 Notes can offer to exchange the 2021 Notes for registered notes having substantially the same terms as the 2021 Notes and evidencing the
same indebtedness as the 2021 Notes. On March 24, 2015, the Company filed an exchange offer registration statement for the 2021 Notes with the SEC,
which was declared effective on April 3, 2015. The exchange offer was completed on April 30, 2015, thereby fulfilling all of the requirements of the 2021
Notes registration rights agreement. In 2019, the Company redeemed all of the 2021 Notes with the net proceeds from the issuance of the 2025 Notes,
together with borrowings under the Company’s revolving credit facility and cash on hand. In conjunction with the redemption, the Company incurred debt
extinguishment costs of $2.2 million, net.
7.625% Senior Notes (the “2022 Notes”)
On November 26, 2013, the Company issued and sold $350.0 million in aggregate principal amount of 7.625% Senior Notes due January 15, 2022, in a
private placement pursuant to Section 4(a)(2) of the Securities Act, to eligible purchasers at a discounted price of 98.494 percent of par. The Company
received net proceeds of approximately $337.4 million, net of discount, initial purchasers’ fees and expenses, which the Company used for general
partnership purposes, to fund previously announced organic growth projects, the purchase price of the Bel-Ray acquisition and the redemption of $100.0
million in aggregate principal amount outstanding of 9.375% Senior Notes due 2019. Interest on the 2022 Notes is paid semiannually in arrears on January 15
and July 15 of each year, beginning on July 15, 2014.
On November 26, 2013, in connection with the issuance and sale of the 2022 Notes, the Company entered into a registration rights agreement with the
initial purchasers of the 2022 Notes obligating the Company to use reasonable best efforts to file an exchange offer registration statement with the SEC, so
that holders of the 2022 Notes can offer to exchange the 2022 Notes for registered notes having substantially the same terms as the 2022 Notes and
evidencing the same indebtedness as the 2022 Notes. On November 27, 2013, the Company filed an exchange offer registration statement for the 2022 Notes
with the SEC, which was declared effective on December 10, 2013. The exchange offer was completed on January 13, 2014, thereby fulfilling all of the
requirements of the 2022 Notes registration rights agreement.
2022 Notes, 2023 Notes and 2025 Notes
In accordance with SEC Rule 3-10 of Regulation S-X, consolidated financial statements of non-guarantors are not required. The Company has no
material assets or operations independent of its subsidiaries. Obligations under its 2022, 2023 and 2025 Notes are fully and unconditionally and jointly and
severally guaranteed on a senior unsecured basis by the Company’s current 100%-owned operating subsidiaries and certain of the Company’s future operating
subsidiaries, with the exception of the Company’s “minor” subsidiaries (as defined by Rule 3-10 of Regulation S-X), including Calumet Finance Corp.
(100%-owned Delaware corporation that was organized for the sole purpose of being a co-issuer of certain of the Company’s indebtedness, including the
2022, 2023 and 2025 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.
On September 27, 2019, the Company executed supplemental indentures to the indentures governing the 2022 and 2023 Notes, naming its wholly-owned
subsidiaries Calumet Mexico, LLC, Calumet Specialty Oils de Mexico, S. de R.L. de C.V., and Calumet Specialty Products Canada, ULC as additional
Guarantors (as defined in the indentures). Following the execution of these supplemental indentures, the Company no longer has material subsidiaries that do
not guarantee the 2022, 2023 and 2025 Notes.
The 2022, 2023 and 2025 Notes are subject to certain automatic customary releases, including the sale, disposition, or transfer of capital stock or
substantially all of the assets of a subsidiary guarantor, designation of a subsidiary guarantor as unrestricted in
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accordance with the applicable indenture, exercise of legal defeasance option or covenant defeasance option, liquidation or dissolution of the subsidiary
guarantor and a subsidiary guarantor ceases to both guarantee other Company debt and to be an obligor under the revolving credit facility. The Company’s
operating subsidiaries may not sell or otherwise dispose of all or substantially all of their properties or assets to, or consolidate with or merge into, another
company if such a sale would cause a default under the indentures governing the 2022, 2023 and 2025 Notes.
The indentures governing the 2022, 2023 and 2025 Notes contain covenants that, among other things, restrict the Company’s ability and the ability of
certain of the Company’s subsidiaries to: (i) sell assets; (ii) pay distributions on, redeem or repurchase the Company’s common units or redeem or repurchase
its subordinated debt; (iii) make investments; (iv) incur or guarantee additional indebtedness or issue preferred units; (v) create or incur certain liens;
(vi) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (vii) consolidate, merge or
transfer all or substantially all of the Company’s assets; (viii) engage in transactions with affiliates and (ix) create unrestricted subsidiaries. These covenants
are subject to important exceptions and qualifications. At any time when the 2022, 2023 and 2025 Notes are rated investment grade by either Moody’s
Investors Service, Inc. (“Moody’s”) or S&P Global Ratings (“S&P”) and no Default or Event of Default, each as defined in the indentures governing the
2022, 2023 and 2025 Notes, has occurred and is continuing, many of these covenants will be suspended. As of December 31, 2019, the Company’s Fixed
Charge Coverage Ratio (as defined in the indentures governing the 2022, 2023 and 2025 Notes) was 2.3. As of December 31, 2019, the Company was in
compliance with all covenants under the indentures governing the 2022, 2023 and 2025 Notes.
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 amendment expands the borrowing base by $99.6
million on the Effective Date of October 11, 2019, by adding the fixed assets of the Company’s Great Falls, MT refinery as collateral to the borrowing base.
The $99.6 million expansion amortizes to zero on a straight-line basis over ten quarters starting in the first quarter of 2020. Additionally, while the fixed
assets of the Great Falls, MT refinery are included in the borrowing base, the first amendment provides for a 25 basis points increase in the applicable margin
for loans, as well as increases the minimum availability under the revolving credit facility required for the company to be able to perform certain actions,
including to make restricted payments of other distributions, sell or dispose of certain assets, make acquisitions or investments, or prepay other indebtedness.
Among other conditions precedent that were required to be satisfied before the Effective Date, the Company was required to consummate an offering of at
least $450.0 million aggregate principal amount of senior unsecured notes. The conditions precedent were satisfied on October 11, 2019.
The revolving credit facility, which is the Company’s primary source of liquidity for cash needs in excess of cash generated from operations, matures in
February 2023 and 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:
Quarterly Average Availability Percentage
Prime Rate Margin LIBOR Rate Margin Prime Rate Margin LIBOR Rate Margin
Base Loans
FILO Loans
≥ 66%
≥ 33% and < 66%
< 33%
0.50%
0.75%
1.00%
1.50%
1.75%
2.00%
1.50%
1.75%
2.00%
2.50%
2.75%
3.00%
The Credit Agreement provides for a 25 basis point reduction in the applicable margin rates beginning in the quarter after our Leverage Ratio (as defined
in the Credit Agreement) is less than 5.5 to 1.0. The Company has met this test consistently since the fiscal quarter ended June 30, 2019. As of December 31,
2019, 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
108
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to the Credit Agreement, the applicable margin rates are increased by 25 basis points for as long as the Great Falls, MT refinery assets are contributing to the
borrowing base. Letters of credit issued under the revolving credit facility accrue fees at a rate equal to the 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 preceding month. The Company also pays a customary letter of credit fee,
including a fronting fee of 0.125% per annum of the stated amount of each outstanding letter of credit, and customary agency fees.
The borrowing capacity at December 31, 2019, under the revolving credit facility was approximately $401.9 million. As of December 31, 2019, the
Company had no outstanding borrowings under the revolving credit facility and outstanding standby letters of credit of $42.5 million, leaving approximately
$359.4 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 (collectively, the “Credit Agreement Collateral”).
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) 10.0% of the Borrowing Base (as defined in the Credit Agreement) then in effect, or 15% while the Great Falls, MT refinery is included in
the borrowing base, and (ii) $35.0 million (which amount is subject to increase in proportion to revolving commitment increases), 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 December 31, 2019, the Company was in compliance with all covenants under the revolving credit facility.
The Company’s payment obligations under all of the Company’s master derivatives contracts for commodity hedging generally are secured by a first
priority lien on the Company’s real property, plant and equipment, fixtures, intellectual property, certain financial assets, certain investment property,
commercial tort claims, chattel paper, documents, instruments and proceeds of the foregoing (including proceeds of hedge arrangements). The Company had
no additional letters of credit or cash margin posted with any hedging counterparty as of December 31, 2019. The Company’s master derivatives contracts and
Collateral Trust Agreement (as defined below) continue to impose a number of covenant limitations on the Company’s operating and financing activities,
including limitations on liens on collateral, limitations on dispositions of collateral and collateral maintenance and insurance requirements.
The Company has a collateral trust agreement (“The Collateral Trust Agreement”) which governs how secured hedging counterparties share collateral
pledged as security for the payment obligations owed by the Company to the secured hedging counterparties under their respective master derivatives
contracts. The Collateral Trust Agreement limits to $150.0 million the extent to which forward purchase contracts for physical commodities are covered by,
and secured under, the Collateral Trust Agreement and the Parity Lien Security Documents (as defined in the Collateral Trust Agreement). There is no such
limit on financially settled derivative instruments used for commodity hedging. Subject to certain conditions set forth in the Collateral Trust Agreement, the
Company has the ability to add secured hedging counterparties from time to time.
As of December 31, 2019, principal payments on debt obligations and future minimum rentals on finance lease obligations are as follows (in millions):
Year
2020
2021
2022
2023
2024
Thereafter
Total
Maturity
1.8
2.6
350.3
325.4
0.4
551.0
1,231.5
$
$
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Table of Contents
11. Derivatives
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company is exposed to price risks due to fluctuations in the price of crude oil, refined products (primarily in the Company’s fuel products segment)
and precious metals. The Company uses various strategies to reduce its exposure to commodity price risk. The strategies to reduce the Company’s risk utilize
both physical forward contracts and financially settled derivative instruments, such as swaps, to attempt to reduce the Company’s exposure with respect to:
•
•
•
•
crude oil purchases and sales;
fuel product sales and purchases;
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”), Western Canadian Select (“WCS”), WTI Midland, Mixed Sweet Blend 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 or revise strategies in anticipation of changes in market conditions and/or its risk profiles.
Such changes in strategies are to position the Company in relation to its risk exposures in an attempt to capture market opportunities as they arise.
The Company is obligated to repurchase crude oil and refined products from Macquarie at the termination of the Supply and Offtake Agreements in
certain scenarios. The Company has determined that the redemption feature on the initially recognized liability related to the Supply and Offtake Agreements
is an embedded derivative indexed to commodity prices. As such, the Company has accounted for this embedded derivative at fair value with changes in the
fair value, if any, recorded in gain (loss) on derivative instruments in the Company’s consolidated statements of operations please read Note 9 - “Inventory
Financing Agreements" for additional information.
The Company recognizes all derivative instruments at their fair values as either current assets or current liabilities in the consolidated balance sheets
(please read Note 12 - “Fair Value Measurements”). Fair value includes any premiums paid or received and unrealized gains and losses. Fair value does not
include any amounts receivable from or payable to counterparties, or collateral provided to counterparties. Derivative asset and liability amounts with the
same counterparty are netted against each other for financial reporting purposes in accordance with the provisions of our master netting arrangements.
110
Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables summarize the Company’s gross fair values of its derivative instruments, presenting the impact of offsetting derivative assets in the
Company’s consolidated balance sheets (in millions):
Balance Sheet
Location
Gross Amounts
of Recognized
Assets
December 31, 2019
December 31, 2018
Gross Amounts
Offset in the
Consolidated
Balance Sheets
Net Amounts of
Assets Presented
in the
Consolidated
Balance Sheets
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset in the
Consolidated
Balance Sheets
Net Amounts of
Assets Presented
in the
Consolidated
Balance Sheets
$
— $
— $
— $
1.0 $
— $
1.0
Derivative instruments not designated as hedges:
Specialty products segment:
Midland crude oil basis
swaps
Derivative
assets
Fuel products segment:
Inventory financing
obligation
Obligations
under inventory
financing
agreements
WCS crude oil basis swaps Derivative
WCS crude oil percentage
basis swaps
Midland crude oil basis
swaps
assets
Derivative
assets
Derivative
assets
Gasoline crack spread swaps Derivative
assets
Diesel crack spread swaps Derivative
Diesel percentage basis
crack spread swaps
2/1/1 Crack spread swap
assets
Derivative
assets
Derivative
assets
Total derivative instruments
$
—
—
—
—
1.8
0.9
—
0.5
3.2 $
—
(1.3)
—
—
(0.5)
(0.5)
—
—
(2.3) $
111
—
(1.3)
—
—
1.3
0.4
—
0.5
0.9 $
1.5
16.5
—
7.1
—
7.4
—
—
—
(1.6)
(6.1)
—
—
—
(6.0)
—
33.5 $
(13.7) $
1.5
14.9
(6.1)
7.1
—
7.4
(6.0)
—
19.8
Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables summarize the Company’s gross fair values of its derivative instruments, presenting the impact of offsetting derivative liabilities in
the Company’s consolidated balance sheets (in millions):
Balance Sheet
Location
Gross Amounts
of Recognized
Liabilities
December 31, 2019
December 31, 2018
Gross Amounts
Offset in the
Consolidated
Balance Sheets
Net Amounts of
Liabilities
Presented in the
Consolidated
Balance Sheets
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset in the
Consolidated
Balance Sheets
Net Amounts of
Liabilities
Presented in the
Consolidated
Balance Sheets
Derivative instruments not designated as hedges:
Fuel products segment:
Inventory financing
obligation
Obligations
under inventory
financing
agreements
$
WCS crude oil basis swaps Derivative
liabilities
WCS crude oil percentage
basis swaps
Derivative
liabilities
Gasoline crack spread swaps Derivative
liabilities
Diesel crack spread swaps Derivative
liabilities
Diesel percentage basis
crack spread swaps
Derivative
liabilities
Total derivative instruments
$
(7.2) $
— $
(7.2) $
— $
— $
(1.3)
—
(0.5)
(0.5)
—
(9.5) $
1.3
—
0.5
0.5
—
2.3 $
—
—
—
—
—
(7.2) $
(1.6)
(6.1)
—
—
1.6
6.1
—
—
(6.0)
(13.7) $
6.0
13.7 $
—
—
—
—
—
—
—
The Company is exposed to credit risk in the event of nonperformance by its counterparties on these derivative transactions. The Company does not
expect nonperformance on any derivative instruments, however, no assurances can be provided. The Company’s credit exposure related to these derivative
instruments is represented by the fair value of contracts reported as derivative assets. As of December 31, 2019, the Company had three counterparty
relationships in which the derivatives held were in net assets totaling $0.9 million. As of December 31, 2018, the Company had four counterparty
relationships in which the derivatives held were in net assets totaling $19.8 million. To manage credit risk, the Company selects and periodically reviews
counterparties based on credit ratings. The Company primarily executes its derivative instruments with large financial institutions that have ratings of at least
A3 and BBB+ by Moody’s and S&P, respectively. In the event of default, the Company would potentially be subject to losses on derivative instruments with
mark-to-market gains. The Company requires collateral from its counterparties when the fair value of the derivatives exceeds agreed-upon thresholds in its
master derivative contracts with these counterparties. No such collateral was held by the Company as of December 31, 2019 or 2018. Collateral received from
counterparties is reported in other current liabilities, and collateral held by counterparties is reported in prepaid expenses and other current assets on the
Company’s consolidated balance sheets and is not netted against derivative assets or liabilities. Any outstanding collateral is released to the Company upon
settlement of the related derivative instrument liability. As of December 31, 2019 and 2018, the Company had provided its counterparties with no collateral.
Certain of the Company’s outstanding derivative instruments are subject to credit support agreements with the applicable counterparties which contain
provisions setting certain credit thresholds above which the Company may be required to post agreed-upon collateral, such as cash or letters of credit, with the
counterparty to the extent that the Company’s mark-to-market net liability, if any, on all outstanding derivatives exceeds the credit threshold amount per such
credit support agreement. The majority of the credit support agreements covering the Company’s outstanding derivative instruments also contain a general
provision stating that if the Company experiences a material adverse change in its business, in the reasonable discretion of the counterparty, the Company’s
credit threshold could be lowered by such counterparty. The Company does not expect that it will experience a material adverse change in its business.
The cash flow impact of the Company’s derivative activities is classified primarily as a change in derivative activity in the operating activities section in
the consolidated statements of cash flows.
112
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For derivative instruments not designated as hedges, the change in fair value of the asset or liability for the period is recorded to unrealized gain (loss) on
derivative instruments in the consolidated statements of operations. Upon the settlement of a derivative not designated as a hedge, the gain or loss at
settlement is recorded to realized gain (loss) on derivative instruments in the consolidated statements of operations. The Company has entered into gasoline
swaps, diesel swaps and certain other crude oil swaps that are not designated as cash flow hedges for accounting purposes. However, these instruments
provide economic hedges of the Company’s crude oil, gasoline and diesel sales.
The Company recorded the following gains (losses) in its consolidated statements of operations related to its derivative instruments not designated as
hedges (in millions):
Amount of Gain (Loss)
Recognized in Realized
Gain on Derivative
Instruments
Amount of Gain (Loss)
Recognized in Unrealized
Gain (Loss) on Derivative Instruments
Year Ended December 31,
Year Ended December 31,
2019
2018
2019
2018
1.6
—
—
14.7
1.0
11.3
—
0.1
—
6.3
—
0.1
0.9
—
—
(1.8)
—
6.0
—
(1.0)
—
(0.7)
—
0.2
(1.0)
(8.7)
—
(16.2)
6.0
(7.1)
—
1.3
—
(6.9)
6.0
0.5
$
35.1 $
3.6 $
(26.1) $
1.0
5.9
(0.3)
14.9
(6.1)
7.1
0.2
1.8
0.2
11.5
(6.0)
—
30.2
Type of Derivative
Specialty products segment:
Midland crude oil basis swaps
Fuel products segment:
Inventory financing obligation
Crude oil swaps
WCS crude oil basis swaps
WCS crude oil percentage basis swaps
Midland crude oil basis swaps
Gasoline swaps
Gasoline crack spread swaps
Diesel swaps
Diesel crack spread swaps
Diesel percentage basis crack spread swaps
2/1/1 crack spread swaps
Total
WCS Crude Oil Basis Swap Contracts
The Company has entered into crude oil basis swaps to mitigate the risk of future changes in pricing differentials between WCS and NYMEX WTI. At
December 31, 2019, the Company had the following derivatives related to WCS crude oil purchases in its fuel products segment, which are not designated as
hedges:
WCS Crude Oil Basis Swap Contracts by Expiration Dates
Barrels Purchased
BPD
First Quarter 2020
Total
Average differential
544,000
544,000
Average Differential
to NYMEX WTI
($/Bbl)
5,978 $
(18.92)
$
(18.92)
At December 31, 2019, the Company had no derivatives related to WCS crude oil basis sales in its fuel products segment, as all positions outstanding at
December 31, 2018 were settled during 2019.
113
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2018, the Company had the following derivatives related to WCS crude oil purchases in its fuel products segment, none of which were
designated as hedges:
WCS Crude Oil Basis Swap Contracts by Expiration Dates
Barrels Purchased
BPD
First Quarter 2019
Second Quarter 2019
Third Quarter 2019
Fourth Quarter 2019
Total
Average differential
419,000
455,000
460,000
460,000
1,794,000
Average Differential
to NYMEX WTI
($/Bbl)
4,656 $
5,000 $
5,000 $
5,000 $
(28.10)
(28.22)
(28.22)
(28.22)
$
(28.19)
At December 31, 2018, the Company had the following derivatives related to WCS crude oil basis sales in its fuel products segment, none of which were
designated as hedges:
WCS Crude Oil Basis Swap Contracts by Expiration Dates
Barrels Sold
BPD
First Quarter 2019
Second Quarter 2019
Third Quarter 2019
Fourth Quarter 2019
Total
Average differential
388,000
455,000
460,000
460,000
1,763,000
Average Differential
to NYMEX WTI
($/Bbl)
4,311 $
5,000 $
5,000 $
5,000 $
(19.84)
(19.84)
(19.84)
(19.84)
$
(19.84)
WCS Crude Oil Percentage Basis Swap Contracts
The Company has entered into derivative instruments to secure a percentage differential of WCS crude oil to NYMEX WTI. At December 31, 2019, the
Company had no derivatives related to WCS crude oil percentage basis swap purchases in its fuel products segment, as all positions outstanding at
December 31, 2018 were settled during 2019.
At December 31, 2018, the Company had the following derivatives related to WCS crude oil percentage basis swap purchases in its fuel products
segment, none of which were designated as hedges:
WCS Crude Oil Percentage Basis Swap Contracts by Expiration Dates
Barrels Purchased
BPD
First Quarter 2019
Second Quarter 2019
Third Quarter 2019
Fourth Quarter 2019
Total
Average percentage
450,000
455,000
460,000
460,000
1,825,000
5,000
5,000
5,000
5,000
Fixed Percentage of
NYMEX WTI
(Average % of
WTI/Bbl)
66.32%
66.32%
66.32%
66.32%
66.32%
Midland Crude Oil Basis Swap Contracts
The Company has entered into crude oil basis swaps to mitigate the risk of future changes in pricing differentials between WTI Midland and NYMEX
WTI. At December 31, 2019, the Company had no derivatives related to Midland crude oil basis swap purchases in its fuel products segment, as all positions
outstanding at December 31, 2018 were settled during 2019.
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2018, the Company had the following derivatives related to Midland crude oil basis swap purchases in its fuel products segment, none
of which were designated as hedges:
Midland Crude Oil Basis Swap Contracts by Expiration Dates
Barrels Purchased
BPD
First Quarter 2019
Second Quarter 2019
Total
Average differential
Gasoline Crack Spread Swap Contracts
501,500
773,500
1,275,000
Average Differential
to NYMEX WTI
($/Bbl)
5,572 $
8,500 $
(12.79)
(11.74)
$
(12.27)
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
First Quarter 2020
Second Quarter 2020
Third Quarter 2020
Fourth Quarter 2020
Total
Average price
591,500
379,000
368,000
368,000
1,706,500
Average Swap
($/Bbl)
12.54
16.41
15.24
9.77
13.38
6,500 $
4,165 $
4,000 $
4,000 $
$
At December 31, 2018, the Company had no derivatives related to gasoline crack spread swap sales in its fuel products segment.
Diesel Crack Spread Swap Contracts
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
First Quarter 2020
Second Quarter 2020
Third Quarter 2020
Fourth Quarter 2020
Total
Average price
500,500
379,000
368,000
368,000
1,615,500
Average Swap
($/Bbl)
22.15
21.68
22.23
21.91
22.00
5,500 $
4,165 $
4,000 $
4,000 $
$
At December 31, 2018, the Company had the following derivatives related to diesel crack spread swap sales in its fuel products segment, none of which
were designated as hedges:
Diesel Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
BPD
First Quarter 2019
Second Quarter 2019
Third Quarter 2019
Fourth Quarter 2019
Total
Average price
450,000
455,000
460,000
460,000
1,825,000
115
Average Swap
($/Bbl)
25.58
25.58
25.58
25.58
25.58
5,000 $
5,000 $
5,000 $
5,000 $
$
Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Diesel Percentage Basis Crack Spread Swap Contracts
The Company has entered into diesel crack spread derivative instruments to secure a fixed percentage of gross profit on diesel in excess of the floating
value of NYMEX WTI crude oil. At December 31, 2019, the Company had no derivatives related to diesel percentage basis crack spread swap sales in its fuel
products segment, as all positions outstanding at December 31, 2018 were settled during 2019.
At December 31, 2018, the Company had the following derivatives related to diesel percentage basis crack spread swap sales in its fuel products
segment, none of which were designated as hedges:
Diesel Percentage Basis Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
BPD
First Quarter 2019
Second Quarter 2019
Third Quarter 2019
Fourth Quarter 2019
Total
Average percentage
2/1/1 Crack Spread Swap Contracts
450,000
455,000
460,000
460,000
1,825,000
5,000
5,000
5,000
5,000
Fixed Percentage of
NYMEX WTI
(Average % of
WTI/Bbl)
138.38%
138.38%
138.38%
138.38%
138.38%
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
First Quarter 2020
Second Quarter 2020
Total
Average price
364,000
30,000
394,000
Average Swap
($/Bbl)
17.43
19.50
17.58
4,000 $
330 $
$
At December 31, 2018, the Company had no derivatives related to 2/1/1 crack spread swap sales in its fuel products segment.
12. Fair Value Measurements
The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Observable inputs are from sources
independent of the Company. Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or
liability developed based upon the best information available in the circumstances. These tiers include the following:
•
•
•
Level 1 — inputs include observable unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 — inputs include other than quoted prices in active markets that are either directly or indirectly observable
Level 3 — inputs include unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
In determining fair value, the Company uses various valuation techniques and prioritizes the use of observable inputs. The availability of observable
inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded and
other characteristics particular to the instrument. For many financial instruments, pricing inputs are readily observable in the market, the valuation
methodology used is widely accepted by market participants and the valuation does not require significant management judgment. For other financial
instruments, pricing inputs are less observable in the marketplace and may require management judgment.
Derivative Assets and Liabilities
Derivative instruments are reported in the accompanying consolidated financial statements at fair value. The Company’s derivative instruments consist of
over-the-counter (“OTC”) contracts, which are not traded on a public exchange. Substantially
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
all of the Company’s derivative instruments are with counterparties that have long-term credit ratings of at least A3 and BBB+ by Moody’s and S&P,
respectively.
To estimate the fair values of the Company’s commodity derivative instruments, the Company uses the forward rate, the strike price, contractual notional
amounts, the risk free rate of return and contract maturity. Various analytical tests are performed to validate the counterparty data. The fair values of the
Company’s derivative instruments are adjusted for nonperformance risk and creditworthiness of the hedging entities through the Company’s credit valuation
adjustment (“CVA”). The CVA is calculated at the counterparty level utilizing the fair value exposure at each payment date and applying a weighted
probability of the appropriate survival and marginal default percentages. The Company uses the counterparty’s marginal default rate and the Company’s
survival rate when the Company is in a net asset position at the payment date and uses the Company’s marginal default rate and the counterparty’s survival
rate when the Company is in a net liability position at the payment date. As a result of applying the applicable CVA at December 31, 2019 and 2018, the
Company’s net assets changed by an immaterial amount.
Observable inputs utilized to estimate the fair values of the Company’s derivative instruments were based primarily on inputs that are readily available in
public markets or can be derived from information available in publicly quoted markets. Based on the use of various unobservable inputs, principally non-
performance risk, creditworthiness of the hedging entities and unobservable inputs in the forward rate, the Company has categorized these derivative
instruments as Level 3. Significant increases (decreases) in any of those unobservable inputs in isolation would result in a significantly lower (higher) fair
value measurement. The Company believes it has obtained the most accurate information available for the types of derivative instruments it holds. Please read
Note 11 - “Derivatives” for further information on derivative instruments.
Pension Assets
Pension assets are reported at fair value in the accompanying consolidated financial statements. At December 31, 2019, the Company’s investments
associated with its Pension Plan (as such term is hereinafter defined) consisted of (i) cash and cash equivalents, (ii) fixed income bond funds, (iii) mutual
equity funds, and (iv) mutual balanced funds. The fixed income bond funds, mutual equity funds, and mutual balanced funds are measured at fair value using
a market approach based on quoted prices from national securities exchanges and are categorized in Level 1 of the fair value hierarchy.
At December 31, 2018, the Company’s investments associated with its Pension Plan primarily consisted of mutual funds. The mutual funds are valued at
the net asset value (“NAV”) of shares in each fund held by the Pension Plan at quarter end as provided by the respective investment sponsors or investment
advisers. Plan investments can be redeemed within a short time frame (approximately 10 business days), if requested. Please read Note 15 - “Employee
Benefit Plans” for further information on pension assets.
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 8 - “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.
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Hierarchy of Recurring Fair Value Measurements
The Company’s recurring assets and liabilities measured at fair value were as follows (in millions):
December 31, 2019
December 31, 2018
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Assets:
Derivative assets:
Inventory financing obligation
WCS crude oil basis swaps
WCS crude oil percentage basis swaps
Midland crude oil basis swaps
Gasoline crack spread swaps
Diesel crack spread swaps
Diesel percentage basis crack spread swaps
2/1/1 Crack spread swaps
Total derivative assets
Pension Plan investments
Total recurring assets at fair value
Liabilities:
Derivative liabilities:
Inventory financing obligation
Total derivative liabilities
RINs obligation
Precious metals leases
Liability Awards
—
—
—
—
—
—
—
—
32.5
32.5 $
— $
—
—
(5.8)
(7.4)
$
$
$
— $
— $
— $
— $
— $
1.5 $
—
—
—
—
—
—
—
—
—
—
(1.3)
—
—
1.3
0.4
—
0.5
0.9
—
(1.3)
—
—
1.3
0.4
—
0.5
0.9
32.5
— $
0.9 $
33.4 $
—
—
—
—
—
—
—
—
0.1
0.1 $
—
—
—
—
—
—
—
—
—
14.9
(6.1)
8.1
—
7.4
(6.0)
—
19.8
—
— $
19.8 $
— $
—
(13.0)
—
—
(7.2) $
(7.2) $
— $
(7.2)
—
—
—
(7.2)
(13.0)
(5.8)
(7.4)
—
—
(5.6)
(2.7)
— $
—
(15.8)
—
—
— $
—
—
—
—
1.5
14.9
(6.1)
8.1
—
7.4
(6.0)
—
19.8
0.1
19.9
—
—
(15.8)
(5.6)
(2.7)
Total recurring liabilities at fair value
$
(13.2) $
(13.0) $
(7.2) $
(33.4) $
(8.3) $
(15.8) $
— $
(24.1)
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):
Fair value at January 1,
Realized gain on derivative instruments
Unrealized gain (loss) on derivative instruments
Settlements
Fair value at December 31,
Total gain (loss) included in net loss attributable to changes in unrealized gain (loss) relating to financial assets and
liabilities held as of December 31,
For the Year Ended December 31,
2019
2018
19.8 $
(35.1)
(26.1)
35.1
(6.3) $
(26.1) $
(10.4)
(3.6)
30.2
3.6
19.8
30.2
$
$
$
All settlements from derivative instruments not designated as hedges are recorded in gain (loss) on derivative instruments in the consolidated statements
of operations. Please read Note 11 - “Derivatives” for further information on derivative instruments.
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.
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
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
generally be classified within Level 3, in the event that the Company were required to measure and record such assets at fair value within its consolidated
financial statements. Please read Note 7 - “Goodwill and Other Intangible Assets” for further information on goodwill impairment.
The Company periodically evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets and property
plant and equipment, when events or circumstances warrant such a review. Fair value is determined primarily using anticipated cash flows assumed by a
market participant discounted at a rate commensurate with the risk involved and these assets would generally be classified within Level 3, in the event that the
Company was required to measure and record such assets at fair value within its consolidated financial statements. Please read Note 2 - “Summary of
Significant Accounting Policies” for further information on long-lived asset impairment.
The Company’s investment in FHC is a non-marketable equity security without a readily determinable fair value. The Company records this investment
using a measurement alternative which measures the security at cost minus impairment, if any, plus or minus changes resulting from qualifying observable
price changes with a same or similar security from the same issuer. The investment in FHC is recorded at fair value only if an impairment or observable price
adjustment is recognized in the current period. If an observable price adjustment or impairment is recognized, the Company would classify this asset as Level
3 within the fair value hierarchy based on the nature of the fair value inputs. In 2019, the Company recorded an impairment charge of $25.4 million on the
investment in FHC and the categorization of the framework used to value the assets is considered Level 3. Please read Note 6 - “Investment in
Unconsolidated Affiliates” for further information.
Cash, cash equivalents and restricted cash
The carrying value of cash, cash equivalents and restricted cash are each considered to be representative of their fair value.
Debt
The estimated fair value of long-term debt at December 31, 2019 and 2018, consists primarily of senior notes. The estimated aggregate fair value of the
Company’s senior notes defined as Level 1 was based upon quoted market prices in an active market. The estimated fair value of the Company’s senior notes
defined as Level 2 was based upon quoted prices for identical or similar liabilities in markets that are not active. The carrying value of borrowings, if any,
under the Company’s revolving credit facility, finance lease obligations and other obligations approximate their fair values as determined by discounted cash
flows and are classified as Level 3. Please read Note 10 - “Long-Term Debt” for further information on long-term debt.
The Company’s carrying and estimated fair value of the Company’s financial instruments, carried at adjusted historical cost, were as follows (in
millions):
Financial Instrument:
2022 and 2023 Senior notes
2025 Senior notes
Finance leases and other obligations
13. Partners’ Capital
Level
Fair Value
Carrying Value
Fair Value
Carrying Value
December 31, 2019
December 31, 2018
1
2
3
$
$
$
676.4 $
598.8 $
6.5 $
668.1 $
540.5 $
6.5 $
1,287.4 $
— $
47.6 $
1,560.7
—
47.6
As of December 31, 2019 and 2018, the Company has 91,073,023 of common units authorized for issuance.
Of the 77,560,355 common units outstanding at December 31, 2019, 61,110,374 common units were held by the public, with the remaining 16,449,981
common units held by the Company’s affiliates (including members of the Company’s general partner and their families).
Significant information regarding rights of the limited partners includes the following:
•
Rights to receive distributions of available cash within 45 days after the end of each quarter, to the extent the Company has sufficient cash from
operations after the establishment of cash reserves.
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
•
•
•
•
Limited partners have limited voting rights on matters affecting the Company’s business. The general partner may consider only the interests and
factors that it desires and has no duty or obligation to give any consideration of any interests of the Company’s limited partners. Limited partners
have no right to elect the board of directors of the Company’s general partner.
The vote of the holders of at least 66 2/3% of all outstanding units voting together as a single class is required to remove the general partner. Any
holder, other than the general partner or the general partner’s affiliates, that owns 20% or more of any class of units outstanding cannot vote on any
matter.
The Company may issue an unlimited number of limited partner interests without the approval of the limited partners.
Limited partners may be required to sell their units to the general partner if at any time the general partner owns more than 80% of the issued and
outstanding common units.
The Company’s general partner is entitled to incentive distributions if the amount it distributes to unitholders with respect to any quarter exceeds
specified target levels shown below:
Minimum Quarterly Distribution
First Target Distribution
Second Target Distribution
Third Target Distribution
Thereafter
Total Quarterly
Distribution Per Common Unit
Marginal Percentage
Interest in Distributions
Target Amount
$0.45
up to $0.495
above $0.495 up to $0.563
above $0.563 up to $0.675
above $0.675
Unitholders
General Partner
98%
98%
85%
75%
50%
2%
2%
15%
25%
50%
The Company’s ability to make distributions is limited by its debt instruments. The revolving credit facility generally permits the Company to make cash
distributions to unitholders as long as immediately after giving effect to such a cash distribution the Company has availability under the revolving credit
facility at least the greater of (i) 15% of the Aggregate Borrowing Base (as defined in the credit agreement) then in effect, or 25% while the Great Falls, MT
refinery is included in the borrowing base, and (ii) $60.0 million (which amount is subject to increase in proportion to revolving commitment increases) plus
the amount of FILO loans outstanding. Further, the revolving credit facility contains one springing financial covenant which provides that only if the
Company’s availability under the revolving credit facility falls below the greater of (a) 10.0% of the Borrowing Base (as defined in the credit agreement) then
in effect, or 15% while the Great Falls, MT refinery is included in the borrowing base, and (b) $35.0 million (which amount is subject to increase in
proportion to revolving commitment increases) plus the amount of FILO loans outstanding, the Company will be required to maintain as of the end of each
fiscal quarter a Fixed Charge Coverage Ratio (as defined in the credit agreement) of at least 1.0 to 1.0. The indentures governing the 2022 Notes, 2023 Notes
and 2025 Notes provide that if the Company’s fixed charge coverage ratio (as defined in the indentures) for the most recently ended four full fiscal quarters is
not less than 1.75 to 1.0, the Company will be permitted to pay distributions to its unitholders in an amount equal to available cash from operating surplus
(each as defined in the Company’s partnership agreement) with respect to its preceding fiscal quarter, subject to certain customary adjustments described in
the indentures. If the Company’s fixed charge coverage ratio is less than 1.75 to 1.0, the Company will be able to pay distributions to its unitholders up to an
amount equal to (i) a $210.0 million basket for the 2022 Notes and (ii) a $225.0 million basket for the 2023 Notes, subject to certain customary adjustments
described in the indentures. If the Company’s fixed charge coverage ratio is less than 3.0 to 1.0, the Company will be able to pay distributions to its
unitholders up to an amount equal to a $25.0 million basket for the 2025 Notes, also subject to certain customary adjustments described in the indentures.
The Company’s distribution policy is as defined in its partnership agreement. In April 2016, the board of directors of the Company’s general partner
determined to suspend payment of the Company’s quarterly cash distribution to unitholders. The board of directors of the Company’s general partner will
continue to evaluate the Company’s ability to reinstate the quarterly cash distribution. The Company made no distributions to its partners for the years ended
December 31, 2019, 2018 and 2017. For the years ended December 31, 2019, 2018 and 2017, the general partner was allocated no incentive distribution
rights.
14. Unit-Based Compensation
The Company’s general partner originally adopted a Long-Term Incentive Plan on January 24, 2006, which was amended and restated effective
December 10, 2015 (the “LTIP”), for its employees, consultants and directors and its affiliates who perform services for the Company. The LTIP provides for
the grant of restricted units, phantom units, unit options and substitute awards and, with respect to unit options and phantom units, the grant of distribution
equivalent rights (“DERs”). Subject to adjustment
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for certain events, an aggregate of 3,883,690 common units may be delivered pursuant to awards under the LTIP. Units withheld to satisfy the Company’s
general partner’s tax withholding obligations are available for delivery pursuant to other awards. The LTIP is administered by the compensation committee of
the Company’s general partner’s board of directors.
Liability Awards are awards that are currently expected to be settled in cash on their vesting dates, rather than in equity units. Phantom unit Liability
Awards are recorded in accrued salaries, wages and benefits in the consolidated balance sheets based on the vested portion of the fair value of the awards on
the balance sheet date. The fair value of Liability Awards are updated at each balance sheet date and changes in the fair values of the vested portions of the
awards are recorded as increases or decreases to compensation expense within general and administrative expense in the consolidated statements of
operations.
Phantom Units
Non-employee directors of the Company’s general partner have been granted phantom units under the terms of the LTIP as part of their director
compensation package related to fiscal years 2019, 2018 and 2017. The phantom units granted related to fiscal years 2019, 2018 and 2017 have a three-year
service period with the 25% vesting on the Grant Date and an additional 25% vesting on each subsequent December 31 with final vesting occurring on the
third December 31 following the grant date. Although ownership of common units related to the vesting of such LTIP phantom units does not transfer to the
recipients until the phantom units vest, the recipients have DERs on these phantom units from the date of grant.
Non-employee directors of the Company’s general partner are eligible to defer their fees earned into the Deferred Compensation Plan. When directors
elect to defer any portion of their compensation into the plans, these deferred amounts are credited to the participant in the form of phantom units. The
compensation committee may recommend a matching contribution for the deferred fees at its discretion.
For the year ended December 31, 2017, named executive officers were awarded phantom units as part of the Company’s achievement of specified levels
of financial performance in fiscal year 2017. For the year ended December 31, 2018, certain named executive officers were awarded phantom units based on
the Company’s achievement of specified levels of financial performance for the fiscal year 2018 which were awarded in 2019. These phantom units are
subject to time-vesting requirements whereby 100% of the phantom units vest in three years. Although ownership of common units related to the vesting of
such phantom units does not transfer to the recipients until the phantom units vest, the recipients have DERs on these phantom units from the date of grant.
For the years ended December 31, 2018 and December 31, 2019, certain named executive officers were awarded phantom units as partial settlement of our
annual incentive bonus program, which was based on the Company’s achievement of specified levels of financial performance for the fiscal year 2018 or
2019, as applicable, which were deferred into our Deferred Compensation Plan as fully vested phantom units.
For unit-based compensation equity awards granted, the Company uses the market price of its common units on the grant date to calculate the fair value
and related compensation cost of the phantom units. The Company amortizes this compensation cost to partners’ capital and general and administrative
expense in the consolidated statements of operations using the straight-line method over the service period, as it expects these units to fully vest.
Unit-based compensation liability awards are recorded in accrued salaries, wages and benefits based on the fair value of the vested portion of the awards
on the balance sheet date. The fair value of liability awards is updated at each balance sheet date and changes in the fair value of the vested portions of the
liability awards are recorded as increases or decreases to compensation expense recorded in general and administrative expense in the consolidated statements
of operations.
Performance Units
In 2017, the Company granted certain named executive officers and other executives performance units with market performance conditions. The award
will vest when market performance conditions are met during the period commencing January 1, 2017 and ending December 31, 2020. As of December 31,
2019, a portion of the performance units are equity-classified awards, in which the fair value was determined on the grant date by application of the Monte
Carlo simulation model. In addition, a portion of the performance units are liability-classified awards and the fair value was determined by the market price of
the Company’s common units on the grant date and remeasured at each balance sheet date. The Company amortizes this compensation over the service period
only if the performance condition is considered probable of occurring.
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the Company’s non-vested phantom units and performance units as of December 31, 2019, and the changes during the years ended
December 31, 2019, 2018 and 2017, are presented below:
Non-vested at January 1, 2017
Granted
Vested
Forfeited
Non-vested at December 31, 2017
Granted
Vested
Forfeited
Non-vested at December 31, 2018
Granted
Vested
Forfeited
Non-vested at December 31, 2019
Number of
Phantom Units
Weighted-Average
Grant Date
Fair Value
754,833 $
2,753,507
(925,199)
(47,363)
2,535,778 $
1,030,174
(1,175,363)
(120,082)
2,270,507 $
1,653,340
(883,511)
(139,048)
2,901,288 $
9.58
4.10
7.30
9.73
3.11
6.29
6.97
6.83
5.71
3.01
4.28
4.10
5.21
For the year ended December 31, 2019, compensation expense of $5.9 million was recognized in the consolidated statements of operations related to unit
grants, including $4.1 million attributable to Liability Awards for the year ended December 31, 2019. For the year ended December 31, 2018, compensation
income, net, of $1.2 million was recognized in the consolidated statements of operations related to vested phantom unit grants, including income of $4.4
million attributable to Liability Awards for the year ended December 31, 2018 caused by the decline in the Company’s unit price during 2018. For the year
ended December 31, 2017, compensation expense of $11.6 million was recognized in the consolidated statements of operations related to vested phantom unit
grants, including $7.0 million attributable to Liability Awards for the year ended December 31, 2017. As of December 31, 2019 and 2018, there was a total of
$7.1 million and $10.3 million, respectively, of unrecognized compensation costs related to non-vested phantom unit grants, including $5.9 million
attributable to Liability Awards for the year ended December 31, 2019. These costs are expected to be recognized over a weighted-average period of
approximately one year. The total fair value of phantom units vested during the years ended December 31, 2019, 2018 and 2017, was $3.2 million, $8.0
million and $7.2 million, respectively.
15. Employee Benefit Plans
The Company has a domestic defined contribution plan administered by its general partner for (i) all full-time employees that are eligible to participate in
the plan (the “401(k) Plan”). Participants in the 401(k) Plan are allowed to contribute 1% to 70% of their pre-tax earnings to the plan, subject to government
imposed limitations. The Company matches 100% of each 1% of eligible compensation contributed by the participant up to 4% and 50% of each additional
1% of eligible compensation contributed up to 6%, for a maximum contribution by the Company of 5% of eligible compensation contributed per participant.
The plan also includes a profit-sharing component for eligible employees. Contributions under the profit-sharing component are determined by the board of
directors of the Company’s general partner and are discretionary. The funding policy is consistent with funding requirements of applicable laws and
regulations.
The Company recorded the following 401(k) Plan matching contribution expense in the consolidated statements of operations (in millions):
401(k) Plan matching contribution expense
Year Ended December 31,
2019
2018
2017
$
5.9 $
5.4 $
5.7
The Company has domestic noncontributory defined benefit plans for those salaried employees as well as those employees represented by either the
United Steelworkers (the “USW”) or the International Union of Operating Engineers (the “IUOE”); who (i) were formerly employees of Penreco and became
employees of the Company as a result of the acquisition of Penreco on January 3, 2008 (the “Penreco Pension Plan”) or (ii) were formerly employees of
Montana Refining Company, Inc. and who
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
became employees of the Company as a result of the acquisition of the Great Falls refinery on October 1, 2012 (the “Great Falls Pension Plan” and together
with the Penreco Pension Plan, the “Pension Plan”). The Company sold the Superior Refinery in 2017 and Husky assumed the retirement plan covering the
Superior employees. Therefore, during 2017, the pension benefit obligation was reduced and certain applicable retirement plan assets were distributed to
Husky related to the plan liabilities assumed by Husky. As a result of the completion of the sale of the Superior Refinery, the Company was required to
remeasure certain pension plan obligations, which resulted in immaterial impact to the consolidated statements of operations in 2017.
During 2019, the Company made an immaterial amount of contributions to its Pension Plan and expects to contribute less than $0.1 million to its Pension
Plan in 2020.
Under the Penreco Pension Plan, benefits are based primarily on years of service for USW and IUOE represented employees and the employee’s final
60 months’ average compensation for salaried employees. In 2009, the Company amended the Penreco Pension Plan, which curtailed Penreco employees
from accumulating additional benefits subsequent to December 31, 2009.
Under the Great Falls Pension Plan, benefits are based primarily on years of service and the employees’ 36 months’ highest average compensation for
salaried employees. Effective October 1, 2012, the date of the acquisition of the Great Falls refinery, the Company amended the Montana Pension Plan, which
curtailed only the Montana salaried employees from accumulating additional benefits subsequent to October 31, 2012. Effective August 31, 2015, the
Company again amended the Great Falls Pension Plan, which curtailed the collective bargaining employees from accumulating additional benefits subsequent
to December 31, 2015. The Company recorded no curtailment gain for the years ended December 31, 2019, 2018 and 2017.
The Company also has domestic contributory defined benefit post-retirement medical plans and contributory life insurance plans for (i) those salaried
employees, as well as those employees represented by either the International Brotherhood of Teamsters (the “IBT”) or USW, who were formerly employees
of Penreco and who became employees of the Company as a result of the acquisition of Penreco on January 3, 2008 (the “Penreco Other Plan”). The funding
policy is consistent with funding requirements of applicable laws and regulations.
Effective 2009, the Company amended the Penreco Other Plan, which curtailed employees from accumulating additional benefits subsequent to February
28, 2009. The long-term accrued benefit obligation recognized in the consolidated balance sheets for the Penreco Other Plan was $0.2 million as of December
31, 2019 and 2018. In addition, there was no other post-retirement benefit income related to this plan for years ended December 31, 2019 and 2018.
The change in the benefit obligations, change in the plan assets, funded status and amounts recognized in the consolidated balance sheets were as follows
(in millions):
Change in projected benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefit payments
Actuarial (gain) loss
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Benefit payments
Actual return on assets
Fair value of plan assets at end of year
Funded status — benefit obligation in excess of plan assets
Reconciliation of amounts recognized in the consolidated balance sheets:
Accrued benefit obligation, long-term
Unrecognized net actuarial loss
Accumulated other comprehensive loss
Net amount recognized at end of year
123
Year Ended December 31,
2019
2018
35.6 $
—
1.5
(2.4)
5.5
40.2 $
31.3 $
(2.4)
3.6
32.5 $
(7.7) $
(7.7) $
10.8
10.8
3.1 $
38.3
0.1
1.3
(1.6)
(2.5)
35.6
35.4
(1.6)
(2.5)
31.3
(4.3)
(4.3)
7.5
7.5
3.2
$
$
$
$
$
$
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accumulated and projected benefit obligations for the Pension Plan were $40.2 million and $35.6 million as of December 31, 2019 and 2018,
respectively. Selected information for the Company’s Pension Plan with an accumulated and projected benefit obligation in excess of plan assets were as
follows (in millions):
Accumulated and projected benefit obligation
Fair value of plan assets
The components of net periodic benefit cost (income) were as follows (in millions):
Service cost
Interest cost
Expected return on assets
Amortization of net loss
Settlement loss recognized
Net periodic benefit cost (income)
Year Ended December 31,
2019
2018
$
$
40.2 $
32.5 $
35.6
31.3
Pension Plan
Year Ended December 31,
2019
2018
2017
— $
1.5
(1.5)
—
0.2
0.1 $
1.3
(1.7)
0.1
—
0.2 $
(0.2) $
0.1
2.3
(2.9)
0.2
0.7
0.4
$
$
The components of net periodic benefit cost (income), other than the service cost component, are presented in the Other financial statement line of Other
income (expense) in the consolidated statements of operations.
The components of changes recognized in other comprehensive (income) loss for the Pension Plan were as follows (in millions):
Pension Plan
Year Ended December 31,
2019
2018
2017
Changes in plan assets and benefit obligations recognized in other comprehensive (income) loss:
Net (gain) loss
Amounts recognized as a component of net periodic benefit cost:
Amortization of actual gains
Total recognized in other comprehensive (income) loss
$
$
3.5 $
1.6 $
(0.2)
3.3 $
(0.1)
1.5 $
(0.2)
(0.9)
(1.1)
The portion relating to the Pension Plan classified in accumulated other comprehensive loss includes losses of $10.8 million and $7.5 million as of
December 31, 2019 and 2018, respectively. In 2020, the estimated amount that will be amortized from accumulated other comprehensive loss includes a net
loss of $0.3 million for the Pension Plan.
For the Pension Plan, the Company uses a corridor approach to amortize actuarial gains and losses. Under this approach, net actuarial gains or losses in
excess of ten percent of the larger of the projected benefit obligation or the fair value of plan assets are amortized on a straight-line basis. The period of
amortization is the average remaining service of active participants who are expected to receive benefits under the plans.
All pension plans have a December 31 measurement date. The significant weighted average assumptions used to determine the benefit obligations for the
years ended December 31, 2019 and 2018, were as follows:
Discount rate for Penreco Pension Plan
Discount rate for Great Falls Pension Plan
124
Benefit Obligations
Assumptions
2019
2018
3.15%
3.14%
4.18%
4.16%
Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The significant weighted average assumptions used to determine the net periodic benefit cost (income) for the years ended December 31, 2019, 2018 and
2017 were as follows:
Discount rate for Penreco Pension Plan
Discount rate for Superior Pension Plan
Discount rate for Great Falls Pension Plan
Expected return on plan assets for Penreco Pension Plan (1)
Expected return on plan assets Superior Pension Plan (1)
Expected return on plan assets for Great Falls Pension Plan (1)
Net Periodic Benefit (Income) Cost
Assumptions
2019
2018
2017
4.18%
—
4.16%
5.00%
—
5.00%
3.56%
—%
3.54%
5.00%
—%
5.00%
4.08%
4.06%
4.04%
6.35%
6.35%
6.35%
(1) The Company considered the historical returns, the future expectation for returns for each asset class and fair value of the plan assets, as well as the
target asset allocation of the Pension Plan portfolio, which was developed in accordance with the Company’s Statement of Investment Policy, to
develop the expected long-term rate of return on plan assets.
The Benefits Plan Committee (the “Investment Committee”) is responsible for the overall management of the Pension Plan assets, and its responsibilities
encompass establishing the investment strategies and policies, monitoring the management of plan assets, reviewing the asset allocation mix on a regular
basis, monitoring the performance of the Pension Plan assets to determine whether the investments objectives are met and guidelines followed and taking the
appropriate action if objectives are not followed. The Company uses different investment managers with various asset management objectives to eliminate
any significant concentration of risk. The Investment Committee believes there are no significant concentrations of risks associated with the investment
assets. The Company’s investment advisor will assist in the continual assessment of assets and the potential reallocation of certain investments and will
evaluate the selection of investment managers for the Pension Plan assets based on such factors as organizational stability, depth of resources, experience,
investment strategy and process, performance expectations and fees.
Long-term strategic investment objectives utilize a diversified mix of equity and fixed income securities to preserve the funded status of the trusts, and
balance risk and return in relationship to the respective liabilities. The primary investment strategy currently employed is a dynamic de-risking strategy that
periodically rebalances among various investment categories depending on the current funded position and maximizes the effectiveness of the Pension Plan
asset allocation strategy. This program is designed to actively move from return-seeking investments (such as equities) toward liability-hedging investments
(such as fixed income) as funding levels improve.
The assets are invested in accordance with prudent expert standards as mandated by the Employee Retirement Income Security Act (“ERISA”). The
Pension Plan’s target asset allocation based on funded status is currently comprised of the following:
Asset Class
Equity funds
Fixed income
Range of
Asset Allocation
20–50%
50–80%
Target
Allocation
40%
60%
Domestic equity funds include funds that invest in U.S. common and preferred stocks. Foreign equity funds invest in securities issued by companies
listed on international stock exchanges. Certain funds have value and growth objectives and managers may attempt to profit from security mis-pricing in
equity markets to meet these objectives. Short-term investments (including commercial paper, certificates of deposits and government repurchase agreements)
and derivatives may be used for hedging purposes to limit exposure to various risk factors.
Fixed income funds invest primarily in U.S. dollar-denominated, investment grade bonds, including U.S. Treasury and government agency securities,
corporate bonds and mortgage and asset-backed securities. These funds may also invest in any combination of non-investment grade bonds, non-U.S. dollar-
denominated bonds and bonds issued by issuers in emerging capital markets. Short-term investments (including commercial paper, certificates of deposits and
government repurchase agreements) and derivatives may be used for hedging purposes to limit exposure to various risk factors.
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s Pension Plan asset allocations, as of December 31, 2019 and 2018, by asset category, are as follows:
Cash and cash equivalents
Equity funds
Balanced funds
Domestic equities
Foreign equities
Fixed income
2019
2018
1%
27%
4%
—%
—%
68%
100%
—%
—%
—%
10%
11%
79%
100%
At December 31, 2019, the Company’s investments associated with its Pension Plan (as such term is hereinafter defined) consisted of (i) cash and cash
equivalents, (ii) fixed income bond funds, (iii) mutual equity funds, and (iv) mutual balanced funds. The fixed income bond funds, mutual equity funds, and
mutual balanced funds are measured at fair value using a market approach based on quoted prices from national securities exchanges and are categorized in
Level 1 of the fair value hierarchy. During 2019, the Company entered into a new investment strategy of investing in exchange traded funds which resulted in
the pension assets being categorized in Level1.
At December 31, 2018, the Company’s investments associated with its Pension Plan primarily consisted of (i) cash and cash equivalents and (ii) mutual
funds. Mutual funds are valued based on the NAV per share (or its equivalent) as a practical expedient to estimate fair value due to the absence of readily
available market prices. NAV’s are provided by the respective investment sponsors or investment advisers and are subsequently reviewed and approved by
management. In the event management concludes a reported NAV does not reflect fair value or is not determined as of the financial reporting measurement
date, the Company will consider whether and when deemed necessary to make an adjustment at the balance sheet date. In determining whether an adjustment
to the external valuation is required, the Company will review material factors that could affect the valuation, such as changes to the composition or
performance of the underlying investments or comparable investments, overall market conditions, expected sale prices for private investments which are
probable of being sold in the short-term and other economic factors that may possibly have a favorable or unfavorable effect on the reported external
valuation. Please read Note 12 for the definition of Level 1.
The Company’s Pension Plan assets measured at fair value, were as follows (in millions):
Cash and cash equivalents
Fixed income
Equity funds
Balanced funds
Total plan assets subject to leveling
Plan assets measured at net asset value
Domestic equities
Foreign equities
Fixed income
Total plan assets measured at net asset value
Total plan assets
Fair Value of Pension Assets at December 31,
2019
2018
Level 1
Total
Level 1
Total
$
$
0.3 $
22.2
8.8
1.2
32.5 $
$
126
0.3 $
22.2
8.8
1.2
32.5 $
—
—
—
—
32.5
0.1 $
—
—
—
0.1 $
$
0.1
—
—
—
0.1
3.2
3.4
24.6
31.2
31.3
Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following benefit payments for the Pension Plan, which reflect expected future service, as appropriate, are expected to be paid in the years indicated
as of December 31, 2019 (in millions):
2020
2021
2022
2023
2024
2025 to 2029
Total
Pension Benefits
1.9
2.0
2.0
2.2
2.1
11.7
21.9
$
$
16. Accumulated Other Comprehensive Loss
The table below sets forth a summary of changes in accumulated other comprehensive income (loss) by component for the years ended December 31,
2019 and 2018 (in millions):
Derivatives
Defined Benefit
Pension And Retiree
Health Benefit Plans
Foreign Currency
Translation
Adjustment
Total
Accumulated other comprehensive loss at December 31, 2017
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Net current period other comprehensive loss
Accumulated other comprehensive loss at December 31, 2018
Other comprehensive gain (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Net current period other comprehensive income (loss)
Accumulated other comprehensive income (loss) at December 31, 2019
$
$
$
— $
—
—
—
— $
0.2
—
0.2
(6.0) $
(1.6)
0.1
(1.5)
(7.5) $
(3.5)
0.2
(3.3)
0.2 $
(10.8) $
(1.2) $
—
—
—
(1.2) $
—
1.2
1.2
— $
(7.2)
(1.6)
0.1
(1.5)
(8.7)
(3.3)
1.4
(1.9)
(10.6)
The table below sets forth a summary of reclassification adjustments out of accumulated other comprehensive loss in the Company’s consolidated
statements of operations for the years ended December 31, 2019 and 2018 (in millions):
Components of Accumulated Other Comprehensive Loss
Amortization of defined benefit pension plan net loss
Realized loss on foreign currency translation adjustment
2019
2018
Location of Loss
$
$
(0.2) $
(1.2)
(1.4) $
(0.1) (1)
Other income
(expense)
—
(0.1) Total
(1) This accumulated other comprehensive loss component is included in the computation of net periodic pension cost. Please read Note 15 - “Employee
Benefit Plans” for additional information.
17. Income Taxes
The Company, as a partnership, is generally not liable for federal and state income taxes on the earnings of Calumet Specialty Products Partners, L.P. and
its wholly-owned subsidiaries. However, the Company conducts certain activities through immaterial, wholly-owned subsidiaries that are corporations, which
in certain circumstances are subject to federal, state and local income taxes. Additionally, the Company is subject to franchise taxes in certain states. Income
taxes on the earnings of the Company, with the exception of the above-mentioned taxes, are the responsibility of its partners, with earnings of the Company
included in partners’ earnings.
For the years ended December 31, 2019 and 2018, an income tax expense of $0.5 million and $0.7 million, respectively, was recognized, as compared to
an income tax benefit of $0.1 million for the year ended December 31, 2017.
127
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As a result of the Company’s analysis, management has determined that the Company does not have any material uncertain tax positions.
18. Earnings per Unit
The following table sets forth the computation of basic and diluted earnings per limited partner unit (in millions, except unit and per unit data):
Numerator for basic and diluted earnings per limited partner unit:
Net loss from continuing operations
Less:
General partner’s interest in net loss from continuing operations
Net loss from continuing operations available to limited partners
Net loss from discontinued operations available to limited partners
Net loss available to limited partners
Denominator for basic and diluted earnings per limited partner unit:
Weighted average limited partner units outstanding (1)
Limited partners’ interest basic and diluted net loss per unit:
From continuing operations
From discontinued operations
Limited partners’ interest
Year Ended December 31,
2019
2018
2017
$
$
$
$
$
(43.6) $
(51.0) $
(0.9)
(42.7) $
—
(42.7) $
(1.0)
(50.0) $
(4.0)
(54.0) $
(31.3)
(0.6)
(30.7)
(71.0)
(101.7)
78,212,136
77,943,992
77,598,950
(0.55) $
—
(0.55) $
(0.64) $
(0.05)
(0.69) $
(0.40)
(0.91)
(1.31)
(1) Total diluted weighted average limited partner units outstanding includes 0.1 million of potentially dilutive phantom units which would have been
anti-dilutive for the year ended December 31, 2019 and 0.2 million potentially dilutive phantom units which would be anti-dilutive in the years
ended December 31, 2018 and 2017.
19. Transactions with Related Parties
During the years ended December 31, 2019, 2018 and 2017, the Company had product sales to related parties, excluding the transactions discussed
below, of $40.2 million, $31.3 million and $37.9 million, respectively. Trade accounts and other receivables from related parties at December 31, 2019 and
2018 were $1.9 million and $0.9 million, respectively. The Company also had purchases from related parties, excluding the transactions discussed below,
during the years ended December 31, 2019, 2018 and 2017 of $14.2 million, $10.7 million and $7.1 million, respectively. Accounts payable to related parties,
excluding accounts payable related to the transactions discussed below, were $3.1 million and $0.9 million, at December 31, 2019 and 2018, respectively.
The general partner employs all of the Company’s employees and the Company reimburses the general partner for certain of its expenses.
During the year ended December 31, 2019, the Company entered into a Master Reimbursement Agreement with The Heritage Group, whereby The
Heritage Group may incur or pay certain fees, expenses or obligations on behalf of the Company, and the Company shall reimburse The Heritage Group for
such incurrence or payment in either cash or common units of the Company, subject to a limit of 4.0 million units valued at $3.60 per unit. As of
December 31, 2019, the Company has accrued approximately $3.8 million for expenses incurred by The Heritage Group and its affiliated entities on behalf of
the Company in accounts payable in the consolidated balance sheets. Effective December 31, 2019, The Heritage Group elected cash reimbursement, with no
further payment obligations in regard to the Master Reimbursement Agreement. Consistent with The Heritage Group’s election, this triggered the obligation
to be settled based upon the terms of the agreement in January 2020.
20. Segments and Related Information
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”).
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s operations are managed by the CODM using the following reportable segments:
•
•
•
Specialty Products. The specialty products segment produces a variety of lubricating oils, solvents, waxes, synthetic lubricants and other products
which are sold to customers who purchase these products primarily as raw material components for basic automotive, industrial and consumer
goods. Specialty products also include synthetic lubricants used in manufacturing, mining and automotive applications.
Fuel Products. The fuel products segment produces primarily gasoline, diesel, jet fuel and asphalt which are primarily sold to customers located in
the PADD 3 and PADD 4 areas within the U.S.
Corporate. The corporate segment primarily consists of general and administrative expenses not allocated to the specialty products or fuel products
segments.
Prior to the sale of Anchor, as disclosed in Note 4 - “Discontinued Operations,” the Company reported an oilfield services segment, which was solely
comprised of Anchor. As a result of Anchor’s classification as a discontinued operation, the Company removed the oilfield services segment.
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.
The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies as disclosed in Note
2 - “Summary of Significant Accounting Policies,” except that the disaggregated financial results for the reporting segments have been prepared using a
management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of
assisting internal operating decisions. The Company accounts for inter-segment sales and transfers at cost plus a specified mark-up. The Company will
periodically refine its expense allocation methodology for its segment reporting as more refined information becomes available and the industry or market
changes. The Company evaluates performance, based upon Adjusted EBITDA (a non-GAAP financial measure). The Company defines Adjusted EBITDA
for any period as EBITDA adjusted for (a) impairment; (b) unrealized gains and losses from mark to market accounting for hedging activities; (c) realized
gains and losses under derivative instruments excluded from the determination of net income (loss); (d) non-cash equity-based compensation expense and
other non-cash items (excluding items such as accruals of cash expenses in a future period or amortization of a prepaid cash expense) that were deducted in
computing net income (loss); (e) debt refinancing fees, premiums and penalties; (f) any net loss realized in connection with an asset sale that was deducted in
computing net income (loss) and (g) 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.
129
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reportable segment information is as follows (in millions):
Year Ended December 31, 2019
Specialty
Products
Fuel
Products (1)
Corporate
Eliminations
Consolidated
Total
$
$
$
$
$
$
$
$
Sales:
External customers
Inter-segment sales
Total sales
Income from unconsolidated affiliates
Adjusted EBITDA
Reconciling items to net loss:
Depreciation and amortization
Loss on impairment and disposal of assets
Loss on sale of business, net
Interest expense
Debt extinguishment costs
Unrealized loss on derivatives
Gain on sale of unconsolidated affiliate
Other non-recurring expenses
Equity based compensation and other items
Income tax expense
Net loss from continuing operations
Year Ended December 31, 2018
Sales:
External customers
Inter-segment sales
Total sales
Loss from unconsolidated affiliates
Adjusted EBITDA
Reconciling items to net loss:
Depreciation and amortization
Gain on sale of business, net
Interest expense
Debt extinguishment costs
Unrealized gain on derivatives
Equity-based compensation and other items
Income tax expense
Net loss from continuing operations
1,354.1 $
93.2
1,447.3 $
3.8 $
2,098.5 $
47.7
2,146.2 $
— $
— $
—
— $
— $
— $
(140.9)
(140.9) $
— $
220.2 $
182.0 $
(97.6) $
— $
47.1
—
—
—
—
1.0
(1.2)
74.7
11.6
8.7
16.3
—
25.1
—
7.6
25.4
—
118.3
2.2
—
—
—
—
—
—
—
—
—
$
3,452.6
—
3,452.6
3.8
304.6
129.4
37.0
8.7
134.6
2.2
26.1
(1.2)
3.5
7.4
0.5
(43.6)
Specialty
Products
Fuel
Products
Corporate
Eliminations
Consolidated
Total
1,382.4 $
98.1
1,480.5 $
(3.7) $
2,115.1 $
81.3
2,196.4 $
— $
— $
—
— $
— $
— $
(179.4)
(179.4) $
— $
3,497.5
—
3,497.5
(3.7)
162.2 $
199.2 $
(97.5) $
— $
263.9
50.1
—
0.2
—
(1.0)
72.2
4.8
23.1
—
(29.2)
8.6
—
132.2
58.8
—
130
—
—
—
—
—
$
130.9
(4.8)
155.5
58.8
(30.2)
4.0
0.7
(51.0)
Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Year Ended December 31, 2017
Specialty
Products
Fuel
Products
Corporate
Eliminations
Consolidated
Total
$
$
$
$
Sales:
External customers
Inter-segment sales
Total sales
Loss from unconsolidated affiliates
Adjusted EBITDA
Reconciling items to net loss:
Depreciation and amortization
Loss on impairment and disposal of assets
Gain on sale of business, net
Interest expense
Unrealized gain on derivatives
Equity-based compensation and other items
Income tax benefit
Net loss from continuing operations
1,300.4 $
78.1
1,378.5 $
— $
2,463.4 $
63.0
2,526.4 $
—
— $
—
— $
$
— $
(141.1)
(141.1) $
— $
3,763.8
—
3,763.8
—
188.3 $
225.8 $
(99.8) $
— $
314.3
69.1
60.3
—
(1.7)
(1.0)
106.4
147.0
(236.0)
12.8
(2.6)
3.6
—
—
172.0
—
—
—
—
—
—
$
179.1
207.3
(236.0)
183.1
(3.6)
15.8
(0.1)
(31.3)
(1) Adjusted EBITDA for the Fuel Products segment for the year ended December 31, 2019 included a $6.5 million gain recorded in cost of sales in the
consolidated statements of operations for proceeds received under the Company’s business interruption insurance policy. The Company incurred
business losses due to increased costs arising from a 2012 pipeline rupture in northwest Louisiana. As a result, the Company filed a contingent
business interruption claim. Specifically, the losses included a loss of throughput at the Shreveport refinery and additional crude transportation
expenses.
International sales accounted for less than 10% of consolidated sales in each of the three years ended December 31, 2019, 2018 and 2017. Substantially
all of the Company’s long-lived assets are domestically located.
The Company offers specialty products primarily in categories consisting of lubricating oils, solvents, waxes, packaged and synthetic specialty products
and other. Fuel products categories primarily consist of gasoline, diesel, jet fuel, asphalt, heavy fuel oils and other. The following table sets forth the major
product category sales for each segment (dollars in millions):
Specialty products:
Lubricating oils
Solvents
Waxes
Packaged and synthetic specialty products
Other
Total
Fuel products:
Gasoline
Diesel
Jet fuel
Asphalt, heavy fuel oils and other
Total
Consolidated sales
2019
2018
2017
Year Ended December 31,
$
$
593.1
325.9
119.3
230.8
85.0
17.2% $
9.4%
3.4%
6.7%
2.5%
600.1
331.9
117.0
256.8
76.6
17.2% $
9.5%
3.3%
7.3%
2.2%
584.2
274.4
117.2
260.7
63.9
1,354.1
39.2%
1,382.4
39.5%
1,300.4
679.6
859.1
134.6
425.2
2,098.5
3,452.6
19.7%
24.9%
3.9%
12.3%
60.8%
100.0% $
683.1
910.0
100.1
421.9
2,115.1
3,497.5
19.5%
26.0%
2.9%
12.1%
60.5%
100.0% $
948.5
877.9
135.0
502.0
2,463.4
3,763.8
15.5%
7.3%
3.1%
6.9%
1.7%
34.5%
25.2%
23.4%
3.6%
13.3%
65.5%
100.0%
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the years ended December 31, 2019, 2018 and 2017, the Company had no customer that represented 10% or greater of consolidated sales.
During the years ended December 31, 2019, 2018 and 2017, the Company had two suppliers that supplied approximately 62.3%, 58.8% and 65.7%,
respectively, of its crude oil supply.
21. Quarterly Financial Data (Unaudited)
The table below sets forth selected quarterly financial data for each of the last two fiscal years (in millions, except unit and per unit data):
2019
Sales
Gross profit
Net income (loss) from continuing operations
Net income (loss)
Net income (loss) available to limited partners
Limited partners’ interest basic and diluted net
income (loss) per unit:
From continuing operations
Limited partners’ interest
Basic weighted average limited partner units
outstanding
Diluted weighted average limited partner units
outstanding
2018
Sales
Gross profit
Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss)
Net income (loss) available to limited partners
Limited partners’ interest basic and diluted net
income (loss) per unit:
From continuing operations
From discontinued operations
Limited partners’ interest
Basic weighted average limited partner units
outstanding
Diluted weighted average limited partner units
outstanding
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total (1)
851.3 $
136.0
16.4
16.4
16.0
0.20 $
0.20 $
896.9 $
107.1
(16.8)
(16.8)
(16.5)
(0.21) $
(0.21) $
929.6 $
117.8
(4.6)
(4.6)
(4.5)
(0.06) $
(0.06) $
774.8 $
90.8
(38.6)
(38.6)
(37.8)
(0.48) $
(0.48) $
3,452.6
451.7
(43.6)
(43.6)
(42.7)
(0.55)
(0.55)
78,111,551
78,212,837
78,299,472
78,332,671
78,175,007
78,212,837
78,299,472
78,332,671
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total (1)
750.5 $
113.2
(2.9)
(1.9)
(4.8)
(4.7)
(0.04) $
(0.02)
(0.06) $
945.5 $
953.5 $
848.0 $
123.4
(51.2)
(0.7)
(51.9)
(50.9)
(0.64) $
(0.01)
(0.65) $
104.3
(16.0)
(0.5)
(16.5)
(16.1)
(0.20) $
(0.01)
(0.21) $
95.8
19.1
(1.0)
18.1
17.7
0.24 $
(0.01)
0.23 $
3,497.5
436.7
(51.0)
(4.1)
(55.1)
(54.0)
(0.64)
(0.05)
(0.69)
$
$
$
$
$
$
78,045,360
77,730,458
77,783,879
78,086,357
78,045,360
77,730,458
77,783,879
78,218,831
(1) The sum of the four quarters may not equal the total year due to rounding.
22. Leases
The Company has various operating and finance leases primarily for the use of land, storage tanks, railcars, equipment, precious metals and office
facilities that have remaining lease terms of greater than one year to fifteen years, some of which include options to extend the lease for up to 35 years, and
some of which include options to terminate the lease within one year. Effective January 1, 2019, the Company adopted ASU 2016-02 using a modified
retrospective transition approach that applied the new standard to
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Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
all leases existing at the effective date of the standard with no restatement of prior periods. Given the adoption of ASU 2016-02, the Company’s operating
leases have been included in operating lease right-of-use (“ROU”) assets, current portion of operating lease liabilities and long-term portion of operating lease
liabilities in the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities
represent its obligation to make lease payments arising from the lease. The Company’s finance leases are included in property, plant and equipment, current
portion of long-term debt and long-term debt, less current portion in the consolidated balance sheets, which remains consistent with the Company’s
presentation of its finance leases prior to the adoption of ASU 2016-02.
The Company elected to apply the following practical expedients and policy elections provided by the standard at transition:
•
•
•
•
•
•
Package of Three - The Company has elected that it will not reassess contracts that have expired or existed at the date of adoption for (1) leases
under the new definition of a lease, (2) lease classification, and (3) whether previously capitalized initial direct costs would qualify for capitalization
under ASC 842.
Portfolio Approach - The Company elected to determine the discount rate used to measure lease liabilities at the portfolio level. Specifically, the
Company segregated its leases into different populations based on lease term.
Discount Rate - The Company elected to apply the discount rate at transition based on the remaining lease term and lease payments rather than the
original lease term and lease payments. As a majority of the Company’s leases do not provide an implicit rate, the Company used an incremental
borrowing rate based on information available at the date of transition to determine the present value of lease payments.
Lease/Non-Lease Components - The Company elected to not separate non-lease components. The Company elected to make this election for each
class of underlying asset.
Definition of Minimum Rental Payments - The Company elected to include executory costs as part of the minimum lease payments for purposes of
measuring the lease liability and right-of-use asset at transition.
Land Easement - The Company elected not to assess whether any land easements are, or contain, leases in accordance with ASC 842 when
transitioning to the standard.
Supplemental balance sheet information related to the Company’s leases as of December 31, 2019, were as follows (in millions):
Assets:
Operating lease assets
Finance lease assets
Total leased assets
Liabilities:
Current
Operating
Finance
Non-current
Operating
Finance
Total lease liabilities
Classification:
Operating lease right-of-use assets
Property, plant and equipment, net (1)
Current portion of operating lease liabilities
Current portion of long-term debt
Long-term operating lease liabilities
Long term debt, less current portion
(1) Finance lease assets are recorded net of accumulated amortization of $7.1 million as of December 31, 2019.
133
December 31, 2019
$
$
$
$
93.1
3.2
96.3
60.6
0.3
33.0
2.4
96.3
Table of Contents
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The components of lease expense related to the Company’s
leases for the year ended December 31, 2019 were as follows (in millions):
Lease Costs:
Fixed operating lease cost
Short-term operating lease cost (1)
Variable operating lease cost (2) (3)
Finance lease cost:
Amortization of right-of-use asset
Interest on lease liabilities
Total lease cost
Classification:
Cost of Sales; SG&A Expenses
Cost of Sales; SG&A Expenses
Cost of Sales; SG&A Expenses
Cost of Sales
Interest expense
December 31,
2019
67.0
8.0
3.2
1.2
1.4
80.8
$
$
(1) The Company’s leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.
(2) Approximately $2.0 million of the Company’s variable operating lease cost for the year ended December 31, 2019 relates to its lease agreement with
Phillips 66 related to the LVT unit at its Lake Charles, Louisiana refinery (“the LVT Agreement”). Pursuant to the LVT Agreement, Phillips 66 is
obligated to supply a minimum supply quantity which the Company agrees 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 an adder. 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 December 31, 2019, 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
2021
2022
2023
2024
Thereafter
Total
Less: Interest
Present value of lease liabilities
Less obligations due within one year
Long-term lease obligations
$
$
$
$
65.0 $
13.8
9.7
6.9
3.9
3.3
102.6 $
9.0
93.6 $
60.6
33.0 $
0.5 $
0.5
0.5
0.5
0.5
1.1
3.6 $
0.9
2.7 $
0.3
2.4 $
65.5
14.3
10.2
7.4
4.4
4.4
106.2
9.9
96.3
60.9
35.4
(1) As of December 31, 2019, the Company’s operating lease payments included no material options to extend lease terms that are reasonably certain of
being exercised. The Company has no legally binding minimum lease payments for leases signed but not yet commenced as of December 31, 2019.
(2) As of December 31, 2019, the Company’s finance lease payments included no material options to extend lease terms that are reasonably certain of
being exercised. In addition, the Company has no legally binding minimum lease payments for leases that have been signed but not yet commenced
as of December 31, 2019.
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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted-average remaining lease term and weighted-average discount rate for the Company’s operating and finance leases were as follows:
Lease Term and Discount Rate:
Weighted-average remaining lease term (years):
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
23. Subsequent Events
December 31, 2019
2.5
7.1
7.3%
8.8%
As of March 1, 2020, the fair value of the Company’s derivatives have increased by approximately $13.0 million subsequent to December 31, 2019.
On January 21, 2020, the Company committed to and announced a cost reduction plan to reduce overall operating expenses, including the reduction of
outside services, facility fixed costs and corporate staffing costs (the “Cost Reduction Plan”). These cost reductions are designed to right-size general and
administrative spending. The Company expects to incur approximately $10 million in one-time costs over the course of 2020 to implement the Cost
Reduction Plan, a significant portion of which are expected to result in cash expenditure.
135
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Item 9. (cid:0)
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report. Our disclosure controls and
procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the
SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures
were not effective as of December 31, 2019 at the reasonable assurance level due to the material weakness in internal control over financial reporting
described below. Notwithstanding this material weakness, management concluded that the consolidated financial statements included in this Annual Report
present fairly, in all material respects, the financial position of the Company at December 31, 2019 in conformity with U.S. generally accepted accounting
principles and our external auditors have issued an unqualified opinion on our consolidated financial statements as of and for the year ended December 31,
2019.
Management’s Annual Report on Internal Control Over Financial Reporting
The management of Calumet Specialty Products Partners, L.P. (the “Company”) is responsible for establishing and maintaining adequate internal control
over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting
principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and board of directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, based on criteria for
effective internal control over financial reporting described in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (“COSO”). During the quarter ended September 30, 2017, we implemented an enterprise
resource planning (“ERP”) system on a company-wide basis, to improve the efficiency of certain financial and related transaction processes.
As of December 31, 2019, the following material weakness exists:
•
The untimely and insufficient operation of controls in the financial statement close process, including lack of timely account reconciliation, analysis
and review related to all financial statement accounts.
This material weakness resulted in not having adequate automated and manual controls designed and in place and not achieving the intended operating
effectiveness of those controls impacting all financial statement accounts and disclosures.
Given the material weakness that exists as of December 31, 2019, we have concluded that internal control over financial reporting remains ineffective as
of December 31, 2019.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements and has issued an
adverse report on the effectiveness of internal control over financial reporting, which is included herein.
Update on Previously Reported Material Weaknesses
We have continued to make progress as it relates to the remediation efforts of certain material weaknesses disclosed in our 2018 Annual Report on Form
10-K. The mitigation of material weaknesses remains subject to ongoing review by our senior
136
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management, as well as oversight by the audit and finance committee of the board of directors, and we will continue to take the necessary measures to
implement our remediation plans, as described below.
Our remediation efforts related to the following material weakness have been implemented and operated for a sufficient period of time to report as
remediated as of December 31, 2019.
•
The ineffective design and implementation of effective controls with respect to the implementation of our enterprise resource planning (“ERP”)
system consistent with our financial reporting requirements. Specifically, management did not design effective controls over the ERP
implementation to ensure appropriate data conversion and data integrity or provide sufficient end user training to our employees to ensure that our
employees could effectively operate the system and carry out their responsibilities.
A brief description of the actions taken to remediate this material weakness is included below.
•
•
Data Management Review and Change Controls - We have developed and implemented a suite of controls over the initiation, testing and approval of
changes to master data.
Provided Training to end users in order to reinforce the importance of our control environment across the company and developed additional training
to employees to enhance their understanding of the ERP system so that they can effectively operate the system and related controls.
After completing our testing of the design and operating effectiveness of these controls, we have concluded that this material weakness has been
remediated.
Remediation Efforts to Address the Remaining Material Weakness
In order to remediate the remaining material weakness, the untimely and insufficient operation of controls in the financial statement close process,
including lack of timely account reconciliation, analysis and review related to all financial statement accounts, we continue to take steps to improve our
overall processes and controls.
Remediation activities include, but are not limited to the following:
•
•
Reviewing, analyzing and properly documenting account reconciliations and our processes related to internal controls over financial reporting.
Continuing to design and implement effective review and approval controls. These controls will address the accuracy and completeness of the data
used in the performance of the respective controls.
We continue to progress in the execution of our remediation plan and are committed to continuing to review and improve our internal control processes
and financial reporting controls and procedures. When fully implemented and operational, we believe the measures described above will remediate the control
deficiencies that led to the remaining material weakness identified above and strengthen our internal controls over financial reporting. As we continue to
evaluate and work to improve our internal controls over financial reporting, we may determine to take additional measures to address control deficiencies or
modify certain activities of the remediation measures described above.
Changes in Internal Control over Financial Reporting
As described above in the “Management’s Annual Report on Internal Controls over Financial Reporting” section, we have undertaken remediation
actions to address certain of the material weaknesses in our internal control over financial reporting. These remediation actions continued throughout the
quarter ended December 31, 2019.
With the exception of the foregoing remediation actions and the changes described in the previous section, there have been no changes in our internal
control over financial reporting during the year ended December 31, 2019 that have materially affected or are reasonably likely to materially affect our
internal control over financial reporting.
137
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Calumet GP, LLC
General Partner and the Partners of Calumet Specialty Products Partners, L.P.
Opinion on Internal Control over Financial Reporting
We have audited Calumet Specialty Products Partners, L.P.’s internal control over financial reporting as of December 31, 2019, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO
criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Calumet
Specialty Products Partners, L.P. (the Company) has not maintained effective internal control over financial reporting as of December 31, 2019, based on the
COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that
a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material
weakness has been identified and included in management’s assessment. Management has identified a material weakness related to the untimely and
insufficient operation of controls in the financial statement close process, including lack of timely account reconciliations, analysis and review related to all
financial statement accounts.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive loss, partners' capital
and cash flows for each of the three years in the period ended December 31, 2019, and the related notes. This material weakness was considered in
determining the nature, timing and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our
report dated March 5, 2020 which expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Indianapolis, Indiana
March 5, 2020
138
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Item 9B. Other Information
On March 5, 2020, the Company announced that Timothy Go, Chief Executive Officer of the Company, notified the board of directors of our general
partner (the “Board”) that he will resign as Chief Executive Officer of the Company effective as of June 1, 2020. His departure is not the result of any
disagreement with the Company or any of its affiliates on any matter relating to the Company’s operations, policies or practices.
On March 5, 2020, the Company also announced that the Board appointed Stephen P. Mawer, age 55, to serve as the Chief Executive Officer of the
Company effective June 1, 2020. Mr. Mawer has served as a member of the Board since March 2016. In addition, Mr. Mawer has served as a member of the
Board of Directors at Zenith Energy Management, LLC, a midstream company, since November 2014, as well as chairman of ClimeCo Corporation, an
environmental commodities development and management company, since July 2017. Mr. Mawer also has served as a member of the advisory board of
Heritage Environmental Services since November 2017. Prior to joining the Board, Mr. Mawer led global commodities trading and served as a senior member
of the Koch Industries management team from January 2000 to June 2014. Mr. Mawer holds Bachelor’s and Master’s degrees in chemical engineering from
the University of Cambridge, England.
There is no arrangement or understanding between Mr. Mawer and any other person pursuant to which Mr. Mawer was appointed as Chief Executive
Officer of the Company effective as of June 1, 2020. There are no family relationships among Mr. Mawer and any directors or officers of the Company. There
have been no transactions nor are there any proposed transactions between the Company and Mr. Mawer that would require disclosure pursuant to Item
404(a) of Regulation S-K.
The information set forth below is included herein for the purpose of providing disclosure under “Item 2.05 - Costs Associated with Exit or Disposal
Activities” of Form 8-K.
The Company previously disclosed its commitment to a Cost Reduction Plan to reduce overall operating expenses, including the reduction of
professional services, facility fixed costs and corporate staffing costs. The Company expects to incur approximately $10 million in one-time costs to
implement the Cost Reduction Plan in 2020 with the majority being recognized in the first quarter of 2020.The charges consist primarily of $7.2 million of
facility exit costs and $2.8 million of one-time termination benefits for employee severance and related costs, substantially all of which are expected to result
in cash expenditures that will be paid out by the end of the fourth quarter of 2020.
The Company eliminated 22 general and administrative positions as part of the Cost Reduction Plan during the first quarter of 2020. The Company has
offered one-time termination benefits to the affected employees including cash severance payments, health care and outplacement service.
On February 2, 2020, the Company announced to its employees at the Bel-Ray facility in Wall Township, New Jersey that it would cease production and
close the facility in the second quarter of 2020. This action will result in the elimination of 49 positions.
The Company’s estimates are based on several assumptions. Actual results may differ materially, and additional charges not currently expected may be
incurred in connection with, or as a result of, the Cost Reduction Plan.
139
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PART III
Management of Calumet Specialty Products Partners, L.P. and Director Independence
Our general partner, Calumet GP, LLC, manages our operations and activities. Unitholders are limited partners and are not entitled to elect the directors
of our general partner or directly or indirectly participate in our management or operations. Our general partner owes certain contractual duties to our
unitholders pursuant to various provisions of our partnership agreement as well as fiduciary duties to its owners.
The directors of our general partner oversee our operations. The owners of our general partner have appointed eight members to our general partner’s
board of directors. The directors of our general partner are generally elected by a majority vote of the owners of our general partner on an annual basis.
However, as long as our executive vice chairman of our general partner, F. William Grube, and trusts, established for the benefit of his family members or
Permitted Transferees (as defined in our partnership agreement), continue to own at least 30% of the membership interests in our general partner, Mr. Grube
(or in certain specified instances, his designee or transferee) has the right to serve as a director of our general partner. The directors of our general partner hold
office until the earlier of their death, resignation, removal or disqualification or until their successors have been elected and qualified.
Pursuant to Section 4360 of the NASDAQ Stock Market, LLC Marketplace Rules (“NASDAQ Rules”), a listed limited partnership like us is not required
to have a majority of independent directors on the board of directors of our general partner or to establish a compensation committee or a
nominating/governance committee. However, four of our general partner’s eight directors are “independent” as that term is defined in the NASDAQ Rules
and Rule 10A-3 of the Exchange Act. In determining the independence of each director, our general partner has adopted standards that incorporate the
NASDAQ Rules and Exchange Act standards. Our general partner’s independent directors as determined in accordance with those standards are: James S.
Carter, Robert E. Funk, Stephen P. Mawer and Daniel L. Sheets. The board of directors held eight meetings during 2019.
The officers of our general partner manage the day-to-day affairs of our business. Officers serve at the discretion of the board of directors.
Directors and Executive Officers
The following table shows information regarding the directors and executive officers of Calumet GP, LLC as of March 5, 2020:
Name
Fred M. Fehsenfeld, Jr.
F. William Grube
Timothy Go
H. Keith Jennings
Bruce A. Fleming
Scott Obermeier
James S. Carter
Robert E. Funk
Stephen P. Mawer
Daniel J. Sajkowski
Amy M. Schumacher
Daniel L. Sheets
Age
Position with Calumet GP, LLC
69
72
53
50
63
47
70
74
55
60
48
62
Chairman of the Board
Executive Vice Chairman
Chief Executive Officer
Executive Vice President — Chief Financial Officer
Executive Vice President — Strategy & Growth
Executive Vice President — Commercial
Director
Director
Director
Director
Director
Director
Each director’s biographical information set forth below includes the particular experience and qualifications that led the board of directors to conclude
that the director is qualified to serve in such capacity.
Fred M. Fehsenfeld, Jr. has served as the chairman of the board of our general partner since September 2005. Mr. Fehsenfeld also served as the vice
chairman of the board of our Predecessor from 1990 until our initial public offering. Mr. Fehsenfeld has worked for The Heritage Group in various capacities
since 1977 and has served as its managing trustee since 1980. Mr. Fehsenfeld received his B.S. in mechanical engineering from Duke University and his M.S.
in management from the Massachusetts Institute of Technology Sloan School.
As co-founder of our Predecessor, Mr. Fehsenfeld has an extensive knowledge base regarding the Company’s operations and has participated in all major
strategic decision making for the Company and our Predecessor since their inception. In his role as managing trustee of The Heritage Group, Mr. Fehsenfeld
serves in lead executive roles, including the role of chairman and chief
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executive officer, for a multitude of different companies within The Heritage Group, providing a breadth of experience in leadership and management across a
wide variety of industries, including energy. Since 2008, Mr. Fehsenfeld has served as chairman of the board of directors of Heritage-Crystal Clean, Inc., a
publicly-traded environmental services company which is owned in part by The Heritage Group. Mr. Fehsenfeld is the father of Amy M. Schumacher,
member of the board of directors of our general partner.
F. William Grube has served as the executive vice chairman of the board of our general partner since April 2015. From January 2011 through April 2015,
Mr. Grube served as chief executive officer and vice chairman of the board of our general partner. From September 2005 through December 2010, Mr. Grube
served as chief executive officer, president and director of our general partner. Mr. Grube has also served as president and chief executive officer of our
Predecessor from 1990 until our initial public offering. From 1973 to 1989, Mr. Grube served as executive vice president of Rock Island Refining
Corporation. Mr. Grube received his B.S. in chemical engineering from Rose-Hulman Institute of Technology and his M.B.A. from Harvard University.
As co-founder of our Predecessor and through his role as prior chief executive officer, Mr. Grube possesses unique experience relative to the management
of the Company on a day-to-day basis over a significant time period and across all functional areas of the Company. Mr. Grube has significant technical
expertise in refining developed over the course of his career, with both the Company and our Predecessor, as well as another refining company which
specialized in the production of fuel products.
Timothy Go has served as chief executive officer of our general partner since January 2016. Prior to joining the Company, Mr. Go served as vice
president — operations of Flint Hills Resources, LP, a wholly owned subsidiary of Koch Industries, Inc., since July 2013. From 2011 through 2013, Mr. Go
served as vice president — operations excellence of Flint Hills Resources, LP. From August 2008 through 2011, Mr. Go served as managing director —
operations excellence of Koch Industries, Inc. From 1989 to 2008, Mr. Go served in various technical and managerial roles with Exxon Mobil. Mr. Go
received a B.S. in chemical engineering from the University of Texas at Austin.
H. Keith Jennings has served as executive vice president and chief financial officer of our general partner since January 2020. Prior to joining the
Company in October 2019, Mr. Jennings was vice president, finance of Eastman Chemical Company from 2018 to 2019. From 2016 to 2018, Mr. Jennings
was vice president and treasurer of Eastman Chemical Company. From 2009 through 2016, Mr. Jennings was vice president and treasurer of Cameron
International Corporation. Mr. Jennings received his Bachelors of Commerce (B. Comm) from the University of Toronto and an M.B.A from Columbia
University.
Bruce A. Fleming has served as executive vice president — strategy & growth of our general partner since March 2016. Prior to joining the Company,
Mr. Fleming served as the vice president of mergers & acquisitions at Tesoro Corporation and as an officer of Tesoro Companies Inc. since 2004. From 1997
through 2004, Mr. Fleming served as managing director of Hong Kong-based Orient Refining Ltd., and from 1981 through 1996 he held senior operations,
business development and planning roles with Amoco Oil and Amoco Corporation where he was most recently vice president of China business
development. Mr. Fleming earned a Ph.D. in chemical engineering from Princeton University and a B.S. in chemical engineering from the University of
Delaware. He is a member of the Board of M&A Standards.
Scott Obermeier was named executive vice president — commercial in January 2020. Mr. Obermeier has been a vice president with the Company since
November 2017 and has more than 20 years of experience in sales and marketing as well as general management roles focused on the specialty chemicals
market. Prior to his work with Calumet, he spent 10 years with Univar Solutions Inc., most recently serving as vice president where he managed the global
chemical distributor’s organic chemicals business. Mr. Obermeier is a graduate of the University of Northern Iowa, with a degree in chemistry marketing.
James S. Carter has served as a member of the board of directors of our general partner since January 2006. Mr. Carter worked in various operations,
commercial and business analysis capacities at ExxonMobil including vice president of U.S. marketing and sales of fuels and specialty products, manager of
U.S. refining and marketing planning and analysis, manager of U.S. distribution activities, analysis manager of ExxonMobil International, and advisor to
ExxonMobil headquarters for European refining and marketing until his retirement in 2003. Mr. Carter is a board member of the Association of Audit
Committee Members, Inc. He received his B.S. in mechanical engineering from Clemson University and his M.B.A. in finance and accounting from Tulane
University.
Mr. Carter brings extensive managerial experience with one of the largest integrated energy companies in the world. He possesses a broad background in
petroleum products marketing, with specific experience in the marketing of fuel products.
Robert E. Funk has served as a member of the board of directors of our general partner since January 2006. Mr. Funk previously served as vice president
— corporate planning and economics of CITGO Petroleum Corporation, a refiner and marketer of transportation fuels, lubricants, petrochemicals, refined
waxes, asphalt and other industrial products, from 1997 until his retirement in December 2004. Mr. Funk previously served CITGO or its predecessor, Cities
Services Company, as general manager — facilities planning from 1988 to 1997, general manager — lubricants operations from 1983 to 1988 and manager
— refinery east, Lake Charles refinery from 1982 to 1983. Mr. Funk received his B.S. in chemical engineering from the University of Kansas.
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Mr. Funk has extensive refining industry experience including planning, operations and managerial roles for a large multinational refining company. His
broad background of experience provides helpful insight to the Company in its implementation of strategic initiatives and its refinery operations in general.
Stephen P. Mawer has served as a board member of our general partner since March 2016. He retired as president of Koch Supply & Trading in 2014
following a 27-year career in commodities trading, risk management and refining operations. While at Koch, Mr. Mawer led global commodities trading and
served as a senior member of the Koch Industries management team. Mr. Mawer holds Bachelor’s and Master’s degrees in chemical engineering from the
University of Cambridge, England. Currently, he serves as a member of the Board of Directors at Zenith Energy Management, a midstream company, as well
as chairman of ClimeCo Corporation, an environmental commodities development and management company. He also serves as a member of the advisory
board of Heritage Environmental Services.
Mr. Mawer brings extensive knowledge of petroleum markets, refining economics, supply/marketing optimization and risk management.
Daniel J. Sajkowski has served as a member of the board of directors of our general partner since September 2014. Mr. Sajkowski has served as executive
vice president, Growth and New Ventures of The Heritage Group since 2013. Prior to joining The Heritage Group, Mr. Sajkowski was the senior director —
downstream technology at Sapphire Energy from 2010 until 2013. From 2004 to 2010, Mr. Sajkowski served as business unit leader at BP’s Whiting, Indiana
refinery. During his career with BP/Amoco, Mr. Sajkowski also held positions as the manager of integrated supply and trading from 2002 until 2004 and vice
president of refining technology from 2000 until 2002. Mr. Sajkowski earned his B.S. and M.S. degrees in chemical engineering from the University of
Michigan and a Ph.D. in chemical engineering from Stanford University. He also completed The General Manager Program at Harvard University.
Mr. Sajkowski has extensive refining industry experience including planning, operations and managerial roles for a large multinational refining company.
His broad background of experience provides helpful insight to the Company in its implementation of strategic initiatives and its refinery operations in
general.
Amy M. Schumacher has served as a member of the board of directors of our general partner since September 2014. Ms. Schumacher has served as the
president of Monument Chemicals, Inc. and Haltermann Solutions since 2010. In addition, in July 2016, Ms. Schumacher assumed the role of president of
The Heritage Group. Prior to joining Monument Chemicals, Inc. and Haltermann Solutions, Ms. Schumacher worked in various capacities for The Heritage
Group leading a variety of growth projects from 2003 until 2010. From 1998 to 2003, Ms. Schumacher was a consultant with Accenture. Ms. Schumacher
received her B.S. in civil engineering from Purdue University and her M.S. in management from the Massachusetts Institute of Technology Sloan School. Ms.
Schumacher currently serves as a trustee for The Heritage Group and sits on a number of private subsidiary boards. Ms. Schumacher is the daughter of Fred
M. Fehsenfeld, Jr., the chairman of the board of our general partner.
Ms. Schumacher has extensive managerial experience including planning and strategy. She possesses a broad background within the chemicals industry,
with specific experience in strategic growth projects.
Daniel L. Sheets has served as a member of the board of directors of our general partner since October 2018. Mr. Sheets worked in various capacities at
Lubrizol including president of Lubrizol Additives from 2009 through his retirement in 2018 and vice president from 2005 to 2008. Prior to that time, Mr.
Sheets served as vice president for engine additives and served as global business manager for fuels, refinery and oilfield products at Lubrizol. Mr. Sheets
received his B.S. in electrical engineering from Pennsylvania State University.
Mr. Sheets has extensive strategy, supply chain, sales and marketing and value capture experience. He possesses a broad background in petroleum
products marketing, with specific experience in the marketing of lubricants, lubricant additives and specialty chemicals.
Board of Directors Committees
Two members of the board of directors of our general partner serve on a conflicts committee to review specific matters that the board believes may
involve conflicts of interest. The conflicts committee determines if the resolution of the conflict of interest is fair and reasonable to us. The members of the
conflicts committee may not be owners, officers or employees of our general partner or directors, officers, or employees of its affiliates, and must meet the
independence and experience standards established by NASDAQ and the Exchange Act to serve on an audit committee of a board of directors, and certain
other requirements. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to us, approved by all of our
partners, and not a breach by our general partner of any duties it may owe us or our unitholders. The two independent board members who serve on the
conflicts committee are Messrs. James S. Carter and Robert E. Funk. Mr. Funk serves as the chairman of the conflicts committee. The conflicts committee
held one meeting during 2019.
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The board of directors of our general partner also has a compensation committee which, among other responsibilities, has overall responsibility for
evaluating and either approving or recommending to the board of directors the director, chief executive officer and senior executive compensation plans,
policies and programs of the Company. NASDAQ does not require a limited partnership like us to have a compensation committee comprised entirely of
independent directors. Accordingly, Messrs. Fred M. Fehsenfeld, Jr., Stephen P. Mawer and Ms. Amy M. Schumacher serve as members of our compensation
committee. Mr. Mawer serves as the chairman of the compensation committee. Mr. Fehsenfeld and Ms. Schumacher are not independent members of the
compensation committee. The compensation committee held six meetings during 2019.
The board of directors has adopted a written charter for the compensation committee which defines the scope of the committee’s authority. The
committee may form and delegate some or all of its authority to subcommittees comprised of committee members when it deems appropriate. The committee
is responsible for reviewing and recommending to the board of directors for its approval the annual salary and other compensation components for the chief
executive officer. The committee reviews and makes recommendations to the board of directors for its approval of any of the Company’s equity
compensation-based plans, including the Long-Term Incentive Plan, or any cash bonus or incentive compensation plans or programs. Also, the committee
reviews and approves all annual salary and other compensation arrangements and components for the senior executives of the Company. Further, the
compensation committee periodically reviews and makes a recommendation to the board of directors for changes in the compensation of all directors. The
committee has the authority to retain or terminate any compensation consultant that assists it in the evaluation of director and senior executive compensation
and to obtain independent advice and assistance from internal and external legal, accounting and other advisors. The committee did not engage an
independent compensation consultant for the 2019 year.
The board of directors of our general partner has an audit and finance committee comprised of four directors, Messrs. James S. Carter, Robert E. Funk,
Stephen P. Mawer and Daniel L. Sheets, each of whom the board of directors of our general partner has determined meets the independence and experience
standards established by NASDAQ and the SEC. In addition, the board of directors of our general partner has determined that Mr. Carter is an “audit
committee financial expert” as defined by the SEC. Mr. Carter serves as the chairman of the audit and finance committee. The audit and finance committee
held six meetings during 2019.
The board of directors has adopted a written charter for the audit and finance committee. The audit and finance committee assists the board of directors in
its oversight of the integrity of our financial statements and our compliance with legal and regulatory requirements and corporate policies and controls. The
audit and finance committee has the sole authority to retain and terminate our independent registered public accounting firm, approves all auditing services
and related fees and the terms thereof and pre-approves any non-audit services to be rendered by our independent registered public accounting firm. The audit
and finance committee is also responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our
independent registered public accounting firm is given unrestricted access to the audit and finance committee.
The board of directors of our general partner has established a risk committee which, among other responsibilities, oversees the Company’s risk
assessment practices. Messrs. Robert E. Funk, Stephen P. Mawer and Daniel J. Sajkowski serve as members of our risk committee. Mr. Sajkowski serves as
the chairman of the risk committee. The board of directors has adopted a written charter for the risk committee which defines the scope of the committee’s
authority. The risk committee held five meetings during 2019.
The board of directors of our general partner has established a strategy and growth committee which, among other responsibilities, oversees our (i) long-
term strategy, (ii) risks and opportunities relating to such strategy, (iii) strategic decisions regarding investments, mergers, acquisitions and divestitures, (iv)
capitalization, (v) ownership structure and (vi) distribution policy. Messrs. Fred M. Fehsenfeld, Jr., Robert E. Funk and Stephen P. Mawer serve as members
of the strategy and growth committee. The board of directors has adopted a written charter for the strategy and growth committee which defines the scope of
the committee’s authority. The strategy and growth committee held six meetings during 2019.
The board of directors of our general partner has established a talent and leadership development committee which, among other responsibilities,
monitors our strategic, long-term, and sustainable approach to talent and development issues relating to people. Messrs. Daniel J. Sajkowski, Daniel L. Sheets
and Ms. Amy M. Schumacher serve as members of our talent and leadership development committee. Ms. Schumacher serves as the chairwoman of the talent
and leadership development committee. The
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board of directors has adopted a written charter for the talent and leadership development committee which defines the scope of the committee’s authority.
The talent and leadership development committee held five meetings during 2019.
We have adopted a Code of Business Conduct and Ethics that applies to all directors, officers, employees and contractors.
Available on our website at www.calumetspecialty.com are copies of our board of director’s committee charters and Code of Business Conduct and
Ethics, all of which also will be provided to unitholders without charge upon their written request to: Investor Relations, Calumet Specialty Products Partners,
L.P., 2780 Waterfront Parkway East Drive, Suite 200, Indianapolis, Indiana, 46214.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act, as amended, requires Calumet’s directors and certain executive officers, as well as beneficial owners of ten percent or
more of Calumet’s common units, to report their holdings and transactions in Calumet’s securities. Based on information furnished to Calumet and contained
in reports filed pursuant to Section 16(a), as well as written representations that no other reports were required for 2019, Calumet’s directors and executive
officers filed all reports required by Section 16(a) with the exception of (i) one late filing related to the vesting of phantom units into common units delivered
on March 29, 2019 for Timothy Go; (ii) one late filing related to the vesting of phantom units into common units delivered on March 29, 2019 for D. West
Griffin and (iii) one late filing related to the vesting of phantom units into common units delivered on March 29, 2019 for Bruce A. Fleming.
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Compensation Discussion and Analysis
For purposes of this Compensation Discussion and Analysis and the compensation tables that follow, the names and positions of our named executive
officers for the 2019 fiscal year were:
•
•
•
•
•
Timothy Go — Chief Executive Officer
D. West Griffin — Executive Vice President — Chief Financial Officer
Bruce A. Fleming — Executive Vice President — Strategy & Growth
F. William Grube — Executive Vice President
Christopher Bohnert — Chief Financial Officer — Finished Lubes and Chemicals
Effective January 2, 2020, Mr. Griffin was no longer employed by Calumet; however, he continued to serve in a consulting role until the close of the
financial process for the 2019 year. Because he served as an executive officer during the 2019 fiscal year, he is deemed to be a “named executive officer” for
that period for purposes of the compensation disclosures that follow.
Mr. Bohnert currently serves in the role of Chief Financial Officer of our Finished Lubricants & Chemicals business and is not currently an executive
officer, however he served as our Chief Accounting Officer from January 1, 2019 until August 12, 2019.
Mr. H. Keith Jennings began serving as the Company’s Executive Vice President and Chief Financial Officer on January 2, 2020. Accordingly, he is not
deemed to be a “named executive officer” for the compensation disclosures that follow.
The compensation committee of the board of directors of our general partner oversees our compensation programs. Our general partner maintains
compensation and benefits programs designed to allow us to attract, motivate and retain the best possible employees to manage us, including executive
compensation programs designed to reward the achievement of both short-term and long-term goals necessary to promote growth and generate positive
unitholder returns. Our general partner’s executive compensation programs are based on a pay-for-performance philosophy, including measurement of our
performance against the specified financial target of Adjusted EBITDA (as defined below). Our executive compensation programs include both long-term and
short-term compensation elements which, together with base salary and employee benefits, constitute a total compensation package intended to be
competitive with similar companies.
Under their collective authority, the compensation committee and the board of directors maintain the right to develop and modify compensation programs
and policies as they deem appropriate. Factors they may consider in making decisions to materially increase or decrease compensation include our overall
financial performance, our growth over time, our changes in complexity as well as individual executive job scope, complexity and performance, and changes
in competitive compensation practices in our defined labor markets. In determining any forms of compensation other than the base salary for the senior
executives, or in the case of the chief executive officer, the recommendation to the board of directors of the forms of compensation for the chief executive
officer, the compensation committee considers our financial performance and relative unitholder return, the value of similar incentive awards to senior
executives at comparable companies and the awards given to senior executives in past years.
Our primary business objectives are to generate cash flows, reduce debt leverage and grow our business. As a result, our Adjusted EBITDA is the
primary measurement of performance taken into account in setting policies and making compensation decisions, as we believe this represents the most
comprehensive measurement of our ability to generate cash flows. Both short-term and long-term forms of executive compensation are specifically structured
on our achievement relative to the annual Adjusted EBITDA goal and, as such, determination of related awards, as well as their Long-Term Incentive Plan
grant or payment, occurs subsequent to the end of each fiscal year upon final determination of Adjusted EBITDA (defined below). We believe that including
these financial objectives as the primary performance measurements to determine compensation awards for all of our executive officers recognizes the
integrated and collaborative effort required by the full executive team to maximize performance. Adjusted EBITDA is a non-GAAP measure that we define,
consistent with the terms of our Credit Agreement and senior notes indentures. The most directly comparable GAAP performance measure for Adjusted
EBITDA is Net loss . Please read Part II, Item 6 “Selected Financial Data — Non-GAAP Financial Measures” for our definition of Adjusted EBITDA.
The compensation committee reviews, on an annual basis, each compensation element for a named executive officer. In each case, the compensation
committee considers the scope of responsibilities and experience and balances these against competitive salary levels. The compensation committee has the
opportunity to meet with the named executive officers and does so at their own discretion at various times during the year, which allows the compensation
committee to form its own assessment of each individual’s performance.
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Our executive compensation programs are designed with the following primary objectives:
•
reward strong individual performance that drives our positive financial results;
• make incentive compensation a significant portion of an executive’s total compensation, designed to balance short-term and long-term performance;
•
•
align the interests of our executives with those of our unitholders; and
attract, develop and retain executives with a compensation structure that is competitive with other publicly-traded partnerships of similar size.
The compensation committee believes the total compensation and benefits program for our named executive officers should consist of the following:
•
•
•
•
•
base salary;
annual incentive plan which includes short-term cash awards and also includes an optional deferred compensation element;
long-term incentive compensation, including unit-based awards;
retirement, health and welfare benefits; and
perquisites.
These elements are designed to constitute an integrated executive compensation structure meant to incentivize a high level of individual executive officer
performance in line with our financial and operating goals.
Base Salary
Design. Salaries provide executives with a base level of semi-monthly income as consideration for fulfillment of certain roles and responsibilities. The
salary program assists us in achieving our objective of attracting and retaining the services of quality individuals who are essential for the growth and
profitability of Calumet. Generally, changes in the base salary levels for our named executive officers are reviewed on an annual basis by the compensation
committee of the board of directors and are effective at the beginning of the following fiscal year.
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Results. The 2019 and 2018 base salaries, where applicable for our named executive officers are as follows:
Timothy Go
D. West Griffin
Bruce A. Fleming
F. William Grube
Christopher Bohnert
2019 Base Salary
2018 Base Salary
$
$
$
$
$
600,000 $
424,368 $
410,429 $
454,363 $
324,105 $
537,450
412,008
398,475
454,363
316,200
Compensation Changes for 2020. With respect to our named executive officers, the compensation committee approved increased salaries for certain
executives as part of its annual salary review process. Effective January 1, 2020, the base salary was increased for Messrs. Go and Fleming to $725,000 and
$422,742, respectively.
Short-Term Cash Bonus Awards
Design. Under the Annual Bonus Program Cash Incentive Compensation Plan (the “Cash Incentive Plan”), short-term cash bonus awards are designed to
aid us in retaining and motivating executives to assist us in meeting our financial performance objectives on an annual basis. Short-term cash awards were
granted to named executive officers based on Adjusted EBITDA performance targets in 2019. We chose a performance metric that was applicable to all
named executive officers. We believe this goal establishes a direct link between executive compensation and our financial performance.
The compensation committee establishes minimum, target and stretch incentive opportunities for each executive officer and other key employees
expressed as a percentage of base salary. The compensation committee may determine whether the applicable performance period will be a full calendar year
or a specific portion of a calendar year, depending upon our incentive goals for the short-term cash awards for that year. For the 2019 award, the amount that
is paid out is based on our achievement of a minimum, target, or stretch level of Adjusted EBITDA during the entire fiscal year. At the recommendation of
the compensation committee, the board of directors approved Adjusted EBITDA targets for the performance period based on budgets prepared by
management. When making the annual determination of the minimum goal, target goal and stretch goal levels of Adjusted EBITDA, the compensation
committee and the board of directors considered the specific circumstances facing us during the year. Generally, the compensation committee seeks to set the
minimum goal, target goal and stretch goal levels such that the relative challenge of achieving each level is consistent from year to year. The expectation that
management will achieve the minimum goal level is high, while meaningful additional effort would be required to achieve the target goal and considerable
additional effort would be required to achieve the stretch goal.
Generally, no awards are paid under the Cash Incentive Plan unless we achieve at least the minimum performance goal, as applicable. If the minimum,
target or stretch level Adjusted EBITDA goal is achieved for 2019, participants in the plan will receive their minimum, target or stretch cash award
opportunity, respectively. If our Adjusted EBITDA is between specified goal levels, participants are eligible to receive a prorated percentage of their cash
award opportunity based on where the actual Adjusted EBITDA amount falls between the levels.
For Messrs. Go, Griffin and Fleming, if any, earned awards will be paid 50% in cash and 50% in fully vested phantom unit awards that will be deferred
into our Deferred Compensation Plan. All phantom units granted will be granted with distribution equivalent rights (“DERs”).
2019 Target Goal and Results. For fiscal year 2019, the minimum Adjusted EBITDA goal was $240.0 million, the target goal was $300.0 million and the
stretch goal was $360.0 million for all named executive officers. For the reasons described in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations — 2019 Update,” we exceeded our minimum goal for the 2019 Adjusted EBITDA as defined in the Cash Incentive Plan, and
achieved an Adjusted EBITDA of $304.6 million.
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The following table summarizes the levels of cash award opportunity for each eligible named executive officer for 2019:
Timothy Go, D. West Griffin and Bruce A. Fleming
F. William Grube and Christopher Bohnert
Cash Incentive Bonus Award Opportunity as a
Percentage of Base Salary(1)
Minimum
Target
50%
25%
150%
50%
Stretch
200%
75%
(1) Company performance goals are based on Adjusted EBITDA.
The compensation committee may also subject a portion of the award to individual performance goals. With respect to Messrs. Go, Griffin and Fleming,
70% of the 2019 award will be based upon the company performance goal noted above, and 30% on individual performance goals.
For 2019, the Adjusted EBITDA was set at the budgeted amount, a level that the board of directors believed reflected the reasonable expectations
management had for our financial performance during the fiscal year and likely to be achieved given actual Adjusted EBITDA achieved for the 2018 fiscal
year. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — 2019 Update,” for a discussion of the factors
that impacted our results. For the 2018 year, compensation targets were also based on Adjusted EBITDA. We believe that Adjusted EBITDA represents the
most comprehensive measurement of the financial performance of our assets.
The following tables reflect our minimum, target and stretch goals for the 2019 and 2018 Cash Incentive Plan awards:
Fiscal Year
2019
2018(1)
Adjusted EBITDA (Dollars in millions)
Actual
$304.6
$263.9
Min. Goal
Target Goal
Stretch Goal
$240.0
$175.0
$300.0
$300.0
$360.0
$400.0
(1) 2018 targets were set based on expected Company performance after the divestitures of Anchor and Superior, which were divested during the 2017
fiscal year.
Individual Performance Objectives. The Compensation Committee evaluates the individual performance of, and performance objectives for, Messrs. Go,
Fleming, and Griffin. Messrs. Grube and Bohnert’s individual performance of, and performance objectives for, are set by Mr. Go. Individual performance and
objectives are specific to each officer position and are set at the beginning of the fiscal year.
Criteria used to measure an individual’s performance may include assessment of objective criteria (e.g., execution of projects within budget parameters,
improving profitability, or timely completing an acquisition or divestiture) as well as qualitative factors such as the executive’s ability to lead, ability to
communicate, and successful adherence to our stated values (i.e., commitment to safety, commitment to integrity, respect, commitment to excellence,
innovation, entrepreneurship and collaboration). There are no specific weights assigned to these various elements of performance.
Compensation Changes for 2020. Upon the recommendation of the compensation committee, the board of directors has approved new Adjusted EBITDA
targets for the 2020 fiscal year based on budgets prepared by management. We do not disclose our confidential 2020 targets, which, if disclosed, would put us
at a competitive disadvantage. However, we believe that management will achieve the 2020 minimum goal level, while meaningful additional effort would be
required to achieve the target goal and considerable additional effort would be required to achieve the stretch goal. There is no guarantee that our named
executive officers will receive an award related to the 2020 year. The 2020 targets and actual results will be discussed within our compensation disclosures for
the 2020 year.
For further description of this compensation program, please see “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based
Awards Table — Description of Cash Incentive Plan.”
Executive Deferred Compensation Plan
Design. The compensation committee allows for the participation of the executive officers in the Calumet Specialty Products Partners, L.P. Executive
Deferred Compensation Plan (the “Deferred Compensation Plan”) to encourage the officers to save for retirement and to assist us in retaining our officers.
The Deferred Compensation Plan is intended to promote retention by giving
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employees an opportunity to save in a tax-efficient manner. The terms governing the retirement benefit under this plan for the executive officers are the same
as those available for other eligible employees in the U.S. Pursuant to the Deferred Compensation Plan, a select group of management, including the named
executive officers, and all of the non-employee directors are eligible to participate by making an annual irrevocable election to defer, in the case of
management, all or a portion of their annual cash incentive award under the Cash Incentive Plan, and, in the case of non-management directors, all or none of
their annual cash retainer. With respect to the 2019 year, all of our named executive officers, other than Messrs. Grube and Bohnert, were required to defer
50% of any Cash Incentive Plan award into deferred phantom units. The deferred amounts are credited to participants’ accounts in the form of phantom units,
with each such phantom unit representing a notional unit that entitles the holder to receive either an actual common unit or the cash value of a common unit
(determined by using the fair market value of a common unit at the time a determination is needed). The phantom units credited to each participant’s account
also receive distribution equivalent rights, which are credited to the participant’s account in the form of additional phantom units. In our sole discretion, we
may make matching contributions of phantom units or purely discretionary contributions of phantom units, in amounts and at times as the compensation
committee recommends and the board of directors approves.
Results. We did not make any discretionary matching contributions of phantom units to the accounts of those participants in the Deferred Compensation
Plan during 2019.
Long-Term Unit-Based Awards
Design. Long-term unit-based awards may consist of any type of award allowed pursuant to our Long-Term Incentive Plan, including phantom units,
restricted units, unit options, substitution awards and DERs. These awards are granted to employees, consultants and directors of our general partner under the
provisions of our Long-Term Incentive Plan, as amended, originally adopted on January 24, 2006, and administered by the compensation committee. These
awards aid Calumet in retaining and motivating executives to assist us in meeting our financial performance objectives.
In fiscal year 2019, the annual unit award opportunity provided to Messrs. Grube and Bohnert consisted of the contingent right to receive phantom units.
The equity-based awards provided to Messrs. Go, Griffin and Fleming for 2019 consisted solely of the phantom unit awards granted to the executives with
respect to the 50% of their cash awards which were deferred into our Deferred Compensation Plan in the form of phantom units. Under the Long-Term
Incentive Plan, phantom units are generally granted upon our achievement of specified levels of Adjusted EBITDA, with adjustments for individual
performance, as discretionary awards, or as part of a sign on award. When granted, phantom units are subject to further time-based vesting criteria specified
in the grant. Upon satisfaction of the time-based vesting criteria specified in the grant, phantom units convert into common units (or cash equivalent).
Accordingly, these awards established a direct link between executive compensation and our financial performance. This component of executive
compensation, when coupled with an extended ratable vesting period as compared to cash awards, further aligns the interests of applicable executives with
our unitholders in the longer-term and reinforces unit ownership levels among executives.
Results. The following table reflects the target number of phantom units that could be awarded to Messrs. Grube and Bohnert depending on whether we
achieved the Adjusted EBITDA minimum, target or stretch goals discussed above in “Short-Term Cash Awards.” The phantom units that they will receive
pursuant to the results of the 2019 Adjusted EBITDA goals and our long-term incentive program for 2019 will not be awarded to them until the first quarter
of 2020 (following certification of our performance results for 2019), although we consider the grant to be part of their 2019 compensation package and for
purposes of the compensation tables that follow this Compensation Discussion and Analysis, the contingent right to receive the phantom awards will be
reported as “granted” during the 2019 year when we originally determined the goals for this incentive award..
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F. William Grube (2)
Christopher Bohnert (3)
2019 Phantom Unit Award Opportunity
Minimum
54,000
Target
104,000
2019 Phantom Unit Award Opportunity
Minimum
$102,000
Target
$204,000
Stretch
156,000
Stretch
$306,000
Phantom Units
To Be Granted (1)
104,000
Cash Equivalent of
Phantom Units
$204,000
(1) Phantom units granted pursuant to our annual awards are subject to a time-vesting requirement, whereby 100% of the units vest on the third
December 31st after the grant date. These phantom units will also receive DERs, if any, which would be paid in the form of cash.
(2) Phantom Unit Award Opportunity for Mr. Grube is reflected in number of Phantom Units.
(3) Phantom Unit Award Opportunity for Mr. Bohnert is reflected as a cash value that will be converted to a number of units on the grant date, which
will occur in the 2020 year.
For further description of this compensation program, please see “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based
Awards Table — Description of Long-Term Incentive Plan.”
Health and Welfare Benefits
We offer a variety of health and welfare benefits to all eligible employees of our general partner. These benefits are consistent with the types of benefits
provided by our peer group and provided so as to ensure that we are able to maintain a competitive position in terms of attracting and retaining executive
officers and other employees. In addition, the health and welfare programs are intended to protect employees against catastrophic loss and encourage a
healthy lifestyle. The named executive officers generally are eligible for the same benefit programs on the same basis as the rest of our employees. Our health
and welfare programs include medical, pharmacy, dental, life and accidental death and dismemberment insurance coverages. In addition, all employees
working over 30 hours per week are eligible for long-term disability coverage. Long-term disability coverage benefits specific to the named executive officers
provide for a compensation allowance, which is grossed up for the payment of taxes, to allow them to purchase long-term disability coverage on an after-tax
basis at no net cost to them. As structured, these long-term disability benefits will pay 60% of monthly earnings, as defined by the policy, up to a maximum of
$15,000 per month during a period of continuing disability up to normal retirement age, as defined by the policy. Executive officers and other key employees
are also eligible to obtain annual executive physical examinations which are paid for by us. Decisions made with respect to this compensation element do not
significantly factor into or affect decisions made with respect to other compensation elements.
Retirement Benefits
We provide the Calumet GP, LLC Retirement Savings Plan (the “401(k) Plan”) to assist our eligible officers and employees in providing for their
retirement. Named executive officers participate in the same retirement savings plan as other eligible employees subject to ERISA limits. We match 100% of
each 1% of eligible compensation contribution by the participant up to 4% and 50% of each additional 1% of eligible compensation contribution up to 6%, for
a maximum contribution by us of 5% of eligible compensation contributions per participant. These contributions are provided as a reward for prior
contributions and future efforts toward our success and growth.
Perquisites
We provide executive officers with perquisites and other personal benefits that we believe are reasonable and consistent with our overall compensation
programs and philosophy. These benefits are provided in order to enable us to attract and retain these executives. Decisions made with respect to this
compensation element do not significantly factor into or affect decisions made with respect to other compensation elements.
All named executive officers are provided with all, or certain of, the following benefits as a supplement to their other compensation:
•
•
•
Executive Physical Program: Generally, on an annual basis, we pay for a complete and professional personal physical exam for each named
executive officer appropriate for their age to improve their health and productivity.
Spousal and Family Travel: On an occasional basis, we pay expenses related to travel of the spouses or certain family members of our named
executive officers in order to accompany the named executive officer to business-related events.
Long-Term Disability Insurance: We provide compensation to allow each named executive officer to purchase long-term disability insurance on an
after-tax basis at no net cost to them.
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•
•
Use of Company Aircraft: On an occasional basis, our named executive officers may be eligible to use a leased aircraft for personal use and the
incremental cost to us is treated as and reflected in the tables below as compensation to the applicable officer for purposes of these disclosures. The
items that we use to determine the incremental cost to us of these flights include the variable costs for personal use of aircraft that were charged to us
by the vendor that operates the leased aircraft for contracted hourly costs, fuel charges, and taxes.
Commuting and Living Expenses: In order for us to attract top executive talent, we must not be limited to those individuals residing in the
Indianapolis metropolitan area and in some cases must be willing to offer payment or reimbursement for an agreed upon amount of relocation,
commuting, temporary housing and other related costs.
The compensation committee periodically reviews the perquisite program to determine if adjustments are appropriate and noted the addition of payment
of legal expenses was appropriate.
Other Compensation Related Matters
The Long-Term Incentive Plan was last amended and restated on December 10, 2015. This amendment included a new provision that addresses the
potential need to recover awards granted under that plan. To the extent that applicable laws or listing standards would require it, or otherwise as determined
appropriate by us, all awards granted under the Long-Term Incentive Plan shall be subject to clawback, forfeiture, repurchase or recoupment, as appropriate.
Because we are not an entity taxable as a corporation, many of the tax issues associated with executive compensation that face publicly-traded
corporations do not directly affect us. Internal Revenue Code Section 409A (“Section 409A”) provides that amounts deferred under nonqualified deferred
compensation plans are includable in a participant’s income when vested, unless certain requirements are met. If these requirements are not met, participants
are also subject to an additional income tax and interest. All of our awards under our Long-Term Incentive Plan, severance arrangements and other
nonqualified deferred compensation plans presently meet these requirements. As a result, employees will be taxed when the deferred compensation is actually
paid to them. We will be entitled to a tax deduction at that time.
While we have not adopted any security ownership requirements or policies for our executives, our executive compensation programs foster the
enhancement of executives’ equity ownership through long-term unit-based awards under the Long-Term Incentive Plan. For a listing of security ownership
by our named executive officers, please read Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters.”
The board of directors of our general partner has adopted the Insider Trading Policy of Calumet GP, LLC and Calumet Specialty Products Partners, L.P.
(the “Insider Trading Policy”), which provides guidelines to employees, officers and directors with respect to transactions in our securities. Pursuant to
Calumet’s Insider Trading Policy, all executive officers and directors must confer with our general counsel before effecting any put or call options for our
securities or purchase or sale of common units. Further, the Insider Trading Policy states that we strongly discourage any put or call options transactions by
officers, directors and all other employees and consultants. The Insider Trading Policy is available on our website at www.calumetspecialty.com or a copy
will be provided at no cost to unitholders upon their written request to: Investor Relations, Calumet Specialty Products Partners, L.P., 2780 Waterfront
Parkway East Drive, Suite 200, Indianapolis, Indiana, 46214.
Our general partner has entered into employment agreements with Timothy Go, chief executive officer and F. William Grube, Executive Vice Chairman
to ensure they will perform their roles for an extended period of time given their positions and value to us. For a discussion of the material terms of these
employment agreements, please refer to “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Description of
Employment Agreements.”
Under the employment agreements, the named executive officers are entitled to receive severance compensation if their employment is terminated under
certain conditions, such as termination by them for “good reason” or by us without “cause,” each is defined in the applicable agreement and further described
in “Potential Payments Upon Termination or Change in Control.”
The employment agreements with the named executive officers and the related severance provisions are designed to meet the following objectives:
•
Change in Control: In certain scenarios, the potential for merger or being acquired may be in the best interests of our unitholders. We provide the
potential for severance compensation to the named executive officers in the event of a change in control transaction to promote their ability to act in
the best interests of our unitholders even though their employment could be terminated as a result of the transaction.
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•
Termination without Cause: We believe severance compensation in such a scenario is appropriate because the named executive officers are bound by
confidentiality, non-solicitation and non-competition provisions covering one year after termination and because we and the named executive
officers have mutually agreed to a severance package that is in place prior to any termination event. This provides us with more flexibility to make a
change in this executive position if such a change is in our and our unitholders’ best interests.
The salary multiple of the change of control benefits, use of the single or double trigger change of control benefits and the amount of the severance
payout were determined through negotiations with the named executive officer at the time that we entered into the employment agreement. Relative to the
overall value to us, the compensation committee believes these potential benefits are reasonable.
Severance Arrangements
We entered into a Transitional Severance Agreement and General Release with Mr. Griffin on October 27, 2019 (the “Severance Agreement”), which
governed certain aspects of his employment with us for the remainder of the 2019 year and until January 2, 2020 (the “Separation Date”), as well as the
severance benefits that he was entitled to receive in connection with his separation from service with us. For more details regarding the Severance Agreement,
please see the section below titled “Potential Payments Upon Termination or Change in Control.”
Report of the Compensation Committee for the Year Ended December 31, 2019
The compensation committee of our general partner has reviewed and discussed our Compensation Discussion and Analysis with management. Based
upon such review, the related discussion with management and such other matters deemed relevant and appropriate by the compensation committee, the
compensation committee has recommended to the board of directors that our Compensation Discussion and Analysis be included in the Company’s Annual
Report on Form 10-K.
Members of the Compensation Committee:
•
•
•
Stephen P. Mawer, Chairman
Fred M. Fehsenfeld, Jr.
Amy M. Schumacher
Summary Compensation Table
The following table sets forth certain compensation information of our named executive officers for the years ended December 31, 2019, 2018 and 2017:
Summary Compensation Table for 2019
Name and Principal Position
Year
Salary
Bonus
Non-Equity Incentive
Plan Compensation (2)
Timothy Go
Chief Executive Officer
D. West Griffin
Executive Vice President - Chief Financial
Officer
Bruce A. Fleming
Executive Vice President - Strategy &
Growth
F William Grube
Executive Vice President
Christopher Bohnert
Chief Financial Officer - Finished Lubes and
Chemicals
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
$
$
$
$
$
$
$
$
$
$
$
$
600,000 $
537,450 $
500,000 $
424,368 $
412,008 $
394,110 $
410,429 $
398,475 $
385,000 $
Unit Awards
(1)
435,000 $
— $
— $
375,000 $
— $ 4,836,561 $
— $
— $
— $
309,006 $
— $ 2,218,750 $
— $
— $
794,435 $
298,856 $
— $ 1,315,500 $
454,363 $
184,812 $
31,968 $
454,363 $
454,363 $
— $
— $
— $
57,780 $
All Other
Compensation (3)
Total
16,139 $ 1,486,139
55,770 $ 1,205,520
14,713 $ 5,788,774
187,386 $
611,754
178,441 $ 1,132,240
258,681 $ 3,171,541
18,299 $ 1,223,163
14,635 $
936,966
24,405 $ 2,081,030
26,410 $
43,333 $
14,136 $
697,553
682,508
753,461
435,000 $
237,300 $
437,500 $
— $
232,785 $
300,000 $
— $
225,000 $
356,125 $
— $
184,812 $
227,182 $
2019
$
324,105 $
128,614 $
178,380 $
— $
19,783 $
650,882
(1) The amounts include the aggregate grant date fair value of (i) with respect to the 2017 year, 143,990 phantom unit awards were granted to Mr. Go
during the 2017 fiscal year related to a correction that was needed in the number of phantom
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units granted to Mr. Go in 2015 and 2016 (described further below), (ii) with respect to the 2017 year, performance units and strategic units to
reward Messrs. Go, Griffin and Fleming the number of which is determined based on certain market and company performance, (iii) with respect to
the 2017, 2018 and 2019 years, phantom unit awards made in connection with Messrs Go, Griffin and Fleming’s requirement to defer 50% of their
cash incentive award under the Cash Incentive Plan into our Deferred Compensation Plan, and (iv) with respect to the 2017, 2018 and 2019 years,
phantom units granted to Mr. Grube (and with respect to Mr. Bohnert in 2019), the number of which is determined based on a performance goal
applicable to the applicable performance year but which were not granted until the following year when performance was certified (see Footnote #3
below for further information). The 2019 phantom units relating to the Cash Incentive Plan are included at “probable” values, which were target
amounts on the grant date in 2019. Maximum values for Messrs. Go, Griffin and Fleming were $600,000, $410,429 and $424,368, respectively. The
amounts reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718, disregarding the estimate of forfeitures.
Please read Note 14 to our consolidated financial statements for the fiscal year ending December 31, 2019 for a discussion of the assumptions used
to determine the FASB ASC Topic 718 value of the awards.
(2) Represents amounts earned under our Cash Incentive Plan and not deferred into the Deferred Compensation Plan. Please read “Compensation
Discussion and Analysis — Elements of Executive Compensation — Short-Term Cash Awards” for further details. See footnote #3 below.
(3) We have determined that the annual phantom units should be reported in the year to which the performance relates, as all decisions that needed to be
made to determine the grant values were determined in the performance year, therefore the amounts reflected in the 2018 row have been modified
from the original disclosures for the 2018 year to include the 2018 phantom units earned in the 2018 year but awarded in 2019. The annual phantom
units reported in the 2019 row reflect the phantom units earned in the 2019 year but not granted until the first quarter of 2020.
(4) The following table provides the aggregate “All Other Compensation” information for each of the named executive officers for the 2019 year.
Timothy Go
D. West Griffin
Bruce A. Fleming
F. William Grube
Christopher Bohnert
401(k) Plan Matching Contributions
Commuting and Living Expenses (1)
Long-Term Disability Insurance
Term Life Insurance
Total
$
$
14,000 $
—
1,440
699
14,000 $
169,579
1,872
1,935
14,000 $
19,533 $
18,306
—
1,440
2,859
—
1,872
5,005
—
718
759
16,139 $
187,386 $
18,299 $
26,410 $
19,783
(1) As part of Mr. Griffin’s offer letter of employment, we provided him $25,000 quarterly for living and commuting expenses. Includes a tax gross up
of $69,579.
Grants of Plan-Based Awards
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The following table sets forth grants of plan-based awards to our named executive officers for the year ended December 31, 2019:
Estimated Possible Payouts Under
Non-Equity
Incentive Plan Awards (1)
Estimated Possible Payouts Under
Equity
Incentive Plan Awards (2)
Name
Timothy Go
Grant
Date
Minimum ($)
Target
($)
Maximum ($)
Minimum
($)
Target
($)
Maximum
($)
2/27/2019 $
150,000 $
450,000 $
600,000
Grant
Date Fair
Value of
Unit
Awards
($)
2/27/2019
$
150,000 $
450,000 $
600,000 $
450,000
$
—
D. West Griffin
2/27/2019 $
106,092 $
212,185 $
424,368
Bruce A. Fleming
2/27/2019 $
102,607 $
307,822 $
410,429
2/27/2019
$
106,092 $
212,185 $
424,368 $
212,185
$
—
2/27/2019
$
102,607 $
307,822 $
410,429 $
307,822
$
—
F. William Grube
2/27/2019 $
65,000 $
130,000 $
195,000
2/27/2019
$
52,000 $
104,000 $
156,000 $
104,000
$
—
Christopher Bohnert
2/27/2019 $
170,000
$
340,000
$
510,000
2/27/2019
$
52,000
$
104,000
$
156,000 $
104,000
$
—
(1) With respect to Messrs. Go, Griffin and Fleming, estimated possible payouts under non-equity incentive plan awards represent 50% of the ranges of
potential cash incentive awards which could have been earned under our Cash Incentive Plan related to fiscal year 2019. For the 2019 year, the 50%
non-cash portion of the Cash Incentive Plan award for Messrs. Go, Griffin and Fleming is required to be deferred into the Deferred Compensation
Plan. For a description of these plans and available awards please read “Narrative Disclosure to Summary Compensation Table and Grants of Plan-
Based Awards Table — Description of Cash Incentive Plan” and “Compensation Discussion and Analysis — Elements of Executive
Compensation — Executive Deferred Compensation Plan.” For Messrs. Grube and Bohnert, estimated possible payouts under non-equity incentive
plan awards represent the full ranges of potential cash incentive awards which could have been earned under our Cash Incentive Plan related to fiscal
year 2019.
(2) With respect to Messrs. Go, Griffin and Fleming, amounts reported in these columns represent the 50% of the ranges of potential cash incentive
awards which could have been earned under our Cash Incentive Plan related to fiscal year 2019. For the 2019 year, 50% of any Cash Incentive Plan
award is required to be deferred into the Deferred Compensation Plan as phantom units. The incentive value presented to the applicable named
executive officers was structured in the form of a cash value which is presented in the columns here. The number of phantom units to be granted will
be determined by dividing the cash value earned under the Cash Incentive Plan by the value of our common units on the date that the cash portion of
the Cash Incentive Plan is paid out. For the cash amount actually payable in the first quarter of 2020, see the Non-Equity Incentive Plan
Compensation section of the Summary Compensation Table. The equity value to be paid to the applicable named executive officers, is equivalent to
the amount in the Non-Equity Incentive Plan Compensation section of the Summary Compensation Table. For a description of these plans and
available awards, please read “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Description of
Cash Incentive Plan” and “Compensation Discussion and Analysis — Elements of Executive Compensation — Executive Deferred Compensation
Plan.” With respect to Messrs. Grube and Bohnert, the amounts reflect the ranges of the value of the phantom units that could be awarded to them
following the certification of our applicable Adjusted EBITDA targets for the 2019 year. The phantom units that will be granted to Messrs. Grube
and Bohnert will remain subject to certain time-based vesting conditions, as further described in “Compensation Discussion and Analysis - Elements
of Executive Compensation - Long-Term Unit-Based Awards.” The number of phantom units to be granted to Messrs. Grube and Bohnert will be
determined on the date of grant in 2020.”
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Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Annual Adjusted EBITDA goals are recommended by the compensation committee to the board of directors and are based upon our annual forecast of
financial performance for the upcoming fiscal year, and such goals are reviewed and approved by the board of directors. These goals are applicable to all
named executives, are established to calculate awards under the Cash Incentive Plan: minimum, target and stretch. Under the Cash Incentive Plan, if our
actual performance meets at least the minimum goal of Adjusted EBITDA goal for the fiscal year, as applicable, executives and certain other management
employees may receive incentive awards ranging from 5% to 50% of base salary, depending on the employee’s position with the general partner. If financial
performance exceeds the minimum Adjusted EBITDA goal, as applicable, the cash incentive award paid as a percentage of base salary may be larger,
ultimately reaching an upper range of 15% to 200% of base salary, if the stretch goal is reached. Cash incentive awards are prorated if actual performance
falls between the defined minimum and stretch goals. If the Adjusted EBITDA, as applicable, falls below the minimum goal, no cash incentive awards are
paid under the Cash Incentive Plan. Discretionary awards with the approval of the compensation committee and Board of Directors may occur. The
compensation committee can recommend to the full board of directors, however, that cash awards be given notwithstanding the fact that we failed to achieve
at least the minimum Adjusted EBITDA goal. Awards earned, if any, under this plan are generally paid in the first quarter of the following fiscal year after
finalizing the calculation of our performance relative to the Adjusted EBITDA targets.
Following is a summary of the Long-Term Incentive Plan and the material terms related to phantom units that we may grant pursuant to the Long-Term
Incentive Plan.
General. The Long-Term Incentive Plan provides for the grant of restricted units, phantom units, unit options and substitute awards and, with respect to
unit options and phantom units, the grant of DERs. Subject to adjustment for certain events, an aggregate of 3,883,960 common units may be delivered
pursuant to awards under the Long-Term Incentive Plan. Units withheld to satisfy our general partner’s tax withholding obligations are available for delivery
pursuant to other awards. Our general partner’s board of directors, in its discretion, may terminate the Long-Term Incentive Plan at any time with respect to
the common units for which a grant has not theretofore been made. The Long-Term Incentive Plan will automatically terminate on the earlier of the
10th anniversary of the amendment date or when common units are no longer available for delivery pursuant to awards under the Long-Term Incentive Plan.
Our general partner’s board of directors has the right to alter or amend the Long-Term Incentive Plan or any part of it from time to time and the compensation
committee may amend any award; provided, however, that no change in any outstanding award may be made that would materially impair the rights of the
participant without the consent of the affected participant. Subject to unitholder approval, if required by the rules of the principal national securities exchange
upon which the common units are traded, the board of directors of our general partner may increase the number of common units that may be delivered with
respect to awards under the Long-Term Incentive Plan.
Phantom Units. During 2019, we granted phantom units pursuant to the Long-Term Incentive Plan. A phantom unit is a notional unit that entitles the
grantee to receive a common unit upon the vesting of the phantom unit, or, in the discretion of the compensation committee, cash equal to the fair market
value of a common unit. The compensation committee may make grants of phantom units under the Long-Term Incentive Plan to eligible individuals
containing such terms, consistent with the Long-Term Incentive Plan, as the compensation committee may determine, including the period over which
phantom units granted will vest. The compensation committee may, in its discretion, base vesting on the grantee’s completion of a period of service or upon
the achievement of specified financial objectives or other criteria. In addition, the phantom units will vest automatically upon a change of control (as defined
in the Long-Term Incentive Plan) of us or our general partner, subject to any contrary provisions in the award agreement.
If a grantee’s employment, consulting or membership on the board of directors terminates for any reason, the grantee’s phantom units will be
automatically forfeited unless, and to the extent, the grant agreement or the compensation committee provides otherwise. Common units to be delivered with
respect to these awards may be common units acquired by our general partner in the open market, common units already owned by our general partner,
common units acquired by our general partner directly from us or any other person or any combination of the foregoing. Our general partner is entitled to
reimbursement by us for the cost incurred in acquiring common units. If we issue new common units with respect to these awards, the total number of
common units outstanding will increase. Any outstanding restricted unit or phantom unit awards fully vest upon the occurrence of certain events including,
but not limited to, change of control, death, disability and normal retirement.
DERs are rights that entitle the grantee to receive, with respect to a phantom unit, cash equal to the cash distributions made by us on a common unit. The
compensation committee, in its discretion, may grant tandem DERs with phantom units on such terms as it deems appropriate.
Participants do not pay any consideration for the common units they receive with respect to these types of awards, and neither we nor our general partner
will receive remuneration for the units delivered with respect to these awards.
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Annual Phantom Unit Programs. Messrs. Grube and Bohnert were provided with an annual phantom unit opportunity during 2019. Messrs. Grube and
Bohnert’s 2019 earned award will be granted to them in the first quarter of 2020. The 2019 phantom unit opportunities provided to our named executive
officers other than Messrs. Grube and Bohnert consisted of 50% of their annual cash incentive award being granted in the form of fully vested phantom units
which were then deferred into the Deferred Compensation Plan.
Mr. Go received a grant of phantom units during 2017 that were unrelated to our 2017 annual equity program. In 2016 and 2015, we granted Mr. Go
phantom units that were intended to be equal to the value of a certain percentage of his salary on the date of grant. In April 2017, we discovered an error in
the methodology previously used to convert cash to equity awards in 2016, therefore we granted him additional phantom units in order to correct the
difference in the number of phantom units he should have received on the original grant dates in 2016 and 2015. The additional 143,990 phantom units
granted to Mr. Go in 2017 were granted with the same terms and conditions as the original 2016 and 2015 grants, which resulted in a portion of the awards
(40,529 phantom units) being vested on the date of grant.
In 2017, performance unit awards and strategic unit awards were granted to Messrs. Go, Griffin and Fleming based on achievement of certain
performance or strategic goals from January 1, 2017 through December 31, 2020 and the passage of time. The details of these awards can be found in the
2017 Annual Report on Form 10-K filed with the SEC on April 2, 2018.
Employment Agreement with Timothy Go, Chief Executive Officer: Our general partner has an employment agreement with Mr. Go dated as of September
14, 2015 (“Go Effective Date”). The initial term of his employment agreement is three years and expired on September 14, 2018, but the agreement provides
for automatic extensions of an additional twelve months beginning on the third anniversary of the Go Effective Date, and on every anniversary of the Go
Effective Date thereafter, unless either party notifies the other of non-extension at least 180 days prior to any such anniversary date.
The agreement provides for an initial annual base salary of $500,000, subject to various adjustments by the board of directors of our general partner that
have been made following the Go Effective Date, as well as a signing bonus, the right to participate in the Long-Term Incentive Plan, other bonus plans, our
retirement, health and welfare benefit plans, and the use of an automobile. Mr. Go’s employment agreement may be terminated at any time by either party
with proper notice. The potential severance benefits provided within the employment agreement are described in greater detail in the “Potential Payments
Upon Termination or Change in Control” section below. For the term of his employment agreement and for the one-year period following the termination of
employment, Mr. Go is prohibited from engaging in competition (as defined in his employment agreement) with us and soliciting our customers and
employees.
Amended and Restated Employment Agreement with F. William Grube, Executive Vice Chairman. Our general partner has amended and restated
employment agreement with Mr. Grube dated as of December 31, 2015 (the “Grube Effective Date”). The initial term of the amended agreement is five years
and will expire on December 31, 2020 (the “Employment Period”), but the agreement provides for automatic extensions of an additional twelve months added
to the Employment Period beginning on the third anniversary of the Grube Effective Date, and on every anniversary of the Grube Effective Date thereafter,
unless either party notifies the other of non-extension at least ninety days prior to any such anniversary date.
The agreement provides for an initial annual base salary of approximately $454,363, subject to various adjustments by the board of directors of our
general partner that have been made following the Grube Effective Date, as well as the right to participate in the Long-Term Incentive Plan, other bonus
plans, our retirement, health and welfare benefit plans, and use of an automobile.
Mr. Grube’s employment agreement may be terminated at any time by either party with proper notice. The potential severance benefits provided within
the employment agreement are described in greater detail in the “Potential Payments Upon Termination or Change in Control” section below. For the term of
the employment agreement and for the one-year period following the termination of employment, Mr. Grube is prohibited from engaging in competition (as
defined in the employment agreement) with us and soliciting our customers and employees.
We do not maintain employment agreements with Messrs. Griffin, Fleming, or Bohnert, although we did enter into the Severance Agreement with Mr.
Griffin in October 2019, which is described in more detail below.
Salary in Proportion to Total Compensation
The following table sets forth the percentage of each named executive officer’s total compensation that we paid in the form of salary for 2019:
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Name
Timothy Go
D. West Griffin
Bruce A. Fleming
F. William Grube
Christopher Bohnert
Outstanding Equity Awards at Fiscal Year-End
Our named executive officers had the following outstanding equity awards at December 31, 2019:
Percentage of
Total
Compensation
40%
69%
34%
92%
70%
Equity Incentive Plan Awards:
Market Value of Units that Have
Not Vested ($) (2)
2,098,750
450,000
(3)
1,049,375
318,276
(3)
524,688
307,822
(3)
—
—
Number of
Units
That Have Not
Vested (#) (1)
Market Value
of Units
That Have Not
Vested ($) (2)
Unit Awards
Equity Incentive
Plan Awards:
Number of
Unearned Units
That Have Not
Vested (#)
— $
— $
— $
—
575,000(1)
(3)
—
287,500(1)
(3)
—
143,750(1)
(3)
$
$
$
$
$
$
21,600 $
78,840
— $
— $
Name
Timothy Go
D. West Griffin
Bruce A. Fleming
F. William Grube
Christopher Bohnert
57,676 $
210,517
(1) These units are scheduled to vest in amounts and on the dates shown in the following table:
Vesting Date
Timothy Go
D. West Griffin
Bruce A. Fleming
F. William Grube
Christopher Bohnert
January 23, 2020
July 1, 2020
September 25, 2020
December 31, 2020
July 1, 2021
December 31, 2021
March 31, 2022
July 1, 2022
Reinstatement of Distributions
$10 Price Target
$16 Price Target
$18 Price Target
—
—
—
—
—
—
—
—
125,000
100,000
250,000
100,000
575,000
—
—
—
—
—
—
—
—
62,500
50,000
125,000
50,000
287,500
—
—
—
—
—
—
—
—
31,250
25,000
62,500
25,000
143,750
—
—
—
10,800
—
10,800
—
—
—
—
—
—
—
—
7,000
—
—
50,676
—
—
—
—
—
—
21,600
57,676
(2) Market value of phantom units reported in these columns is calculated by multiplying the closing market price of $3.65 of our common units at
December 31, 2019 by the number of units outstanding.
(3) Our named executive officers other than Messrs. Grube and Bohnert were required to defer 50% of their 2019 Cash Incentive Plan award in the form
of phantom units. Because the equity portion of this award was originally denominated in cash, and could not be converted to a number of units until
the settlement date for the Cash Incentive Plan award in the first quarter of 2020, there is not a number of units to reflect in this column. The
potential value of the award, based on December 31, 2019 unit prices and the assumption of a target payout is reflected in the accompanying column
as the
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Market Value of Units that Have Not Vested. Following the end of the 2019 year these amounts were converted to a specific number of phantom
units that were deferred into the Deferred Compensation Plan as fully vested phantom units.
Options Exercises and Stock Vested
Our named executive officers exercised no options and had a total of 277,074 phantom units related to the Deferred Compensation Plan and the Long-
Term Incentive Plan vest during the year ended December 31, 2019. The vested units related to the Deferred Compensation Plan will remain in the Deferred
Compensation Plan until the earlier of the date specified by each participant and the participant’s termination of employment, as further described under
“Nonqualified Deferred Compensation” below:
Name
Timothy Go
D. West Griffin
Bruce A. Fleming
F. William Grube
Christopher Bohnert
Unit Awards
Number of
Units Vested
Value Realized
on Vesting (1)
105,721 $
65,390 $
98,963 $
— $
$
7,000
379,882
232,788
355,527
—
27,020
(1) Market value of phantom units reported in this column is calculated by multiplying the closing market price of our common units on the vesting date
by the number of units vesting on such date.
Nonqualified Deferred Compensation
The Deferred Compensation Plan became effective as of January 1, 2009. The Deferred Compensation Plan is an unfunded arrangement intended to be
exempt from the participation, vesting, funding and fiduciary requirements set forth in Title I of the Employee Retirement Income Security Act of 1974, as
amended, and to comply with Section 409A of the Code. Our obligations under the Deferred Compensation Plan will be general unsecured obligations to pay
deferred compensation in the future to eligible participants in accordance with the terms of the Deferred Compensation Plan from our general assets. The
compensation committee of our general partner’s board of directors acts as the plan administrator.
Name
Timothy Go
D. West Griffin
Bruce A. Fleming
F. William Grube
Christopher Bohnert
Executive Contributions in Nonqualified Deferred Compensation Table for 2019
Executive
Contributions
in 2019(1)
Company
Contributions
in 2019 (2)
Aggregate
Earnings
in 2019 (3)
Aggregate
Withdrawals/
Distributions in 2019
Aggregate
Balance at End
of 2019 (4)
$
$
$
$
$
243,302 $
238,674 $
230,691 $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
243,302
238,674
230,691
132,090
—
(1) Executive contributions in 2019 represent phantom units granted to certain of our named executive officers based on the requirement to defer 50% of
their cash incentive award under the Cash Incentive Plan related to the 2018 fiscal year into the Deferred Compensation Plan. All amounts reflected
in this column were also reported as compensation for the year 2018 in the Summary Compensation Table under the heading “Unit Awards.”
(2) No company contributions were made with respect to the 2019 year. Our contributions would have represented discretionary matching contributions
made in the form of phantom units granted to our named executive officers.
(3) Aggregate earnings in 2019 would have represented additional phantom units earned through DERs in the applicable named executive officer’s
Deferred Compensation Plan account on phantom units granted under the executive contribution and the discretionary matching contribution in
previous years if applicable. These amounts, which would have represented the fair value of the phantom units earned on the corresponding dates of
our distributions to our unitholders in fiscal year 2019, and would have been included as compensation in 2019 under “Unit Awards” in the Summary
Compensation Table.
(4) While the aggregate balance of each participant’s Deferred Compensation Plan account at the end of the fiscal year is comprised of the phantom
units related to the executive and discretionary matching contributions as well as the phantom
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units attributable to aggregate earnings accumulated, if earrings had been applicable during the 2019 year, the dollar amount of each participant’s
account as of December 31, 2019, was determined by multiplying all phantom units deemed to be included in the participant’s account by the closing
price of our common units on December 31, 2019 (the last trading day of the fiscal year), which was $3.65. The phantom units associated with each
executive’s account as of December 31, 2019, were as follows: Mr. Go, 66,658, Mr. Griffin, 65,390 and Mr. Fleming, 63,203. With respect to
Messrs. Go, Griffin and Fleming, the 2019 executive contribution is related to the phantom units deferred with respect to the 2018 annual incentive
bonuses, as bonus amounts are not converted to units until the date upon which the cash payment is made, during the first quarter of the year
following the year to which the bonus relates. Phantom units that relate to the 2019 incentive award but which will not be converted until the first
quarter of 2020 will not be reflected in this table until the 2020 contributions are reported. Subject to the executive’s continued employment with us,
these phantom units will become vested over a four year period (except for phantom units associated with executive contributions, which are fully
vested at the time of cash incentive deferral), but such vesting applies to the number of phantom units credited to the participant’s account, and not
the value of the account at any given time. The value of the executive’s account will fluctuate due to the fact that the value of their phantom units
will track the value of our common units. Also, at the current point in time, an executive’s account may not be fully vested; subject to the forfeiture
provisions described below, the amounts do not reflect the payout amount that an executive would receive if he voluntarily left our service prior to
vesting.
The named executive officers, as well as other officers and key employees, participate in the Deferred Compensation Plan by making an annual
irrevocable election to defer all or a portion of their annual cash incentive award for the year. In 2019, none of the executives made an elective contribution to
the plan of 100% of his Cash Incentive Plan award. All of the named executive officers other than Messrs. Grube and Bohnert were required to defer 50% of
their Cash Incentive Plan award. The deferred amounts will be credited to the participants’ accounts in the form of phantom units, and will receive DERs to
be credited in the form of additional phantom units to the participants’ account. We have the discretion to make matching contributions of phantom units or
purely discretionary contributions of phantom units, in amounts and at times as the compensation committee determines appropriate. For the 2019 year, there
were no matching contributions to named executives of deferred amounts related to the 2019 fiscal year. Participants will at all times be 100% vested in
amounts they have deferred; however, amounts we have contributed may be subject to a vesting schedule, as determined appropriate by the compensation
committee. The participants’ accounts are adjusted at least quarterly to determine the fair market value of our phantom units, as well as any DERs that may
have been credited in that time period. Distributions from the Deferred Compensation Plan are payable on the earlier of the date specified by each participant
and the participant’s termination of employment. Death, disability, normal retirement or a change in control (as such terms are defined within the Long-Term
Incentive Plan) require automatic distribution of the Deferred Compensation Plan benefits, and will also accelerate at that time the vesting of any portion of a
participant’s account that has not already become vested. Benefits will be distributed to participants in the form of our common units, cash or a combination
of common units and cash at the election of the compensation committee. In the event that accounts are paid in common units, such units will be distributed
pursuant to the Long-Term Incentive Plan. Unvested portions of a participant’s account will be forfeited in the event that a distribution was due to a
participant’s voluntary resignation or a termination for cause. To ensure compliance with Section 409A of the Code, distributions to participants that are
considered “key employees” (as defined in Code Section 409A of the Code) may be delayed for a period of six months following such key employees’
termination of employment with us.
Potential Payments Upon Termination or Change in Control
We provide certain of our named executive officers with certain severance and change in control benefits in order to provide them with assurances
against certain types of terminations without cause or resulting from change in control transactions where the terminations were not based upon cause. This
type of protection is intended to provide the executive with a basis for keeping focus and functioning in the unitholders’ interests at all times. In addition to
the potential acceleration of our equity-based awards upon certain events, our employment agreements with Mr. Go and Mr. Grube contain severance and
change in control provisions.
In the event that severance payments are triggered under the applicable employment agreement, Messrs. Go and Grube will be eligible to receive
payments as soon as administratively possible, though if Code Section 409A would subject them to additional taxes upon receipt of the payments, we will
delay the payment of these amounts for a period of six months and provide for interest to accrue on such delayed amounts at the maximum nonusurious rate
from the date of the originally scheduled payment date. Messrs. Go and Grube are also eligible to receive an additional sum from us in the event that any
termination payment we provide to them is considered a “parachute” payment pursuant to Section 280G of the Internal Revenue Code of 1986, as amended
(the “Code”); a parachute payment could occur in connection with a change in control or a termination of employment that was also in connection with a
change in control, but such a payment would not occur in the event of a termination of Messrs. Go or Grube’s employment that is not in connection with a
change in control. This additional payment, if necessary, would equal the amount necessary to place him in the same after-tax position he would have been in
absent the additional excise taxes imposed by Section 280G of the Code. Lastly, severance potentially payable to Messrs. Go and Grube under their
employment agreement are partially provided in consideration for Messrs. Go and Grube’s agreements not to compete with us or solicit our employees for a
period of one year following a termination of employment.
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The employment agreement in place as of December 31, 2019, contains the following definitions for each of the possible “triggering events” that could
result in a termination payment to the below referenced named executive officer:
•
Cause. Mr. Go may be terminated for cause if: (i) Mr. Go is indicted for a felony (or a plea of nolo contendere thereto); (ii) Mr. Go’s conduct in
connection with his employment duties or responsibilities is fraudulent, unlawful, or grossly negligent; (iii) Mr. Go exhibits willful misconduct; (iv)
Mr. Go is materially insubordinate or fails to follow the lawful instructions or directions from the board of directors or its designee, if such failure is
not cured; if curable, by Mr. Go after he has been given ten (10) days written notice of such failure; (v) any material breach of the employment
agreement by Mr. Go occurs, including but not limited to, a breach of the restrictive covenants set forth in Section 10 of the agreement, if such
breach is not cured, if curable, by Mr. Go after he has been given ten (10) days written notice of such breach; (vi) any acts of dishonesty are
committed by Mr. Go, resulting or intending to result in personal gain or enrichment at the expense of the Company, its subsidiaries or affiliates; or
(vii) Mr. Go fails to comply with a material policy of the Company, its subsidiaries or affiliates, if such failure is not cured, if curable, by Mr. Go
after he has been given ten (10) days written notice of such failure.
• Mr. Grube may be terminated for cause due to: (i) Mr. Grube’s willful and continuing failure (excluding as a result of his mental or physical
incapacity) to perform his duties and responsibilities with us; (ii) Mr. Grube’s having committed any act of material dishonesty against us or any of
our affiliates (including theft, misappropriation, embezzlement, forgery, fraud, or willful and intentional falsification of records or
misrepresentations); (iii) Mr. Grube’s willful and continuing material breach of the employment agreement; (iv) Mr. Grube’s having been convicted
of, or having entered a plea of nolo contendre to any felony; or (v) Mr. Grube’s having been the subject of any final and non-appealable order,
judicial or administrative, obtained or issued by the SEC, for any securities violation involving fraud, including, for example, any such order
consented to by Mr. Grube in which findings of facts or any legal conclusions establishing liability are neither admitted nor denied.
•
Change in Control. Messrs. Go and Grube’s agreements state that a change in control may occur upon any of the following events:
◦
◦
◦
any “person” or “group,” within the meaning of those terms as used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended, other than the Company or its Affiliates, or Fred M. Fehsenfeld Jr. or F. William Grube or their respective immediate families or
Affiliates, becomes the beneficial owner, by way or merger, consolidation, recapitalization, reorganization or otherwise, of 50% or more of the
voting power of the outstanding equity interests of the Company;
a person or entity other than the Company or an Affiliate of the Company becomes the general partner of the Company; or
the sale or other disposition, including by liquidation or dissolution, of all or substantially all of the assets of the Company in one or more
transactions to any person other than an Affiliate of the Company.
•
•
Good Reason. Mr. Go has the right to terminate employment under his employment agreement, upon the occurrence of any of the following
circumstances, without his prior consent: (i) material diminution in his total compensation opportunity in effect on the Go Effective Date; (ii)
material breach by us of any of our covenants or obligations under his agreement; (iii) material reduction in his authority, duties or responsibilities or
reporting relationship; (iv) the involuntary relocation of the geographic location of his principal place of employment by more than 100 miles from
the location of his principal place of employment as of the Go Effective Date; and (v) following a Change in Control (as defined in the agreement),
our failure to obtain an agreement from any successor to us to assume and agree to perform this agreement in the same manner and to the same
extent that we would be required to perform if no succession had taken place, except where such assumption occurs by operation of law; provided
however, that notwithstanding the foregoing provisions or any other provisions of his agreement to the contrary, any assertion by him of a
termination for Good Reason (as defined in his agreement) shall not be effective unless all of the following conditions are satisfied: (i) the conditions
described above giving rise to his termination of employment must have arisen without his consent; (ii) he must provide written notice to the board
of directors of the existence of such condition(s) within 30 days of the initial existence of such condition(s); (iii) the condition(s) specified in such
notice must remain uncorrected for 30 days following the board of directors’ receipt of such written notice; and (iv) the date of his termination of
employment must occur within 90 days after the initial existence of the condition(s) specified in such notice.
Good reason under Mr. Grube’s employment agreement includes: (i) any material breach by us of the employment agreement; (ii) any requirement
by us that Mr. Grube relocate outside of the metropolitan Indianapolis, Indiana area; (iii) failure of any successor to assume the employment
agreement not later than the date as of which it acquires substantially all of the equity, assets or business of us; (iv) any material reduction in Mr.
Grube’s title, authority, responsibilities, or duties (including a change that causes him to cease being a member of the board of directors or reporting
directly and
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solely to the board of directors); or (v) the assignment of Mr. Grube any duties materially inconsistent with his duties as our executive vice president.
Totally Disabled. Under Mr. Go’s employment agreement, we have the right to terminate his employment if he is unable to perform, with or without
reasonable accommodation, the essential functions of his position as a result of a physical or mental injury or illness for a period of (i) 90
consecutive days or (ii) 180 days in any one-year period.
Mr. Go’s employment agreement provides him with the opportunity to receive a transaction bonus upon the occurrence of certain company transactions
that must occur prior to the fifth anniversary of the date of his employment agreement (or September 14, 2020). Mr. Go may receive a transaction bonus (the
“Transaction Bonus”) of five percent (5%) of the excess, if any, of (i) the value realized by our general partner’s equity-holders upon a “Transaction Event”
over (ii) four hundred million dollars ($400,000,000), which amount shall (i) be increased by the amount of contributions to us by our general partner in the
event of equity offerings by us and (ii) exclude any value realized by our general partner’s equity-holders with respect to direct holdings of limited partner
interests in us. For purposes of Mr. Go’s employment agreement, “Transaction Event” means the first to occur of the following events: (i) any “person” or
“group” other than an affiliate of our general partner becomes the beneficial owner, by way of merger, consolidation, recapitalization, reorganization or
otherwise, of all or substantially all of the voting power of the outstanding equity interests of our general partner; (ii) the sale or other disposition, including
by liquidation or dissolution, of all or substantially all of the assets of our general partner in one or more transactions to any person other than an affiliate; (iii)
a conversion of all or substantially all of the Incentive Distribution Rights held by our general partner into our units; or (iv) a monetization of all or
substantially all of the partnership interests in a transaction not described in clauses (i) through (iii).
Upon a Change of Control, all outstanding awards granted pursuant to the Long-Term Incentive Plan shall automatically vest and be payable at their
maximum target level or become exercisable in full, as the case may be, or any restricted periods connected to the award shall terminate and all performance
criteria, if any, shall be deemed to have been achieved at the maximum level. We provided these “single-trigger” change of control benefits because we
believed such benefits were important retention tools for us, as providing for accelerated vesting of awards under the Long-Term Incentive Plan upon a
Change of Control enables employees, including the named executive officers, to realize value from these awards in the event that we go through a change of
control transaction. In addition, we believed that it was important to provide the named executive officers with a sense of stability, both in the middle of
transactions that may create uncertainty regarding their future employment and post-termination as they seek future employment. Whether or not a change of
control results in a termination of our officers’ employment with us or a successor entity, we wanted to provide our officers with certain guarantees regarding
the importance of equity incentive compensation awards they were granted prior to that change of control. Further, we believe that change of control
protection allows management to focus their attention and energy on the business transaction at hand without any distractions regarding the effects of a
change of control. Also, we believe that such protection maximizes unitholder value by encouraging the named executive officers to review objectively any
proposed transaction in determining whether such proposed transaction is in the best interest of our unitholders, whether or not the executive will continue to
be employed.
For purposes of the Long-Term Incentive Plan, a Change of Control shall be deemed to have occurred upon one or more of the following events: (i) any
person or group, other than a person or group who is our affiliate, becomes the beneficial owner, by way of merger, consolidation, recapitalization,
reorganization or otherwise, of fifty percent (50%) or more of the voting power of our outstanding equity interests; (ii) a person or group, other than our
general partner or one of our general partner’s affiliates, becomes our general partner; or (iii) the sale or other disposition, including by liquidation or
dissolution, of all or substantially all of our assets or the assets of our general partner in one or more transactions to any person or group other than an a
person or group who is our affiliate. However, in the event that an award is subject to Code Section 409A, a Change of Control shall have the same meaning
as such term in the regulations or other guidance issued with respect to Code Section 409A for that particular award.
Under the Long-Term Incentive Plan, awards that were outstanding as of December 31, 2019, will also accelerate upon a termination due to death,
disability or a normal retirement upon or after reaching the age of 66. The board of directors has the final authority to determine if a disability is permanent or
of a long-term duration resulting in termination from us. A “disability” per the terms of the Long-Term Incentive Plan grant means (i) a participant’s inability
to engage in any substantial gainful activity by reason of a physical or mental impairment that can be expected to result in death or can be expected to last for
a continuous period of 12 months, or (ii) the participant is, by reason of a physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of 12 months, receiving income replacement benefits for a period of not less than 3 months under one of our accident
and health plans. We have determined that providing acceleration of the Long-Term Incentive Plan awards upon a death or disability is appropriate because
the termination of a participant’s employment with us due to such an occurrence is often an unexpected event, and it is our belief that providing an immediate
value to the participant or his family, as appropriate, in such a situation is a competitive retention tool. We also believe that providing for acceleration upon a
normal retirement is appropriate due to the fact that the definition of a normal retirement requires an executive to remain employed with us until late in his
career, and the acceleration of their equity awards upon such an event provides the executives with a reassurance that they will receive value for their awards
at the end of their career. We have determined that it is in the unitholders’ best interest
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to provide such retention tools with respect to our equity compensation awards due to the fact that we strive to retain a high level of executive talent while
competing in a very aggressive industry.
Severance Arrangement with Mr. Griffin
We entered into a Transitional Severance Agreement and General Release with Mr. Griffin on October 27, 2019 (the “Severance Agreement”), which
governed certain aspects of his employment with us for the remainder of the 2019 year and until January 2, 2020 (the “Separation Date”), as well as the
severance benefits that he was entitled to receive upon his separation from service with us.
The Severance Agreement will provide Mr. Griffin with cash payments, subject to Mr. Griffin executing a general release and waiver in the Company’s
favor, totaling $1,065,000, to be paid in three separate installments through July 2020, the amount of which is equal to 12 months of his annual base salary
plus his target annual bonus amount. Any outstanding phantom unit awards that Mr. Griffin holds at the time of his separation from service will be treated in
accordance with the terms of our Long-Term Incentive Plan and the grant agreements governing those awards.
The Severance Agreement also subjects payment of the severance benefits described above to the requirement that Mr. Griffin continued to perform his
duties as Chief Financial Officer until December 31, 2019, during which time he also assisted us in providing a smooth transition to the new Chief Financial
Officer. From and after the Separation Date through June 30, 2020, Mr. Griffin will provide up to 80 hours of assistance to the Company at no additional cost
to us. In the event that we desire Mr. Griffin to provide additional services following his satisfaction of the original 80 hours, we will pay him an hourly rate
of $505 per hour for his services, plus any reasonable expenses.
The Severance Agreement requires Mr. Griffin to comply with standard confidentiality and non-disparagement provisions. The Severance Agreement has
no impact on any restrictive covenants that were contained within any agreement previously entered into between the parties (including any employment
agreements).
The Deferred Compensation Plan provides the executives with the opportunity to defer all or a portion of their eligible compensation each year. At the
time of their deferral election, the executive may choose a day in the future in which a payout from the plan will occur with regard to their vested account
balance, or, if earlier, the payout of vested accounts will occur upon the executive’s termination from service for any reason. Despite the executive’s payout
election date, however, the Deferred Compensation Plan accounts will also receive accelerated vesting and a pay out in the event of the executive’s
termination from service due to death, disability or normal retirement, or upon the occurrence of a Change of Control.
A “disability” under the Deferred Compensation Plan means (i) a participant’s inability to engage in any substantial gainful activity by reason of a
physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of 12 months, or (ii) the participant is,
by reason of a physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of 12 months, receiving
income replacement benefits for a period of not less than 3 months under one of our accident and health plans. A “normal retirement” means a participant’s
termination of employment on or after the date that he or she reaches the age of 66.
There are various connections between the Deferred Compensation Plan and the Long-Term Incentive Plan. A “Change of Control” for the Deferred
Compensation Plan shall have the same definition as that term within the Long-Term Incentive Plan noted above. Our compensation committee also has the
discretion to pay Deferred Compensation Plan accounts in either cash or our common units. In the event that a Deferred Compensation Plan account is settled
in our common units, those units will be issued pursuant to the Long-Term Incentive Plan. For purposes of this disclosure we have assumed that the
compensation committee would determine to settle the Deferred Compensation Plan accounts solely in our common units, meaning that the amounts below
would reflect the fair market value of common units that could be issued pursuant to the Long-Term Incentive Plan in connection with a termination of
employment or a Change of Control. Please note that the compensation committee’s decision regarding such a settlement could not be determined with any
certainty until such an event actually occurred.
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The table below reflects the amount of compensation payable to our named executive officers in the event of a termination of employment or a change in
control of the Company on December 31, 2019. For purposes of calculating the potential payments, we have made certain assumptions that we have
determined to be reasonable and relevant to our unitholders.
Name
Benefits
Termination by Us
Without Cause, or
Good Reason
Termination by
Executive
Termination by Us
for Cause, or
Without Good
Reason
Termination by
Executive
Termination by Us
Without Cause, or
Good Reason
Termination, in
Connection with a
Change in Control
Termination Due
to Death or
Disability
Change in
Control
Base Salary (1)
$
900,000 $
Compensation Incentive Awards (2)
Long-Term Incentive Plan (3)
Timothy Go
Deferred Compensation Plan (4)
Post-Employment Health Care (5)
Outplacement Assistance (6)
Total
Long-Term Incentive Plan (3)
Deferred Compensation Plan (4)
Total
Long-Term Incentive Plan (3)
Deferred Compensation Plan (4)
Total
Base Salary (1)
D. West
Griffin
Bruce A.
Fleming
F. William
Grube
Christopher
Bohnert
Compensation Incentive Awards (2)
Long-Term Incentive Plan (3)
Deferred Compensation Plan (4)
Total
Long-Term Incentive Plan (3)
Total
1,350,000
1,702,053
—
30,015
50,000
— $
—
1,551,250
—
—
—
1,800,000 $
— $
2,700,000
1,702,053
450,687
40,020
50,000
900,000
1,702,053
450,687
—
—
—
—
1,702,053
450,687
—
—
$
$
$
$
$
$
$
$
$
4,032,068 $
1,551,250 $
6,742,760 $
3,052,740 $
2,152,740
775,625
$
775,625
$
775,625
$
775,625
$
—
775,625 $
518,337
$
—
—
142,208
142,208
775,625 $
387,813
$
917,833 $
917,833 $
518,337
$
518,337
$
—
399,503
399,503
518,337 $
387,813 $
917,840 $
917,840 $
1,363,089 $
— $
1,363,089 $
— $
227,182
78,840
—
1,669,111 $
210,517
$
210,517 $
—
—
—
— $
— $
— $
227,182
78,840
132,090
1,801,201 $
210,517
$
210,517 $
227,182
78,840
132,090
438,112 $
210,517
$
210,517 $
775,625
142,208
917,833
518,337
399,503
917,840
—
—
78,840
132,090
210,930
210,517
210,517
(1) As per his employment agreement, Mr. Go will receive three times his base salary if a qualifying termination occurs within twenty-four months
following a Change in Control (“Change in Control Period”) or 1.5 times his base salary if the qualifying termination occurs at any time other than
the Change in Control Period and Mr. Grube will receive three times his base salary for a qualifying termination whether or not in connection with a
Change in Control.
(2) As per their employment agreements, for termination due to death or disability, Messrs. Go and Grube will be entitled to receive a pro rata portion of
any incentive compensation awards for the bonus year in which the termination occurs. For termination for good reason by the executive or by us
without cause, Mr. Go will be entitled to 3 times his cash incentive bonus if a qualifying termination occurs with the Change in Control Period or 1.5
times his cash incentive bonus if the termination occurs at any time other than the Change in Control Period and Mr. Grube will be entitled to receive
a pro rata portion of any compensation incentive awards for the bonus year in which the termination occurs. For termination without good reason by
executive or by us with cause, Mr. Go will not be entitled to any pro rata portion of incentive compensation awards, although Mr. Grube’s pro-rata
bonus is considered to be part of the accrued obligations that he would receive upon a termination for any reason. Assuming a termination on
December 31, 2019, amounts have been calculated assuming that the entire 2019 bonus award would be payable for the 2019 year. Mr. Go is also
entitled to receive the Transaction Bonus, as described further above, in the event of certain transactions. Solely for the purposes of this table, we
have assumed the Transaction Bonus amount would be equal to $0 as no such transaction has taken place as of December 31, 2019 and the amount
cannot be estimated with any certainty.
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(3) All amounts assume that the executives received full vesting of equity awards due to the applicable qualifying termination or Change in Control
event, or in the event of termination for cause, settlement of awards that had previously vested. The value of all phantom units pursuant to equity
awards under the Long-Term Incentive Plan were valued at our December 31, 2019, closing common unit price of $3.65. As required pursuant to
Section 409A of the Code, in the event that any of the executives are also “key employees” as defined in Section 409A of the Code at the time a
settlement would become due, we would delay the settlement of such an executive’s equity awards until the first day of the seventh month following
the applicable event requiring settlement of equity awards under the Long-Term Incentive Plan. Amounts include fully vested awards related to
performance unit awards and strategic unit awards granted to Messrs. Go and Fleming in 2017 but which could not be paid out until a termination of
employment or change in control.
(4) Amounts assume that the executives received full vesting of the Deferred Compensation Plan accounts due to the applicable qualifying termination
(death, disability, or normal retirement) or Change in Control event. All vested amounts will also receive accelerated distribution upon a qualifying
termination or a Change in Control event, therefore the columns “Termination by Us Without Cause, or Good Reason Termination, in Connection
with a Change in Control,” “Change in Control” and “Termination Due to Death and Disability” also include vested account balances that would be
distributed upon the applicable triggering event. None of our named executive officers was normal retirement age (66 for purposes of the Deferred
Compensation Plan) as of December 31, 2019, therefore none of the named executive officers were eligible to receive the distribution of his vested
Deferred Compensation Plan account upon a termination event in addition to the columns reflected in the table above. The value of all phantom units
held in the Deferred Compensation Plan accounts was valued at our December 31, 2019, closing common unit price of $3.65. As required pursuant
to Section 409A of the Code, in the event that any of the executives are also “key employees” as defined in Section 409A of the Code at the time a
settlement would become due, we would delay the settlement of such an executive’s account until the first day of the seventh month following the
applicable event requiring settlement of the Deferred Compensation Plan account. As of December 31, 2019, the 50% portion of the 2019 Cash
Incentive Awards that were required to be deferred were still deemed to be outstanding equity awards, and not part of the Deferred Compensation
Plan accounts.
(5) Per the employment agreement of Mr. Go, in connection with certain qualifying terminations, if the executive timely and properly elects continuation
coverage under the Company’s group health plans pursuant to the Consolidated Omnibus Reconciliation act of 1985 (“COBRA”) then: (i) the
Company shall reimburse the executive for the difference between the monthly amount the executive pays to effect and continue such coverage for
himself and spouse and eligible dependents, if any, and the monthly employee contribution amount that active similarly situated employees of the
Company pay for the same or similar coverage under such group health plans; and (ii) on and after the date the executive is no longer eligible to
receive COBRA continuation coverage, if the executive has not become eligible to receive coverage under a group health plan sponsored by another
employer, then the Company shall pay a lump sum cash payment equal to the product of (x) the monthly reimbursement amount and (y) (A) if such
termination does not occur within the Change of Control Period, 18 and (B) if such termination occurs within the Change in Control Period, 24.
(6) Per the employment agreement for Mr. Go, in connection with certain qualifying terminations, for the 12-month period beginning on his termination
date, or until the executive begins other full-time employment with a new employer, whichever occurs first, the executive shall be entitled to receive
outplacement services that are directly related to the termination of the executive’s employment and are provided by a nationally prominent
executive outplacement services firm, provided however, that the total amount of the expenses paid by Company shall not exceed $50,000. A
maximum payment is assumed to be made.
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Compensation of Directors
Officers or employees of our general partner who also serve as directors do not receive additional compensation for their service as a director of our
general partner. Each director who is not an officer or employee of our general partner receives an annual fee as well as compensation for attending meetings
of the board of directors and board committee meetings. Non-employee directors were entitled to fees and equity awards for 2019 that consisted of the
following:
•
•
•
•
•
•
•
•
•
•
an annual fee of $70,000;
an annual equity award in the form of restricted or phantom units, valued at approximately $100,000;
an audit and finance committee chair annual fee of $20,000;
a non-chair audit and finance committee member annual fee of $10,000;
a strategy and growth committee chair annual fee of $10,000;
a non-chair strategy and growth committee annual fee of $5,000;
a conflicts committee and compensation committee chair annual fee of $8,000;
a non-chair conflicts committee and compensation committee annual fee of $4,000;
all other committee chair annual fee of $5,000; and
all other committee member annual fee of $2,500.
In addition, we reimburse each non-employee director for his or her out-of-pocket expenses incurred in connection with attending meetings of the board
of directors or board committees. Under certain circumstances, we will also indemnify each director for his or her actions associated with being a director to
the fullest extent permitted under Delaware law.
The following table sets forth certain compensation information of our non-employee directors for the year ended December 31, 2019:
Name
Fred M. Fehsenfeld, Jr.
James S. Carter
Robert E. Funk
Stephen P. Mawer
Daniel J. Sajkowski
Amy M. Schumacher
Daniel L. Sheets
Director Compensation Table for 2019
Fees Earned or
Paid in Cash
Unit
Awards (1)
Total
$
$
$
$
$
$
$
— $
— $
35,814 $
— $
— $
— $
— $
179,003 $
193,997 $
147,753 $
195,502 $
177,501 $
179,003 $
182,500 $
179,003
193,997
183,567
195,502
177,501
179,003
182,500
(1) The amounts in this column are calculated based on the aggregate grant date fair value of (i) annual phantom unit awards to all non-employee
directors, (ii) cash fees paid in the form of phantom unit awards (“Director Fee” awards) and (iii) matching phantom unit awards granted to those
non-employee directors who deferred all of the fees they earned in 2019 pursuant to the Deferred Compensation Plan (“Matching Units”). The
amounts reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718, disregarding the estimate of forfeitures.
Please read Note 14 to our consolidated financial statements for the fiscal year ending December 31, 2019 for a discussion of the assumptions used
to determine the FASB ASC Topic 718 value of the awards.
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Annual Phantom Unit Awards
The number of phantom units granted during 2019 with respect to annual grants, Director Fees and Matching Units are disclosed in the table below.
Fred M. Fehsenfeld, Jr.
James S. Carter
Robert E. Funk
Stephen P. Mawer
Daniel J. Sajkowski
Amy M. Schumacher
Daniel L. Sheets
Grant Date
May 7, 2019
August 6, 2019
November 4, 2019
November 6, 2019
May 7, 2019
August 6, 2019
November 4, 2019
November 6, 2019
May 7, 2019
August 6, 2019
November 4, 2019
November 6, 2019
May 7, 2019
August 6, 2019
November 4, 2019
November 6, 2019
May 7, 2019
August 6, 2019
November 4, 2019
November 6, 2019
May 7, 2019
August 6, 2019
November 4, 2019
November 6, 2019
May 7, 2019
August 6, 2019
November 4, 2019
November 6, 2019
Annual Director Phantom Unit Awards
Number of Units
Granted (#) (1)
Number of Matching
Units Granted (#) (2)
Aggregate Grant
Date Fair Value
5,471
4,193
5,692
28,409
6,510
4,989
6,772
28,409
3,307
2,535
3,440
28,409
6,614
5,069
6,880
28,409
5,367
4,114
5,584
28,409
5,471
4,193
5,692
28,409
5,713
4,379
5,944
28,409
1,824
1,398
1,897
—
2,170
1,663
2,257
—
1,102
845
1,147
—
2,205
1,690
2,293
—
1,789
1,371
1,861
—
1,824
1,398
1,897
—
1,904
1,460
1,981
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
26,335
26,334
26,334
100,000
31,335
31,331
31,331
100,000
15,916
15,920
15,917
100,000
31,837
31,835
31,830
100,000
25,833
25,834
25,834
100,000
26,335
26,334
26,334
100,000
27,498
27,502
27,500
100,000
(1) This column represents both the annual phantom unit award and Director Fees grant. With respect to the annual phantom unit award, 25% of the
phantom units vested immediately, entitling the director to receive an equal number of common units, with an additional 25% vesting on
December 31st of each of the three successive years. With respect to the Director Fees grant, all phantom units vest on the third December 31st after
the grant date.
(2) With respect to the Matching Units, the phantom units will vest on the third December 31st after the grant date.
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The following table summarizes the aggregate balance of each director’s phantom unit awards as of December 31, 2019:
Fred M. Fehsenfeld, Jr.
James S. Carter
Robert E. Funk
Stephen P. Mawer
Daniel J. Sajkowski
Amy M. Schumacher
Daniel L. Sheets
Annual Director Phantom Unit Awards
Number of Units That
Have Not Vested
Market Value of Units
That Have Not Vested (1)
71,248
79,129
77,979
78,010
70,268
72,236
20,852
$
$
$
$
$
$
$
260,055
288,821
284,623
284,737
256,478
263,661
76,110
(1) The market value of each director’s unvested phantom units as of December 31, 2019 was determined by multiplying all unvested phantom units by
the closing price of our common units on December 31, 2019, which was $3.65.
Deferred Compensation Plan
Our directors were eligible to defer their fees earned into the Deferred Compensation Plan. When directors elect to defer any portion of their
compensation into the plan, these deferred amounts are credited to the participant in the form of phantom units, and will receive DERs to be credited to the
participant’s account in the form of additional phantom units on the corresponding dates of our distributions to our unitholders. The compensation committee
may recommend a matching contribution for the deferred fees at its discretion. Phantom units credited to a participant’s account pursuant to matching
contributions also carry DERs to be credited to the participant’s account in the form of additional phantom units.
The following table summarizes the aggregate balance of each director’s Deferred Compensation Plan account at the end of the fiscal year:
Director Nonqualified Deferred Compensation Table for 2019
Name
Fred M. Fehsenfeld, Jr.
James S. Carter
Robert E. Funk
Stephen P. Mawer
Daniel J. Sajkowski
Amy M. Schumacher
Daniel L. Sheets
Number of Units
Aggregate
Balance at end
of 2019 (1)
76,979
88,144
62,263
24,751
45,195
48,839
21,381
$
$
$
$
$
$
$
280,973
321,726
227,260
90,341
164,962
178,262
78,041
(1) The dollar amount of each director’s account as of December 31, 2019 was determined by multiplying all phantom units deemed to be included in
the director’s account by the closing price of our common units on December 31, 2019, which was $3.65.
Compensation Committee Interlocks and Insider Participation
The members of our compensation committee are Stephen P. Mawer, Fred M. Fehsenfeld, Jr. and Amy M. Schumacher. Mr. Fehsenfeld, Jr. is the
chairman of the board of our general partner. Mr. Mawer is a member of the board of our general partner. Ms. Schumacher is a member of the board of our
general partner. Please read Item 13 “Certain Relationships and Related Transactions and Director Independence” for descriptions of our transactions in fiscal
year 2019 with certain entities related to Messrs. Fehsenfeld and Mawer and Ms. Schumacher. Mr. Fehsenfeld and Ms. Schumacher are not independent
members of the compensation committee. No executive officer of our general partner served as a member of the compensation committee of another entity
that had an executive officer serving as a member of our board of directors or compensation committee.
Risk Considerations in our Overall Compensation Program
Our compensation policies and practices are designed to provide rewards for generating cash flows, reducing debt leverage and growing our business.
Currently, our incentive compensation programs are based on performance, at the Company level,
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relative to goals we set for Adjusted EBITDA. In our assessment of risk related to such use of a single financial performance metric, we considered the
relative difficulty for any employee to engage in an undue amount of risk-taking activity with a result that would be reasonably likely to have a material
adverse effect on us due to the breadth and scope of activities, both operational and financial, across that organization that are captured in the calculation of
Adjusted EBITDA. Also, we considered the current approval controls that exist to mitigate against excessive risk-taking that might impact Adjusted EBITDA
and, in turn, our compensation programs. For example, we have specific approval policies related to the entry into derivative instruments, material
commercial agreements and material capital expenditures. Also, our full board of directors, as well as through the actions of its various committees, regularly
assesses our key risk areas to monitor the impacts of such risks on our financial performance. Further, we considered the design of our incentive
compensation programs, noting that the inclusion of both shorter-term cash incentive awards and longer-term unit awards further align the interest our
employees and our unitholders. As a result of these considerations, we have concluded that the risks arising from our compensation policies and practices for
our employees are not reasonably likely to have a material adverse effect on us.
CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are
providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of Timothy
Go, our Chief Executive Officer (“CEO”).
The employees providing services to us are provided by Calumet GP, LLC, our general partner, as we do not have any employees for purposes of the pay
ratio rules. Rather than providing a pay ratio disclosure that contemplates no employees, we have determined that the disclosure that would be most aligned
with the spirit of the pay ratio rules and that would provide our unitholders with more meaningful information would be to provide a ratio using the median
employee from general partner’s employee population. References to “our” employees below therefore refer to the employees of our general partner.
For 2019, our last completed fiscal year:
•
•
•
The median of the annual total compensation of all employees of our general partner (other than the CEO) was $83,230;
The annual total compensation of the CEO, as reported in the Summary Compensation Table included elsewhere within this Annual Report, was
$1,486,139; and
Based on this information, for 2019 the ratio of the annual total compensation of Mr. Go to the median of the annual total compensation of all
employees was approximately 18 to 1.
To identity the median of the annual total compensation of all our general partner’s employees, as well as to determine the annual total compensation of
our general partner’s median employee and the CEO, we took the following steps:
• We determined that, as of December 31, 2019, our general partner’s employee population consisted of approximately 1,500 individuals with all of
these individuals located in the United States. This population consisted of our full-time, part-time, and temporary employees, as we do not have
seasonal workers.
• We selected December 31, 2019 as our identification date for determining our median employee compensation.
• We used a consistently applied compensation measure to identify the median employee by comparing the amount of salary or wages and bonuses
reflected in our general partner’s payroll records as reported to the Internal Revenue Service on Form W-2 for 2019. We did not annualize the
compensation for any employees that were not employed by our general partner for all of 2019.
• We do not widely distribute annual equity awards to employees, therefore such awards were excluded from our compensation measure.
• We identified our general partner’s median employee by consistently applying this compensation measure to all of our employees included in our
analysis. Since all of our general partner’s employees, including the CEO, are located in the United States, we did not make any cost of living
adjustments in identifying the median employee.
•
After we identified our general partner’s median employee, we combined all of the elements of such employee’s compensation for the 2019 year in
accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $83,230. The difference between
such employee’s salary, wages and overtime pay and the employee’s annual total compensation represents contributions in the amount of $(4,230)
that we made on the employee’s behalf to our 401(k) plan for the 2019 year and to the employee’s health savings account for the 2019 year.
• With respect to the annual total compensation of the CEO, we used the amount reported in the “Total” column of our 2019 Summary Compensation
Table included in this Annual Report.
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Item 12. (cid:0)
The following table sets forth the beneficial ownership of our units as of March 4, 2020, held by:
•
•
•
•
each person who beneficially owns 5% or more of our outstanding units;
each director of our general partner;
each named executive officer of our general partner; and
all directors and executive officers of our general partner as a group.
The amounts and percentages of units beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,”
which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a
beneficial owner of securities as to which he or she has no economic interest.
Except as indicated by footnote, the persons named in the table below have sole voting and investment power with respect to all units shown as
beneficially owned by them, subject to community property laws where applicable. Except as indicated by footnote, the address for the beneficial owners
listed below is 2780 Waterfront Parkway East Drive, Suite 200, Indianapolis, Indiana, 46214.
Name of Beneficial Owner
The Heritage Group (1)(2)
Calumet, Incorporated (2)
Adams Asset Advisors, LLC (3)
James S. Carter
Fred M. Fehsenfeld, Jr. (1)(2)(4)(5)
Bruce A. Fleming
Robert E. Funk
Timothy Go
D. West Griffin
F. William Grube (6)
Christopher Bohnert
Stephen P. Mawer
Daniel J. Sajkowski
Amy M. Schumacher (1)(5)(6)
Daniel L. Sheets
Common Units
Beneficially
Owned
11,867,533
1,934,287
4,178,677
Percentage of
Total Units
Beneficially
Owned
15.25%
2.49%
5.37%
168,503
752,559
286,079
118,564
247,208
97,860
234,123
11,807
76,492
64,830
74,530
3,906
*
*
*
*
*
*
*
*
*
*
*
*
All directors and executive officers as a group (14 persons)
2,192,513
2.82%
*
= less than 1 percent.
(1) Twenty-nine grantor trusts indirectly own all of the outstanding general partner interests in The Heritage Group, an Indiana general partnership. The
direct or indirect beneficiaries of the grantor trusts are members of the Fehsenfeld family. Each of the grantor trusts has five trustees, Fred M.
Fehsenfeld, Jr., James C. Fehsenfeld, Nicholas J. Rutigliano, William S. Fehsenfeld and Amy M. Schumacher, each of whom exercises equivalent
voting rights with respect to each such trust. Each of Fred M. Fehsenfeld, Jr. and Amy M. Schumacher, who are directors of our general partner,
disclaims beneficial ownership of all of the common units owned by The Heritage Group, and none of these units are shown as being beneficially
owned by such directors in the table above. Of these common units, 367,197 are owned by The Heritage Group Investment Company, LLC
(“Investment LLC”). Investment LLC is under common ownership with The Heritage Group. The Heritage Group, although not the owner of the
common units, serves as the Manager of Investment LLC, and in that capacity has sole voting and investment power over the common units. The
Heritage Group disclaims beneficial ownership of the
167
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common units owned by Investment LLC except to the extent of its pecuniary interest therein. The address for The Heritage Group is 5400 W. 86th
St., Indianapolis, Indiana, 46268.
(2) The common units of Calumet, Incorporated are indirectly owned 45.8% by The Heritage Group and 5.1% by Fred M. Fehsenfeld, Jr. personally.
Fred M. Fehsenfeld, Jr. is also a director of Calumet, Incorporated. Accordingly, 885,294 of the common units owned by Calumet, Incorporated are
also shown as being beneficially owned by The Heritage Group in the table above, and 97,971 of the common units owned by Calumet, Incorporated
are also shown as being beneficially owned by Fred M. Fehsenfeld, Jr. in the table above. The Heritage Group and Fred M. Fehsenfeld, Jr. disclaim
beneficial ownership of all of the common units owned by Calumet, Incorporated in excess of their respective pecuniary interests in such units. The
address of Calumet, Incorporated is 5400 W. 86th St., Indianapolis, Indiana, 46268.
(3) As noted in the Schedule 13G filed with the SEC on January 8, 2020, the filing person has indicated that it has or shares beneficial ownership of such
units. The address for Adams Asset Advisors, LLC is 8150 N. Central Expwy #M1120, Dallas, Texas 75206.Includes common units that are owned
by the spouse and certain children of Fred M. Fehsenfeld, Jr., for which he disclaims beneficial ownership.
(4) Does not include a total of 1,979,804 common units owned by two trusts, the direct or indirect beneficiaries of which are members of the Fred M.
Fehsenfeld, Jr. family. Each of the trusts has five trustees, Fred M. Fehsenfeld, Jr., James C. Fehsenfeld, Nicholas J. Rutigliano, William S.
Fehsenfeld and Amy M. Schumacher, each of whom exercises equivalent voting rights with respect to each such trust. Each of Fred M. Fehsenfeld,
Jr. and Amy M. Schumacher, who are directors of our general partner, disclaims beneficial ownership of all of the common units owned by the trusts,
and none of these units are shown as being beneficially owned by such directors in the table above.
(5)
(6)
Includes common units that are owned by the spouse of F. William Grube, for which he disclaims beneficial ownership.
Includes common units that are owned by the spouse and children of Amy M. Schumacher, for which she disclaims beneficial ownership.
Equity Compensation Plan Information
The following table summarizes information about our equity compensation plans as of December 31, 2019:
Number of Securities
to be Issued Upon
Exercise of Outstanding
Options, Warrants
and Rights (1)(2)
Weighted-Average
Exercise Price
of Outstanding
Options, Warrants
and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected
in Column (a)) (2)
Long-Term Incentive Plan
Total
1,021,102 $
1,021,102 $
—
—
542,320
542,320
(1) The Long-Term Incentive Plan contemplates the issuance or delivery of up to 3,883,960 common units to satisfy awards under the plan. The number
of units presented in column (a) assumes that all outstanding grants may be satisfied by the issuance of new units or the purchase of existing units on
the open market upon vesting. In fact, some portion of the phantom units may be settled in cash and some portion will be withheld for taxes. Any
units not issued upon vesting will become “available for future issuance” under Column (c). For more information on our Long-Term Incentive Plan,
please read Item 11 “Executive and Director Compensation — Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based
Awards Table — Description of Long-Term Incentive Plan.”
(2) As of December 31, 2019, the Company has determined the equity-classified performance units are likely to be settled in cash and have reclassified
these as liability awards. Liability classified awards are not included in this calculation. As of December 31, 2019, we determined that certain units
classified as equity awards as of December 31, 2018 are likely to be settled in cash and, as a result, we have reclassified them as liability awards.
Item 13. (cid:0)
Distributions and Payments to Our General Partner and its Affiliates
Owners of our general partner and their affiliates own 16,449,981 common units representing an approximately 21.0% limited partner interest in us. In
addition, our general partner owns a 2% general partner interest in us and all of the incentive distribution rights. Our general partner is entitled to receive
incentive distributions if the amount we distribute with respect to any quarter exceeds levels specified in our partnership agreement. Under the quarterly
incentive distribution provisions, generally our general
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partner is entitled, without duplication, to 15% of amounts we distribute in excess of $0.495 ($1.98 annualized) per unit, 25% of the amounts we distribute in
excess of $0.563 ($2.25 annualized) per unit and 50% of amounts we distribute in excess of $0.675 ($2.70 annualized) per unit. We suspended distributions in
April 2016. Please read Part II, Item 5 “Market for Registrant’s Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities —
Market Information” for additional information related to our distribution policy and the incentive distribution rights.
Our general partner does not receive any management fee or other compensation for its management of our partnership; however, our general partner and
its affiliates are reimbursed for all expenses incurred on our behalf. These expenses include the cost of employee, officer and director compensation and
benefits properly allocable to us and all other expenses necessary or appropriate to the conduct of our business and allocable to us. The partnership agreement
provides that our general partner determines the expenses that are allocable to us. There is no limit on the amount of expenses for which our general partner
and its affiliates may be reimbursed.
Omnibus Agreement
We entered into an omnibus agreement, dated January 31, 2006, with The Heritage Group and certain of its affiliates pursuant to which The Heritage
Group and its controlled affiliates agreed not to engage in, whether by acquisition or otherwise, the business of refining or marketing specialty lubricating
oils, solvents and wax products as well as gasoline, diesel and jet fuel products in the continental U.S. (“restricted business”) for so long as The Heritage
Group controls us. This restriction does not apply to:
•
•
•
•
•
•
•
any business owned or operated by The Heritage Group or any of its affiliates as of January 31, 2006;
the refining and marketing of asphalt and asphalt-related products and related product development activities;
the refining and marketing of other products that do not produce “qualifying income” as defined in the Internal Revenue Code;
the purchase and ownership of up to 9.9% of any class of securities of any entity engaged in any restricted business;
any restricted business acquired or constructed that The Heritage Group or any of its affiliates acquires or constructs that has a fair market value or
construction cost, as applicable, of less than $5.0 million;
any restricted business acquired or constructed that has a fair market value or construction cost, as applicable, of $5.0 million or more if we have
been offered the opportunity to purchase it for fair market value or construction cost and we decline to do so with the concurrence of the conflicts
committee of the board of directors of our general partner; and
any business conducted by The Heritage Group with the approval of the conflicts committee of the board of directors of our general partner.
Employee Costs
Our general partner employs all of our employees and we reimburses the general partner for certain of its expenses.
Product Sales and Related Purchases
During 2019, we made ordinary course sales of certain specialty products to Monument Chemicals, Inc. (“Monument Chemicals”), a specialty chemical
company owned in part by The Heritage Group. Amy M. Schumacher is president of Monument Chemicals. The total purchases made by us from Monument
Chemicals in 2019 for product purchases was approximately $0.2 million. The total sales made by us to Monument Chemicals in 2019 were approximately
$8.1 million. As of December 31, 2019, there was approximately $0.9 million due to us from Monument Chemicals related to these products sales. We
anticipate that we will continue to sell products to Monument Chemicals in the future. We believe that the product sales prices and credit terms offered to
Monument Chemicals are comparable to prices and terms offered to non-affiliated third-party customers.
During 2019, we made ordinary course purchases of certain services from Heritage-Crystal Clean Inc. (“Crystal Clean”), a cleaning and waste removal
company owned in part by The Heritage Group and Fred M. Fehsenfeld, Jr. as an individual. The total purchases made by us from Crystal Clean in 2019 for
cleaning and waste removal services were approximately $1.7 million. As of December 31, 2019, there was an approximately $0.1 million balance due from
us to Crystal Clean related to these purchases. We expect that we will continue to utilize these services from Crystal Clean in the future. During 2019, we
made ordinary course sales of certain specialty products to Crystal Clean. The total sales made by us to Crystal Clean in 2019 for certain specialty products
were approximately $0.2 million. We anticipate that we will continue to sell products to Crystal Clean in the future. We believe that the product sales prices
and credit terms offered to Crystal Clean are comparable to prices and terms offered to non-affiliated third-party customers.
During 2019, we made ordinary course purchases from Heritage Environmental Services (“Heritage Environmental”), a cleaning and waste removal
company owned in part by The Heritage Group and Fred M. Fehsenfeld, Jr. as an individual. Total purchases made by us from Heritage Environmental in
2019 for cleaning and waste removal services were approximately $8.4
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million. As of December 31, 2019, there was a $2.7 million balance due from us to Heritage Environmental related to these purchases. We expect that we will
continue to utilize these services from Heritage Environmental in the future.
During 2019, we made ordinary course sales of certain specialty products to Heritage Advanced Products, LLC (“Heritage Advanced”), a specialty
chemical company owned in part by The Heritage Group. The total sales made by us to Heritage Advanced in 2019 were approximately $0.1 million. As of
December 31, 2019, there was an immaterial balance due us from Heritage Advanced related to these products sales. We anticipate that we will continue to
sell products to Heritage Advanced in the future. We believe that the product sales prices and credit terms offered to Heritage Advanced are comparable to
prices and terms offered to non-affiliated third-party customers.
During 2019, we made payments to Asphalt Materials, Inc., an affiliate of The Heritage Group (“Asphalt Materials”), for expenses related to the business
use of The Heritage Group’s company plane by our senior executive officers and for consulting services provided to us by Asphalt Materials. The aggregate
payments for these services made by us to Asphalt Materials in 2019 was approximately $0.4 million. We believe that the costs of the services provided to us
by Asphalt Materials are comparable to costs charged by non-affiliated third-party suppliers of similar services. We expect that we will continue to utilize
these services from Asphalt Materials in the future. During 2019, we made ordinary course sales of certain fuel products to Asphalt Materials of $8.2 million.
As of December 31, 2019, there was an approximately $0.9 million balance due to us from Asphalt Materials related to these products sales. We anticipate
that we will continue to sell products to Asphalt Materials in the future. We believe that the product sales prices and credit terms offered to Asphalt Materials
are comparable to prices and terms offered to non-affiliated third-party customers.
During 2019, we made ordinary course sales of certain fuel products to Western States Asphalt, Inc., an affiliate of The Heritage Group (“Western
States”), of $23.6 million. We anticipate that we will continue to sell products to Western States in the future. We believe that the product sales prices and
credit terms offered to Western States are comparable to prices and terms offered to non-affiliated third-party customers.
Product Collaboration
During 2018, we entered into an agreement with The Heritage Group that will allow us to use The Heritage Group’s research facilities, equipment and
supplies in exchange for a portion of the profit from new products developed. Our employees use the research facility on a regular basis and some of our
equipment is located in the research facility. The agreement allows for joint projects with The Heritage Group in which both parties would share in the profit
of new products developed. There were approximately $0.6 million profit sharing expenses in 2019. As of December 31, 2019, there was a $0.2 million
balance due from us to The Heritage Group related to these expenses.
During 2019, the Company entered into a Master Reimbursement Agreement with The Heritage Group whereby The Heritage Group may incur or pay
certain fees, expenses or obligations on behalf of the Company, and the Company shall reimburse The Heritage Group for such incurrences or payments in
either cash or common units of the Company, subject to a limit of 4.0 million units valued at $3.60 per unit. As of December 31, 2019, the Company has
accrued approximately $3.8 million for expenses incurred by The Heritage Group on behalf of the Company. The Heritage Group elected cash
reimbursement, with no further payment obligations in regard to the Master Reimbursement Agreement. Consistent with The Heritage Group’s election, this
triggered the obligation to be settled based upon the terms of the agreement in January 2020.
Acquisition
On March 23, 2018, we along with The Heritage Group acquired Biosynthetic Technologies, LLC (“Biosynthetic Technologies”), a startup company
which developed an intellectual property portfolio for the manufacture of renewable-based and biodegradable esters for $7.0 million. The purchase price was
split 50/50 between us and The Heritage Group. We intend to develop and commercialize the renewable esters and is designing a commercial scale test at our
existing esters manufacturing plant in Missouri.
In March 2019, the Company sold its investment in Biosynthetic Technologies to The Heritage Group for total proceeds of $5.0 million which was
recorded in the “other” component of other income (expense) on the consolidated statements of operations.
Procedures for Review and Approval of Related Person Transactions
Effective February 9, 2007, to further formalize the process by which related person transactions are analyzed and approved or disapproved, the board of
directors of our general partner has adopted the Calumet Specialty Products Partners, L.P. Related Person Transactions Policy (the “Policy”) to be followed in
connection with all related person transactions (as defined by the Policy) involving the Company and its subsidiaries. The Policy was adopted to provide
guidelines and procedures for the application of the partnership agreement to related person transactions and to further supplement the conflict resolution
policies already set forth therein.
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The Policy defines a “related person transaction” to mean any transaction since the beginning of the Company’s last fiscal year (or any currently
proposed transaction) in which: (i) the Company or any of its subsidiaries was or is to be a participant; (ii) the amount involved exceeds $120,000 (including
any series of similar transactions exceeding such amount on an annual basis); and (iii) any related person (as defined in the Policy) has or will have a direct or
indirect material interest. Under the terms of the policy, our general partner’s chief executive officer (“CEO”) has the authority to approve a related person
transaction (considering any and all factors as the CEO determines in his sole discretion to be relevant, reasonable or appropriate under the circumstances) so
long as it is:
(a)
in the normal course of the Company’s business;
(b) not one in which the CEO or any of his immediate family members has a direct or indirect material interest; and
(c) on terms no less favorable to the Company than those generally being provided to or available from unrelated third parties or fair to the Company,
taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or
advantageous to the Company).
The CEO does not have the authority to approve the issuances of equity or grants of awards under the Company’s Long-Term Incentive Plan, except as
provided in that plan. Pursuant to the Policy, any other related person transaction must be approved by the conflicts committee acting in accordance with the
terms and provisions of its charter.
A copy of the Policy is available on our website at www.calumetspecialty.com and will be provided to unitholders without charge upon their written
request to: Investor Relations, Calumet Specialty Products Partners, L.P., 2780 Waterfront Parkway E. Drive, Suite 200, Indianapolis, Indiana, 46214.
Please read Item 10 “Directors, Executive Officers of Our General Partner and Corporate Governance” for a discussion of director independence matters.
Item 14. (cid:0)
The following table details the aggregate fees billed for professional services rendered by our independent auditor during 2019 and 2018 (in millions):
Audit fees
Audit-related fees
Total
Year Ended December 31,
2019
2018
$
$
6.2 $
—
6.2 $
5.3
—
5.3
“Audit fees” above include those related to our annual audit and quarterly review procedures.
“Audit-related fees” primarily relate to securities offerings.
Pre-Approval Policy
The audit and finance committee of our general partner’s board of directors has adopted an audit and finance committee charter, which is available on our
website at http://www.calumetspecialty.com. The charter requires the audit and finance committee to pre-approve all audit and non-audit services to be
provided by our independent registered public accounting firm. The audit and finance committee does not delegate its pre-approval responsibilities to
management or to an individual member of the audit and finance committee. Services for the audit, tax and all other fee categories above were pre-approved
by the audit and finance committee.
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Item 15. (cid:0)
PART IV
(a)(1) Consolidated Financial Statements
The consolidated financial statements of Calumet Specialty Products Partners, L.P. are included in Part II, Item 8 “Financial Statements and
Supplementary Data.”
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
See Index to Exhibits of this Annual Report.
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Exhibit Number
2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
4.2
4.3
4.4
4.5
4.6*
10.1
Index to Exhibits
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Description
Membership Interest Purchase Agreement, dated as of August 11, 2017, by and between Calumet Lubricants Co., Calumet
Specialty Products Partners, L.P. and Husky Superior Refining Holding Corp. (incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission on August 14, 2017 (File No. 000-51734)).
Membership Interest Purchase Agreement, dated as of November 21, 2017, by and among Anchor Drilling Fluids USA, LLC,
Calumet Operating LLC, Q’Max Solutions Inc. and Q’Max America Inc. (Incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission on November 28, 2017 (File No. 000-51734)).
Membership Interest Purchase Agreement, dated November 10, 2019, by and between Calumet Refining, LLC and Starlight
Relativity Acquisition Company LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed with the Commission on November 12, 2019 (File No. 000-51734)).
Certificate of Limited Partnership of Calumet Specialty Products Partners, L.P. (incorporated by reference to Exhibit 3.1 to the
Registrant’s Registration Statement on Form S-1 filed with the Commission on October 7, 2005 (File No. 333-128880)).
Amended and Restated Limited Partnership Agreement of Calumet Specialty Products Partners, L.P. (incorporated by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 13, 2006 (File No. 000-
51734)).
Amendment No. 1 to the First Amended and Restated Agreement of Limited Partnership of Calumet Specialty Products Partners,
L.P. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on
July 11, 2006 (File No. 000-51734)).
Amendment No. 2 to First Amended and Restated Agreement of Limited Partnership of Calumet Specialty Products Partners, L.P.
(incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 18,
2008 (File No. 000-51734)).
Amendment No. 3 to First Amended and Restated Agreement of Limited Partnership of Calumet Specialty Products Partners, L.P.
(incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on January 4,
2018 (File No. 000-51734)).
Certificate of Formation of Calumet GP, LLC (incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement
on Form S-1 filed with the Commission on October 7, 2005 (File No. 333-128880)).
Amended and Restated Limited Liability Company Agreement of Calumet GP, LLC (incorporated by reference to Exhibit 3.2 to
the Registrant’s Current Report on Form 8-K filed with the Commission on February 13, 2006 (File No. 000-51734)).
Specimen Unit Certificate representing common units (incorporated by reference to Exhibit 3.7 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Commission on November 4, 2010 (File No. 000-51734)).
Indenture, dated November 26, 2013, by and among Calumet Specialty Products, L.P., Calumet Finance Corp., certain subsidiary
guarantors party thereto and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission on November 26, 2013 (File No. 000-51734)).
Indenture, dated March 31, 2014, by and among Calumet Specialty Products, L.P., Calumet Finance Corp., certain subsidiary
guarantors party thereto and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission on March 31, 2014 (File No. 000-51734)).
Indenture, dated March 27, 2015, by and among Calumet Specialty Products, L.P., Calumet Finance Corp., certain subsidiary
guarantors party thereto and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission on March 30, 2015 (File No. 000-51734)).
Indenture, dated October 11, 2019, by and among Calumet Specialty Products Partners, L.P., Calumet Finance Corp., certain
subsidiary guarantors named therein and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit
4.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 11, 2019 (File No. 000-51734)).
— Description of Common Units.
—
Amended Crude Oil Sale Contract, effective April 1, 2008, between Plains Marketing, L.P. and Calumet Shreveport Fuels, LLC
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on
March 20, 2008 (File No. 000-51734)).
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Exhibit Number
10.2†
10.3†
10.4†
10.5
10.6†
10.7
10.8
10.9
—
—
—
—
—
—
—
—
10.10
—
10.11
—
10.12
—
10.13
—
10.14
10.15†
10.16†
—
—
—
Description
Calumet Specialty Products Partners, L.P. Executive Deferred Compensation Plan, dated December 18, 2008 and effective
January 1, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the
Commission on December 22, 2008 (File No. 000-51734)).
Form of Phantom Unit Grant Agreement (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-
K filed with the Commission on January 28, 2009 (File No. 000-51734)).
F. William Grube Amended and Restated Employment Agreement dated and effective December 31, 2015 (incorporated by
reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K filed with the Commission on February 29, 2016 (File
No. 000-51734)).
Omnibus Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the
Commission on February 13, 2006 (File No. 000-51734)).
Form of Unit Option Grant (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1/A
filed with the Commission on November 16, 2005 (File No. 333-128880)).
Temporary Waiver Under Supply and Offtake Agreement, dated as of November 14, 2017, between Macquarie Energy North
America Trading Inc. and Calumet Shreveport Refining LLC (incorporated by reference to Exhibit 10.20 to the Registrant’s
Annual Report on Form 10-K filed with the Commission on April 2, 2018 (File No. 000-51734)).
Temporary Waiver Under Supply and Offtake Agreement, dated as of December 12, 2017, between Macquarie Energy North
America Trading Inc. and Calumet Shreveport Refining, LLC (incorporated by reference to Exhibit 10.21 to the Registrant’s
Annual Report on Form 10-K filed with the Commission on April 2, 2018 (File No. 000-51734)).
Consent Letter under the Second Amended and Restated Credit Agreement, dated as of November 13, 2017, by and among
Calumet Specialty Products Partners, L.P. and certain of its subsidiaries as Borrowers, certain of its subsidiaries as Guarantors, the
Lenders, Bank of America, N.A., as Agent, JPMorgan Chase Bank, N.A. and Wells Fargo Capital Finance, LLC, as Co-
Syndication Agents, U.S. Bank National Association and Deutsche Bank Trust Company Americas, as Co-Documentation Agents
and Bank of America, N.A., J.P. Morgan Securities LLC and Wells Fargo Capital Finance, LLC, as Joint Lead Arrangers and
Joint Book Runners (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed with the
Commission on April 2, 2018 (File No. 000-51734)).
Consent Letter under the Second Amended and Restated Credit Agreement, dated as of November 27, 2017, by and among
Calumet Specialty Products Partners, L.P. and certain of its subsidiaries as Borrowers, certain of its subsidiaries as Guarantors, the
Lenders, Bank of America, N.A., as Agent, JPMorgan Chase Bank, N.A. and Wells Fargo Capital Finance, LLC, as Co-
Syndication Agents, U.S. Bank National Association and Deutsche Bank Trust Company Americas, as Co-Documentation Agents
and Bank of America, N.A., J.P. Morgan Securities LLC and Wells Fargo Capital Finance, LLC, as Joint Lead Arrangers and
Joint Book Runners (incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed with the
Commission on April 2, 2018 (File No. 000-51734)).
Third Amended and Restated Credit Agreement, dated as of February 23, 2018, by and among Calumet Specialty Products
Partners, L.P. and certain of its subsidiaries as Borrowers, certain of its subsidiaries as Guarantors, the Lenders, Bank of America,
N.A., as Agent, JPMorgan Chase Bank, N.A and Wells Fargo Bank, N.A., as Co-Syndication Agents (incorporated by reference
from exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the commission on March 1, 2018 (File-No. 000-
51734)).
First Amendment to Third Amended and Restated Credit Agreement, dated as of September 4, 2019, by and among Calumet
Specialty Products Partners, L.P. and certain of its subsidiaries as Borrowers, certain of its subsidiaries as Guarantors, the
Lenders, Bank of America, N.A., as Agent, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A., as Co-Syndication Agents
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on
September 6, 2019 (File No. 000-51734)).
Amended and Restated Collateral Trust Agreement, dated as of April 20, 2016, among Calumet Specialty Products Partners, L.P.,
the obligors party thereto, the secured hedge counterparties party thereto and Wilmington Trust, National Association, as Trustee
and Collateral Trustee (incorporated by reference to exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the
commission on April 21, 2016 (File No. 000-51734)).
Second Amended and Restated Intercreditor Agreement, dated April 20, 2016, by and among the Collateral Trustee, Bank of
America, N.A., as administrative agent, and the obligors named therein (incorporated by reference to exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed with the commission on April 21, 2016 (File No. 000-51734)).
Timothy Go Employment, Confidentiality, and Non-Compete Agreement (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission on September 16, 2015 (File No. 000-51734)).
Amended and Restated Long-Term Incentive Plan, effective as of December 10, 2015 (incorporated by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K filed with the Commission on December 11, 2015 (File No. 000-51734)).
174
Table of Contents
Exhibit Number
10.17
10.18
—
—
10.19
—
10.20
—
Description
Supply and Offtake Agreement, dated as of June 19, 2017, between Macquarie Energy North America Trading Inc., Calumet
Shreveport Fuels, LLC and Calumet Shreveport Lubricants & Waxes, LLC (incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2017 (File No. 000-51734)).
First Amendment to Supply and Offtake Agreement, dated March 28, 2018 between Macquarie Energy North America Trading
Inc. and Calumet Shreveport Refining, LLC formerly known as Calumet Shreveport Lubricants and Waxes, LLC and successor
by merger to Calumet Shreveport Fuels, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-Q filed with the Commission on May 15, 2015 ( File No. 000-51734)).
Second Amendment to Supply and Offtake Agreement, dated December 21, 2018 between Macquarie Energy North America
Trading Inc. and Calumet Shreveport Refining, LLC formerly known as Calumet Shreveport Lubricants and Waxes, LLC and
successor by merger to Calumet Shreveport Fuels, LLC (incorporated by reference to Exhibit 10.18 to the Registrant’s Annual
Report on Form 10-K filed with the Commission on March 7, 2019 (File No. 000-51734)).
Third Amendment to Supply and Offtake Agreement, dated May 9, 2019, between Macquarie Energy North America Trading Inc.
and Calumet Shreveport Refining, LLC formerly known as Calumet Shreveport Lubricants and Waxes, LLC and successor by
merger to Calumet Shreveport Fuels, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the Commission on May 10, 2019 (File No. 000-51734)).
Calumet GP, LLC Annual Bonus Plan, dated February 23, 2017 and effective January 1, 2017 (incorporated by reference to
Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2017 (File No. 000-
51734)).
Form of Award Agreement (incorporated by reference to Exhibit 10.4 (included as an attachment to Exhibit 10.3) to the
Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2017 (File No. 000-51734)).
First Amendment to the Form of Award Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Commission on December 28, 2017 (File No. 000-51734)).
Buyer Parent Guaranty, dated as of August 11, 2017, by and between Husky Oil Operations Limited and Calumet Lubricants Co.,
Limited Partnership (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the
Commission on August 14, 2017 (File No. 000-51734)).
Employment and Transition Agreement, dated as of April 17, 2017, by and among Calumet Specialty Products Partners, L.P. and
R. Patrick Murray, II (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Commission on August 7, 2017 (File No. 000-51734)).
Severance Agreement and General Release, dated March 22, 2019, between Calumet GP, LLC and William A. Anderson
(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on
August 8 , 2019 (File No. 000-51734)).
—
—
—
—
—
—
— Severance Agreement and General Release, dated October 17, 2019, between Calumet GP, LLC and D. West Griffin.
H. Keith Jennings Employment Agreement.
— List of Subsidiaries of Calumet Specialty Products Partners, L.P.
— Consent of Ernst & Young, LLP, independent registered public accounting firm.
— Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
— Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
10.21†
10.22†
10.23†
10.24
10.25
10.26
10.27*
10.28*
21.1*
23.1*
31.1*
31.2*
32.1**
— Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
100.INS*
— XBRL Instance Document.
101.SCH*
— XBRL Taxonomy Extension Schema Document.
101.CAL*
— XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
— XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
— XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
— XBRL Taxonomy Extension Presentation Linkbase Document.
175
Table of Contents
†
*
Identifies management contract and compensatory plan arrangements.
Filed herewith.
**
Furnished herewith.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CALUMET SPECIALTY PRODUCTS
PARTNERS, L.P.
By:
CALUMET GP, LLC
its general partner
By:
/s/ Timothy Go
Timothy Go
Chief Executive Officer
176
Date: March 5, 2020
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Name
/s/ Timothy Go
Timothy Go
Title
Date
Chief Executive Officer of Calumet GP, LLC
Date: March 5, 2020
(Principal Executive Officer)
/s/ H. Keith Jennings
H. Keith Jennings
Executive Vice President and Chief Financial Officer of
Calumet GP, LLC (Principal Financial Officer and
Principal Accounting Officer)
Date: March 5, 2020
/s/ Fred M. Fehsenfeld, Jr.
Fred M. Fehsenfeld, Jr.
/s/ James S. Carter
James S. Carter
/s/ Robert E. Funk
Robert E. Funk
/s/ Stephen P. Mawer
Stephen P. Mawer
/s/ Daniel J. Sajkowski
Daniel J. Sajkowski
/s/ Amy M. Schumacher
Amy M. Schumacher
/s/ Daniel L. Sheets
Daniel L. Sheets
Director and Chairman of the Board of Calumet GP, LLC
Date: March 5, 2020
Director of Calumet GP, LLC
Director of Calumet GP, LLC
Director of Calumet GP, LLC
Director of Calumet GP, LLC
Director of Calumet GP, LLC
Director of Calumet GP, LLC
177
Date: March 5, 2020
Date: March 5, 2020
Date: March 5, 2020
Date: March 5, 2020
Date: March 5, 2020
Date: March 5, 2020
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
DESCRIPTION OF THE COMMON UNITS
Exhibit 4.6
The Units
The common units represent limited partner interests in us. The holders of our common units are entitled to participate in partnership distributions and
exercise the rights or privileges available to limited partners under our partnership agreement. For a description of the relative rights and preferences of
holders of common units in and to partnership distributions, please read this section and “Our Cash Distribution Policy and Restrictions on Distributions.” For
a description of the rights and privileges of limited partners under our partnership agreement, including voting rights, please see “The Partnership
Agreement.” References to “we,” “us” and “our” mean Calumet Specialty Products Partners, L.P. Our outstanding common units are listed on the NASDAQ
Global Select Market under the symbol “CLMT.” Any additional common units we issue will also be listed on the NASDAQ Global Select Market.
Transfer of Common Units
By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited partner with
respect to the common units transferred when such transfer and admission is reflected in our books and records. Each transferee:
•
•
•
represents that the transferee has the capacity, power and authority to become bound by our partnership agreement;
automatically agrees to be bound by the terms and conditions of, and is deemed to have executed, our partnership agreement; and
gives the consents and approvals contained in our partnership agreement
A transferee will become a substituted limited partner of our partnership for the transferred common units automatically upon the recording of the
transfer on our books and records. Calumet GP, LLC (our “general partner”) will cause any transfers to be recorded on our books and records no less
frequently than quarterly.
We may, at our discretion, treat the nominee holder of a common unit as the absolute owner. In that case, the beneficial holders’ rights are limited solely
to those that it has against the nominee holder as a result of any agreement between the beneficial owner and the nominee holder.
Common units are securities and are transferable according to the laws governing transfers of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to become a substituted limited partner in our partnership for the transferred common units.
Until a common unit has been transferred on our books, we and the transfer agent may treat the record holder of the unit as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations.
THE PARTNERSHIP AGREEMENT
The following is a summary of certain material provisions of our partnership agreement that relate to ownership of our common units. Our partnership
agreement is included as an exhibit to the annual report on Form 10-K of which this exhibit is a part.
Capital Contributions
Unitholders are not obligated to make additional capital contributions, except as described below under “- Limited Liability.”
Voting Rights
The following is a summary of the unitholder vote required for the matters specified below. Various matters requiring the approval of a “unit majority”
require the approval of a majority of the common units.
In voting their common units, our general partner and its affiliates will have no fiduciary duty or obligation whatsoever to us or the limited partners,
including any duty to act in good faith or in the best interests of us and our limited partners. For any action that is to be approved at a meeting of unitholders,
the holders of a majority of the outstanding units of the class or classes for which a meeting has been called represented in person or by proxy will constitute a
quorum unless any action by the unitholders requires approval by holders of a greater percentage of the units, in which case the quorum will be the greater
percentage. Please read “- Meetings; Voting.”
Issuance of additional units
No approval right.
Amendment of our partnership agreement
Certain amendments may be made by the general partner without the
approval of the unitholders. Other amendments generally require the
approval of a unit majority. Please read “- Amendment of the
Partnership Agreement.”
Merger of our partnership or the sale of all or
substantially all of our assets
Unit majority in certain circumstances. Please read “- Merger,
Sale or Other Disposition of Assets.”
Dissolution of our partnership
Unit majority. Please read “- Termination and Dissolution.”
Continuation of
partnership upon dissolution
the business of our
Unit majority. Please read “- Termination and Dissolution.”
Withdrawal of our general partner
No approval right. Please read “- Withdrawal or Removal of the
General Partner.”
Removal of our general partner
Not less than 66⅔% of the outstanding units, including units held by
our general partner and its affiliates. Please read “- Withdrawal or
Removal of the General Partner.”
Transfer of the general partner interest
No approval right. Please read “- Transfer of General Partner Interest.”
Transfer of incentive distribution rights
No approval right. Please read “- Transfer of Incentive Distribution
Rights.”
Transfer of ownership interests in our
general partner
No approval required at any time. Please read “- Transfer of Ownership
Interests in Our General Partner.”
Limited Liability
Assuming that a limited partner does not participate in the control of our business within the meaning of the Delaware Revised Uniform Limited
Partnership Act (the “Delaware Act”) and that he otherwise acts in conformity with the provisions of the partnership agreement, his liability under the
Delaware Act will be limited, subject to possible exceptions, to the amount of capital he is obligated to contribute to us for his common units plus his share of
any undistributed profits and assets. If it were determined, however, that the right, or exercise of the right, by the limited partners as a group:
•
•
•
to remove or replace our general partner;
to approve some amendments to our partnership agreement; or
to take other action under our partnership agreement;
constituted “participation in the control” of our business for the purposes of the Delaware Act, then the limited partners could be held personally liable for our
obligations under the laws of Delaware, to the same extent as our general partner. This liability would extend to persons who transact business with us who
reasonably believe that the limited partner is a general partner. Neither our partnership agreement nor the Delaware Act specifically provides for legal
recourse against the general partner if a limited partner
were to lose limited liability through any fault of the general partner. While this does not mean that a limited partner could not seek legal recourse, we know
of no precedent for this type of a claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a distribution to a partner if, after the distribution, all liabilities of the limited partnership,
other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specific property of the
partnership, would exceed the fair value of the assets of the limited partnership. For the purpose of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of property subject to liability for which recourse of creditors is limited shall be included in the
assets of the limited partnership only to the extent that the fair value of that property exceeds the non-recourse liability. The Delaware Act provides that a
limited partner who receives a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Act shall be liable to
the limited partnership for the amount of the distribution for three years. Under the Delaware Act, a substituted limited partner of a limited partnership is
liable for the obligations of his assignor to make contributions to the partnership, except that such person is not obligated for liabilities unknown to him at the
time he became a limited partner and that could not be ascertained from the partnership agreement.
Our subsidiaries conduct business in several states. Maintenance of our limited liability as a member of our operating company may require compliance
with legal requirements in the jurisdictions in which our operating company conducts business, including qualifying our subsidiaries to do business there.
Limitations on the liability of limited partners for the obligations of a limited partner have not been clearly established in many jurisdictions. If, by
virtue of our membership interest in our operating company or otherwise, it were determined that we were conducting business in any state without
compliance with the applicable limited partnership or limited liability company statute, or that the right or exercise of the right by the limited partners as a
group to remove or replace the general partner, to approve some amendments to our partnership agreement, or to take other action under the partnership
agreement constituted “participation in the control” of our business for purposes of the statutes of any relevant jurisdiction, then the limited partners could be
held personally liable for our obligations under the law of that jurisdiction to the same extent as our general partner under the circumstances. We will operate
in a manner that our general partner considers reasonable and necessary or appropriate to preserve the limited liability of the limited partners.
Issuance of Additional Securities
Our partnership agreement authorizes us to issue an unlimited number of additional partnership securities for the consideration and on the terms and
conditions determined by our general partner without the approval of the unitholders.
We may issue an unlimited number of common units without the approval of the unitholders as follows:
under employee benefits plans;
upon conversion of the general partner interest and incentive distribution rights as a result of a withdrawal or removal of our general partner;
upon conversion of units of equal rank with the common units into common units or other parity units under certain circumstances;
in the event of a combination or subdivision of common units
in the connection with an acquisition or an expansion capital improvement that increases cash flow from operations per unit on an estimated pro
forma basis;
if the proceeds of the issuance are used to repay indebtedness, the cost of which to service is greater than the distribution obligations associated with
the units issued in connection with its retirement; or
in connection with the redemption of common units or other w
•
•
•
•
•
•
•
It is possible that we will fund acquisitions through the issuance of additional common units or other partnership securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing holders of common units
in our distributions of available cash. In addition, the issuance of additional common units or other partnership securities may dilute the value of the interests
of the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership agreement, we may also issue additional partnership securities that, as
determined by our general partner, may have special voting rights to which the common units are not entitled. In addition, our partnership agreement does not
prohibit the issuance by our subsidiaries of equity securities, which may effectively rank senior to the common units.
Upon issuance of additional partnership securities, our general partner will be entitled, but not required, to make additional capital contributions to the
extent necessary to maintain its 2% general partner interest in us. The general partner’s 2% interest in us will be reduced if we issue additional units in the
future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2% general partner interest. Moreover, our general
partner will have the right, which it may from time to time assign in whole or in part to any of its affiliates, to purchase common units or other partnership
securities whenever, and on the same terms that, we issue those securities to persons other than our general partner and its affiliates, to the extent necessary to
maintain the percentage interest of the general partner and its affiliates, including such interest represented by common units, that existed immediately prior to
each issuance. Otherwise, under our partnership agreement, the holders of common units will not have preemptive rights to acquire additional common units
or other partnership securities.
Amendment of the Partnership Agreement
General. Amendments to our partnership agreement may be proposed only by or with the consent of our general partner. However, our general partner
will have no duty or obligation to propose any amendment and may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited
partners, including any duty to act in good faith or in the best interests of us or the limited partners. In order to adopt a proposed amendment, other than the
amendments discussed below, our general partner is required to seek written approval of the holders of the number of units required to approve the
amendment or call a meeting of the limited partners to consider and vote upon the proposed amendment. Except as described below, an amendment must be
approved by a unit majority.
Prohibited Amendments. No amendment may be made that would:
•
•
enlarge the obligations of any limited partner without its consent, unless approved by at least a majority of the type or class of limited partner
interests so affected; or
enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise
payable by us to our general partner or any of its affiliates without the consent of our general partner, which consent may be given or withheld at its
option.
The provision of our partnership agreement preventing the amendments having the effects described in any of the clauses above can be amended upon
the approval of the holders of at least 90% of the outstanding units voting together as a single class (including units owned by our general partner and its
affiliates).
No Unitholder Approval. Our general partner may generally make amendments to our partnership agreement without the approval of any limited partner
or assignee to reflect:
•
•
•
•
•
a change in our name, the location of our principal place of our business, our registered agent or our registered office;
the admission, substitution, withdrawal or removal of partners in accordance with our partnership agreement;
a change that our general partner determines to be necessary or appropriate to qualify or continue our qualification as a limited partnership or a
partnership in which the limited partners have limited liability under the laws of any state or to ensure that neither we nor the operating company nor
any of its subsidiaries will be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes;
an amendment that is necessary, in the opinion of our counsel, to prevent us or our general partner or its directors, officers, agents or trustees from in
any manner being subjected to the provisions of the Investment Company Act of 1940, the Investment Advisors Act of 1940, or “plan asset”
regulations adopted under the Employee Retirement Income Security Act of 1974 whether or not substantially similar to plan asset regulations
currently applied or proposed;
an amendment that our general partner determines to be necessary or appropriate for the authorization of additional partnership securities or rights to
acquire partnership securities;
•
•
•
•
any amendment expressly permitted in our partnership agreement to be made by our general partner acting alone;
an amendment effected, necessitated or contemplated by a merger agreement that has been approved under the terms of our partnership agreement;
any amendment that our general partner determines to be necessary or appropriate for the formation by us of, or our investment in, any corporation,
partnership or other entity, as otherwise permitted by our partnership agreement;
a change in our fiscal year or taxable year and related changes;
• mergers with or conveyances to another limited liability entity that is newly formed and has no assets, liabilities or operations at the time of the
merger or conveyance other than those it receives by way of the merger or conveyance; or
•
any other amendments substantially similar to any of the matters described in the bullet points above.
In addition, our general partner may make amendments to our partnership agreement without the approval of any limited partner or assignee in
connection with a merger or consolidation approved in connection with our partnership agreement, or if our general partner determines that those
amendments:
•
•
•
•
•
do not adversely affect the limited partners (or any particular class of limited partners) in any material respect;
are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of
any federal or state agency or judicial authority or contained in any federal or state statute;
are necessary or appropriate to facilitate the trading of limited partner interests or to comply with any rule, regulation, guideline or requirement of
any securities exchange on which the limited partner interests are or will be listed for trading;
are necessary or appropriate for any action taken by our general partner relating to splits or combinations of units under the provisions of our
partnership agreement; or
are required to effect the intent of the provisions of our partnership agreement or are otherwise contemplated by our partnership agreement.
Opinion of Counsel and Unitholder Approval. Our general partner will not be required to obtain an opinion of counsel that an amendment will not result
in a loss of limited liability to the limited partners or result in our being treated as an entity for federal income tax purposes in connection with any of the
amendments described under “- No Unitholder Approval.” No other amendments to our partnership agreement will become effective without the approval of
holders of at least 90% of the outstanding units voting as a single class unless we first obtain an opinion of counsel to the effect that the amendment will not
affect the limited liability under applicable law of any of our limited partners.
In addition to the above restrictions, any amendment that would have a material adverse effect on the rights or preferences of any type or class of
outstanding units in relation to other classes of units will require the approval of at least a majority of the type or class of units so affected. Any amendment
that reduces the voting percentage required to take any action is required to be approved by the affirmative vote of limited partners whose aggregate
outstanding units constitute not less than the voting requirement sought to be reduced.
Merger, Sale or Other Disposition of Assets
A merger or consolidation of us requires the prior consent of our general partner. However, our general partner will have no duty or obligation to
consent to any merger or consolidation and may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including
any duty to act in good faith or in the best interest of us or the limited partners.
In addition, our partnership agreement generally prohibits our general partner without the prior approval of the holders of a unit majority, from causing
us to, among other things, sell, exchange or otherwise dispose of all or substantially all of our assets in a single transaction or a series of related transactions,
including by way of merger, consolidation or other combination, or approving on our behalf the sale, exchange or other disposition of all or substantially all
of the assets of our subsidiaries. Our general partner may, however, mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our
assets without that approval. Our general partner may also sell all or substantially all of our assets under a foreclosure or other realization upon those
encumbrances without that approval. Finally, our general partner may consummate any merger without the prior
approval of our unitholders if we are the surviving entity in the transaction, the transaction would not result in a material amendment to our partnership
agreement, each of our units will be an identical unit of our partnership following the transaction, and the units to be issued do not exceed 20% of our
outstanding units immediately prior to the transaction.
If the conditions specified in our partnership agreement are satisfied, our general partner may convert us or any of our subsidiaries into a new limited
liability entity or merge us or any of our subsidiaries into, or convey all of our assets to, a newly formed entity if the sole purpose of that merger or
conveyance is to effect a mere change in our legal form into another limited liability entity. The unitholders are not entitled to dissenters’ rights of appraisal
under our partnership agreement or applicable Delaware law in the event of a conversion, merger or consolidation, a sale of substantially all of our assets or
any other transaction or event.
Termination and Dissolution
We will continue as a limited partnership until terminated under our partnership agreement. We will dissolve upon:
•
•
•
•
the election of our general partner to dissolve us, if approved by the holders of units representing a unit majority;
there being no limited partners, unless we are continued without dissolution in accordance with applicable Delaware law;
the entry of a decree of judicial dissolution of our partnership; or
the withdrawal or removal of our general partner or any other event that results in its ceasing to be our general partner other than by reason of a
transfer of its general partner interest in accordance with our partnership agreement or withdrawal or removal following approval and admission of a
successor.
Upon a dissolution under the last clause above, the holders of a unit majority may also elect, within specific time limitations, to continue our business
on the same terms and conditions described in our partnership agreement by appointing as a successor general partner an entity approved by the holders of
units representing a unit majority, subject to our receipt of an opinion of counsel to the effect that:
•
•
the action would not result in the loss of limited liability of any limited partner; and
neither our partnership, our operating company nor any of our other subsidiaries would be treated as an association taxable as a corporation or
otherwise be taxable as an entity for federal income tax purposes upon the exercise of that right to continue.
Liquidation and Distribution of Proceeds
Upon our dissolution, unless our business is continued as described above, the liquidator authorized to wind up our affairs will, acting with all of the
powers of our general partner that are necessary or appropriate to liquidate our assets and apply the proceeds of the liquidation as provided in “Our Cash
Distribution Policy and Restrictions on Distributions - Distributions of Cash Upon Liquidation.” The liquidator may defer liquidation or distribution of our
assets for a reasonable period of time or distribute assets to partners in kind if it determines that a sale would be impractical or would cause undue loss to our
partners.
Withdrawal or Removal of the General Partner
Our general partner currently may withdraw as general partner without first obtaining approval of any unitholder by giving 90 days’ written notice, and
that withdrawal will not constitute a violation of our partnership agreement. In addition, the partnership agreement permits our general partner to sell or
otherwise transfer all of its general partner interest in us without the approval of the unitholders. Please read “- Transfer of General Partner Interest” and “-
Transfer of Incentive Distribution Rights.”
Upon withdrawal of our general partner under any circumstances, other than as a result of a transfer by our general partner of all or a part of its general
partner interest in us, the holders of a unit majority, voting as separate classes, may select a successor to that withdrawing general partner. If a successor is not
elected, or is elected but an opinion of counsel regarding limited liability and tax matters cannot be obtained, we will be dissolved, wound up and liquidated,
unless within a specified period after that withdrawal, the holders of a unit majority agree in writing to continue our business and to appoint a successor
general partner. Please read “- Termination and Dissolution.”
Our general partner may not be removed unless that removal is approved by the vote of the holders of not less than 66⅔% of the outstanding units,
voting together as a single class, including units held by our general partner and its affiliates, and we receive an opinion of counsel regarding limited liability
and tax matters. Any removal of our general partner is also subject to the
approval of a successor general partner by the vote of the holders of a majority of the outstanding common units. The ownership of more than 33⅓% of the
outstanding units by our general partner and its affiliates would give them the practical ability to prevent our general partner’s removal.
Our partnership agreement also provides that if our general partner is removed as our general partner under circumstances where cause does not exist
and units held by the general partner and its affiliates are not voted in favor of that removal:
•
•
any existing arrearages in payment of the minimum quarterly distribution on the common units will be extinguished; and
our general partner will have the right to convert its general partner interest and its incentive distribution rights into common units or to receive cash
in exchange for those interests based on the fair market value of those interests at that time.
In the event of removal of a general partner under circumstances where cause exists or withdrawal of a general partner where that withdrawal violates
our partnership agreement, a successor general partner will have the option to purchase the general partner interest and incentive distribution rights of the
departing general partner for a cash payment equal to the fair market value of those interests. Under all other circumstances where a general partner
withdraws or is removed by the limited partners, the departing general partner will have the option to require the successor general partner to purchase the
general partner interest of the departing general partner and its incentive distribution rights for fair market value. In each case, this fair market value will be
determined by agreement between the departing general partner and the successor general partner. If no agreement is reached, an independent investment
banking firm or other independent expert selected by the departing general partner and the successor general partner will determine the fair market value. Or,
if the departing general partner and the successor general partner cannot agree upon an expert, then an expert chosen by agreement of the experts selected by
each of them will determine the fair market value.
If the option described above is not exercised by either the departing general partner or the successor general partner, the departing general partner’s
general partner interest and its incentive distribution rights will automatically convert into common units equal to the fair market value of those interests as
determined by an investment banking firm or other independent expert selected in the manner described in the preceding paragraph.
In addition, we will be required to reimburse the departing general partner for all amounts due the departing general partner, including, without
limitation, all employee-related liabilities, including severance liabilities, incurred for the termination of any employees employed by the departing general
partner or its affiliates for our benefit.
Transfer of General Partner Interest
Our general partner may at its option transfer all or any part of its general partner interest in our partnership to another person without unitholder
approval. As a condition of such transfer, the transferee must assume, among other things, the rights and duties of our general partner, agree to be bound by
the provisions of our partnership agreement, and furnish an opinion of counsel regarding limited liability and tax matters.
Our general partner and its affiliates may, at any time, transfer units to one or more persons, without unitholder approval.
Transfer of Ownership Interests in Our General Partner
At any time, the members of our general partner may sell or transfer all or part of their membership interests in our general partner to an affiliate or
third party without the approval of our unitholders.
Transfer of Incentive Distribution Rights
Our general partner or any subsequent holder may transfer any or all of its incentive distribution rights without unitholder approval.
Change of Management Provisions
Our partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove Calumet GP, LLC
as our general partner or otherwise change our management. If any person or group other than our general partner and its affiliates acquires beneficial
ownership of 20% or more of any class of units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to any
person or group that acquires the units from our general partner or its affiliates and any transferees of that person or group approved by our general partner or
to any person or group who acquires the units with the prior approval of the board of directors of our general partner.
Our partnership agreement also provides that if our general partner is removed under circumstances where cause does not exist and units held by our
general partner and its affiliates are not voted in favor of that removal:
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any existing arrearages in payment of the minimum quarterly distribution on the common units will be extinguished; and
our general partner will have the right to convert its general partner interest and its incentive distribution rights into common units or to receive cash
in exchange for those interests.
Limited Call Right
If at any time our general partner and its affiliates own more than 80% of the then-issued and outstanding limited partner interests of any class, our
general partner will have the right, but not the obligation, which right may be assigned in whole or in part to any of its affiliates or to us, to acquire all, but not
less than all, of the remaining partnership securities of the class held by unaffiliated persons as of a record date to be selected by our general partner, on at
least 10 but not more than 60 days’ notice. The purchase price in the event of this purchase is the greater of:
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the highest cash price paid by either of our general partner or any of its affiliates for any partnership securities of the class purchased within the 90
days preceding the date on which our general partner first mails notice of its election to purchase those partnership securities; and
the current market price as of the date three days before the date the notice is mailed.
As a result of our general partner’s right to purchase outstanding partnership securities, a holder of partnership securities may have his partnership
securities purchased at an undesirable time or price. The tax consequences to a unitholder of the exercise of this call right are the same as a sale by that
unitholder of his common units in the market.
Meetings; Voting
Except as described below regarding a person or group owning 20% or more of any class of units then outstanding, unitholders who are record holders
of units on the record date will be entitled to notice of, and to vote at, meetings of our limited partners and to act upon matters for which approvals may be
solicited.
Any action that is required or permitted to be taken by the unitholders may be taken either at a meeting of the unitholders or without a meeting if
consents in writing describing the action so taken are signed by holders of the number of units necessary to authorize or take that action at a meeting.
Meetings of the unitholders may be called by our general partner or by unitholders owning at least 20% of the outstanding units of the class for which a
meeting is proposed. Unitholders may vote either in person or by proxy at meetings. The holders of a majority of the outstanding units of the class or classes
for which a meeting has been called represented in person or by proxy will constitute a quorum unless any action by the unitholders requires approval by
holders of a greater percentage of the units, in which case the quorum will be the greater percentage.
Each record holder of a unit has a vote according to his percentage interest in us, although additional limited partner interests having special voting
rights could be issued. Please read “- Issuance of Additional Securities.” However, if at any time any person or group, other than our general partner and its
affiliates, or a direct or subsequently approved transferee of our general partner or its affiliates, acquires, in the aggregate, beneficial ownership of 20% or
more of any class of units then outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and
will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, determining the presence of a quorum
or for other similar purposes. Common units held in nominee or street name account will be voted by the broker or other nominee in accordance with the
instruction of the beneficial owner unless the arrangement between the beneficial owner and his nominee provides otherwise.
Any notice, demand, request, report or proxy material required or permitted to be given or made to record holders of common units under our
partnership agreement will be delivered to the record holder by us or by the transfer agent.
Status as Limited Partner
Except as described under “- Limited Liability,” the common units will be fully paid, and unitholders will not be required to make additional
contributions. By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited
partner with respect to the common units transferred when such transfer and admission is reflected in our books and records.
Non-Citizen Transferees
If we are or become subject to federal, state or local laws or regulations that, in the reasonable determination of our general partner, create a substantial
risk of cancellation or forfeiture of any property that we have an interest in because of the nationality, citizenship or other related status of any limited partner,
we may redeem the units held by the limited partner at their current market price. In order to avoid any cancellation or forfeiture, our general partner may
require each limited partner to furnish information about his nationality, citizenship or related status. If a limited partner fails to furnish information about his
nationality, citizenship or other related status within 30 days after a request for the information or our general partner determines after receipt of the
information that the limited partner is not an eligible citizen, the limited partner may be treated as a non-citizen transferee. A non-citizen transferee is entitled
to an interest equivalent to that of a limited partner for the right to share in allocations and distributions from us, including liquidating distributions. A non-
citizen transferee does not have the right to vote his units and may not receive distributions in kind upon our liquidation.
Books and Reports
Our general partner is required to keep appropriate books of our business at our principal offices. The books will be maintained for both tax and
financial reporting purposes on an accrual basis. For tax and fiscal reporting purposes, our fiscal year is the calendar year.
We will furnish or make available to record holders of common units, within 120 days after the close of each fiscal year, an annual report containing our
audited financial statements and a report on those financial statements by our independent public accountants. Except for our fourth quarter, we will also
furnish or make available summary financial information within 90 days after the close of each quarter.
We will furnish each record holder of a unit with information reasonably required for tax reporting purposes within 90 days after the close of each
calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided.
Our ability to furnish this summary information to unitholders will depend on the cooperation of unitholders in supplying us with specific information. Every
unitholder will receive information to assist him in determining his federal and state tax liability and filing his federal and state income tax returns, regardless
of whether he supplies us with information.
Right to Inspect Our Books and Records
Our partnership agreement provides that a limited partner can, for a purpose reasonably related to his interest as a limited partner, upon reasonable
demand stating the purpose of such demand and at his own expense, have furnished to him:
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a current list of the name and last known address of each partner;
a copy of our tax returns;
information as to the amount of cash, and a description and statement of the agreed value of any other property or services, contributed or to be
contributed by each partner and the date on which each partner became a partner;
copies of our partnership agreement, our certificate of limited partnership, related amendments and powers of attorney under which they have been
executed;
information regarding the status of our business and financial condition; and
any other information regarding our affairs as is just and reasonable.
Our general partner may, and intends to, keep confidential from the limited partners trade secrets or other information the disclosure of which our
general partner believes in good faith is not in our best interests or that we are required by law or by agreements with third parties to keep confidential.
Registration Rights
Under our partnership agreement, we have agreed to register for resale under the Securities Act of 1933, as amended (the “Securities Act”), and
applicable state securities laws any common units or other partnership securities proposed to be sold by our general partner or any of its affiliates or their
transferees if an exemption from the registration requirements is not available. We have also agreed to include on any registration statement we file any
partnership securities proposed to be sold by our general partner or its affiliates or their transferees. These registration rights continue for two years following
any withdrawal or removal
of Calumet GP, LLC as our general partner. In connection with any registration of this kind, we will indemnify each unitholder participating in the registration
and its officers, directors and controlling persons from and against any liabilities under the Securities Act or any state securities laws arising from the
registration statement or prospectus. We are obligated to pay all expenses incidental to the registration, excluding underwriting discounts and commissions.
OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
Distributions of Available Cash
General. Within 45 days after the end of each quarter, we will distribute our available cash to unitholders of record on the applicable record date.
Definition of Available Cash. Available cash generally means, for any quarter, all cash on hand at the end of the quarter:
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less the amount of cash reserves established by our general partner to:
provide for the proper conduct of our business;
comply with applicable law, any of our debt instruments or other agreements; or
provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters;
plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of
the quarter for which the determination is being made. Working capital borrowings are generally borrowings that will be made under our revolving
credit facility and in all cases are used solely for working capital purposes or to pay distributions to partners.
Intent to Distribute the Minimum Quarterly Distribution. We intend to distribute to the holders of common units on a quarterly basis at least the
minimum quarterly distribution of $0.45 per unit, or $1.80 per year, to the extent we have sufficient cash from our operations after establishment of cash
reserves and payment of fees and expenses, including payments to our general partner. However, there is no guarantee that we will pay the minimum
quarterly distribution on the units in any quarter. The amount of distributions paid and the decision to make any distribution is determined by our general
partner, taking into consideration the terms of our partnership agreement. We are prohibited from making any distributions to unitholders if it would cause an
event of default, or an event of default is existing, under our credit agreement.
General Partner Interest and Incentive Distribution Rights. Our general partner is currently entitled to 2% of all quarterly distributions since inception
that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to
maintain its current general partner interest. The general partner’s initial 2% interest in these distributions may be reduced if we issue additional units in the
future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2% general partner interest. Our general partner also
currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50%, of the cash we distribute from operating
surplus (as defined below) in excess of $0.45 per unit. The maximum distribution of 50% includes distributions paid to our general partner on its 2% general
partner interest, and assumes that our general partner maintains its general partner interest at 2%. The maximum distribution of 50% does not include any
distributions that our general partner may receive on units that it owns. Please read “- Incentive Distribution Rights” for additional information.
Operating Surplus and Capital Surplus
General. All cash distributed to unitholders is characterized as either “operating surplus” or “capital surplus.” Our partnership agreement requires that
we distribute available cash from operating surplus differently than available cash from capital surplus.
Operating Surplus. Operating surplus generally consists of:
our cash balance on the closing date of our initial public offering; plus
$10.0 million (as described below); plus
all of our cash receipts after the closing of our initial public offering, excluding cash from (1) borrowings that are not working capital borrowings,
(2) sales of equity and debt securities and (3) sales or other dispositions of assets outside the ordinary course of business; plus
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working capital borrowings made after the end of a quarter but before the date of determination of operating surplus for the quarter; less
all of our operating expenditures after the closing of our initial public offering (including the repayment of working capital borrowings, but not the
repayment of other borrowings) and maintenance capital expenditures; less
the amount of cash reserves established by our general partner for future operating expenditures.
Maintenance capital expenditures represent capital expenditures made to replace partially or fully depreciated assets, to maintain the existing operating
capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash
flows. Expansion capital expenditures represent capital expenditures made to expand the existing operating capacity of our assets or to expand the operating
capacity or revenues of existing or new assets, whether through construction or acquisition. Costs for repairs and minor renewals to maintain facilities in
operating condition and that do not extend the useful life of existing assets are treated as operations and maintenance expenses as we incur them. Our
partnership agreement provides that our general partner determines how to allocate a capital expenditure for the acquisition or expansion of our assets
between maintenance capital expenditures and expansion capital expenditures.
Capital Surplus. Capital surplus consists of:
borrowings other than working capital borrowings;
sales of our equity and debt securities; and
sales or other dispositions of assets for cash, other than inventory, accounts receivable and other current assets sold in the ordinary course of business
or as part of normal retirement or replacement of assets.
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Characterization of Cash Distributions. We treat all available cash distributed as coming from operating surplus until the sum of all available cash
distributed since we began operations equals the operating surplus as of the most recent date of determination of available cash. We treat any amount
distributed in excess of operating surplus, regardless of its source, as capital surplus. As reflected above, operating surplus includes $10.0 million. This
amount does not reflect actual cash on hand that is available for distribution to our unitholders. Rather, it is a provision that will enable us, if we choose, to
distribute as operating surplus up to this amount of cash we receive in the future from non-operating sources, such as asset sales, issuances of securities and
borrowings, that would otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus.
Distributions of Available Cash from Operating Surplus
We will make distributions of available cash from operating surplus for any quarter in the following manner:
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first, 98% to all unitholders, pro rata, and 2% to the general partner, until we distribute for each outstanding unit an amount equal to the minimum
quarterly distribution for that quarter; and
thereafter, in the manner described in “- Incentive Distribution Rights” below.
The preceding discussion is based on the assumptions that our general partner maintains its 2% general partner interest and that we do not issue
additional classes of equity securities.
Incentive Distribution Rights
Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus
after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution
rights, but may transfer these rights separately from its general partner interest, subject to restrictions in the partnership agreement.
If for any quarter:
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we have distributed available cash from operating surplus to the common unitholders in an amount equal to the minimum quarterly distribution; and
we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution;
then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and the general partner in the following
manner:
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first, 98% to all unitholders, pro rata, and 2% to the general partner, until each unitholder receives a total of $0.495 per unit for that quarter (the “first
target distribution”);
second, 85% to all unitholders, pro rata, and 15% to the general partner, until each unitholder receives a total of $0.563 per unit for that quarter (the
“second target distribution”);
third, 75% to all unitholders, pro rata, and 25% to the general partner, until each unitholder receives a total of $0.675 per unit for that quarter (the
“third target distribution”); and
thereafter, 50% to all unitholders, pro rata, and 50% to the general partner.
In each case, the amount of the target distribution set forth above is exclusive of any distributions to common unitholders to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution. The preceding discussion is based on the assumptions that our general partner maintains its 2%
general partner interest and that we do not issue additional classes of equity securities.
Percentage Allocations of Available Cash from Operating Surplus
The following table illustrates the percentage allocations of the additional available cash from operating surplus between the unitholders and our general
partner up to the various target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of
our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column
“Total Quarterly Distribution Target Amount,” until available cash from operating surplus we distribute reaches the next target distribution level, if any. The
percentage interests shown for the unitholders and the general partner for the minimum quarterly distribution are also applicable to quarterly distribution
amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2% general partner
interest and assume our general partner has contributed any additional capital to maintain its 2% general partner interest and has not transferred its incentive
distribution rights.
Minimum Quarterly Distribution
First Target Distribution
Second Target Distribution
Third Target Distribution
Thereafter
Total Quarterly Distribution
Target Amount
$0.45
up to $0.495
above $0.495 up to $0.563
above $0.563 up to $0.675
above $0.675
Marginal Percentage Interest in
Distributions
Unitholders
General Partner
2%
2%
15%
25%
50%
98%
98%
85%
75%
50%
Distributions from Capital Surplus
How Distributions from Capital Surplus Will Be Made. We will make distributions of available cash from capital surplus, if any, in the following
manner:
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first, 98% to all unitholders, pro rata, and 2% to the general partner, until we distribute for each common unit that was issued in our initial public
offering, an amount of available cash from capital surplus equal to the initial unit price;
second, 98% to the common unitholders, pro rata, and 2% to the general partner, until we distribute for each common unit, an amount of available
cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and
thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus.
Effect of a Distribution from Capital Surplus. Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price
from the initial public offering, which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as
the “unrecovered initial unit price.” Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels
will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price. Because distributions of capital surplus will reduce
the minimum
quarterly distribution, after any of these distributions are made, it may be easier for the general partner to receive incentive distributions. However, any
distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied to the payment of the minimum quarterly
distribution or any arrearages.
Once we distribute capital surplus on a unit issued in our initial public offering in an amount equal to the initial unit price, our partnership agreement
specifies that the minimum quarterly distribution and the target distribution levels will be reduced to zero. Our partnership agreement specifies that we then
make all future distributions from operating surplus, with 50% being paid to the holders of units and 50% to the general partner. The percentage interests
shown for our general partner include its 2% general partner interest and assume the general partner has not transferred the incentive distribution rights.
Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels
In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our
units into fewer units or subdivide our units into a greater number of units, our partnership agreement specifies that the following items will be
proportionately adjusted:
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the minimum quarterly distribution;
target distribution levels; and
the unrecovered initial unit price.
For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the
unrecovered initial unit price would each be reduced to 50% of its initial level. Our partnership agreement provides that we not make any adjustment by
reason of the issuance of additional units for cash or property.
In addition, if legislation is enacted or if existing law is modified or interpreted by a governmental taxing authority, so that we become taxable as a
corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, our partnership agreement specifies that the minimum
quarterly distribution and the target distribution levels for each quarter will be reduced by multiplying each distribution level by a fraction, the numerator of
which is available cash for that quarter and the denominator of which is the sum of available cash for that quarter plus the general partner’s estimate of our
aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs
from the estimated tax liability for any quarter, the difference will be accounted for in subsequent quarters.
Distributions of Cash Upon Liquidation
General. If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We
will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and the general
partner, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.
The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of outstanding common units to receive their
unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment
of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the holders of common
units to fully recover all of these amounts. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive
distribution rights of the general partner.
Manner of Adjustments for Gain. The manner of the adjustment for gain is set forth in the partnership agreement. If we liquidate, we will allocate any
gain to the partners in the following manner:
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first, to the general partner and the holders of units who have negative balances in their capital accounts to the extent of and in proportion to those
negative balances;
second, 98% to the common unitholders, pro rata, and 2% to the general partner, until the capital account for each common unit is equal to the sum
of: (1) the unrecovered initial unit price; and (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation
occurs;
third, 98% to all unitholders, pro rata, and 2% to the general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum
of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (2) the
cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the minimum quarterly distribution per unit that we distributed 98% to the unitholders, pro rata, and 2% to the
general partner, for each quarter of our existence;
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fourth, 85% to all unitholders, pro rata, and 15% to the general partner, until we allocate under this paragraph an amount per unit equal to: (1) the
sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less (2) the
cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that we
distributed 85% to the unitholders, pro rata, and 15% to the general partner for each quarter if our existence;
fifth, 75% to all unitholders, pro rata, and 25% to the general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum
of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less (2) the
cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that we
distributed 75% to the unitholders, pro rata, and 25% to the general partner for each quarter of our existence; and
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thereafter, 50% to all unitholders, pro rata, and 50% to the general partner.
The percentage interests set forth above for our general partner include its 2% general partner interest and assume the general partner has not transferred
the incentive distribution rights.
Manner of Adjustments for Losses. If we liquidate, we will generally allocate any loss to the general partner and the unitholders in the following
manner:
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first, 98% to the holders of common units in proportion to the positive balances in their capital accounts and 2% to the general partner, until the
capital accounts of the common unitholders have been reduced to zero; and
thereafter, 100% to the general partner.
Adjustments to Capital Accounts. Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional
units. In this regard, our partnership agreement specifies that we allocate any unrealized and, for tax purposes, unrecognized gain or loss resulting from the
adjustments to the unitholders and the general partner in the same manner as we allocate gain or loss upon liquidation. In the event that we make positive
adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we allocate any later negative adjustments to
the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner which results, to the extent possible, in the general
partner’s capital account balances equaling the amount which they would have been if no earlier positive adjustments to the capital accounts had been made.
SEVERANCE AGREEMENT AND GENERAL RELEASE
Exhibit 10.27
THIS SEVERANCE AGREEMENT AND GENERAL RELEASE (the “Agreement”) is entered into by and
between Calumet GP, LLC, Calumet Specialty Products Partners, L.P., and its direct or indirect subsidiaries and other
affiliates (collectively, the “Company”) and D. West Griffin (“Employee”) (individually, “Party”; and jointly, the “Parties”).
Recitals
Officer (CFO) and Executive Vice President; and
Employee has been employed by the Company since January 5, 2017, and is presently the Chief Financial
amicable and certain terms as set forth in this Agreement.
The Parties wish to terminate the employment relationship between the Company and Employee on
A.
B.
Terms and Conditions
NOW, THEREFORE, in consideration of the promises and obligations contained in this Agreement, the sufficiency
of which is hereby acknowledged, the Parties hereby agree as follows:
1.
Separation Date. Employee’s employment with the Company shall terminate effective January 2, 2020
(“Separation Date”). Employee, however, will have certain obligations beyond the Separation Date as set forth below.
2.
Severance. In consideration for the promises made by Employee in this Agreement, the Company shall
provide Employee three installment payments totaling a gross amount of One Million, Sixty-Five Thousand Six Hundred
and One Dollars and Zero Cents ($1,065,601.00), subject to all applicable employment taxes and withholdings. The first
installment of Five Hundred Seventy-Five Thousand Dollars and Zero Cents ($575,000.00) gross will be paid on the next
regularly-scheduled payday following the Effective Date of the Subsequent Release Agreement as described below in
January 2020. The second installment of Two Hundred Eighty-One Thousand Eight Hundred Ninety-Eight Dollars and Zero
Cents ($281,898.00) gross will be paid on the next regularly-scheduled payday following March 31, 2020. The third
installment of Two Hundred Eight Thousand Seven Hundred Three Dollars and Zero Cents ($208,703.00) gross will be paid
on the next regularly-scheduled payday following June 30, 2020. The foregoing three payments shall be collectively
referred to herein as the “Severance Package.” Company acknowledges that apart from the Severance Package, Employee
will be reimbursed for any expenses he incurs during his employment in accordance with the travel and entertainment
policy which have not otherwise been reimbursed by the last date of his employment. Employee will also be receive
reimbursement for commuting costs of $25,000 grossed up for taxes for the period through December 31, 2019, which will
be due at the same time as the first installment payment described above (“Commuting Payment”).
Employee also understands and agrees that in further consideration for the Severance Package and to be eligible for
same, Employee must execute (and not revoke) the “Subsequent Release and Waiver Agreement” in the form attached to
this Agreement (“Subsequent Release Agreement”) on or within seven (7) days of the Separation Date.
3.
LTIP. Employee’s LTIP units will be treated in accordance with the terms of the applicable contract(s),
letter agreement and amendments, or plan document. Pursuant to the First
Amendment to Phantom Unit Grant Agreement signed by Employee on December 21, 2017, the Parties agree that
Employee has satisfied the obligation to purchase the requisite number of units.
4.
Transition and Future Assistance. To be eligible for the Severance Package, through December 31, 2019,
Employee will perform his normal duties as CFO and will assist Company in (1) supporting the remediation of the
Company’s Material Weaknesses, and (2) providing a smooth transition and handover to any newly appointed Chief
Financial Officer. It is understood that Employee will work from home starting December 15, 2019 and that Employee will
take November 27 and 29 as vacation. Employee will execute any necessary documentation effecting his resignation from
any corporate roles or offices relating to the Company. Employee agrees to provide support to the new CFO after December
31, 2019 by assisting the Company by answering any questions it may have to support the filing of the Company’s Form
10-K for 2019. Employee agrees that after his Separation Date and through June 30, 2020, he will cooperate and make
himself reasonably available to Company (including its agents and attorneys) in the event Employee’s assistance is needed
to answer questions or provide input on Company-related matters. Employee agrees that the first 80 hours of support to the
Company, including up to a maximum of five in-person days in Indianapolis, will be at no additional cost to the Company
other than reimbursement of reasonable expenses incurred by Employee to provide that support. If the Company requires
additional support from Employee, the Company will pay Employee an hourly rate of $505/hr, plus reasonable expenses for
that assistance. If the Company requires Employee to be in Indianapolis to provide support after his Separation Date, each
day he is required to be physically present will counted as eight hours for purposes of this Section, regardless of the amount
of time worked.
5.
Complete Payment. The Severance Package, to which Employee would not otherwise be entitled, shall
constitute complete settlement and satisfaction of any and all present or potential claims for loss of wages, including any
and all forms of compensation, commissions, bonuses, and benefits of employment, reinstatement, severance pay (apart
from the Severance Package and other payments described in paragraphs 2 and 4), incentive plan payouts (save for the
Employee’s participation in the existing long-term incentive program that provides for potential future vesting
opportunities), compensatory damages, punitive damages, declaratory relief, interest, attorney’s fees, costs, other litigation
fees, and any and all other forms of monetary or injunctive relief. Employee hereby expressly acknowledges payment in full
by the Company of any and all earned and unpaid compensation and benefits (excluding any unpaid vested vacation pay,
expenses Employee has incurred that have not yet been reimbursed, any Commuting Payment and any long-term incentive
program payments) as of the Effective Date of this Agreement. Apart from the Severance Package, the Company shall have
no continuing liability to Employee for any compensation, commissions, bonuses, incentive payments, or benefits of
employment save for the Employee’s participation in the existing long-term incentive program that provides for potential
future vesting opportunities; provided, however, that this provision shall have no effect on any unpaid vested vacation pay.
6.
Unemployment Compensation Benefits. The Company shall not contest any claim for unemployment
compensation benefits Employee might file in connection with Employee’s termination.
7.
Release of Claims. In consideration of the promises made by the Company in this Agreement, Employee
hereby RELEASES AND FOREVER DISCHARGES the Company and its owners, directors, principals, officers, agents,
employees, subsidiaries, affiliates, successors, and assigns (collectively, the “Released Parties”) from any and all claims,
demands, liabilities, actions, or causes of action which Employee had, has, or may have on account of, arising out of, or
related to: (a) Employee’s employment with the Company and the termination of that employment, including,
without limitation, any and all claims, demands, liabilities, actions, or causes of action arising under Title VII of the Civil
Rights Act of 1964; the Civil Rights Act of 1991; Sections 1981 through 1988 of Title 42 of the United States Code; the
Employee Retirement Income Security Act of 1974; the Americans with Disabilities Act; the Age Discrimination in
Employment Act; the Family and Medical Leave Act; the Occupational Safety and Health Act; the Lilly Ledbetter Fair Pay
Act; the Equal Pay Act; Indiana or Texas civil-rights statutes; Indiana or Texas payment-of-wages statutes; The Texas
Payday Law; any statute administered by the Texas Workforce Commission or Indiana Department of Workforce
Development; and any and all other federal, state and local laws governing terms and conditions of employment, wages,
hours, compensation, discrimination, and any and all other matters; and (b) any and all other matters occurring prior to the
Effective Date of this Agreement other than amounts due pursuant to paragraphs 2 and 4 and any obligation of the Company
to indemnify Employee. Employee is hereby releasing each and every claim, known or unknown, contingent or actual,
which Employee has or may have against the Released Parties, or any of them, as of the Effective Date, except the
foregoing release does not extend to any claim for unemployment compensation benefits or any claim that may not
lawfully be released by private agreement, nor does it restrict Employee’s right to file a charge with any
administrative or government agency or participate in an administrative or government agency investigation or
proceeding; provided, however, that by signing this Agreement, Employee understands and agrees that, in the event
that Employee files any charge or claim against the Released Parties or any of them, this Agreement may operate to
limit or preclude Employee’s entitlement to relief or recovery from such claim, including any costs or attorneys’ fees.
Further, this Agreement does not release claims for monies owed (i.e., future hourly rates or expenses) as a result of
the terms provided in Paragraphs 2 and 4.
8.
Covenant Not To Sue. Employee promises and agrees not to file a lawsuit against the Released Parties or
any of them with respect to any claim or cause of action released herein. In the event that Employee violates this covenant,
Employee understands and agrees that any such claim will be subject to dismissal with prejudice and further agrees to
reimburse the Released Parties for their attorneys’ fees and costs incurred to secure such dismissal.
9.
Acknowledgement of Payment in Full. Employee acknowledges receipt of payment in full for all
compensation owed to Employee under federal and state law, except for the Severance Package and any other potential or
contingent future payments as set forth herein. Employee further acknowledges that Employee is not aware of any facts or
circumstances constituting a violation by the Company of the Fair Labor Standards Act or any other statute or law relating
to Employee’s payment of wages or hours of work. Employee further warrants that Employee has made no allegations
against the Company and is not aware of any facts or circumstances that would give rise to any claims on Employee’s
behalf for sexual harassment or sexual abuse.
10.
Return of the Company Property and Confidentiality.
(a)
Within five (5) days of the Separation Date, or upon a date of the Company’s choosing (but no
later than July 5, 2020) if in the Company’s opinion Employee will need any particular equipment to fill his obligations in
2020, Employee shall return to the Company any Company-provided id cards, iPad, laptop, tablet, cell phone, credit card,
keys (including desk, office, and building keys), Company identification card or badge, passwords, access codes,
documentation, information, reports, files, memoranda, records, identification, hardware, and software, and any physical or
personal property of any nature that Employee received, prepared or helped prepare in connection with Employee’s
employment with the Company (“Company Information/Property”). Employee
expressly agrees that Employee will not retain any copies, duplicates, reproductions, or excerpts of any such Company
Information/Property in any (including electronic) form.
(b)
If Employee is in possession of a Company-owned vehicle (“Vehicle”), the payment of the
Severance Package is contingent upon the return of the Vehicle (along with the keys to same), unless (1) there is an agreed-
upon written purchase plan for the Vehicle between Employee and Company, or (2) the Employee has express, written
authorization from the Company to keep and receive title to the Vehicle.
(c)
Employee hereby acknowledges that, in connection with the performance of Employee’s duties,
Employee has been given access to certain confidential and proprietary information relating to and used in the Company’s
business, which may include, without limitation, confidential personnel information, including compensation, benefits,
medical, performance, and disciplinary information; systems, procedures, manuals, and financial information; general
compensation data; marketing strategies and information; pending projects and proposals; business plans and forecasts;
trade information or secrets; costs and pricing information; trademarks and trade names; or records and copies of records
pertaining to the operations, customers, or business of the Company, as well as other confidential information, documents,
and records regarding the Company’s business which the Company has acquired and/or developed through substantial
amounts of time, money and effort, all of which is collectively and individually defined as “Confidential Information.”
Employee hereby agrees that all Confidential Information is and shall remain the sole and exclusive property of the
Company. Employee further agrees that Employee shall not at any time following the Separation Date use, reveal, report,
publish, transfer or otherwise disclose to any person, corporation or other entity, any of the Confidential Information
without the prior written consent of the CEO of the Company, except for such information which is or becomes generally
available to the public other than as a result of an act or omission on the part of Employee. Employee shall return to the
Company all Confidential Information in Employee’s possession, custody or control on or before the Effective Date of this
Agreement. Notwithstanding the foregoing, nothing in this Agreement shall prohibit Employee from reporting possible
violations of federal law or regulation to any governmental agency or entity, including but not limited to the Securities and
Exchange Commission, or making other disclosures that are protected under the whistleblower provisions of federal law or
regulation. Employee does not need prior authorization of the Company to make any such reports or disclosures and is not
required to notify Company that he/she has made such reports or disclosures.
11.
Compliance Certification. Employee hereby acknowledges and agrees that Employee is fully familiar with
certain areas of the Released Parties’ operations, business practices, financial dealings, compliance measures and controls,
personnel practices and policies, and other functions and personnel activities, over which Employee had direct and indirect
authority or control during Employee’s employment with the Released Parties; and that the only present or potential
violations of the Released Parties’ rules, regulations, controls, or policies, or any federal, state, or local law, ordinance,
statute, or regulation, or any other breach of duty or responsibility by the Released Parties or any of its managers,
supervisors, owners, members, officers, or other employees, of which Employee is aware, if any, are fully set forth in the
“Certification of Compliance” appended hereto.
12.
Intellectual Property. In the event that Employee has generated or possesses intellectual property
generated during or arising out of Employee’s employment with the Company (“Works”), the ownership of such intellectual
property shall reside with the Company regardless of whether such Works are capable of copyright protection. Employee
agrees to execute any documents which the Company deems reasonably necessary in connection with the assignment of
such Works
and copyright therein to the Company. Employee will take whatever steps and do whatever acts the Company requests,
including, but not limited to, placement of the Company’s proper copyright notice on such Works to secure or aid in
securing and maintaining copyright protection in such Works, and will assist the Company or its nominees in filing
applications to register claims of copyright in such Works.
13.
Waiver of Breach. No act or omission by the Company shall be deemed a waiver by the Company of any
of its rights under this Agreement. Employee acknowledges that every situation is unique and the Company may need to
respond differently to the actions by one employee or the facts of one situation than to the actions of another employee or
the facts of another situation. Therefore, the failure of the Company to enforce the same, similar, or different restrictions
against Employee or another employee or to seek a different remedy shall not be construed as a waiver or estoppel to the
enforcement of the Agreement’s restrictions against Employee.
14.
Non-Disparagement. Employee specifically understands and agrees that Employee shall not disparage,
demean, or otherwise communicate through any means, including social media, any information damaging or potentially
damaging to the business or reputation of Released Parties or any of them to any third party, including, but not limited to,
the media and business community and any past or present employees of the Company, without the express written consent
of the Company. The CEO, in turn, will not disparage, demean, or otherwise communicate through any means, including
social media, any information damaging or potentially damaging to the reputation of Employee to any third party, including,
but not limited to, the media and business community, without the express written consent of Employee. It is understood
and agreed by the Parties that this provision shall not apply to any information, complaint, or other communication that
Employee or Company may in good faith file with or communicate to any judicial or other governmental entity or agency
concerning any of the Released Parties or Employee.
15.
Neutral Reference. The Company understands and agrees that any prospective employer of Employee who
contacts the Company’s Vice President of Human Resources, General Counsel, or CEO for reference information about
Employee shall be informed only of Employee’s dates of employment and Employee’s last job title.
16.
Breach by Employee. Employee understands and agrees that a material breach by Employee of this
Agreement nullifies any obligation of the Company to provide the Severance Package and obligates Employee to return to
the Company all monies already paid to Employee pursuant to this Agreement at the time of the breach except for the Carve
Out Items (as defined below) and permits the Company to pursue any other legal or equitable relief to which it is otherwise
entitled as the result of such breach. The Carve Out Items are $1,000 (One Thousand Dollars), Employee’s LTIP units
(vested or unvested), reasonable travel and expenses incurred and reimbursable in accordance with Company policy and the
Commuting Payment.
17.
No Admission of Liability by the Released Parties. Employee agrees that neither this Agreement nor the
furnishing of the consideration for this Agreement shall be deemed or construed at any time for any purpose as an
admission by the Released Parties or any of them of any liability or unlawful conduct of any kind.
18.
Changes Must Be in Writing. This Agreement may not be modified, altered, or changed except upon the
express written consent of both Parties in which specific reference is made to this Agreement.
19.
Entire Agreement and Statement on Restrictive Covenants. This Agreement sets forth the entire agreement
between Employee and the Company with regard to Employee’s separation and fully supersedes any prior agreements or
understandings between the Parties with regard to the same subject; provided, however, that this Agreement shall have no
effect on any restrictive covenants that would otherwise survive the termination of Employee’s employment contained in
any non-competition, non-solicitation, non-poaching, intellectual property, or non-disclosure obligations or commitments
that are presently in place by virtue of existing contract (e.g., the non-competition, non-solicitation and non-poaching
covenants contained in Employee’s January 5, 2017 At-Will Employment Agreement) or policy restrictions on Employee
arising out of or in connection with Employee’s employment with the Company. For the avoidance of doubt, Employee
reaffirms his obligations set forth in Employee’s continuing covenants in his At-Will Employment Agreement, and
regardless of same, Employee specifically agrees to refrain from directly or indirectly inducing, encouraging, or soliciting
for employment any Calumet employee for 12 months following the Effective Date of the Subsequent Release Agreement.
Employee acknowledges that Employee has not relied on any representations, promises, or agreements of any kind made to
Employee in connection with Employee’s decision to sign this Agreement, except for those set forth in this Agreement.
20.
Severability. Each provision and individual covenant of this Agreement and the At-Will Agreement is
severable. If any court or other governmental body of competent jurisdiction shall conclude that any provision or individual
covenant of this Agreement or the At-Will Agreement is invalid or unenforceable, such provision or individual covenant
shall be deemed ineffective to the extent of such unenforceability without invalidating the remaining provisions and
covenants, which shall remain in full force and effect. Further, with regard to the At-Will Agreement, if any provision, term,
or covenant of same is found to be unenforceable, the court shall limit the application of such term, provision, or covenant,
or modify any such term, provision, or covenant and proceed to enforce the remainder of the surviving terms of the At-Will
Agreement as so limited or modified. The parties further agree that if any provision of this Agreement or the At-Will
Agreement is susceptible of two or more constructions, one of which would render the provision unenforceable, then the
provision shall be construed to have the meaning that renders it enforceable.
21.
Successors Are Bound. Each of the agreements and promises contained in this Agreement shall be binding
upon, and shall inure to the benefit of, the heirs, executors, assignees, administrators, agents, and successors in interest to
each of the Parties.
22.
Section Headings. The section headings in this Agreement are inserted solely as a matter of convenience
and for reference and, in the event of any conflict, the text of this Agreement, rather than the headings, will control.
23.
Counterparts. This Agreement may be executed in one or more counterparts, each of which (including a
facsimile or pdf attachment to e-mail thereof) shall be deemed an original, but which together shall constitute one and the
same instrument. The facsimile or pdf shall be admissible in any legal proceedings as if it were a manually signed original.
24.
Choice of Law and Venue. This Agreement shall be interpreted in accordance with the laws of the State of
Indiana. Exclusive jurisdiction and venue over any and all disputes arising out of or in connection with this Agreement shall
be in Marion County, Indiana, or in the United States District Court for the Southern District of Indiana.
25.
Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR THE AT-WILL
AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL
DISPUTES THAT RELATE TO THIS AGREEMENT OR THE AT-WILL AGREEMENT, INCLUDING, WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, FRAUD CLAIMS, AND ALL OTHER COMMON LAW AND
STATUTORY CLAIMS.
26.
Right to Revoke for Seven (7) Days After Signing and Effective Date. Employee may revoke this
Agreement by giving written notice of such revocation to the Company at any time within seven (7) days following the date
this Agreement is signed by Employee, and this Agreement shall not become effective or enforceable until the end of such
revocation period (“Effective Date”).
27.
Review Period and Acknowledgment of Rights and Understandings. Employee expressly agrees and
acknowledges the following: (a) that Employee was given this Agreement on October 3, 2019; (b) that Employee
understands the terms and conditions of this Agreement; (c) that Employee has knowingly and voluntarily entered into this
Agreement; (d) that Employee has hereby been advised in writing to consult an attorney in connection with reviewing
and entering into this Agreement; (e) that Employee has been given at least twenty-one (21) days to review and consider
the original draft of this Agreement before signing this Agreement; and (f) that this Agreement, when signed by the
Company and Employee (without revocation), is legally binding upon both the Company and Employee, as well as their
heirs, assigns, executors, administrators, agents, successors in interest, even if Employee decides not to consult with an
attorney in connection with reviewing and entering into this Agreement or if Employee fails to utilize the full twenty-one
(21) days given Employee for this purpose.
28.
Twenty-One (21) Day Review Period Not Increased by Changes. Employee agrees that any
modifications, material or otherwise, made to this Agreement do not restart or affect in any manner the original twenty-one
(21) day consideration period set forth in the previous Section.
WHEREFORE, intending to be legally bound to each and all of the terms of this Agreement, the Parties hereby execute this
Agreement this _2nd___ day of January_ 2020.
D. West Griffin
CALUMET GP, LLC (for itself and on behalf of the Company)
_/s/ D. West Griffin ____/s/ Pete Andrich ______
Signature: Signature:
_ D. West_Griffin___________ ______Pete Andrich_______
Printed Signature: Printed Signature:
“Employee” ________HR VP__________
Title:
“Company”
Certification of Compliance
I, D. West Griffin, hereby confirm that I am fully familiar with certain areas of the Company’s operations, business
practices, financial dealings, compliance measures and controls, personnel practices and policies, and other functions and personnel
activities, over which I had direct and indirect authority or control during my employment with the Company; and that the only
present or potential violations of the Company’s rules, regulations, controls, or policies, or any federal, state, or local law,
ordinance, statute, or regulation, or any other breach of duty or responsibility by the Company or any of its managers, supervisors,
owners, members, officers, or other employees, of which I am aware, if any, are fully set forth in this Certification of Compliance
as indicated below (and on additional attached pages, if necessary):
X I am not aware of any present or potential violations of the Company’s rules, regulations, controls, or policies, or any federal,
state, or local law, ordinance, statute, or regulation, or any other breach of duty or responsibility by the Company or any of its
managers, supervisors, owners, members, officers, or other employees, as of the date below.
The only potential or real violation(s) of the Company’s rules, regulations, controls, or policies, or any federal, state, or local law,
ordinance, statute, or regulation, or any other breach of duty or responsibility by the Company or any of its managers, supervisors,
owners, members, officers, or other employees, of which I am aware as of the date below is (are) as follows:
__/s/ D. West Griffin _____ ___1/02/2020_________
Jennings Employment Agreement
October 27, 2019
Exhibit 10.28
H. Keith Jennings
6327 Sewanee Avenue
Houston, Texas, 77005
Subject: Calumet Offer Letter
Dear Keith,
On behalf of Calumet GP, LLC I am pleased to extend to you this offer to join us as EVP, Chief Financial Officer (CFO) and
Principal Accounting Officer. You will be located at our Indianapolis, Indiana location and will report to me. Your start date will be
Monday, October 28, 2019.
Your starting annual salary will be $425,000. You will be eligible to participate in the Calumet Annual Bonus Plan with a bonus
target of 150% of your annual base salary based on company financial metrics and your own individual contributions. If minimum
financial metrics and minimum individual contributions are met, it would pay at 50% of your base salary and at its maximum it
would pay at 200% of your base annual salary. If actual performance falls between the various levels (between minimum and target
for instance), the annual bonus award will be prorated, up to the maximum potential award. Should the Company not meet its
minimum financial target, no awards will be issued regardless of individual contributions. Your participation in the Plan will
commence on January 1, 2019 at the start of our fiscal year and be prorated accordingly if you start work after that date. Any award
earned under this Program will be paid 50% in cash and 50% in fully vested phantom units which you must hold for a minimum of
3 years.
For a sign-on bonus, Calumet will match any purchases of CLMT units that you make in the open market according to the
following conditions. You agree to conduct your purchases in accordance with our insider trading policy. Our match will apply to
your purchases from your start date through the first 12 calendar months, equivalent to $500,000 that we will match unit for unit in
“company match phantom units.” Our match will be grossed up for taxes. Your right to receive these company match phantom
units will not be subject to any other performance standard. At the end of months 3, 9 and 12 of your employment, we will deliver
you the number of fully vested phantom units equal to the number CLMT units you purchased during the preceding three or six
month period, as applicable. If you are terminated without cause, the company match phantom units earned but not yet delivered
will be delivered immediately following termination. Within two years from your start date and for the duration of your
employment with Calumet, you agree to maintain the equivalent of twice your annual salary in aggregated value of CLMT units
and/or company match phantom units.
You will also be eligible to participate in the Calumet GP, LLC Amended and Restated Long-Term Incentive Plan. Your annual
LTIP target will be 60% of your annual base salary and these units have a 3-year cliff vest requirement. Any award under the Plan
will take into consideration your individual contribution as well as the achievement of Company financial targets. Should the
Company not meet its minimum financial target, no awards will be issued under the Plan.
As a salaried, exempt full-time employee you will be eligible for all benefits currently available to full-time employees of Calumet,
including the Group Health Care plan, Life and AD&D Insurance, Long-Term Disability income Insurance, Retirement Savings
Plan, which has a current Company match of 100% on the first 4% employee contribution and then 50% on the next 2% employee
contribution. You
will also be eligible for the Calumet Deferred Compensation Plan with its generous match. For every $1 you contribute from your
tax deferred bonus, the Company contributes a match of 33%. Relocation benefits will be agreed by both parties to optimize tax
liabilities and will cover moving your household goods, travel arrangements for your family and new home purchase assistance.
One month of temporary living expenses are included in your relocation benefits (including temporary housing), and an additional
5 months of temporary housing benefits will also be included.
Your vacation time off eligibility is 160 hours, which will be prorated for 2019 based on your actual start date.
As an officer of the company, you will be covered by the company’s D&O insurance policy. The policy details will be sent to you
separately.
Calumet GP, LLC is an at-will employer. Calumet does not offer tenured or guaranteed employment. Either Calumet or the
employee can terminate the employment relationship at any time, with or without cause, with or without notice (see separate At
Will Employment Agreement). In the event you are terminated by Calumet without cause (other than in connection with a Change
in Control (as defined below)), you will receive severance equal to 12 months of your annual base salary and annual target bonus,
contingent on you signing Calumet’s standard severance and release agreement. In the event you are terminated without cause
within 24 months following a Change in Control, you will receive 200% of the sum of your base salary and target bonus, in each
case, as in effect as of the termination date, contingent on you signing Calumet’s standard severance and release agreement. As
used herein, a “Change in Control” means, and shall be deemed to have occurred upon, the first to occur of the following events: (i)
any “person” or “group,” within the meaning of those terms as used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended, other than the Company or its Affiliates, or Fred M. Fehsenfeld, Jr. or F. William Grube or their respective
immediate families or Affiliates, becomes the beneficial owner, by way of merger, consolidation, recapitalization, reorganization or
otherwise, of 50% or more of the voting power of the outstanding equity interests of the Calumet Specialty Products Partners, L.P.
(“MLP”) or the Company; (ii) a person or entity other than the Company or an Affiliate of the Company becomes the general
partner of the MLP; or (iii) the sale or other disposition, including by liquidation or dissolution, of all or substantially all of the
assets of the Company or the MLP in one or more transactions to any person other than an Affiliate of the Company or the MLP.
Notwithstanding the foregoing, in any circumstance or transaction in which compensation payable pursuant to this commitment
would be subject to the income tax under Section 409A (as defined below) if the foregoing definition of “Change in Control” were
to apply, but would not be so subject if the term “Change in Control” were defined herein to mean a “change in control event”
within the meaning of Treasury Regulation § 1.409A-3(i)(5), then “Change in Control” means, but only to the extent necessary to
prevent such compensation from becoming subject to the income tax under Section 409A, a transaction or circumstance that
satisfies the requirements of both (1) a Change in Control under the applicable clause (i) through (iii) above, and (2) a “change in
control event” within the meaning of Treasury Regulation § 1.409A-3(i)(5).
Please note that consistent with Calumet’s policy, this offer of employment is contingent upon:
•
•
•
Satisfactory results of a drug and alcohol screening that we will arrange for you
Satisfactory results of a routine background check
Proof of authorization to work and proof of identify in compliance with terms of the Federal Immigration Reform and
Control Act. (1-9)
• Execution of all applicable employment agreements and consent Calumet Policies.
Failure or refusal to submit to or satisfactorily complete these requirements will results in rescinding this offer of employment.
I am pleased to have you join the Calumet team and look forward to working with you. Please call me with any questions.
Sincerely,
Tim Go
Chef Executive Officer
Agreed and accepted:
__/s/ H. Keith Jennings___________ _____1/29/2020__________
H. Keith Jennings Date
SUBSIDIARIES OF CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
(As of December 31, 2019)
Exhibit 21.1
Name of Subsidiary
Calumet Operating, LLC
Calumet Refining, LLC
Calumet Shreveport Refining, LLC
Calumet Finance Corp.
Calumet Karns City Refining, LLC
Calumet Dickinson Refining, LLC
Calumet Missouri, LLC
Calumet Montana Refining, LLC
Calumet Branded Products, LLC
Bel-Ray Company, LLC
Bel-Ray Company Pty Limited
Kurlin Company, LLC
Calumet Mexico, LLC
Calumet Specialty Oils de Mexico, S. de R.L. de C.V.
Calumet Africa Proprietary Limited
Calumet Princeton Refining, LLC
Calumet Cotton Valley Refining, LLC
Calumet Specialty Products Canada, ULC
Calumet International, Inc.
Jurisdiction of Organization
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Australia
Delaware
Delaware
Mexico
South Africa
Delaware
Delaware
Canada
Delaware
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statements:
(1) Registration Statement (Form S-8 No. 333-226740) of Calumet Specialty Products Partners, L.P.,
(2) Registration Statement (Form S-8 No. 333-208511) of Calumet Specialty Products Partners, L.P.,
(3) Registration Statement (Form S-8 No. 333-186961) of Calumet Specialty Products Partners, L.P., and
(4) Registration Statement (Form S-8 No. 333-138767) of Calumet Specialty Products Partners, L.P..
of our reports dated March 5, 2020, with respect to the consolidated financial statements of Calumet Specialty Products Partners, L.P., and the effectiveness of
internal control over financial reporting of Calumet Specialty Products Partners, L.P. included in this Annual Report (Form 10-K) for the year ended
December 31, 2019.
/s/ Ernst & Young LLP
Indianapolis, Indiana
March 5, 2020
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.1
I, Timothy Go, certify that:
1. I have reviewed this Annual Report on Form 10-K of Calumet Specialty Products Partners, L.P. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date:
March 5, 2020
/s/ Timothy Go
Timothy Go
Chief Executive Officer of Calumet GP, LLC, general partner of
Calumet Specialty Products Partners, L.P.
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.2
I, H. Keith Jennings, certify that:
1. I have reviewed this Annual Report on Form 10-K of Calumet Specialty Products Partners, L.P. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date:
March 5, 2020
/s/ H. Keith Jennings
H. Keith Jennings
Executive Vice President and Chief Financial Officer of Calumet GP, LLC, general partner of
Calumet Specialty Products Partners, L.P.
(Principal Financial Officer)
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
UNDER SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C. § 1350
Exhibit 32.1
In connection with the Annual Report of Calumet Specialty Products Partners, L.P. (the “Company”) on Form 10-K for the year ended December 31, 2019
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of Calumet GP, LLC, the general
partner of the Company, does hereby certify that:
(a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
(b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
March 5, 2020
March 5, 2020
/s/ Timothy Go
Timothy Go
Chief Executive Officer of Calumet GP, LLC, general partner of Calumet Specialty
Products Partners, L.P
(Principal Executive Officer)
/s/ H. Keith Jennings
H. Keith Jennings
Executive Vice President and Chief Financial Officer of Calumet GP, LLC, general partner
of Calumet Specialty Products Partners, L.P
(Principal Financial Officer)