UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 000-51734
Calumet Specialty Products Partners, L.P.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 37-1516132 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) | |
2780 Waterfront Parkway East Drive, Suite 200 | ||
Indianapolis, Indiana | 46214 | |
(Address of Principal Executive Officers) | (Zip Code) |
(317) 328-5660
(Registrants Telephone Number Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
At August 9, 2012, there were 57,529,778 common units outstanding.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
QUARTERLY REPORT
For the Three and Six Months Ended June 30, 2012
Table of Contents
2
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this Quarterly Report) includes certain forward-looking statements. These statements can be identified by the use of forward-looking terminology including may, intend, believe, expect, anticipate, estimate, continue, or other similar words. The statements regarding (i) estimated capital expenditures as a result of the required audits or required operational changes included in our settlement with the Louisiana Department of Environmental Quality (LDEQ) 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 and fuel products price changes and (iii) our ability to meet our financial commitments, minimum quarterly distributions to our unitholders, debt service obligations, debt instrument covenants, contingencies and anticipated capital expenditures, as well as other matters discussed in this Quarterly Report that are not purely historical data, are forward-looking statements. These forward-looking statements are based on our current expectations and beliefs 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 revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. 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 (1) Part I Item 3 Quantitative and Qualitative Disclosures About Market Risk and (2) Part I Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (2011 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 Quarterly Report to Calumet Specialty Products Partners, L.P., the Company, we, our, us or like terms refer to Calumet Specialty Products Partners, L.P. and its subsidiaries. References in this Quarterly Report to our general partner refer to Calumet GP, LLC, the general partner of Calumet Specialty Products Partners, L.P.
3
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2012 | December 31, 2011 | |||||||
(Unaudited) | ||||||||
(In thousands, except unit data) | ||||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 65,474 | $ | 64 | ||||
Accounts receivable: |
||||||||
Trade |
247,387 | 208,928 | ||||||
Other |
1,198 | 3,137 | ||||||
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|
|
|
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248,585 | 212,065 | |||||||
Inventories |
513,319 | 497,740 | ||||||
Derivative assets |
14,949 | 58,502 | ||||||
Prepaid expenses and other current assets |
11,307 | 8,179 | ||||||
Deposits |
7,869 | 2,094 | ||||||
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|
|
|
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Total current assets |
861,503 | 778,644 | ||||||
Property, plant and equipment, net |
856,510 | 842,101 | ||||||
Restricted cash |
263,313 | | ||||||
Goodwill |
50,450 | 48,335 | ||||||
Other intangible assets, net |
27,019 | 22,675 | ||||||
Other noncurrent assets, net |
52,363 | 40,303 | ||||||
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Total assets |
$ | 2,111,158 | $ | 1,732,058 | ||||
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LIABILITIES AND PARTNERS CAPITAL | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 247,626 | $ | 302,826 | ||||
Accrued interest payable |
10,348 | 10,500 | ||||||
Accrued salaries, wages and benefits |
12,277 | 13,481 | ||||||
Taxes payable |
15,140 | 13,068 | ||||||
Other current liabilities |
7,823 | 4,600 | ||||||
Current portion of long-term debt |
773 | 551 | ||||||
Derivative liabilities |
45,531 | 43,581 | ||||||
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|
|
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Total current liabilities |
339,518 | 388,607 | ||||||
Pension and postretirement benefit obligations |
26,547 | 26,957 | ||||||
Other long-term liabilities |
1,139 | 1,055 | ||||||
Long-term debt, less current portion |
862,255 | 586,539 | ||||||
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|
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Total liabilities |
1,229,459 | 1,003,158 | ||||||
Commitments and contingencies |
||||||||
Partners capital: |
||||||||
Limited partners interest (57,529,778 and 51,529,778 units issued and outstanding, respectively, at June 30, 2012 and December 31, 2011) |
870,717 | 666,471 | ||||||
General partners interest |
29,044 | 23,902 | ||||||
Accumulated other comprehensive income (loss) |
(18,062 | ) | 38,527 | |||||
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|
|
|||||
Total partners capital |
881,699 | 728,900 | ||||||
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Total liabilities and partners capital |
$ | 2,111,158 | $ | 1,732,058 | ||||
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|
See accompanying notes to unaudited condensed consolidated financial statements.
4
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, |
For the Six Months
Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In thousands, except per unit data) | ||||||||||||||||
Sales |
$ | 1,086,996 | $ | 733,770 | $ | 2,256,582 | $ | 1,339,010 | ||||||||
Cost of sales |
958,188 | 683,205 | 2,043,530 | 1,241,581 | ||||||||||||
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|
|||||||||
Gross profit |
128,808 | 50,565 | 213,052 | 97,429 | ||||||||||||
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Operating costs and expenses: |
||||||||||||||||
Selling, general and administrative |
22,046 | 10,467 | 40,188 | 20,995 | ||||||||||||
Transportation |
24,957 | 22,691 | 52,499 | 45,766 | ||||||||||||
Taxes other than income taxes |
1,918 | 1,203 | 3,648 | 2,563 | ||||||||||||
Insurance recoveries |
| (7,910 | ) | | (8,698 | ) | ||||||||||
Other |
1,428 | 703 | 3,244 | 1,238 | ||||||||||||
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|||||||||
Operating income |
78,459 | 23,411 | 113,473 | 35,565 | ||||||||||||
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Other income (expense): |
||||||||||||||||
Interest expense |
(18,392 | ) | (10,544 | ) | (36,976 | ) | (18,025 | ) | ||||||||
Debt extinguishment costs |
| (15,130 | ) | | (15,130 | ) | ||||||||||
Realized gain (loss) on derivative instruments |
21,218 | (2,370 | ) | 30,642 | (1,984 | ) | ||||||||||
Unrealized gain (loss) on derivative instruments |
(15,280 | ) | (3,124 | ) | 10,764 | (3,541 | ) | |||||||||
Other |
(4 | ) | 274 | 114 | 103 | |||||||||||
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|||||||||
Total other income (expense) |
(12,458 | ) | (30,894 | ) | 4,544 | (38,577 | ) | |||||||||
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Net income (loss) before income taxes |
66,001 | (7,483 | ) | 118,017 | (3,012 | ) | ||||||||||
Income tax expense |
339 | 168 | 432 | 438 | ||||||||||||
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Net income (loss) |
$ | 65,662 | $ | (7,651 | ) | $ | 117,585 | $ | (3,450 | ) | ||||||
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Allocation of net income (loss): |
||||||||||||||||
Net income (loss) |
$ | 65,662 | $ | (7,651 | ) | $ | 117,585 | $ | (3,450 | ) | ||||||
Less: |
||||||||||||||||
General partners interest in net income (loss) |
1,314 | (153 | ) | 2,352 | (69 | ) | ||||||||||
General partners incentive distribution rights |
1,096 | | 1,619 | | ||||||||||||
Nonvested share based payments |
377 | | 685 | | ||||||||||||
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Net income (loss) available to limited partners |
$ | 62,875 | $ | (7,498 | ) | $ | 112,929 | $ | (3,381 | ) | ||||||
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Weighted average limited partner units outstanding: |
||||||||||||||||
Basic |
55,028 | 39,886 | 53,354 | 38,373 | ||||||||||||
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Diluted |
55,074 | 39,886 | 53,380 | 38,373 | ||||||||||||
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Limited partners interest basic and diluted net income (loss) per unit |
$ | 1.14 | $ | (0.19 | ) | $ | 2.12 | $ | (0.09 | ) | ||||||
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Cash distributions declared per limited partner unit |
$ | 0.56 | $ | 0.475 | $ | 1.09 | $ | 0.945 | ||||||||
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See accompanying notes to unaudited condensed consolidated financial statements.
5
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, |
For the Six Months
Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net income (loss) |
$ | 65,662 | $ | (7,651 | ) | $ | 117,585 | $ | (3,450 | ) | ||||||
Other comprehensive income (loss): |
||||||||||||||||
Cash flow hedges: |
||||||||||||||||
Cash flow hedge loss reclassified to net income (loss) |
53,229 | 27,430 | 96,031 | 46,944 | ||||||||||||
Change in fair value of cash flow hedges |
20,166 | (14,051 | ) | (152,888 | ) | (142,775 | ) | |||||||||
Defined benefit pension and retiree health benefit plans |
133 | 61 | 268 | 122 | ||||||||||||
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Total other comprehensive income (loss) |
73,528 | 13,440 | (56,589 | ) | (95,709 | ) | ||||||||||
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Comprehensive income (loss) attributable to partners capital |
$ | 139,190 | $ | 5,789 | $ | 60,996 | $ | (99,159 | ) | |||||||
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See accompanying notes to unaudited condensed consolidated financial statements.
6
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
Accumulated
Other Comprehensive Income (Loss) |
Partners Capital | |||||||||||||||
General Partner |
Limited Partners |
Total | ||||||||||||||
(In thousands) | ||||||||||||||||
Balance at December 31, 2011 |
$ | 38,527 | $ | 23,902 | $ | 666,471 | $ | 728,900 | ||||||||
Other comprehensive loss |
(56,589 | ) | | | (56,589 | ) | ||||||||||
Net income |
| 3,971 | 113,614 | 117,585 | ||||||||||||
Units repurchased for phantom unit grants |
| | (2,110 | ) | (2,110 | ) | ||||||||||
Issuance of phantom units |
| | 1,648 | 1,648 | ||||||||||||
Amortization of vested phantom units |
| | 864 | 864 | ||||||||||||
Proceeds from public offering of common units, net |
| | 146,597 | 146,597 | ||||||||||||
Contributions from Calumet GP, LLC |
| 3,122 | | 3,122 | ||||||||||||
Distributions to partners |
| (1,951 | ) | (56,367 | ) | (58,318 | ) | |||||||||
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Balance at June 30, 2012 |
$ | (18,062 | ) | $ | 29,044 | $ | 870,717 | $ | 881,699 | |||||||
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See accompanying notes to unaudited condensed consolidated financial statements.
7
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30, |
||||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
Operating activities |
||||||||
Net income (loss) |
$ | 117,585 | $ | (3,450 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
39,286 | 28,964 | ||||||
Amortization of turnaround costs |
7,161 | 5,746 | ||||||
Non-cash interest expense |
2,759 | 1,655 | ||||||
Non-cash debt extinguishment costs |
| 14,401 | ||||||
Provision for doubtful accounts |
267 | 255 | ||||||
Unrealized (gain) loss on derivative instruments |
(10,764 | ) | 3,541 | |||||
Non-cash equity based compensation |
1,875 | 1,963 | ||||||
Other non-cash activities |
813 | (1,625 | ) | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(31,815 | ) | (48,479 | ) | ||||
Inventories |
(4,828 | ) | (111,555 | ) | ||||
Prepaid expenses and other current assets |
(2,856 | ) | (1,747 | ) | ||||
Derivative activity |
(590 | ) | 5,699 | |||||
Turnaround costs |
(14,141 | ) | (7,501 | ) | ||||
Deposits |
(5,775 | ) | (12,735 | ) | ||||
Accounts payable |
(57,872 | ) | 58,145 | |||||
Accrued interest payable |
(152 | ) | 4,689 | |||||
Accrued salaries, wages and benefits |
(718 | ) | 383 | |||||
Taxes payable |
2,072 | 1,186 | ||||||
Other liabilities |
2,389 | (9,473 | ) | |||||
Pension and postretirement benefit obligations |
(142 | ) | (620 | ) | ||||
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Net cash provided by (used in) operating activities |
44,554 | (70,558 | ) | |||||
Investing activities |
||||||||
Additions to property, plant and equipment |
(22,456 | ) | (20,635 | ) | ||||
Proceeds from insurance recoveries equipment |
| 1,942 | ||||||
Acquisitions of TruSouth and Missouri |
(46,402 | ) | | |||||
Change in restricted cash |
(263,313 | ) | | |||||
Proceeds from sale of property, plant and equipment |
1,913 | 130 | ||||||
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Net cash used in investing activities |
(330,258 | ) | (18,563 | ) | ||||
Financing activities |
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Proceeds from borrowings revolving credit facility |
1,055,168 | 692,543 | ||||||
Repayments of borrowings revolving credit facility |
(1,055,168 | ) | (675,285 | ) | ||||
Repayments of borrowings term loan credit facility |
| (367,385 | ) | |||||
Payments on capital lease obligations |
(881 | ) | (534 | ) | ||||
Proceeds from public offering of common units, net |
146,597 | 92,290 | ||||||
Proceeds from senior notes offering |
270,187 | 400,000 | ||||||
Debt issuance costs |
(7,483 | ) | (17,582 | ) | ||||
Contributions from Calumet GP, LLC |
3,122 | 1,970 | ||||||
Common units repurchased for vested phantom unit grants |
(2,110 | ) | (620 | ) | ||||
Distributions to partners |
(58,318 | ) | (36,258 | ) | ||||
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Net cash provided by financing activities |
351,114 | 89,139 | ||||||
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Net increase in cash and cash equivalents |
65,410 | 18 | ||||||
Cash and cash equivalents at beginning of period |
64 | 37 | ||||||
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Cash and cash equivalents at end of period |
$ | 65,474 | $ | 55 | ||||
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Supplemental disclosure of noncash financing and investing activities |
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Equipment acquired under capital lease |
$ | 4,255 | $ | | ||||
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See accompanying notes to unaudited condensed consolidated financial statements.
8
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Description of the Business
Calumet Specialty Products Partners, L.P. (the Company) is a Delaware limited partnership. The general partner of the Company is Calumet GP, LLC, a Delaware limited liability company. As of June 30, 2012, the Company had 57,529,778 limited partner common units and 1,174,077 general partner equivalent units. The general partner owns 2% of the Company and all of the incentive distribution rights (as defined in the Companys partnership agreement), while the remaining 98% is owned by limited partners. The general partner employs all employees and the limited partnership reimburses the general partner for all expenses. The Company is engaged in the production and marketing of crude oil-based specialty lubricating oils, white mineral oils, solvents, petrolatums, asphalt, waxes and fuel and fuel related products including gasoline, diesel, jet fuel and heavy fuel oils. The Company owns facilities located in Shreveport, Louisiana (Shreveport and TruSouth); Superior, Wisconsin (Superior); Princeton, Louisiana (Princeton); Cotton Valley, Louisiana (Cotton Valley); Karns City, Pennsylvania (Karns City); Dickinson, Texas (Dickinson); Louisiana, Missouri (Missouri) and Houston, Texas (Royal Purple) and terminals located in Burnham, Illinois (Burnham); Rhinelander, Wisconsin (Rhinelander); Crookston, Minnesota (Crookston) and Proctor, Minnesota (Duluth).
The unaudited condensed consolidated financial statements of the Company as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America (the U.S.) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal nature, unless otherwise disclosed. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. These unaudited condensed consolidated financial statements should be read in conjunction with the Companys 2011 Annual Report.
2. New and Recently Adopted Accounting Pronouncements
In July 2012, the FASB issued ASU No. 2012-02, Intangibles (Topic 350)Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02). ASU 2012-02 permits an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is more than its carrying amount. If based on its qualitative assessment an entity concludes it is more likely than not that the fair value of an indefinite-lived intangible asset exceeds its carrying amount, quantitative impairment testing is not required. However, if an entity concludes otherwise, quantitative impairment testing is required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2012-02 on its financial statements.
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210)Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). ASU 2011-11 will require entities to disclose information about offsetting and related arrangements to enable financial statement users to understand the effect of such arrangements on the balance sheet. Entities are required to disclose both gross information and net information about financial instruments and derivative instruments that are either offset in the balance sheet or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. ASU 2011-11 is effective for the first reporting period (including interim periods) beginning after January 1, 2013 and should be applied retrospectively for any period presented. The Company is in the process of evaluating the impact of the adoption of ASU 2011-11 on its financial stat ements.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05), which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income (loss) as part of the statement of partners capital. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income (loss) which contains two sections, net income and other comprehensive income (loss), or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12), which indefinitely defers the requirement in ASU 2011-05 to present reclassification adjustments out of accumulated other comprehensive income (loss) by component in both the statement in which net income is presented and the statement in which other comprehensive income (loss) is presented. During the deferral period, the existing requirements in U.S. GAAP for the presentation of reclassification adjustments must continue to be followed. Amendments to ASU 2011-05, as superseded by ASU 2011-12, are effective for fiscal years (including interim periods) beginning after December 15, 2011 and are to be applied retrospectively, with early adoption permitted. The Company elected to present the components of comprehensive loss in two separate but consecutive financial statements, which is illustrated in the unaudited condensed consolidated statements of operations and the unaudited condensed consolidated statements of comprehensive income (loss).
9
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS (ASU 2011-04). ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments are of two types: (i) those that clarify the FASBs intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. ASU 2011-04 is effective for the first reporting period (including interim periods) beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on the Companys unaudited condensed consolidated financial statements.
3. Acquisitions
Superior Acquisition
On September 30, 2011, the Company completed the acquisition of the Superior, Wisconsin refinery and associated operating assets and inventories and related business of Murphy Oil Corporation (Murphy Oil) for aggregate consideration of approximately $413,173 (Superior Acquisition). The Superior Acquisition was financed by a combination of (i) net proceeds of $193,538 from the Companys September 2011 public offering of common units (including the general partners contribution and excluding the over-allotment option exercised), (ii) net proceeds of $180,296 from the Companys September 2011 private placement of 9 3/8% senior notes due May 1, 2019 and (iii) borrowings under the Companys revolving credit facility.
The allocation of the aggregate purchase price to assets acquired and liabilities assumed is as follows:
Allocation of Purchase Price |
||||
Inventories |
$ | 183,602 | ||
Prepaid expenses and other current assets |
5,845 | |||
Property, plant and equipment |
239,478 | |||
Accrued salaries, wages and benefits |
(775 | ) | ||
Pension and postretirement benefit obligations |
(14,977 | ) | ||
|
|
|||
Total purchase price |
$ | 413,173 | ||
|
|
Missouri Acquisition
On January 3, 2012, the Company completed the acquisition of the aviation and refrigerant lubricants business (a polyolester based synthetic lubricants business) of Hercules Incorporated, a subsidiary of Ashland, Inc., and a manufacturing facility located in Louisiana, Missouri (Missouri Acquisition) for aggregate consideration of approximately $19,575. The Missouri Acquisition was financed with borrowings under the Companys revolving credit facility and cash on hand. The Company believes the Missouri Acquisition will provide greater diversity to its specialty products segment. The assets acquired have been included in the condensed consolidated balance sheets and results have been included in the unaudited condensed consolidated statements of operations since the date of acquisition. In connection with the Missouri Acquisition, during the three and six months ended June 30, 2012, the Company incurred acquisition costs of approximately $25 and $505, respectively, which are reflected in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.
The Company recorded $1,478 of goodwill as a result of this acquisition, all of which was recorded within the Companys specialty products segment. Goodwill recognized in the acquisition relates primarily to enhancing the Companys strategic platform for expansion in its specialty products segment. The allocation of the aggregate purchase price to assets acquired is as follows:
Allocation of Purchase Price |
||||
Inventories |
$ | 2,775 | ||
Property, plant and equipment |
9,955 | |||
Goodwill |
1,478 | |||
Other intangible assets |
5,367 | |||
|
|
|||
Total purchase price |
$ | 19,575 | ||
|
|
10
The component of the intangible asset listed in the table above as of January 3, 2012, based upon a third party appraisal, was as follows:
Amount | Life | |||||||
Customer relationships |
$ | 5,367 | 20 |
TruSouth Acquisition
On January 6, 2012, the Company completed the acquisition of all of the outstanding membership interests of TruSouth Oil, LLC, a specialty petroleum packaging and distribution company located in Shreveport, Louisiana (TruSouth Acquisition) for aggregate consideration of approximately $26,827. The TruSouth Acquisition was financed with borrowings under the Companys revolving credit facility. Immediately prior to its acquisition by the Company, TruSouth was owned in part by affiliates of the Companys general partner. The Company believes the TruSouth Acquisition will provide greater diversity to its specialty products segment. The assets acquired and liabilities assumed have been included in the condensed consolidated balance sheets and results have been included in the unaudited condensed consolidated statements of operations since the date of acquisition. In connection with the TruSouth Acquisition, during the three and six months ended June 30, 2012, the Company incurred acquisition costs of $25 and $179, respectively, which are reflected in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.
The Company recorded $637 of goodwill as a result of this acquisition, all of which was recorded within the Companys specialty products segment. Goodwill recognized in the acquisition relates primarily to enhancing the Companys strategic platform for expansion in its specialty products segment. The allocation of the aggregate purchase price to assets acquired and liabilities assumed is as follows:
Allocation of Purchase Price |
||||
Accounts receivable |
$ | 4,972 | ||
Inventories |
7,976 | |||
Prepaid expenses and other current assets |
272 | |||
Property, plant and equipment |
17,682 | |||
Goodwill |
637 | |||
Other intangible assets |
2,545 | |||
Accounts payable |
(2,672 | ) | ||
Accrued salaries, wages and benefits |
(151 | ) | ||
Other current liabilities |
(918 | ) | ||
Long-term debt |
(3,516 | ) | ||
|
|
|||
Total purchase price, net of cash acquired |
$ | 26,827 | ||
|
|
The components of intangible assets listed in the table above as of January 6, 2012, based upon a third party appraisal, were as follows:
Amount | Life | |||||||
Customer relationships |
$ | 1,775 | 15 | |||||
Tradenames |
675 | 9 | ||||||
Non-competition agreements |
95 | 2 | ||||||
|
|
|
|
|||||
Total |
$ | 2,545 | ||||||
|
|
|||||||
Weighted average amortization period |
13 |
11
Results of Sales and Earnings
The following financial information reflects the results of sales and operating income of the Superior, Missouri and TruSouth Acquisitions that are included in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2012:
Three Months Ended June 30, 2012 |
Six Months Ended June 30, 2012 |
|||||||
Sales |
$ | 331,336 | $ | 685,158 | ||||
Operating income |
28,159 | 48,531 |
Pro Forma Financial Information
The following unaudited pro forma financial information reflects the unaudited condensed consolidated results of operations of the Company as if the Superior, Missouri and TruSouth Acquisitions had taken place on January 1, 2011.
Three Months Ended June 30, 2011 |
Six Months Ended June 30, 2011 |
|||||||
Sales |
$ | 1,162,330 | $ | 2,060,473 | ||||
Net income |
662 | 7,229 | ||||||
Limited partners interest net income per unit basic and diluted |
$ | 0.01 | $ | 0.14 |
The Companys historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the Superior, Missouri and TruSouth Acquisitions. This unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or the future consolidated results of operations of the combined company.
For the three months ended June 30, 2011 the unaudited pro forma financial information reflects adjustments to increase interest expense by $10,243 as a result of the issuance of the 2019 Notes (defined below), amending and restating the revolving credit facility, additional borrowings under the revolving credit facility to fund portions of the Superior, Missouri and TruSouth Acquisitions and the repayment of borrowings under the prior term loan from the net proceeds of the 2019 Notes issued in April 2011. Additionally, the unaudited pro forma financial information reflects adjustments to increase depreciation expense by $216 as a result of the addition of fixed assets related to the Superior Acquisition at their estimated fair value, as well as adjustments to eliminate the income tax expense attributable to the Superior Acquisition of $6,702.
For the six month ended June 30, 2011 the unaudited pro forma financial information reflects adjustments to increase interest expense by $20,490 as a result of the issuance of the 2019 Notes, amending and restating the revolving credit facility, additional borrowings under the revolving credit facility to fund a portion of the Superior, Missouri and TruSouth Acquisitions and the repayment of borrowings under the prior term loan from the net proceeds of the 2019 Notes issued in April 2011. Additionally, the unaudited pro forma financial information reflects adjustments to increase depreciation expense by $431 as a result of the addition of fixed assets related to the Superior Acquisition at their estimated fair value, as well as adjustments to eliminate the income tax expense attributable to the Superior Acquisition of $11,170.
Fair Value Measurements of Acquisitions
The fair value of the property, plant and equipment and intangible assets are based upon the discounted cash flow method that involves inputs that are not observable in the market (Level 3). Goodwill assigned represents the amount of consideration transferred in excess of the fair value assigned to individual assets acquired and liabilities assumed.
4. Inventories
The Company uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on managements estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. 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.
Inventories consist of the following:
June 30 , 2012 |
December 31, 2011 |
|||||||
Raw materials |
$ | 112,584 | $ | 105,802 | ||||
Work in process |
95,523 | 91,763 | ||||||
Finished goods |
305,212 | 300,175 | ||||||
|
|
|
|
|||||
$ | 513,319 | $ | 497,740 | |||||
|
|
|
|
12
The replacement cost of these inventories, based on current market values, would have been $27,053 and $87,635 higher as of June 30, 2012 and December 31, 2011, respectively.
5. Commitments and Contingencies
From time to time, the Company is a party to certain claims and litigation incidental to its business, including claims made by various taxation and regulatory authorities, such as the U.S. Environmental Protection Agency (EPA), the Louisiana Department of Environmental Quality (LDEQ), the Wisconsin Department of Natural Resources (WDNR), the Internal Revenue Service, various state and local departments of revenue and the federal Occupational Safety and Health Administration (OSHA), as the result of audits or reviews of the Companys 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.
Environmental
The Company operates crude oil and specialty hydrocarbon refining and terminal operations, which are subject to stringent and complex federal, state, regional and local laws and regulations governing worker health and safety, the discharge of materials into the environment and environmental protection. These laws and regulations can impose obligations that are applicable to the Companys operations, such as requiring the acquisition of permits to conduct regulated activities, restricting the manner in which the Company may release materials into the environment, requiring remedial activities or capital expenditures to mitigate pollution from former or current operations, requiring the application of specific health and safety criteria addressing worker protection and imposing substantial liabilities for pollution resulting from its operations. 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 connection with the Superior Acquisition, the Company became a party to an existing consent decree (Consent Decree) with the EPA and WDNR that applies, in part, to its Superior refinery. Under the Consent Decree, the Company will have to complete certain reductions in air emissions at the Superior refinery as well as report upon certain emissions from the facility to the EPA and WDNR. The Company currently estimates costs of approximately $4,300 to make known equipment upgrades and conduct other discrete tasks in compliance with the Consent Decree. Failure to perform required tasks under the Consent Decree could result in the imposition of stipulated penalties, which could be significant. In addition, the Company may have to pursue certain additional environmental and safety-related projects at the Superior refinery including, but not limited to: (i) installing process equipment pursuant to applicable EPA fuel content regulations; (ii) purchasing emission credits on an interim basis until such time as any process equipment that may be required under the EPA fuel content regulations is installed and operational; (iii) performing monitoring of historical contamination at the facility; (iv) upgrading treatment equipment or possibly pursuing other remedies, as necessary, to satisfy new effluent discharge limits under a federal Clean Water Act permit renewal that is pending and (v) pursuing various voluntary programs at the Superior refinery, including removing asbestos-containing materials or enhancing process safety or other maintenance practices. Completion of these additional projects would result in the Company incurring additional costs, which could be substantial. For the three and six months ended June 30, 2012, the Company incurred approximately $886 and $1,429, respectively, of costs related to installing process equipment pursuant to the EPA fuel content regulations.
On June 29, 2012, the EPA issued a Finding of Violation/Notice of Violation to the Companys Superior refinery. This finding is in response to information provided to the EPA by the Company in response to an information request. The EPA alleges that the efficiency of the flares at the Superior refinery is lower than regulatory requirements. The Company is contesting the allegations and is currently awaiting an informal conference with the EPA. The Company does not believe that the resolution of these allegations will have a material adverse effect on the Companys financial results or operations.
In addition, the Company is indemnified by Murphy Oil for specified environmental liabilities including: (i) certain obligations arising out of the Consent Decree (including payment of a civil penalty required under the Consent Decree), (ii) certain liabilities arising in connection with Murphy Oils transport of certain wastes and other materials to specified offsite real properties for disposal or recycling prior to the Superior Acquisition and (iii) certain liabilities for certain third party actions, suits or proceedings alleging exposure, prior to the Superior Acquisition, of an individual to wastes or other materials at the specified on-site real property, which wastes or other materials were spilled, released, emitted or discharged by Murphy Oil. The Company is also indemnified by Murphy Oil for two years following the Superior Acquisition for liabilities arising from breaches of certain environmental representations and warranties made by Murphy Oil, subject to a maximum liability of $22,000, for which the Company is required to contribute up to the first $6,600.
On December 23, 2010, the Company entered into a settlement agreement with the LDEQ under LDEQs Small Refinery and Single Site Refinery Initiative, covering the Shreveport, Princeton and Cotton Valley refineries. This settlement agreement became effective on January 31, 2012. The settlement agreement, termed the Global Settlement, resolved alleged violations of the federal Clean Air Act and federal Clean Water Act regulations prior to December 31, 2010. The Company made a $1,000 payment to
13
the LDEQ and agreed to complete beneficial environmental programs and implement emissions reduction projects at the Companys Shreveport, Cotton Valley and Princeton refineries on an agreed-upon schedule. During the three and six months ended June 30, 2012, the Company incurred approximately $1,089 and $2,172, respectively, of expenditures and estimates additional expenditures of approximately $4,000 to $8,000 of capital expenditures and expenditures related to additional personnel and environmental studies over the next four years as a result of the implementation of these requirements. This agreement also fully settles the alleged environmental and permit violations at the Companys Shreveport, Cotton Valley and Princeton refineries and stipulates that no further civil penalties over alleged past violations at those refineries will be pursued by the LDEQ. The required investments are expected to include projects resulting in (i) nitrogen oxide and sulfur dioxide emission reductions from heaters and boilers and the application of New Source Performance Standards for sulfur recovery plants and flaring devices, (ii) control of incidents related to acid gas flaring, tail gas and hydrocarbon flaring, (iii) electrical reliability improvements to reduce flaring, (iv) flare refurbishment at the Shreveport refinery, (v) enhancement of the Benzene Waste National Emissions Standards for Hazardous Air Pollutants programs and the Leak Detection and Repair programs at the Companys Shreveport, Princeton and Cotton Valley refineries and (vi) Title V audits and targeted audits of certain regulatory compliance programs. During negotiations with the LDEQ, the Company voluntarily initiated projects for certain of these requirements prior to completing the Global Settlement with the LDEQ, and currently anticipates completion of these projects over the next four years. These capital investment requirements will be incorporated into the Companys annual capital expenditures budget and the Company does not expect any additional capital expenditures as a result of the required audits or required operational changes included in the Global Settlement to have a material adverse effect on the Companys financial results or operations. The terms of this settlement agreement were deemed final and effective on January 31, 2012 upon the concurrence of the Louisiana Attorney General.
Voluntary remediation of subsurface contamination is in process at each of the Companys refinery sites. The remedial projects are being overseen by the appropriate state agencies. Based on current investigative and remedial activities, the Company believes that the groundwater contamination at these refineries can be controlled or remedied without having a material adverse effect on the Companys financial condition. However, such costs are often unpredictable and, therefore, there can be no assurance that the future costs will not become material. The Company incurred approximately $13 of such capital expenditures at its Cotton Valley refinery during the three and six months ended June 30, 2012. The Company incurred approximately $57 and $261, respectively, of such capital expenditures at its Cotton Valley refinery during the three and six months ended June 30, 2011.
The Company is indemnified by Shell Oil Company, as successor to Pennzoil-Quaker State Company and Atlas Processing Company, for specified environmental liabilities arising from the operations of the Shreveport refinery prior to the Companys acquisition of the facility. The indemnity is unlimited in amount and duration, but requires the Company to contribute up to $1,000 of the first $5,000 of indemnified costs for certain of the specified environmental liabilities.
Occupational Health and Safety
The Company is subject to various laws and regulations relating to occupational health and safety, including OSHA and comparable state laws. These laws and regulations strictly govern the protection of the health and safety of employees. In addition, OSHAs hazard communication standard requires that information be maintained about hazardous materials used or produced in the Companys operations and that this information be provided to employees, contractors, state and local government authorities and customers. The Company maintains safety and training programs as part of its ongoing efforts to ensure compliance with applicable laws and regulations. The Company has implemented an internal program of inspection designed to monitor and enforce compliance with worker safety requirements as well as a quality system that meets the requirements of the ISO-9001-2008 Standard. The integrity of the Companys ISO-9001-2008 Standard certification is maintained through surveillance audits by its registrar at regular intervals designed to ensure adherence to the standards. The Companys compliance with applicable health and safety laws and regulations has required, and continues to require, substantial expenditures.
The Company has completed studies to assess the adequacy of its process safety management practices at its Shreveport refinery with respect to certain consensus codes and standards. During the three and six months ended June 30, 2012, the Company incurred approximately $48 and $302, respectively, of capital expenditures and expects to incur between $1,000 and $4,000 of capital expenditures during the remainder of 2012 and in 2013 to address OSHA compliance issues identified in these studies. The Company expects these capital expenditures will enhance its equipment such that the equipment maintains compliance with applicable consensus codes and standards.
In the first quarter of 2011, OSHA conducted an inspection of the Cotton Valley refinerys process safety management program under OSHAs National Emphasis Program. On March 14, 2011, OSHA issued a Citation and Notification of Penalty (the Cotton Valley Citation) to the Company as a result of the Cotton Valley inspection, which included a proposed penalty amount of $208. The Company has contested the Cotton Valley Citation and associated penalties and is currently in negotiations with OSHA to reach a settlement allowing an extended abatement period for a new refinery flare system study and for completion of facility site modifications, including relocation and hardening of structures.
14
Labor Matters
The Company has employees covered by various collective bargaining agreements. The Superior collective bargaining agreement expired on July 1, 2012 but has been indefinitely extended for a rolling 21 day period. The Missouri collective bargaining agreement was ratified on May 1, 2012 and will expire on April 30, 2014.
Standby Letters of Credit
The Company has agreements with various financial institutions for standby letters of credit which have been issued to domestic vendors. As of June 30, 2012 and December 31, 2011, the Company had outstanding standby letters of credit of $175,560 and $230,040, respectively, under its senior secured revolving credit facility (the revolving credit facility). Refer to Note 6 for additional information regarding the revolving credit facility. The maximum amount of letters of credit the Company could issue at June 30, 2012 and December 31, 2011 under its revolving credit facility is subject to borrowing base limitations, with a maximum letter of credit sublimit equal to $680,000, which is the greater of (i) $400,000 and (ii) 80% of revolver commitments ($850,000 at June 30, 2012 and December 31, 2011) in effect.
As of June 30, 2012 and December 31, 2011, the Company had availability to issue letters of credit of $388,459 and $340,715, respectively, under its revolving credit facility. As discussed in Note 7, as of June 30, 2012 and December 31, 2011 the outstanding standby letters of credit issued under the revolving credit facility included a $25,000 letter of credit issued to a hedging counterparty to support a portion of its fuel products hedging program.
15
6. Long-Term Debt
Long-term debt consisted of the following:
June 30, 2012 |
December 31, 2011 |
|||||||
Borrowings under amended and restated senior secured revolving credit agreement with third-party lenders, interest payments monthly, borrowings due June 2016 |
$ | | $ | | ||||
Borrowings under 2019 Notes, interest at a fixed rate of 9.375%, interest payments semiannually, borrowings due May 2019, effective interest rate of 9.90% for the six months ended June 30, 2012 |
600,000 | 600,000 | ||||||
Borrowings under 2020 Notes, interest at a fixed rate of 9.625%, interest payments semiannually, borrowings due August 2020, effective interest rate of 9.625% for the six months ended June 30, 2012 |
275,000 | | ||||||
Capital lease obligations, at various interest rates, interest and principal payments monthly through January 2027 |
5,905 | 786 | ||||||
Less unamortized discount on 2019 Notes issued in September 2011 and 2020 Notes |
(17,877 | ) | (13,696 | ) | ||||
|
|
|
|
|||||
Total long-term debt |
863,028 | 587,090 | ||||||
Less current portion of long-term debt |
773 | 551 | ||||||
|
|
|
|
|||||
$ | 862,255 | $ | 586,539 | |||||
|
|
|
|
9 5/8% Senior Notes
On June 29, 2012, in connection with the Royal Purple Acquisition (defined below), the Company issued and sold $275,000 in aggregate principal amount of 9 5/8% of senior notes due August 1, 2020 (the 2020 Notes) in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended (the Securities Act), to eligible purchasers at a discounted price of 98.25 percent of par. The 2020 Notes were resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to persons outside the United States pursuant to Regulation S under the Securities Act. The Company received net proceeds of $262,704, net of discount, underwriters fees and expenses. The net proceeds (before expenses) of $263,313 from the sale of the 2020 Notes were deposited into an escrow account pending completion of the Royal Purple Acquisition and released from the escrow account at the closing of the Royal Purple Acquisition on July 3, 2012. As of June 30, 2012, net proceeds (before expenses) were included in restricted cash on the consolidated condensed balance sheets. Refer to Note 14 for additional information regarding the Royal Purple Acquisition.
Interest on the 2020 Notes is paid semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2013. The 2020 Notes will mature on August 1, 2020, unless redeemed prior to maturity. The 2020 Notes are jointly and severally guaranteed on a senior unsecured basis by all of the Companys current operating subsidiaries and certain of the Companys future operating subsidiaries, with the exception of Calumet Finance Corp. (a wholly owned Delaware corporation that was organized for the sole purpose of being a co-issuer of certain of the Companys indebtedness, including the 2020 Notes). The 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 indenture governing the 2020 Notes.
At any time prior to August 1, 2015, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 2020 Notes with the net proceeds of a public or private equity offering at a redemption price of 109.625% of the principal amount, plus any accrued and unpaid interest to the date of redemption, provided that: (1) at least 65% of the aggregate principal amount of 2020 Notes issued remains outstanding immediately after the occurrence of such redemption and (2) the redemption occurs within 120 days of the date of the closing of such public or private equity offering.
On and after August 1, 2016, the Company may on any one or more occasions redeem all or a part of the 2020 Notes at the redemption prices (expressed as percentages of principal amount) set forth below, plus any accrued and unpaid interest to the applicable redemption date on such 2020 Notes, if redeemed during the twelve-month period beginning on August 1 of the years indicated below:
Year |
Percentage | |||
2016 |
104.813 | % | ||
2017 |
102.406 | % | ||
2018 and at any time thereafter |
100.000 | % |
Prior to August 1, 2016, the Company may on any one or more occasions redeem all or part of the 2020 Notes at a redemption price equal to the sum of: (1) the principal amount thereof, plus (2) a make-whole premium (as set forth in the indenture governing the 2020 Notes) at the redemption date, plus any accrued and unpaid interest to the applicable redemption date.
16
The indenture governing the 2020 Notes contains covenants that, among other things, restrict the Companys ability and the ability of certain of the Companys subsidiaries to: (i) sell assets; (ii) pay distributions on, redeem or repurchase the Companys 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 Companys restricted subsidiaries to the Company; (vii) consolidate, merge or transfer all or substantially all of the Companys 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 2020 Notes are rated investment grade by both Moodys Investors Service, Inc. and Standard & Poors Ratings Services and no Default or Event of Default, each as defined in the indenture governing the 2020 Notes, has occurred and is continuing, many of these covenants will be suspended.
Upon the occurrence of certain change of control events, each holder of the 2020 Notes will have the right to require that the Company repurchase all or a portion of such holders 2020 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.
On June 29, 2012, in connection with the issuance and sale of the 2020 Notes, the Company entered into a registration rights agreement (the Registration Rights Agreement) with the initial purchasers of the 2020 Notes obligating the Company to use reasonable best efforts to file an exchange registration statement with the SEC, so that holders of the 2020 Notes can offer to exchange the 2020 Notes for registered notes having substantially the same terms as the 2020 Notes and evidencing the same indebtedness as the 2020 Notes. The Company must use reasonable best efforts to cause the exchange offer registration statement to become effective by June 28, 2013 and remain effective until 180 days after the closing of the exchange. Additionally, the Company has agreed to commence the exchange offer promptly after the exchange offer registration statement is declared effective by the SEC and use reasonable best efforts to complete the exchange offer not later than 60 days after such effective date. Under certain circumstances, in lieu of a registered exchange offer, the Company must use reasonable best efforts to file a shelf registration statement for the resale of the 2020 Notes. If the Company fails to satisfy these obligations on a timely basis, the annual interest borne by the 2020 Notes will be increased by up to 1.0% per annum until the exchange offer is completed or the shelf registration statement is declared effective.
9 3/8% Senior Notes
On April 21, 2011, in connection with the restructuring of the majority of its outstanding long-term debt, the Company issued and sold $400,000 in aggregate principal amount of 9 3/8% of senior notes due May 1, 2019 (the 2019 Notes issued in April 2011) in a private placement pursuant to Rule 144A under the Securities Act to eligible purchasers at par. The 2019 Notes issued in April 2011 were resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to persons outside the United States pursuant to Regulation S under the Securities Act. The Company received proceeds of $388,999 net of underwriters fees and expenses, which the Company used to repay in full borrowings outstanding under its prior term loan, as well as all accrued interest and fees, and for general partnership purposes.
On September 19, 2011, in connection with the Superior Acquisition, the Company issued and sold $200,000 in aggregate principal amount of 9 3/8% of senior notes due May 1, 2019 (the 2019 Notes issued in September 2011) in a private placement pursuant to Rule 144A under the Securities Act to eligible purchasers at a discounted price of 93 percent of par. The 2019 Notes issued in September 2011 were resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to persons outside the United States pursuant to Regulation S under the Securities Act. The Company received proceeds of $180,296 net of discount, underwriters fees and expenses, which the Company used to fund a portion of the purchase price of the Superior Acquisition. Because the terms of the 2019 Notes issued in September 2011 are substantially identical to the terms of the 2019 Notes issued in April 2011, in this Quarterly Report, the Company collectively refers to the 2019 Notes issued in April 2011 and the 2019 Notes issued in September 2011 as the 2019 Notes.
Interest on the 2019 Notes is paid semiannually in arrears on May 1 and November 1 of each year, beginning on November 1, 2011. The 2019 Notes will mature on May 1, 2019, unless redeemed prior to maturity. The 2019 Notes are jointly and severally guaranteed on a senior unsecured basis by all of the Companys current operating subsidiaries and certain of the Companys future operating subsidiaries, with the exception of Calumet Finance Corp. (a wholly owned Delaware corporation that was organized for the sole purpose of being a co-issuer of certain of the Companys indebtedness, including the 2019 Notes). The 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 2019 Notes.
The indentures governing the 2019 Notes contain covenants that, among other things, restrict the Companys ability and the ability of certain of the Companys subsidiaries to: (i) sell assets; (ii) pay distributions on, redeem or repurchase the Companys 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 Companys restricted subsidiaries to the Company; (vii) consolidate, merge or transfer all or substantially all of the Companys 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 2019 Notes are rated investment grade by both Moodys Investors Service, Inc. and Standard & Poors Ratings Services and no Default or Event of Default, each as defined in the indentures governing the 2019 Notes, has occurred and is continuing, many of these covenants will be suspended.
17
Amended and Restated Senior Secured Revolving Credit Facility
The Company has an $850,000 senior secured revolving credit facility, which is its primary source of liquidity for cash needs in excess of cash generated from operations. The revolving credit facility matures in June 2016 and currently bears interest at a rate equal to prime plus a basis points margin or LIBOR plus a basis points margin, at the Companys option. As of June 30, 2012, the margin was 125 basis points for prime and 250 basis points for LIBOR; however, the margin can fluctuate quarterly based on the Companys average availability for additional borrowings under the revolving credit facility in the preceding calendar quarter.
In addition to paying interest monthly 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 0.375% to 0.50% per annum depending on the average daily available unused borrowing capacity. 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 June 30, 2012 under the revolving credit facility was $564,019. As of June 30, 2012, the Company had no outstanding borrowings under the revolving credit facility, leaving $388,459 available for additional borrowings based on specified availability limitations. Lenders under the revolving credit facility have a first priority lien on the Companys cash, accounts receivable, inventory and certain other personal property.
The revolving credit facility contains various covenants that limit, among other things, the Companys 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 Companys availability under the revolving credit facility falls below the greater of (i) 12.5% of the lesser of (a) the Borrowing Base (as defined in the revolving credit agreement) (without giving effect to the LC Reserve (as defined in the revolving credit agreement)) and (b) the credit agreement commitments then in effect and (ii) $46,364, (as increased, upon the effectiveness of the increase in the maximum availability under the revolving credit facility, by the same percentage as the percentage increase in the revolving credit agreement commitments), 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 revolving credit agreement) of at least 1.0 to 1.0.
Capital Lease Obligations
In connection with the TruSouth Acquisition, the Company acquired $5,771 of capital leases for a building and equipment.
Maturities of Long-term Debt
As of June 30, 2012, maturities of the Companys long-term debt are as follows:
Year |
Maturity | |||
2012 |
$ | 393 | ||
2013 |
771 | |||
2014 |
423 | |||
2015 |
303 | |||
2016 |
328 | |||
Thereafter |
878,687 | |||
|
|
|||
Total |
$ | 880,905 | ||
|
|
7. Derivatives
The Company utilizes derivative instruments to minimize its price risk and volatility of cash flows associated with the purchase of crude oil and natural gas, the sale of fuel products and interest payments. The Company employs various hedging strategies, which are further discussed below. The Company does not hold or issue derivative instruments for trading purposes.
18
The Company recognizes all derivative instruments at their fair values (see Note 8) as either current assets or current liabilities on the condensed consolidated balance sheets. Fair value includes any premiums paid or received and unrealized gains and losses. Fair value does not include any amounts receivable from or payable to counterparties, or collateral provided to counterparties. Derivative asset and liability amounts with the same counterparty are netted against each other for financial reporting purposes. The Companys financial results are subject to the possibility that changes in a derivatives fair value could result in significant ineffectiveness and potentially no longer qualify it for hedge accounting. The Company recorded the following derivative assets and liabilities at their fair values as of June 30, 2012 and December 31, 2011:
Derivative Assets | Derivative Liabilities | |||||||||||||||
June 30, 2012 | December 31, 2011 | June 30, 2012 | December 31, 2011 | |||||||||||||
Derivative instruments designated as hedges: |
||||||||||||||||
Fuel products segment: |
||||||||||||||||
Crude oil swaps |
$ | (19,019 | ) | $ | 83,919 | $ | (40,557 | ) | $ | 56,041 | ||||||
Gasoline swaps |
5,152 | (20,605 | ) | 7,227 | (1,596 | ) | ||||||||||
Diesel swaps |
8,624 | (4,561 | ) | (12,156 | ) | (22,586 | ) | |||||||||
Jet fuel swaps |
8,167 | 1,077 | 1,335 | (72,537 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative instruments designated as hedges |
2,924 | 59,830 | (44,151 | ) | (40,678 | ) | ||||||||||
Derivative instruments not designated as hedges: |
||||||||||||||||
Fuel products segment: |
||||||||||||||||
Crude oil swaps |
(4,901 | ) | | (5,082 | ) | | ||||||||||
Gasoline swaps |
4,464 | | | | ||||||||||||
Diesel swaps |
13,239 | | 5,051 | | ||||||||||||
Jet fuel swaps |
| | (480 | ) | | |||||||||||
Specialty products segment: |
||||||||||||||||
Crude oil swaps |
| | 584 | | ||||||||||||
Natural gas swaps (1) |
(777 | ) | (1,328 | ) | (1,308 | ) | (1,892 | ) | ||||||||
Interest rate swaps: (2) |
| | (145 | ) | (1,011 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative instruments not designated as hedges |
12,025 | (1,328 | ) | (1,380 | ) | (2,903 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative instruments |
$ | 14,949 | $ | 58,502 | $ | (45,531 | ) | $ | (43,581 | ) | ||||||
|
|
|
|
|
|
|
|
(1) | The Company enters into natural gas swaps to economically hedge its exposures to price risk related to these commodities in its specialty products segment. The Company has not designated these derivative instruments as cash flow hedges. |
(2) | The Company refinanced a significant majority of its long-term debt in April 2011 and, as a result, all of its interest rate swaps that were designated as cash flow hedges for the interest payments under the previous term loan facility are no longer designated as cash flow hedges. |
The Company accounts for certain derivatives hedging purchases of crude oil, sales of gasoline, diesel and jet fuel and the payment of interest as cash flow hedges. The derivatives hedging sales and purchases are recorded to sales and cost of sales, respectively, in the unaudited condensed consolidated statements of operations upon recording the related hedged transaction in sales or cost of sales. The derivatives designated as hedging payments of interest are recorded in interest expense in the unaudited condensed consolidated statements of operations upon payment of interest. The Company assesses, both at inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.
To the extent a derivative instrument designated as a hedge is determined to be effective as a cash flow hedge of an exposure to changes in the fair value of a future transaction, the change in fair value of the derivative is deferred in accumulated other comprehensive income (loss), a component of partners capital in the condensed consolidated balance sheets, until the underlying transaction hedged is recognized in the unaudited condensed consolidated statements of operations. Hedge accounting is discontinued when it is determined that a derivative no longer qualifies as an effective hedge or when it is no longer probable that the hedged forecasted transaction will occur. When hedge accounting is discontinued because the derivative instrument no longer qualifies as an effective cash flow hedge, the derivative instrument is subject to the mark-to-market method of accounting prospectively. Changes in the mark-to-market fair value of the derivative instrument are recorded to unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. Unrealized gains and losses related to discontinued cash flow hedges that were previously accumulated in accumulated other comprehensive income (loss) will remain in accumulated other comprehensive income (loss) until the underlying transaction is reflected in earnings, unless it is probable that the hedged forecasted transaction will not occur, at which time, associated deferred amounts in accumulated other comprehensive income (loss) are immediately recognized in unrealized gain (loss) on derivative instruments.
19
Effective January 1, 2012, hedge accounting was discontinued prospectively for certain crude oil derivative instruments when it was determined that they were no longer highly effective in offsetting changes in the cash flows associated with crude oil purchases at the Companys Superior refinery due to the volatility in crude oil pricing differentials between heavy crude oil and NYMEX WTI. The discontinuance of hedge accounting on these crude oil derivative instruments has caused the Company to recognize derivative gains of $13,975 and derivative losses of $67,770 in realized gain (loss) on derivative instruments and unrealized gain (loss) on derivative instruments, respectively, in the unaudited condensed consolidated statements of operations for the three months ended June 30, 2012. The discontinuance of hedge accounting on these crude oil derivative instruments caused the Company to recognize derivative gains of $41,154 and derivative losses of $38,472 in realized gain (loss) on derivative instruments and unrealized gain (loss) on derivative instruments, respectively, in the unaudited condensed consolidated statements of operations for the six months ended June 30, 2012.
Effective April 1, 2012, hedge accounting was discontinued prospectively for certain gasoline and diesel derivative instruments associated with gasoline and diesel sales at the Companys Superior refinery. The Company voluntarily discontinued hedge accounting on these gasoline and diesel fuel products derivative instruments because the associated crack spread crude oil derivatives no longer qualified for hedge accounting. The discontinuance of hedge accounting on these gasoline and diesel derivative instruments has caused the Company to recognize derivative gains of $13,273 and $80,691 in realized gain (loss) on derivative instruments and unrealized gain (loss) on derivative instruments, respectively, in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2012.
The amount reclassified from accumulated other comprehensive income (loss) into earnings, as a result of the discontinuance of hedge accounting for certain jet fuel products derivative instruments because it was no longer probable that the original forecasted transaction would occur by the end of the originally specified time period, has caused the Company to recognize derivative losses of $1,068 and $480 in realized gain (loss) on derivative instruments and unrealized gain (loss) on derivative instruments, respectively, in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2012.
For derivative instruments not designated as cash flow hedges and the portion of any cash flow hedge that is determined to be ineffective, the change in fair value of the asset or liability for the period is recorded to unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. Upon the settlement of a derivative not designated as a cash flow hedge, the gain or loss at settlement is recorded to realized gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. Ineffectiveness is inherent in the hedging of crude oil and fuel products. Due to the volatility in the markets for crude oil and fuel products, the Company is unable to predict the amount of ineffectiveness each period, which has the potential for the future loss of hedge accounting, determined on a derivative by derivative basis or in the aggregate for a specific commodity. Ineffectiveness has resulted, and the loss of hedge accounting has resulted, in increased volatility in the Companys financial results. However, even though certain derivative instruments may not qualify for hedge accounting, the Company intends to continue to utilize such instruments as management believes such derivative instruments continue to provide the Company with the opportunity to more effectively stabilize cash flows.
The Company recorded the following amounts in its condensed consolidated balance sheets, unaudited condensed consolidated statements of operations, unaudited condensed consolidated statements of other comprehensive income (loss) and its unaudited condensed consolidated statements of partners capital as of, and for the three months ended, June 30, 2012 and 2011 related to its derivative instruments that were designated as cash flow hedges:
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivatives (Effective Portion) |
Amount of (Gain) Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Net Income (Loss) (Effective Portion) |
Amount of Gain (Loss) Recognized in Net Income (Loss) on Derivatives (Ineffective Portion) |
||||||||||||||||||||||||||||
Three Months Ended June 30, |
Location
of (Gain) Loss |
Three Months Ended June 30, |
Location of Gain (Loss) |
Three Months Ended June 30, |
||||||||||||||||||||||||||
Type of Derivative |
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||||||||
Fuel products segment: |
||||||||||||||||||||||||||||||
Crude oil swaps |
$ | (131,590 | ) | $ | (75,758 | ) | Cost of sales | $ | (13,407 | ) | $ | (41,998 | ) | Unrealized/ Realized | $ | (11,703 | ) | $ | (1,716 | ) | ||||||||||
Gasoline swaps |
18,102 | 1,374 | Sales | 22,898 | 12,576 | Unrealized/ Realized | 3,421 | (878 | ) | |||||||||||||||||||||
Diesel swaps |
47,399 | 27,530 | Sales | 16,236 | 25,074 | Unrealized/ Realized | 759 | 19 | ||||||||||||||||||||||
Jet fuel swaps |
86,255 | 31,169 | Sales | 25,008 | 29,113 | Unrealized/ Realized | 6,233 | (1,128 | ) | |||||||||||||||||||||
Jet fuel collars |
| | Sales | | | Unrealized/ Realized | | | ||||||||||||||||||||||
Specialty products segment: |
||||||||||||||||||||||||||||||
Crude oil swaps |
| | Cost of sales | 2,494 | 2,665 | Unrealized/ Realized | | | ||||||||||||||||||||||
Natural gas swaps |
| | Cost of sales | | | Unrealized/ Realized | | | ||||||||||||||||||||||
Interest rate swaps: |
| 1,634 | Interest expense | | | Unrealized/ Realized | | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 20,166 | $ | (14,051 | ) | $ | 53,229 | $ | 27,430 | $ | (1,290 | ) | $ | (3,703 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
20
The Company recorded the following gains (losses) in its unaudited condensed consolidated statements of operations and its unaudited condensed consolidated statements of partners capital for the three months ended June 30, 2012 and 2011 related to its derivative instruments not designated as cash flow hedges.
Amount of Gain
(Loss) Recognized in Realized Gain (Loss) on Derivative Instruments |
Amount of Gain
(Loss) Recognized in Unrealized Gain (Loss) on Derivative Instruments |
|||||||||||||||
Three Months Ended June 30, |
Three Months Ended June 30, |
|||||||||||||||
Type of Derivative |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Fuel products segment: |
||||||||||||||||
Crude oil swaps |
$ | (7,780 | ) | $ | | $ | (81,862 | ) | $ | | ||||||
Gasoline swaps |
11,391 | | 39,817 | | ||||||||||||
Diesel swaps |
5,184 | | 40,874 | | ||||||||||||
Jet fuel swaps |
(1,068 | ) | | (480 | ) | | ||||||||||
Jet fuel collars |
| | | | ||||||||||||
Specialty products segment: |
||||||||||||||||
Crude oil swaps |
| | 584 | | ||||||||||||
Natural gas swaps |
(2,050 | ) | | 2,607 | | |||||||||||
Interest rate swaps: |
(140 | ) | (553 | ) | 151 | (1,238 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 5,537 | $ | (553 | ) | $ | 1,691 | $ | (1,238 | ) | ||||||
|
|
|
|
|
|
|
|
The Company recorded the following amounts in its condensed consolidated balance sheets, unaudited condensed consolidated statements of operations, unaudited condensed consolidated statements of other comprehensive income (loss) and its unaudited condensed consolidated statements of partners capital as of, and for the six months ended, June 30, 2012 and 2011 related to its derivative instruments that were designated as cash flow hedges:
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivatives (Effective Portion) |
Amount of (Gain) Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Net Income (Loss) (Effective Portion) |
Amount of Gain (Loss) Recognized in Net Income (Loss) on Derivatives (Ineffective Portion) |
||||||||||||||||||||||||||||
Six Months Ended June 30, |
Location
of (Gain) Loss |
Six Months Ended June 30, |
Location of Gain (Loss) |
Six Months Ended June 30, |
||||||||||||||||||||||||||
Type of Derivative |
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||||||||
Fuel products segment: |
||||||||||||||||||||||||||||||
Crude oil swaps |
$ | (98,900 | ) | $ | 61,188 | Cost of sales | $ | (34,610 | ) | $ | (61,099 | ) | Unrealized/ Realized | $ | 49,926 | $ | (497 | ) | ||||||||||||
Gasoline swaps |
(40,165 | ) | (17,736 | ) | Sales | 39,204 | 18,815 | Unrealized/ Realized | (15,318 | ) | (1,339 | ) | ||||||||||||||||||
Diesel swaps |
(21,431 | ) | (68,792 | ) | Sales | 22,841 | 43,187 | Unrealized/ Realized | (1,840 | ) | (538 | ) | ||||||||||||||||||
Jet fuel swaps |
7,608 | (119,414 | ) | Sales | 68,610 | 42,674 | Unrealized/ Realized | 1,891 | (1,604 | ) | ||||||||||||||||||||
Jet fuel collars |
| | Sales | | | Unrealized/ Realized | | | ||||||||||||||||||||||
Specialty products segment: |
||||||||||||||||||||||||||||||
Crude oil swaps |
| | Cost of sales | (14 | ) | 2,665 | Unrealized/ Realized | | | |||||||||||||||||||||
Natural gas swaps |
| | Cost of sales | | | Unrealized/ Realized | | | ||||||||||||||||||||||
Interest rate swaps: |
| 1,979 | Interest expense | | 702 | Unrealized/ Realized | | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | (152,888 | ) | $ | (142,775 | ) | $ | 96,031 | $ | 46,944 | $ | 34,659 | $ | (3,978 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded the following gains (losses) in its unaudited condensed consolidated statements of operations and its unaudited condensed consolidated statements of partners capital for the six months ended June 30, 2012 and 2011 related to its derivative instruments not designated as cash flow hedges.
21
Amount of Gain
(Loss) Recognized in Realized Gain (Loss) on Derivative Instruments |
Amount of Gain
(Loss) Recognized in Unrealized Gain (Loss) on Derivative Instruments |
|||||||||||||||
Six Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Type of Derivative |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Fuel products segment: |
||||||||||||||||
Crude oil swaps |
$ | (7,353 | ) | $ | | $ | (80,165 | ) | $ | | ||||||
Gasoline swaps |
11,391 | | 39,817 | | ||||||||||||
Diesel swaps |
5,184 | | 40,874 | | ||||||||||||
Jet fuel swaps |
(1,068 | ) | | (480 | ) | | ||||||||||
Jet fuel collars |
| (562 | ) | | 543 | |||||||||||
Specialty products segment: |
||||||||||||||||
Crude oil swaps |
| 932 | 584 | (662 | ) | |||||||||||
Natural gas swaps |
(3,450 | ) | | 1,135 | | |||||||||||
Interest rate swaps: |
(589 | ) | (752 | ) | 867 | (1,046 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 4,115 | $ | (382 | ) | $ | 2,632 | $ | (1,165 | ) | ||||||
|
|
|
|
|
|
|
|
The cash flow impact of the Companys derivative activities is classified primarily as a component of net income (loss) in the operating activities section in the unaudited condensed consolidated statements of cash flows.
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 Companys credit exposure related to these derivative instruments is represented by the fair value of contracts reported as derivative assets. As of June 30, 2012 and December 31, 2011, the Company had three counterparties, in which the derivatives held were net assets, totaling $14,949 and $58,502, respectively. 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 Baa2 and BBB by Moodys 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 June 30, 2012 or December 31, 2011. The Companys contracts with these counterparties allow for netting of derivative instruments executed under each contract. Collateral received from counterparties is reported in other current liabilities, and collateral held by counterparties is reported in deposits, on the Companys condensed consolidated balance sheets and not netted against derivative assets or liabilities. As of June 30, 2012 and December 31, 2011, the Company had provided its counterparties with no collateral above a $25,000 letter of credit provided to one counterparty to support crack spread hedging. For financial reporting purposes, the Company does not offset the collateral provided to a counterparty against the fair value of its obligation to that counterparty. Any outstanding collateral is released to the Company upon settlement of the related derivative instrument liability.
Certain of the Companys 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 Companys mark-to-market net liability, if any, on all outstanding derivatives exceeds the credit threshold amount per such credit support agreement. In certain cases, the Companys credit threshold is dependent upon the Companys maintenance of certain corporate credit ratings with Moodys and S&P. In the event that the Companys corporate credit rating was lowered below its current level by either Moodys or S&P, such counterparties would have the right to reduce the applicable threshold to zero and demand full collateralization of the Companys net liability position on outstanding derivative instruments. As of June 30, 2012 and December 31, 2011, there was a net asset of $1,941 and $3,561, respectively, associated with the Companys outstanding derivative instruments subject to such requirements. In addition, the majority of the credit support agreements covering the Companys 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 Companys credit threshold could be lowered by such counterparty. The Company does not expect that it will experience a material adverse change in its business.
22
The effective portion of the cash flow hedges classified in accumulated other comprehensive loss is $9,763 as of June 30, 2012. The effective portion of the cash flow hedges classified in accumulated other comprehensive income was $47,094 as of December 31, 2011. Absent a change in the fair market value of the underlying transactions, the following other comprehensive income (loss) at June 30, 2012 will be reclassified to earnings by December 31, 2014 with balances being recognized as follows:
Year |
Accumulated
Other Comprehensive Income (Loss) |
|||
2012 |
$ | (26,239 | ) | |
2013 |
15,723 | |||
2014 |
753 | |||
|
|
|||
Total |
$ | (9,763 | ) | |
|
|
Based on fair values as of June 30, 2012, the Company expects to reclassify $16,253 of net losses on derivative instruments from accumulated other comprehensive loss to earnings during the next twelve months due to actual crude oil purchases and gasoline, diesel and jet fuel sales. However, the amounts actually realized will be dependent on the fair values as of the dates of settlement.
Crude Oil Swap and Collar Contracts Specialty Products Segment
The Company is exposed to fluctuations in the price of crude oil, its principal raw material. Historically, the Company has utilized combinations of options and swaps to manage crude oil price risk and volatility of cash flows in its specialty products segment. These derivatives may be designated as cash flow hedges of the future purchase of crude oil if they meet the hedge criteria. The companys general policy is to enter into crude oil derivative contracts that mitigate the Companys exposure to price risk associated with crude oil purchases related to specialty products production (for up to 70% of expected purchases). The Company may execute derivative contracts for up to two years forward. As of June 30, 2012, the Company had the following crude oil derivatives related to future crude oil purchases in its specialty products segment, none of which are designated as cash flow hedges.
Crude Oil Swap Contracts by Expiration Dates |
Barrels Purchased |
BPD | Average Swap ($/Bbl) |
|||||||||
Calendar Year 2013 |
200,000 | 548 | $ | 84.75 | ||||||||
|
|
|
|
|||||||||
Totals |
200,000 | |||||||||||
Average price |
$ | 84.75 |
As of December 31, 2011, the Company did not have any crude oil derivatives related to future crude oil purchases in its specialty products segment.
Natural Gas Swap Contracts
Natural gas purchases comprise a significant component of the Companys cost of sales; therefore, changes in the price of natural gas also significantly affect its profitability and cash flows. The Company utilizes swap contracts to manage natural gas price risk and volatility of cash flows. The Companys policy is generally to enter into natural gas derivative contracts to hedge no more than 75% of its anticipated natural gas requirement for a period no greater than three years forward. At June 30, 2012, the Company had the following natural gas derivatives related to natural gas purchases in its specialty products segment, none of which were designated as cash flow hedges.
Natural Gas Swap Contracts by Expiration Dates |
MMBtu | $/MMBtu | ||||||
Third Quarter 2012 |
1,200,000 | $ | 4.03 | |||||
Fourth Quarter 2012 |
600,000 | 4.08 | ||||||
|
|
|
|
|||||
Totals |
1,800,000 | |||||||
Average price |
$ | 4.05 |
At December 31, 2011, the Company had the following natural gas derivatives related to natural gas purchases in its specialty products segment, none of which were designated as cash flow hedges.
23
Natural Gas Swap Contracts by Expiration Dates |
MMBtu | $/MMBtu | ||||||
First Quarter 2012 |
1,200,000 | $ | 3.90 | |||||
Second Quarter 2012 |
1,200,000 | 3.93 | ||||||
Third Quarter 2012 |
1,200,000 | 4.03 | ||||||
Fourth Quarter 2012 |
600,000 | 4.08 | ||||||
|
|
|
|
|||||
Totals |
4,200,000 | |||||||
Average price |
$ | 3.97 |
Crude Oil Contracts Fuel Products Segment
Crude Oil Swap Contracts
The Company is exposed to fluctuations in the price of crude oil, its principal raw material. The Company utilizes swap contracts to manage crude oil price risk and volatility of cash flows in its fuel products segment. The Companys policy is generally to enter into crude oil swap contracts for a period no greater than five years forward and for no more than 75% of crude oil purchases used in fuels production. At June 30, 2012, the Company had the following derivatives related to crude oil purchases in its fuel products segment, all of which are designated as cash flow hedges.
Crude Oil Swap Contracts by Expiration Dates |
Barrels Purchased |
BPD | Average Swap ($/Bbl) |
|||||||||
Third Quarter 2012 |
1,472,000 | 16,000 | $ | 86.23 | ||||||||
Fourth Quarter 2012 |
1,242,000 | 13,500 | 90.50 | |||||||||
Calendar Year 2013 |
5,328,000 | 14,597 | 99.03 | |||||||||
Calendar Year 2014 |
1,910,000 | 5,233 | 88.25 | |||||||||
|
|
|
|
|||||||||
Totals |
9,952,000 | |||||||||||
Average price |
$ | 94.00 |
At June 30, 2012, the Company had the following derivatives related to crude oil purchases in its fuel products segment, none of which are designated as cash flow hedges.
Crude Oil Swap Contracts by Expiration Dates |
Barrels Purchased |
BPD | Average Swap ($/Bbl) |
|||||||||
Third Quarter 2012 |
1,380,000 | 15,000 | $ | 83.35 | ||||||||
Fourth Quarter 2012 |
1,380,000 | 15,000 | 83.35 | |||||||||
Calendar Year 2013 |
1,821,000 | 4,989 | 98.72 | |||||||||
|
|
|
|
|||||||||
Totals |
4,581,000 | |||||||||||
Average price |
$ | 89.46 |
At December 31, 2011, the Company had the following derivatives related to crude oil purchases in its fuel products segment, all of which are designated as cash flow hedges.
Crude Oil Swap Contracts by Expiration Dates |
Barrels Purchased |
BPD | Average Swap ($/Bbl) |
|||||||||
First Quarter 2012 |
2,866,500 | 31,500 | $ | 85.34 | ||||||||
Second Quarter 2012 |
2,775,500 | 30,500 | 84.83 | |||||||||
Third Quarter 2012 |
2,852,000 | 31,000 | 84.83 | |||||||||
Fourth Quarter 2012 |
2,622,000 | 28,500 | 86.73 | |||||||||
Calendar Year 2013 |
4,420,000 | 12,110 | 97.93 | |||||||||
Calendar Year 2014 |
1,000,000 | 2,740 | 90.55 | |||||||||
|
|
|
|
|||||||||
Totals |
16,536,000 | |||||||||||
Average price |
$ | 89.07 |
24
Crude Oil Basis Swap Contracts
In April, 2012 the Company entered into a crude oil basis swaps to mitigate the risk of future changes in pricing differentials between Canadian heavy crude oil and NYMEX WTI crude oil. At June 30, 2012, the Company had the following derivatives related to crude oil basis swaps in its fuel products segment, none of which are designated as cash flow hedges.
Crude Oil Basis Swap Contracts by Expiration Dates |
Barrels Purchased |
BPD | Average Differential to NYMEX WTI ($/Bbl) |
|||||||||
Calendar Year 2013 |
730,000 | 2,000 | $ | (23.75 | ) | |||||||
|
|
|
|
|||||||||
Totals |
730,000 | |||||||||||
Average price |
$ | (23.75 | ) |
At December 31, 2011, the Company had no derivatives related to crude oil basis swaps in its fuel products segment.
Fuel Products Swap Contracts
The Company is exposed to fluctuations in the prices of gasoline, diesel and jet fuel. The Company utilizes swap contracts to manage diesel, gasoline and jet fuel price risk and volatility of cash flows in its fuel products segment. The Companys policy is generally to enter into diesel, jet fuel and gasoline swap contracts for a period no longer than five years forward and for no more than 75% of forecasted fuel sales.
Diesel Swap Contracts
At June 30, 2012, the Company had the following derivatives related to diesel and jet fuel sales in its fuel products segment, all of which are designated as cash flow hedges.
Diesel Swap Contracts by Expiration Dates |
Barrels Sold |
BPD | Average Swap ($/Bbl) |
|||||||||
Third Quarter 2012 |
690,000 | 7,500 | $ | 98.96 | ||||||||
Fourth Quarter 2012 |
506,000 | 5,500 | 105.41 | |||||||||
Calendar Year 2013 |
1,926,000 | 5,277 | 121.78 | |||||||||
Calendar Year 2014 |
910,000 | 2,493 | 111.15 | |||||||||
|
|
|
|
|||||||||
Totals |
4,032,000 | |||||||||||
Average price |
$ | 113.42 |
At June 30, 2012, the Company had the following derivatives related to diesel and jet fuel sales in its fuel products segment, none of which are designated as cash flow hedges.
Diesel Swap Contracts by Expiration Dates |
Barrels Sold |
BPD | Average Swap ($/Bbl) |
|||||||||
Third Quarter 2012 |
460,000 | 5,000 | $ | 115.27 | ||||||||
Fourth Quarter 2012 |
460,000 | 5,000 | 115.27 | |||||||||
Calendar Year 2013 |
1,456,000 | 3,989 | 127.20 | |||||||||
|
|
|
|
|||||||||
Totals |
2,376,000 | |||||||||||
Average price |
$ | 122.58 |
At December 31, 2011, the Company had the following derivatives related to diesel and jet fuel sales in its fuel products segment, all of which are designated as cash flow hedges.
25
Diesel Swap Contracts by Expiration Dates |
Barrels Sold |
BPD | Average Swap ($/Bbl) |
|||||||||
First Quarter 2012 |
546,000 | 6,000 | $ | 118.07 | ||||||||
Second Quarter 2012 |
819,000 | 9,000 | 110.09 | |||||||||
Third Quarter 2012 |
1,150,000 | 12,500 | 105.48 | |||||||||
Fourth Quarter 2012 |
966,000 | 10,500 | 110.11 | |||||||||
Calendar Year 2013 |
1,831,000 | 5,016 | 123.20 | |||||||||
|
|
|
|
|||||||||
Totals |
5,312,000 | |||||||||||
Average price |
$ | 114.44 |
Jet Fuel Swap Contracts
At June 30, 2012, the Company had the following derivatives related to diesel and jet fuel sales in its fuel products segment, all of which are designated as cash flow hedges.
Jet Fuel Swap Contracts by Expiration Dates |
Barrels Sold |
BPD | Average Swap ($/Bbl) |
|||||||||
Third Quarter 2012 |
754,000 | 8,196 | $ | 99.80 | ||||||||
Fourth Quarter 2012 |
736,000 | 8,000 | 104.79 | |||||||||
Calendar Year 2013 |
2,498,000 | 6,844 | 127.09 | |||||||||
Calendar Year 2014 |
1,000,000 | 2,740 | 115.56 | |||||||||
|
|
|
|
|||||||||
Totals |
4,988,000 | |||||||||||
Average price |
$ | 117.37 |
At June 30, 2012, the Company had the following derivatives related to diesel and jet fuel sales in its fuel products segment, none of which are designated as cash flow hedges.
Jet Fuel Swap Contracts by Expiration Dates |
Barrels Sold |
BPD | Average Swap ($/Bbl) |
|||||||||
Third Quarter 2012 |
28,000 | 304 | $ | 99.12 | ||||||||
|
|
|
|
|||||||||
Totals |
28,000 | |||||||||||
Average price |
$ | 99.12 |
At December 31, 2011, the Company had the following derivatives related to diesel and jet fuel sales in its fuel products segment, all of which are designated as cash flow hedges.
Jet Fuel Swap Contracts by Expiration Dates |
Barrels Sold |
BPD | Average Swap ($/Bbl) |
|||||||||
First Quarter 2012 |
1,274,000 | 14,000 | $ | 97.97 | ||||||||
Second Quarter 2012 |
1,046,500 | 11,500 | 98.47 | |||||||||
Third Quarter 2012 |
782,000 | 8,500 | 99.78 | |||||||||
Fourth Quarter 2012 |
736,000 | 8,000 | 104.79 | |||||||||
Calendar Year 2013 |
2,044,000 | 5,600 | 125.13 | |||||||||
Calendar Year 2014 |
1,000,000 | 2,740 | 115.56 | |||||||||
|
|
|
|
|||||||||
Totals |
6,882,500 | |||||||||||
Average price |
$ | 109.60 |
26
Gasoline Swap Contracts
At June 30, 2012, the Company had the following derivatives related to gasoline sales in its fuel products segment, all of which are designated as cash flow hedges.
Gasoline Swap Contracts by Expiration Dates |
Barrels Sold |
BPD | Average Swap ($/Bbl) |
|||||||||
Calendar Year 2013 |
904,000 | 2,477 | $ | 114.75 | ||||||||
|
|
|
|
|||||||||
Totals |
904,000 | |||||||||||
Average price |
$ | 114.75 |
At June 30, 2012, the Company had the following derivatives related to gasoline sales in its fuel products segment, none of which are designated as cash flow hedges.
Gasoline Swap Contracts by Expiration Dates |
Barrels Sold |
BPD | Average Swap ($/Bbl) |
|||||||||
Third Quarter 2012 |
920,000 | 10,000 | $ | 102.48 | ||||||||
Fourth Quarter 2012 |
920,000 | 10,000 | 102.48 | |||||||||
Calendar Year 2013 |
365,000 | 1,000 | 105.50 | |||||||||
|
|
|
|
|||||||||
Totals |
2,205,000 | |||||||||||
Average price |
$ | 102.98 |
At December 31, 2011, the Company had the following derivatives related to gasoline sales in its fuel products segment, all of which are designated as cash flow hedges.
Gasoline Swap Contracts by Expiration Dates |
Barrels Sold |
BPD | Average Swap ($/Bbl) |
|||||||||
First Quarter 2012 |
1,046,500 | 11,500 | $ | 100.72 | ||||||||
Second Quarter 2012 |
910,000 | 10,000 | 102.48 | |||||||||
Third Quarter 2012 |
920,000 | 10,000 | 102.48 | |||||||||
Fourth Quarter 2012 |
920,000 | 10,000 | 102.48 | |||||||||
Calendar Year 2013 |
545,000 | 1,4293 | 107.11 | |||||||||
|
|
|
|
|||||||||
Totals |
4,341,500 | |||||||||||
Average price |
$ | 102.63 |
Interest Rate Swap Contracts
The Companys profitability and cash flows are affected by changes in interest rates, specifically LIBOR and prime rates. The primary purpose of the Companys interest rate risk management activities is to hedge its exposure to changes in interest rates. Historically, the Companys policy has been to enter into interest rate swap agreements to hedge up to 75% of its interest rate risk related to variable rate debt. With the issuances of the 2019 Notes and 2020 Notes, which constitute fixed rate debt, the Company does not expect to enter into additional hedges (beyond those listed below) to fix its interest rates. The following table summarizes the Companys outstanding interest rate swaps as of June 30, 2012:
Interest Rate Swap Contract |
Effective Date | Maturity Date | Notional Amount |
Swap Contract | Weighted Average Fixed Rate |
|||||||||
2006 Swap (1) |
June 9, 2006 | December 10, 2012 | $ | 19,975 | 3 Month LIBOR | 5.44 | % | |||||||
2006 Swap (1) |
December 10, 2007 | December 10, 2012 | $ | 19,975 | 3 Month LIBOR plus 1.98% spread | 5.44 | % |
(1) | Due to the repayment of $19,000 of the outstanding balance of the Companys then existing term loan facility in August 2007 and subsequent refinancing of the remaining term loan balance, this interest rate swap contract was not designated as a cash flow hedge of the future payment of interest. The entire change in the fair value of this interest rate swap was recorded to unrealized loss on derivative instruments in the consolidated statements of operations. In the first quarter of 2008, the Company fixed its unrealized loss on this interest rate swap derivative instrument by entering into an offsetting interest rate swap expiring December 2012, which is not designated as a cash flow hedge. The notional amount is based upon a fixed schedule set forth in the confirmation, and the amount disclosed is the notional amount as of June 30, 2012. |
27
8. 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 Companys 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 1inputs include observable unadjusted quoted prices in active markets for identical assets or liabilities |
| Level 2inputs include other than quoted prices in active markets that are either directly or indirectly observable |
| Level 3inputs include unobservable inputs in which little or no market data exists; therefore requiring an entity to develop its own assumptions |
In determining fair value, the Company uses various valuation techniques and prioritizes the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded and other characteristics particular to the instrument. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants and the valuation does not require significant management judgment. For other financial instruments, pricing inputs are less observable in the marketplace and may require management judgment.
Recurring Fair Value Measurements
Derivative Assets and Liabilities
Derivative instruments are reported in the accompanying unaudited condensed consolidated financial statements at fair value. The Companys derivative instruments consist of over-the-counter (OTC) contracts, which are not traded on a public exchange. Substantially all of the Companys derivative instruments are with counterparties that have long-term credit ratings of at least Baa2 and BBB by Moodys and S&P, respectively.
To estimate the fair values of the Companys derivative instruments, the Company uses the market approach. Under this approach, the fair values of the Companys derivative instruments for crude oil, gasoline, diesel, jet fuel, natural gas and interest rates are determined primarily based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Generally, the Company obtains this data through surveying its counterparties and performing various analytical tests to validate the data. In situations where the Company obtains inputs via quotes from its counterparties, it verifies the reasonableness of these quotes via similar quotes from another counterparty as of each date for which financial statements are prepared. The Company also includes an adjustment for non-performance risk in the recognized measure of fair value of all of the Companys derivative instruments. The adjustment reflects the full credit default spread (CDS) applied to a net exposure by counterparty. When the Company is in a net asset position, it uses its counterpartys CDS, or a peer groups estimated CDS when a CDS for the counterparty is not available. The Company uses its own peer groups estimated CDS when it is in a net liability position. As a result of applying the applicable CDS at June 30, 2012, the Companys asset was reduced by $183 and the liability was reduced by approximately $1,301. As a result of applying the CDS at December 31, 2011, the Companys asset was reduced by $1,297 and the liability was reduced by approximately $165.
Based on the use of various unobservable inputs, principally non-performance risk and unobservable inputs in forward years for crude oil, gasoline, jet fuel, diesel and natural gas, 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 has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative instruments it holds. See Note 7 for further information on derivative instruments.
Pension Assets
Pension assets are reported at fair value using quoted market prices in the accompanying unaudited condensed consolidated financial statements. The Companys investments associated with its Pension Plan (as such term is hereinafter defined) primarily consist of (i) cash and cash equivalents, (ii) mutual funds that are publicly traded and (iii) a commingled fund. The mutual funds are publicly traded and market prices are readily available; thus, these investments are categorized as Level 1. The commingled fund is categorized as Level 2 because inputs used in its valuation are not quoted prices in active markets that are indirectly observable and is valued at the net asset value of shares held by the Pension Plan at quarter end.
28
Hierarchy of Recurring Fair Value Measurements
The Companys recurring assets and liabilities measured at fair value at June 30, 2012 and December 31, 2011 were as follows:
June 30, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 65,474 | $ | | $ | | $ | 65,474 | $ | 64 | $ | | $ | | $ | 64 | ||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||||||||||
Crude oil swaps |
| | (23,920 | ) | (23,920 | ) | | | 83,919 | 83,919 | ||||||||||||||||||||||
Gasoline swaps |
| | 9,616 | 9,616 | | | (20,605 | ) | (20,605 | ) | ||||||||||||||||||||||
Diesel swaps |
| | 21,863 | 21,863 | | | (4,561 | ) | (4,561 | ) | ||||||||||||||||||||||
Jet fuel swaps |
| | 8,167 | 8,167 | | | 1,077 | 1,077 | ||||||||||||||||||||||||
Natural gas swaps |
| | (777 | ) | (777 | ) | | | (1,328 | ) | (1,328 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total derivative assets |
| | 14,949 | 14,949 | | | 58,502 | 58,502 | ||||||||||||||||||||||||
Restricted cash |
263,313 | | | 263,313 | | | | | ||||||||||||||||||||||||
Pension plan investments |
34,616 | 2,593 | | 37,209 | 33,580 | 2,462 | | 36,042 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total recurring assets at fair value |
$ | 363,403 | $ | 2,593 | $ | 14,949 | $ | 380,945 | $ | 33,644 | $ | 2,462 | $ | 58,502 | $ | 94,608 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||||||||||||||
Crude oil swaps |
$ | | $ | | $ | (45,055 | ) | (45,055 | ) | $ | | $ | | $ | 56,041 | $ | 56,041 | |||||||||||||||
Gasoline swaps |
| | 7,227 | 7,227 | | | (1,596 | ) | (1,596 | ) | ||||||||||||||||||||||
Diesel swaps |
| | (7,105 | ) | (7,105 | ) | | | (22,586 | ) | (22,586 | ) | ||||||||||||||||||||
Jet fuel swaps |
| | 855 | 855 | | | (72,537 | ) | (72,537 | ) | ||||||||||||||||||||||
Natural gas swaps |
| | (1,308 | ) | (1,308 | ) | | | (1,892 | ) | (1,892 | ) | ||||||||||||||||||||
Interest rate swaps |
| | (145 | ) | (145 | ) | | | (1,011 | ) | (1,011 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total derivative liabilities |
| | (45,531 | ) | (45,531 | ) | | | (43,581 | ) | (43,581 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total recurring liabilities at fair value |
$ | | $ | | $ | (45,531 | ) | $ | (45,531 | ) | $ | | $ | | $ | (43,581 | ) | $ | (43,581 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth a summary of net changes in fair value of the Companys Level 3 financial assets and liabilities for the six months ended June 30, 2012 and 2011:
Six Months Ended June 30, |
||||||||
2012 | 2011 | |||||||
Fair value at January 1, |
$ | 14,921 | $ | (32,814 | ) | |||
Realized (gain) loss on derivative instruments |
(30,642 | ) | 1,984 | |||||
Unrealized gain (loss) on derivative instruments |
10,764 | (3,541 | ) | |||||
Change in fair value of cash flow hedges |
(152,888 | ) | (142,775 | ) | ||||
Settlements |
127,263 | 39,261 | ||||||
Transfers in (out) of Level 3 |
| | ||||||
|
|
|
|
|||||
Fair value at June 30, |
$ | (30,582 | ) | $ | (137,885 | ) | ||
|
|
|
|
|||||
Total gain (loss) included in net income attributable to changes in unrealized gain (loss) relating to financial assets and liabilities held as of June 30, |
$ | 10,764 | $ | (3,541 | ) | |||
|
|
|
|
All settlements from derivative instruments that are deemed effective and were designated as cash flow hedges are included in sales for gasoline, diesel and jet fuel derivatives, cost of sales for crude oil and natural gas derivatives, and interest expense for interest rate derivatives in the unaudited condensed consolidated financial statements of operations in the period that the hedged cash flow occurs. Any ineffectiveness associated with these derivative instruments are recorded in earnings in realized gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. All settlements from derivative instruments not designated as cash flow hedges are recorded in realized gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. See Note 7 for further information on derivative instruments.
29
Nonrecurring Fair Value Measurements
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition. Refer to Note 3 for the fair values of assets acquired and liabilities assumed in connection with the Missouri and TruSouth Acquisitions.
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 generally be classified within Level 3, in the event that the Company were required to measure and record such assets at fair value within its unaudited condensed consolidated financial statements.
The Company periodically evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets and property plant and equipment, when events or circumstances warrant such a review. Fair value is determined primarily using anticipated cash flows assumed by a market participant discounted at a rate commensurate with the risk involved and these assets would generally be classified within Level 3, in the event that the Company were required to measure and record such assets at fair value within its unaudited condensed consolidated financial statements.
Estimated Fair Value of Financial Instruments
Cash
The carrying values of cash and cash equivalents, including restricted cash, are considered to be representative of their respective fair values, due to the short maturity of these instruments.
Debt
The estimated fair value of long-term debt at June 30, 2012 consists primarily of the 2019 Notes and 2020 Notes. The estimated fair value of long-term debt at December 31, 2011 consists primarily of the 2019 Notes and borrowings under the revolving credit facility. The fair value of the Companys 2019 Notes and 2020 Notes were based upon using quoted market prices in an active market and are classified as Level 1. The carrying value of borrowings, if any, under the Companys revolving credit facility approximates its fair value as determined by discounted cash flows and is classified as Level 3. Capital lease obligations approximate their fair value as determined by discounted cash flows and are classified as Level 3.
The Companys carrying and estimated fair value of the Companys financial instruments, carried at adjusted historical cost, at June 30, 2012 and December 31, 2011 were as follows:
June 30, 2012 | December 31, 2011 | |||||||||||||||
Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||
Financial Instrument: |
||||||||||||||||
2019 Notes |
$ | 608,996 | $ | 586,936 | $ | 591,750 | $ | 586,304 | ||||||||
2020 Notes |
279,813 | 270,187 | | | ||||||||||||
Capital lease and other obligations |
5,905 | 5,905 | 786 | 786 |
9. Partners Capital
On May 8, 2012, the Company completed a public offering of its common units in which it sold 6,000,000 common units to the underwriters of the offering at a price to the public of $25.50 per common unit. The proceeds received by the Company from this offering (net of underwriting discounts, commissions and expenses but before its general partners capital contribution) were $146,597 and were used to repay borrowings under its revolving credit facility. Underwriting discounts totaled $6,180. The Companys general partner contributed $3,122 to maintain its 2% general partner interest.
The Companys distribution policy is defined in its partnership agreement. For the three months ended June 30, 2012 and 2011, the Company made distributions of $30,119 and $19,311, respectively, to its partners. For the six months ended June 30, 2012 and 2011, the Company made distributions of $58,318 and $36,258, respectively, to its partners.
For the three months ended June 30, 2012 and 2011 the general partner was allocated $1,096 and $0, respectively, in incentive distribution rights. For the six months ended June 30, 2012 and 2011 the general partner was allocated $1,619 and $0, respectively, in incentive distribution rights.
30
10. Unit-Based Compensation
A summary of the Companys nonvested phantom units as of June 30, 2012 and the changes during the six months ended June 30, 2012 is presented below:
Nonvested Phantom Units |
Grant | Weighted Average Grant Date Fair Value |
||||||
Nonvested at December 31, 2011 |
325,096 | $ | 20.82 | |||||
Granted |
100,661 | 23.78 | ||||||
Vested |
(86,236 | ) | 22.49 | |||||
Forfeited |
(14,909 | ) | 21.78 | |||||
|
|
|
|
|||||
Nonvested at June 30, 2012 |
324,612 | $ | 21.25 | |||||
|
|
|
|
For the three months ended June 30, 2012 and 2011, compensation expense of $720 and $653, respectively, was recognized in the unaudited condensed consolidated statements of operations related to vested phantom unit grants. For the six months ended June 30, 2012 and 2011, compensation expense of $864 and $1,282, respectively, was recognized in the unaudited condensed consolidated statements of operations related to vested phantom unit grants. As of June 30, 2012 and 2011, there was a total of $6,897 and $1,929, respectively, of unrecognized compensation costs related to nonvested phantom unit grants. These costs are expected to be recognized over a weighted-average period of approximately three years.
11. Employee Benefit Plans
The components of net periodic pension and other post retirement benefits cost (credit) for the three months ended June 30, 2012 and 2011 were as follows:
For the Three Months Ended June 30, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
Pension Benefits |
Other Post Retirement Employee Benefits |
Pension Benefits |
Other Post Retirement Employee Benefits |
|||||||||||||
Service cost |
$ | 225 | $ | 131 | $ | 25 | $ | | ||||||||
Interest cost |
621 | 89 | 333 | 4 | ||||||||||||
Expected return on assets |
(597 | ) | | (265 | ) | | ||||||||||
Amortization of net (gain) loss |
143 | (1 | ) | 70 | | |||||||||||
Prior service credit |
| (9 | ) | | (9 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost (credit) |
$ | 392 | $ | 210 | $ | 163 | $ | (5 | ) | |||||||
|
|
|
|
|
|
|
|
The components of net periodic pension and other post retirement benefits cost (credit) for the six months ended June 30, 2012 and 2011 were as follows:
For the Six Months Ended June 30, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
Pension Benefits |
Other Post Retirement Employee Benefits |
Pension Benefits |
Other Post Retirement Employee Benefits |
|||||||||||||
Service cost |
$ | 450 | $ | 262 | $ | 49 | $ | | ||||||||
Interest cost |
1,243 | 178 | 666 | 9 | ||||||||||||
Expected return on assets |
(1,195 | ) | | (529 | ) | | ||||||||||
Amortization of net (gain) loss |
287 | (2 | ) | 140 | (1 | ) | ||||||||||
Prior service credit |
| (18 | ) | | (18 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost (credit) |
$ | 785 | $ | 420 | $ | 326 | $ | (10 | ) | |||||||
|
|
|
|
|
|
|
|
31
At June 30, 2012, the Companys investments associated with its non-contributory defined benefit plans (the Pension Plan) primarily consist of (i) cash and cash equivalents, (ii) mutual funds that are publicly traded and (iii) a commingled fund. The mutual funds are publicly traded and market prices of the mutual funds are readily available; thus, these investments are categorized as Level 1. The commingled fund is categorized as Level 2 because inputs used in its valuation are not quoted prices in active markets that are indirectly observable and is valued at the net asset value of the shares held by the Pension Plan at quarter end. The Companys Pension Plan assets measured at fair value at June 30, 2012 and December 31, 2011 were as follows:
June 30, 2012 Pension Assets |
December 31, 2011 Pension Assets |
|||||||||||||||
Level 1 | Level 2 | Level 1 | Level 2 | |||||||||||||
Cash and cash equivalents |
$ | 22,490 | $ | | $ | 22,243 | $ | | ||||||||
Equity |
4,375 | | 4,000 | | ||||||||||||
Foreign equities |
717 | | 691 | | ||||||||||||
Commingled fund |
| 2,593 | | 2,462 | ||||||||||||
Fixed income |
7,034 | | 6,646 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 34,616 | $ | 2,593 | $ | 33,580 | $ | 2,462 | |||||||||
|
|
|
|
|
|
|
|
12. Earnings per Unit
The following table sets forth the computation of basic and diluted earnings per limited partner unit for the three and six months ended June 30, 2012 and 2011:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In thousands, except unit data) | ||||||||||||||||
Numerator for basic and diluted earnings per limited partner unit: |
||||||||||||||||
Net income (loss) |
$ | 65,662 | $ | (7,651 | ) | $ | 117,585 | $ | (3,450 | ) | ||||||
General partners interest in net income (loss) |
1,314 | (153 | ) | 2,352 | (69 | ) | ||||||||||
General partners incentive distribution rights |
1,096 | | 1,619 | | ||||||||||||
Nonvested share based payments |
377 | | 685 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) available to limited partners |
$ | 62,875 | $ | (7,498 | ) | $ | 112,929 | $ | (3,381 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Denominator: |
||||||||||||||||
Basic weighted average limited partner units outstanding |
55,028 | 39,886 | 53,354 | 38,373 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Participating securities phantom units |
46 | | 26 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted weighted average limited partner units outstanding |
55,074 | 39,886 | 53,380 | 38,373 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Limited partners interest basic net income (loss) per unit |
$ | 1.14 | $ | (0.19 | ) | $ | 2.12 | $ | (0.09 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Limited partners interest diluted net income (loss) per unit |
$ | 1.14 | $ | (0.19 | ) | $ | 2.12 | $ | (0.09 | ) | ||||||
|
|
|
|
|
|
|
|
13. Segments and Related Information
a. Segment Reporting
The Company has two reportable segments: Specialty Products and Fuel Products. The Specialty Products segment produces a variety of lubricating oils, solvents, waxes and asphalt and other by-products. These products are sold to customers who purchase these products primarily as raw material components for basic automotive, industrial and consumer goods. The Fuel Products segment produces a variety of fuel and fuel-related products including gasoline, diesel, jet fuel and heavy fuel oils. The results of the operations from such assets acquired as a result of the Superior Acquisition have been included in the both segments since the date of acquisition, September 30, 2011. The results of operations from such assets acquired as a result of the Missouri and TruSouth Acquisitions have been included in the specialty products segment since their dates of acquisition, January 3, 2012 and January 6, 2012, respectively.
32
The accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed in Note 2 Summary of Significant Accounting Policies in Part II Item 8 Financial Statements and Supplementary Data of the Companys 2011 Annual Report except that the Company evaluates segment performance based on operating income (loss). The Company accounts for intersegment sales and transfers at cost plus a specified mark-up. Reportable segment information is as follows:
Three Months Ended June 30, 2012 |
Specialty Products |
Fuel Products |
Combined Segments |
Eliminations | Consolidated Total |
|||||||||||||||
Sales: |
||||||||||||||||||||
External customers |
$ | 572,409 | $ | 514,587 | $ | 1,086,996 | $ | | $ | 1,086,996 | ||||||||||
Intersegment sales |
287,374 | 13,051 | 300,425 | (300,425 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total sales |
$ | 859,783 | $ | 527,638 | $ | 1,387,421 | $ | (300,425 | ) | $ | 1,086,996 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Depreciation and amortization |
18,656 | 4,645 | 23,301 | | 23,301 | |||||||||||||||
Operating income |
49,949 | 28,510 | 78,459 | | 78,459 | |||||||||||||||
Reconciling items to net income: |
||||||||||||||||||||
Interest expense |
(18,392 | ) | ||||||||||||||||||
Gain on derivative instruments |
5,938 | |||||||||||||||||||
Other |
(4 | ) | ||||||||||||||||||
Income tax expense |
(339 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
Net income |
$ | 65,662 | ||||||||||||||||||
|
|
|||||||||||||||||||
Capital expenditures |
$ | 10,718 | $ | 2,003 | $ | 12,721 | $ | | $ | 12,721 |
Three Months Ended June 30, 2011 |
Specialty Products |
Fuel Products |
Combined Segments |
Eliminations | Consolidated Total |
|||||||||||||||
Sales: |
||||||||||||||||||||
External customers |
$ | 466,414 | $ | 267,356 | $ | 733,770 | $ | | $ | 733,770 | ||||||||||
Intersegment sales |
291,351 | 15,272 | 306,623 | (306,623 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total sales |
$ | 757,765 | $ | 282,628 | $ | 1,040,393 | $ | (306,623 | ) | $ | 733,770 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Depreciation and amortization |
17,065 | | 17,065 | | 17,065 | |||||||||||||||
Operating income (loss) |
35,485 | (12,074 | ) | 23,411 | | 23,411 | ||||||||||||||
Reconciling items to net loss: |
||||||||||||||||||||
Interest expense |
(10,544 | ) | ||||||||||||||||||
Debt extinguishment costs |
(15,130 | ) | ||||||||||||||||||
Loss on derivative instruments |
(5,494 | ) | ||||||||||||||||||
Other |
274 | |||||||||||||||||||
Income tax expense |
(168 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
Net loss |
$ | (7,651 | ) | |||||||||||||||||
|
|
|||||||||||||||||||
Capital expenditures |
$ | 14,069 | $ | | $ | 14,069 | $ | | $ | 14,069 |
Six Months Ended June 30, 2012 |
Specialty Products |
Fuel Products |
Combined Segments |
Eliminations | Consolidated Total |
|||||||||||||||
Sales: |
||||||||||||||||||||
External customers |
$ | 1,134,904 | $ | 1,121,678 | $ | 2,256,582 | $ | | $ | 2,256,582 | ||||||||||
Intersegment sales |
597,071 | 22,238 | 619,309 | (619,309 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total sales |
$ | 1,731,975 | $ | 1,143,916 | $ | 2,875,891 | $ | (619,309 | ) | $ | 2,256,582 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Depreciation and amortization |
37,350 | 9,097 | 46,447 | | 46,447 | |||||||||||||||
Operating income |
78,643 | 34,830 | 113,473 | | 113,473 | |||||||||||||||
Reconciling items to net income: |
||||||||||||||||||||
Interest expense |
(36,976 | ) | ||||||||||||||||||
Gain on derivative instruments |
41,406 | |||||||||||||||||||
Other |
114 | |||||||||||||||||||
Income tax expense |
(432 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
Net income |
$ | 117,585 | ||||||||||||||||||
|
|
|||||||||||||||||||
Capital expenditures |
$ | 18,260 | $ | 4,196 | $ | 22,456 | $ | | $ | 22,456 |
33
Six Months Ended June 30, 2011 |
Specialty Products |
Fuel Products |
Combined Segments |
Eliminations | Consolidated Total |
|||||||||||||||
Sales: |
||||||||||||||||||||
External customers |
$ | 863,516 | $ | 475,494 | $ | 1,339,010 | $ | | $ | 1,339,010 | ||||||||||
Intersegment sales |
507,428 | 18,907 | 526,335 | (526,335 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total sales |
$ | 1,370,944 | $ | 494,401 | $ | 1,865,345 | $ | (526,335 | ) | $ | 1,339,010 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Depreciation and amortization |
34,710 | | 34,710 | | 34,710 | |||||||||||||||
Operating income (loss) |
51,955 | (16,390 | ) | 35,565 | | 35,565 | ||||||||||||||
Reconciling items to net loss: |
||||||||||||||||||||
Interest expense |
(18,025 | ) | ||||||||||||||||||
Debt extinguishment costs |
(15,130 | ) | ||||||||||||||||||
Loss on derivative instruments |
(5,525 | ) | ||||||||||||||||||
Other |
103 | |||||||||||||||||||
Income tax expense |
(438 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
Net loss |
$ | (3,450 | ) | |||||||||||||||||
|
|
|||||||||||||||||||
Capital expenditures |
$ | 20,635 | $ | | $ | 20,635 | $ | | $ | 20,635 |
June 30, 2012 | December 31, 2011 | |||||||
Segment assets: |
||||||||
Specialty products |
$ | 1,582,410 | $ | 1,159,040 | ||||
Fuel products |
528,748 | 573,018 | ||||||
|
|
|
|
|||||
Total assets |
$ | 2,111,158 | $ | 1,732,058 | ||||
|
|
|
|
b. Geographic Information
International sales accounted for less than 10% of consolidated sales in each of the three and six months ended June 30, 2012 and 2011. All of the Companys long-lived assets are domestically located.
c. Product Information
The Company offers specialty products primarily in five general categories consisting of lubricating oils, solvents, waxes, fuels and asphalt and other by-products. Fuel products primarily consist of gasoline, diesel, jet fuel and heavy fuel oils and other. The following table sets forth the major product category sales:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Specialty products: |
||||||||||||||||
Lubricating oils |
$ | 297,984 | $ | 246,448 | $ | 610,732 | $ | 455,499 | ||||||||
Solvents |
122,783 | 135,642 | 257,579 | 253,978 | ||||||||||||
Waxes |
34,792 | 33,874 | 71,942 | 68,181 | ||||||||||||
Fuels |
2,482 | 592 | 5,482 | 1,423 | ||||||||||||
Asphalt and other by-products |
114,368 | 49,858 | 189,169 | 84,435 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 572,409 | $ | 466,414 | $ | 1,134,904 | $ | 863,516 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Fuel products: |
||||||||||||||||
Gasoline |
244,936 | 127,452 | 538,328 | 223,233 | ||||||||||||
Diesel |
199,320 | 91,611 | 440,034 | 173,764 | ||||||||||||
Jet fuel |
42,292 | 40,686 | 88,197 | 67,460 | ||||||||||||
Heavy fuel oils and other |
28,039 | 7,607 | 55,119 | 11,037 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 514,587 | $ | 267,356 | $ | 1,121,678 | $ | 475,494 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated sales |
$ | 1,086,996 | $ | 733,770 | $ | 2,256,582 | $ | 1,339,010 | ||||||||
|
|
|
|
|
|
|
|
34
d. Major Customers
During the three and six months ended June 30, 2012 and 2011, the Company had no customer that represented 10% or greater of consolidated sales.
14. Subsequent Events
On July 3, 2012, the Company completed the acquisition of all the membership interests of Royal Purple, LLC (Royal Purple) for aggregate consideration of approximately $332,679, excluding certain purchase price adjustments (Royal Purple Acquisition). Royal Purple is a formulator and marketer of premium industrial and consumer lubricants across several large markets including oil and gas, chemicals and refining, power generation, manufacturing and transportation, food and drug manufacturing and automotive aftermarket. The Royal Purple Acquisition was financed with the net proceeds, net of discount, underwriters fees and expenses, of $262,704 from the Companys 2020 Notes offering and cash on hand.
The Royal Purple Acquisition purchase price allocation has not yet been finalized due to the timing of the closing of the acquisition. The final determination of fair value for certain assets and liabilities will be completed as soon as the information necessary to complete the analysis is obtained.
On July 20, 2012, the Company declared a quarterly cash distribution of $0.59 per unit on all outstanding units, or approximately $35,890 in aggregate, for the quarter ended June 30, 2012. The distribution will be paid on August 14, 2012 to unitholders of record as of the close of business on August 3, 2012. This quarterly distribution of $0.59 per unit equates to $2.36 per unit, or approximately $143,560 in aggregate on an annualized basis.
The fair value of the Companys derivatives decreased by approximately $36,000 subsequent to June 30, 2012 to a net liability of approximately $67,000. The fair value of the Companys long-term debt, excluding capital leases, has increased by approximately $16,000 subsequent to June 30, 2012.
35
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The historical consolidated financial statements included in this Quarterly Report reflect all of the assets, liabilities and results of operations of Calumet Specialty Products Partners, L.P. (Calumet, the Company, we, our, us). The following discussion analyzes the financial condition and results of operations of the Company for the three and six months ended June 30, 2012 and 2011. Unitholders should read the following discussion and analysis of the financial condition and results of operations for Calumet in conjunction with our 2011 Annual Report and the historical unaudited condensed consolidated financial statements and notes of the Company included elsewhere in this Quarterly 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 plants primarily located in Louisiana, Wisconsin and Pennsylvania. We own and lease additional facilities, primarily related to production and distribution of specialty products throughout the U.S. Our business is organized into two segments: specialty products and fuel products. In our specialty products segment, we process crude oil and other feedstocks into a wide variety of customized lubricating oils, white mineral oils, solvents, petrolatums, asphalt and waxes. 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. In our fuel products segment, we process crude oil into a variety of fuel and fuel-related products, including gasoline, diesel, jet fuel and heavy fuel oils. In connection with our production of specialty products and fuel products, we also produce asphalt and a limited number of other by-products.
Second Quarter 2012 Update
For the three months ended June 30, 2012 and 2011, 42.1% and 51.5%, respectively, of our sales volume and 68.8% and 115.3%, respectively, of our gross profit was generated from our specialty products segment while, for the same periods, 57.9% and 48.5%, respectively, of our sales volume and 31.2% and (15.3)%, respectively, of our gross profit was generated from our fuel products segment.
We continued to see strength in product demand in our specialty products segment in the second quarter of 2012. We noted a 24.7% increase in barrels of specialty products sold for the quarter ended June 30, 2012 compared to the same period in 2011, including the impact of incremental sales in the second quarter of 2012 from the Superior Acquisition, which closed on September 30, 2011. Excluding incremental sales volume associated with the Superior, TruSouth and Missouri Acquisitions, our specialty products sales volume decreased 1.9% primarily due to the April 28, 2012 shutdown by ExxonMobil of a crude oil pipeline serving the Shreveport refinery for a portion of its crude oil requirements. Our specialty products segment generated a gross profit margin of 15.5% for the three months ended June 30, 2012, as compared to a gross profit margin of 12.5% in the same period of 2011, as specialty products sales pricing remained fairly constant throughout the second quarter of 2012 while crude oil prices decreased significantly during the quarter.
Higher sales and production volume in our fuel products segment during the second quarter of 2012 allowed us to take advantage of higher market crack spreads. We noted an 82.9% increase in barrels of fuel products sold in the second quarter of 2012 compared to the same period in 2011, driven primarily by incremental fuel products sales from the Superior refinery partially offset by lower production at our Shreveport refinery due to the April 28, 2012 shutdown by ExxonMobil of a crude oil pipeline serving the refinery for a portion of its crude oil requirements. Historically, the barrels of crude oil received from this pipeline have been among the most expensive barrels run by our Shreveport refinery. As a result of the ExxonMobil pipeline shutdown, our Shreveport refinery run rates decreased by an average of approximately 4,500 bpd for the second quarter of 2012 compared to the first quarter of 2012. We expect these decreased run rates will remain in effect until the ExxonMobil pipeline service is restored or our ability to receive crude oil by rail, from other suppliers, at our Shreveport refinery is expanded, which is anticipated to be completed in the fourth quarter of 2012. The fuel products segment generated a gross profit margin of 7.8% during the second quarter of 2012 compared to a loss of 2.9% in the same period of 2011. Also improving gross profit were lower realized losses on our derivative instruments as outlined in the table below. During the second quarter of 2012, we entered into additional derivative instruments due to the strength in forward crack spreads, adding 1.6 million barrels of derivatives for calendar years 2012 through 2014 at an average of $24.89 per barrel.
During the second quarter of 2012, Bakken crude oil and Canadian heavy crude oil differentials to NYMEX WTI averaged $19.78 per barrel below NYMEX WTI. In addition to the benefit from the Bakken crude oil and Canadian heavy crude oil differentials, our Superior refinery fuel products sales benefited from Group 3 diesel prices improving from an average of $1.94 below U.S. Gulf Coast diesel prices in the first quarter of 2012 to an average of $0.19 above U.S. Gulf Coast diesel prices during the second quarter of 2012. As we have not executed any basis trades to lock in this differential during the second quarter of 2012, we benefited from the inversion of this differential during the second quarter of 2012 compared to the first quarter of 2012. Alternatively, we currently use U.S. Gulf Coast fuel products swaps to hedge our Group 3 fuel selling price exposure.
36
On July 3, 2012, we completed the acquisition of all the membership interests of Royal Purple, LLC (Royal Purple) for aggregate consideration of approximately $332.7 million, excluding certain purchase price adjustments (Royal Purple Acquisition). Royal Purple is a formulator and marketer of premium industrial and consumer lubricants across several large markets including oil and gas, chemicals and refining, power generation, manufacturing and transportation, food and drug manufacturing and automotive aftermarket. The Royal Purple Acquisition was financed with the net proceeds (net of discount, underwriters fees and expenses) of $262.7 million from our June 2012 private placement of 9 5/8% senior notes due August 1, 2020 and cash on hand. We intend to continue to pursue strategic acquisitions to enhance our existing assets.
We generated $27.5 million in cash flow from operations during the second quarter of 2012. We generated distributable cash flow (as defined below in Non-GAAP Financial Measures) of $94.9 million and $25.4 million for the second quarter of 2012 and 2011, respectively, and paid distributions of $30.1 million to our unitholders in the second quarter of 2012, an increase of $10.8 million over the same period in the prior year. We plan to continue focusing our efforts on generating positive cash flows from operations which we expect will be used to (i) improve our liquidity position, (ii) pay quarterly distributions to our unitholders, (iii) service our debt obligations and (iv) provide funding for general partnership purposes.
Key Performance Measures
Our sales and net income are principally affected by the price of crude oil, demand for specialty 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 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 additional factors beyond our control. We monitor these risks and enter into financial derivatives designed to 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 risk so that we can meet our cash distribution, debt service and capital expenditure requirements despite fluctuations in crude oil and fuel products prices. We enter into derivative contracts for future periods in quantities that do not exceed our projected purchases of crude oil and natural gas and sales of fuel products. Please read Part I Item 3 Quantitative and Qualitative Disclosures About Market RiskCommodity Price Risk. As of June 30, 2012, we have derivative instruments for approximately 14.5 million barrels of fuel products through December 2014 at an average refining margin of $23.37 per barrel with average refining margins ranging from a low of $18.12 per barrel in 2012 to a high of $26.50 per barrel in 2013. Please refer to Note 7 under Part I Item 1 Financial StatementsNotes to Unaudited Condensed Consolidated Financial Statements and Part I Item 3 Quantitative and Qualitative Disclosures About Market RiskExisting Commodity Derivative Instruments and Interest Rate Risk and Commodity Price Risk for detailed information regarding our derivative instruments.
Our management uses several financial and operational measurements to analyze our performance. These measurements include the following:
| sales volumes; |
| production yields; and |
| specialty products and fuel products gross profit. |
Sales volumes. We view the volumes of specialty products and fuel products sold as an important measure of our ability to effectively utilize our refining assets. Our ability to meet the demands of our customers is driven by the volumes of crude oil and feedstocks that we run at 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.
Production yields. In order to maximize our gross profit and minimize lower margin by-products, we seek the optimal product mix for each barrel of crude oil we refine, which we refer to as production yield.
Specialty products and fuel products 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 specialty products and fuel products 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 specialty products and fuel products gross profit as indicators 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 in selling prices typically lags behind the rising costs of crude oil feedstocks for specialty products. Other than plant fuel, production-related expenses generally remain stable across broad ranges of throughput volumes, but can fluctuate depending on maintenance activities performed during a specific period.
37
Our fuel products segment gross profit may differ from a standard U.S. Gulf Coast and a Group 3 2/1/1 or 3/2/1 market crack spread due to many factors, including derivative activities to hedge both our fuel products segment revenues and the cost of crude oil reflected in gross profit, our fuel products mix as shown in our production table being different than the ratios used to calculate such market crack spreads, the allocation of by-product (primarily asphalt) losses to the fuel products segment, operating costs including fixed costs and actual crude oil costs differing from market indices and our local market pricing differentials for fuel products in the Shreveport, Louisiana and Superior, Wisconsin vicinities as compared to U.S. Gulf Coast and Group 3 postings, respectively.
In addition to the foregoing measures, we also monitor our selling, general and administrative expenditures, substantially all of which are incurred through our general partner.
38
Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011
Production Volume. The following table sets forth information about our combined 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 in our fuel products segment. The table includes the results of operations at our Superior refinery commencing October 1, 2011. The table also includes the results of operations at our Missouri facility commencing January 3, 2012 and TruSouth facility commencing January 6, 2012 except that our TruSouth operations are not included in total feedstock runs or total facility production in the table as these packaging operations are not related to our refining operations.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2012 | 2011 | % Change | 2012 | 2011 | % Change | |||||||||||||||||||
(In bpd) | (In bpd) | |||||||||||||||||||||||
Total sales volume (1) |
91,198 | 59,648 | 52.9 | % | 94,357 | 56,619 | 66.7 | % | ||||||||||||||||
Total feedstock runs (2) |
89,775 | 61,853 | 45.1 | % | 93,990 | 58,986 | 59.3 | % | ||||||||||||||||
Facility production: (3) |
||||||||||||||||||||||||
Specialty products: |
||||||||||||||||||||||||
Lubricating oils |
15,524 | 14,141 | 9.8 | % | 15,102 | 13,961 | 8.2 | % | ||||||||||||||||
Solvents |
10,189 | 11,051 | (7.8 | )% | 9,658 | 10,592 | (8.8 | )% | ||||||||||||||||
Waxes |
1,234 | 1,204 | 2.5 | % | 1,255 | 1,133 | 10.8 | % | ||||||||||||||||
Fuels |
914 | 435 | 110.1 | % | 680 | 533 | 27.6 | % | ||||||||||||||||
Asphalt and other by-products |
15,310 | 8,961 | 70.9 | % | 15,648 | 8,495 | 84.2 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
43,171 | 35,792 | 20.6 | % | 42,343 | 34,714 | 22.0 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Fuel products: |
||||||||||||||||||||||||
Gasoline |
20,582 | 10,266 | 100.5 | % | 22,742 | 9,619 | 136.4 | % | ||||||||||||||||
Diesel |
20,176 | 11,424 | 76.6 | % | 21,648 | 11,095 | 95.1 | % | ||||||||||||||||
Jet fuel |
5,251 | 5,429 | (3.3 | )% | 5,353 | 4,303 | 24.4 | % | ||||||||||||||||
Heavy fuel oils and other |
2,816 | 1,065 | 164.4 | % | 3,118 | 812 | 284.0 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
48,825 | 28,184 | 73.2 | % | 52,861 | 25,829 | 104.7 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total facility production (3) |
91,996 | 63,976 | 43.8 | % | 95,204 | 60,543 | 57.3 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Total sales volume includes sales from the production at our facilities and certain third-party facilities pursuant to supply and/or processing agreements and sales of inventories. Total sales volume includes the sale of purchased fuel product blendstocks such as ethanol and biodiesel in our fuel products segment sales. The increase in total sales volume for the three and six months ended June 30, 2012 compared to the same periods in 2011 is due primarily to incremental sales of fuel products and asphalt subsequent to the Superior Acquisition on September 30, 2011, as well as increased sales volumes of lubricating oils. |
(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 the total feedstock runs for the three and six months ended June 30, 2012 compared to the same periods in 2011 is due primarily to incremental feedstock runs from the Superior refinery partially offset by decreased run rates at our Shreveport refinery during the second quarter of 2012 due to the ExxonMobil pipeline serving this refinery being shut down since April 28, 2012. |
(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, including such agreements with LyondellBasell. The difference between total facility production and total feedstock runs is primarily a result of the time lag between the input of feedstock and production of finished products and volume loss. The increase in total facility production for three and six months ended June 30, 2012 compared to the same periods in 2011 is due primarily to the operational items discussed above in footnote 2 of this table. |
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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 income (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.
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Sales |
$ | 1,086,996 | $ | 733,770 | $ | 2,256,582 | $ | 1,339,010 | ||||||||
Cost of sales |
958,188 | 683,205 | 2,043,530 | 1,241,581 | ||||||||||||
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