Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM              TO             
Commission File Number: 000-51734
 
 
Calumet Specialty Products Partners, L.P.
(Exact Name of Registrant as Specified in Its Charter) 
 
 
Delaware
 
35-1811116
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
 
 
2780 Waterfront Parkway East Drive, Suite 200
 
 
Indianapolis, Indiana
 
46214
(Address of Principal Executive Officers)
 
(Zip Code)
(317) 328-5660
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒   No  ☐
Indicate by check mark whether the registrant has submitted electronically 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  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
☐
 
Accelerated filer
 
☒
Non-accelerated filer
 
☐ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
☐
Emerging growth company
 
☐
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
On August 9, 2018, there were 77,099,282 common units outstanding.
 

Table of Contents

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
QUARTERLY REPORT
For the Three and Six Months Ended June 30, 2018
Table of Contents
 
 
Page
 

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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes certain “forward-looking statements.” These statements can be identified by the use of forward-looking terminology including “may,” “intend,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “plan,” “should,” “could,” “would,” or other similar words. The statements regarding (i) estimated capital expenditures as a result of required audits or required operational changes or other environmental and regulatory liabilities, (ii) our anticipated levels of, use and effectiveness of derivatives to mitigate our exposure to crude oil price changes, natural gas price changes and fuel products price changes, (iii) estimated costs of complying with the U.S. Environmental Protection Agency’s (“EPA”) Renewable Fuel Standard (“RFS”), including the prices paid for Renewable Identification Numbers (“RINs”), (iv) our ability to meet our financial commitments, debt service obligations, debt instrument covenants, contingencies and anticipated capital expenditures, (v) our access to capital to fund capital expenditures and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms, (vi) our access to inventory financing under our supply and offtake agreements, (vii) our ability to remediate the identified material weaknesses and further strengthen the overall controls surrounding information systems and (viii) the future effectiveness of our new enterprise resource planning (“ERP”) system to further enhance operating efficiencies and provide more effective management of our business operations, as well as other matters discussed in this Quarterly Report that are not purely historical data, are forward-looking statements. These forward-looking statements are based on our expectations and beliefs as of the date hereof concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future sales and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisition or disposition transactions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Known material factors that could cause our actual results to differ from those in the forward-looking statements are those described in (i) Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (“2017 Annual Report”), (ii) Part II, Item 1A “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 and (iii) Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” and Part II, Item 1A “Risk Factors” in this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
References in this Quarterly Report to “Calumet Specialty Products Partners, L.P.,” “Calumet,” “the Company,” “we,” “our,” “us” or like terms refer to Calumet Specialty Products Partners, L.P. and its subsidiaries. References in this Quarterly Report to “our general partner” refer to Calumet GP, LLC, the general partner of Calumet Specialty Products Partners, L.P.




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PART I
Item 1. Financial Statements
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
 
(In millions, except unit data)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
38.8

 
$
164.3

Restricted cash
—

 
350.0

Accounts receivable, net:
 
 
 
Trade
269.9

 
265.4

Other
32.5

 
88.7

 
302.4

 
354.1

Inventories
334.1

 
314.4

Derivative assets
3.8

 
—

Prepaid expenses and other current assets
10.0

 
8.7

Total current assets
689.1

 
1,191.5

Property, plant and equipment, net
1,135.5

 
1,159.2

Investment in unconsolidated affiliates
25.4

 
35.0

Goodwill
171.4

 
171.4

Other intangible assets, net
97.9

 
107.9

Other noncurrent assets, net
25.2

 
23.8

Total assets
$
2,144.5

 
$
2,688.8

LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
 
 
 
Accounts payable
$
257.9

 
$
282.3

Accrued interest payable
30.8

 
52.5

Accrued salaries, wages and benefits
30.1

 
35.9

Other taxes payable
21.3

 
16.1

Obligations under inventory financing agreements
108.1

 
103.1

Other current liabilities
22.3

 
73.7

Current portion of long-term debt
2.9

 
354.1

Derivative liabilities
0.1

 
6.0

Discontinued operations, current liabilities
0.3

 
2.0

Total current liabilities
473.8

 
925.7

Pension and postretirement benefit obligations
3.0

 
3.1

Other long-term liabilities
1.5

 
1.9

Long-term debt, less current portion
1,599.6

 
1,638.2

Total liabilities
2,077.9

 
2,568.9

Commitments and contingencies
 
 
 
Partners’ capital:
 
 
 
Limited partners’ interest 77,081,069 units and 76,788,801 units, issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
58.9

 
113.3

General partner’s interest
12.7

 
13.8

Accumulated other comprehensive loss
(5.0
)
 
(7.2
)
Total partners’ capital
66.6

 
119.9

Total liabilities and partners’ capital
$
2,144.5

 
$
2,688.8

See accompanying notes to unaudited condensed consolidated financial statements.

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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions, except per unit and unit data)
Sales
$
945.5

 
$
967.0

 
$
1,696.0

 
$
1,853.5

Cost of sales
822.1

 
823.3

 
1,459.4

 
1,580.3

Gross profit
123.4

 
143.7

 
236.6

 
273.2

Operating costs and expenses:
 
 
 
 
 
 
 
Selling
10.6

 
15.1

 
25.3

 
31.4

General and administrative
31.9

 
32.4

 
72.5

 
63.0

Transportation
33.0

 
35.6

 
63.3

 
71.3

Taxes other than income taxes
5.4

 
4.8

 
7.3

 
10.0

Asset impairment
—

 
—

 
—

 
0.4

Other operating (income) expense
(1.1
)
 
1.1

 
(16.7
)
 
3.0

Operating income
43.6

 
54.7

 
84.9

 
94.1

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(37.5
)
 
(44.5
)
 
(82.7
)
 
(88.4
)
Debt extinguishment costs
(58.2
)
 
—

 
(58.8
)
 
—

Gain on derivative instruments
0.8

 
1.3

 
0.7

 
7.0

Other
0.9

 
0.5

 
2.4

 
0.7

Total other expense
(94.0
)
 
(42.7
)
 
(138.4
)
 
(80.7
)
Net income (loss) from continuing operations before income taxes
(50.4
)
 
12.0

 
(53.5
)
 
13.4

Income tax expense (benefit) from continuing operations
0.8

 
—

 
0.6

 
(0.1
)
Net income (loss) from continuing operations
$
(51.2
)
 
$
12.0

 
$
(54.1
)
 
$
13.5

Net loss from discontinued operations, net of tax
$
(0.7
)
 
$
(2.4
)
 
$
(2.6
)
 
$
(10.1
)
Net income (loss)
$
(51.9
)
 
$
9.6

 
$
(56.7
)
 
$
3.4

Allocation of net income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(51.9
)
 
$
9.6

 
$
(56.7
)
 
$
3.4

Less:
 
 
 
 
 
 
 
General partner’s interest in net income (loss)
(1.0
)
 
0.2

 
(1.1
)
 
0.1

Non-vested share based payments
—

 
0.2

 
—

 
0.2

Net income (loss) available to limited partners
$
(50.9
)
 
$
9.2

 
$
(55.6
)
 
$
3.1

Weighted average limited partner units outstanding:
 
 
 
 
 
 
 
Basic
77,730,458

 
77,554,815

 
77,644,262

 
77,485,058

Diluted
77,730,458

 
77,714,112

 
77,644,262

 
77,725,656

Limited partners’ interest basic and diluted net income (loss) per unit:
 
 
 
 
 
 
 
From continuing operations
$
(0.64
)
 
$
0.15

 
$
(0.68
)
 
$
0.17

From discontinued operations
(0.01
)
 
(0.03
)
 
(0.03
)
 
(0.13
)
Limited partners’ interest
$
(0.65
)
 
$
0.12

 
$
(0.71
)
 
$
0.04

See accompanying notes to unaudited condensed consolidated financial statements.

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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions)
Net income (loss)
$
(51.9
)
 
$
9.6

 
$
(56.7
)
 
$
3.4

Other comprehensive income:
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Cash flow hedge loss reclassified to net loss
2.1

 
—

 
2.1

 
—

Defined benefit pension and retiree health benefit plans
0.1

 
—

 
0.1

 
—

Total other comprehensive income
2.2

 
—

 
2.2

 
—

Comprehensive income (loss) attributable to partners’ capital
$
(49.7
)
 
$
9.6

 
$
(54.5
)
 
$
3.4

See accompanying notes to unaudited condensed consolidated financial statements.


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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
 
Accumulated Other
Comprehensive Loss
 
Partners’ Capital
 
 
 
 
General
Partner
 
Limited
Partners
 
Total
 
(In millions)
Balance at December 31, 2017
$
(7.2
)
 
$
13.8

 
$
113.3

 
$
119.9

Other comprehensive income
2.2

 
—

 
—

 
2.2

Net loss
—

 
(1.1
)
 
(55.6
)
 
(56.7
)
Amortization of phantom units
—

 
—

 
2.1

 
2.1

Settlement of tax withholdings on equity-based incentive compensation
—

 
—

 
(0.9
)
 
(0.9
)
Balance at June 30, 2018
$
(5.0
)
 
$
12.7

 
$
58.9

 
$
66.6

See accompanying notes to unaudited condensed consolidated financial statements.

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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended June 30,
 
2018

2017
 
(In millions)
Operating activities
 
 
 
Net income (loss)
$
(56.7
)

$
3.4

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Net loss from discontinued operations
2.6

 
10.1

Depreciation and amortization
59.2


74.2

Amortization of turnaround costs
6.0


14.0

Non-cash interest expense
4.4


4.8

Loss on debt extinguishment costs
58.8

 
—

Unrealized gain on derivative instruments
(2.8
)

(11.9
)
Asset impairment
—

 
0.4

Equity based compensation
3.0


3.3

Lower of cost or market inventory adjustment
(15.0
)
 
(9.2
)
Other non-cash activities
0.2


5.0

Changes in assets and liabilities:
 
 
 
Accounts receivable
19.5


(25.9
)
Inventories
(2.6
)

(38.3
)
Prepaid expenses and other current assets
2.2


(2.1
)
Derivative activity
(0.3
)

(0.3
)
Turnaround costs
(7.6
)

(10.3
)
Accounts payable
(17.7
)

8.1

Accrued interest payable
(20.3
)

(0.1
)
Accrued salaries, wages and benefits
(6.7
)

10.2

Other taxes payable
5.2


0.5

Other liabilities
(54.7
)

(55.6
)
Pension and postretirement benefit obligations
—


(0.4
)
Net cash used in discontinued operations
—

 
(15.5
)
Net cash used in operating activities
(23.3
)
 
(35.6
)
Investing activities
 
 
 
Additions to property, plant and equipment
(33.3
)

(29.7
)
Investment in unconsolidated affiliate
(3.8
)

—

Proceeds from sale of unconsolidated affiliate
9.9

 
—

Proceeds from sale of business, net
28.4

 
—

Proceeds from sale of property, plant and equipment
0.2

 
—

Net cash (used in) provided by discontinued investing activities
3.4

 
(0.3
)
Net cash (used in) provided by investing activities
4.8

 
(30.0
)
Financing activities
 
 
 
Proceeds from borrowings — revolving credit facility
141.0

 
606.9

Repayments of borrowings — revolving credit facility
(141.1
)
 
(616.7
)
Repayments of borrowings — senior notes
(400.0
)
 
—

Payments on capital lease obligations
(1.8
)
 
(4.5
)
Proceeds from (payments on) inventory financing agreements
(4.0
)
 
105.4

Payments on other financing obligations
(1.6
)
 
(1.1
)
Payments on extinguishment of debt
(46.6
)
 
—

Debt issuance costs
(2.9
)
 
(2.1
)
Contributions from Calumet GP, LLC
—

 
0.1

Net cash provided by (used in) financing activities
(457.0
)
 
88.0

Net increase (decrease) in cash, cash equivalents and restricted cash
(475.5
)
 
22.4

Cash, cash equivalents and restricted cash at beginning of period
514.3


4.2

Cash, cash equivalents and restricted cash at end of period
$
38.8

 
$
26.6

Supplemental disclosure of non-cash investing activities
 
 
 
Non-cash property, plant and equipment additions
$
2.5

 
$
6.5

See accompanying notes to unaudited condensed consolidated financial statements.

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CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business and Presentation of Financial Statements
Calumet Specialty Products Partners, L.P. (the “Company”) is a publicly traded Delaware limited partnership listed on the NASDAQ Global Select Market under the ticker symbol “CLMT.” The general partner of the Company is Calumet GP, LLC, a Delaware limited liability company. As of June 30, 2018, the Company had 77,081,069 limited partner common units and 1,573,083 general partner equivalent units outstanding. The general partner owns 2% of the Company and all of the incentive distribution rights (as defined in the Company’s partnership agreement), while the remaining 98% is owned by limited partners. The general partner employs all of the Company’s employees and the Company reimburses the general partner for certain of its expenses.
The Company’s core business is the production and marketing of crude oil-based specialty products including lubricating oils, solvents, waxes, synthetic lubricants and other products. The Company is also engaged in the production and marketing of fuel and fuel related products including gasoline, diesel, jet fuel, asphalt and other products. The Company is based in Indianapolis, Indiana and owns specialty and fuel products facilities. The Company owns and leases additional facilities, primarily related to production and marketing of specialty and fuel products, throughout the United States (“U.S.”). Subsequent to the sale of Anchor Drilling Fluids USA, LLC (“Anchor”) on November 21, 2017, the Company manages its business in two reportable segments: specialty products and fuel products.
On November 8, 2017, the Company completed the sale of all of the issued and outstanding membership interests in Calumet Superior, LLC, which owns the Superior, Wisconsin refinery (“Superior Refinery”). The sale included the associated working capital, the Superior Refinery’s wholesale marketing business and related assets, including certain owned or leased product terminals, and certain crude gathering assets and line space in North Dakota to Husky Superior Refining Holding Corp (the “Superior Transaction”). The Superior Transaction did not qualify for discontinued operations.
Prior to November 21, 2017, the Company owned and operated Anchor, which provided oilfield services and products in the U.S. On November 21, 2017, the Company completed the sale of Anchor; therefore, effective in its fourth quarter of 2017, the Company classified its results of operations and the assets and liabilities, for all periods presented, to reflect Anchor as a discontinued operation. Prior to being reported as discontinued operations, Anchor was included as its own reportable segment as oilfield services. See Note 5 - “Discontinued Operations” for further discussion.
The unaudited condensed consolidated financial statements of the Company as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017, included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal nature, unless otherwise disclosed. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s 2017 Annual Report.
2. Summary of Significant Accounting Policies
Reclassifications
Certain amounts in the prior years’ unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation.
Other Current Liabilities
Other current liabilities consisted of the following (in millions):
 
June 30, 2018
 
December 31, 2017
RINs Obligation
$
5.8

 
$
59.1

Other
16.5

 
14.6

Total
$
22.3

 
$
73.7


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The Company’s Renewable Identification Numbers (“RINs”) obligation (“RINs Obligation”) represents a liability for the purchase of RINs to satisfy the EPA requirement to blend biofuels into the fuel products it produces pursuant to the EPA’s RFS. RINs are assigned to biofuels produced in the U.S. as required by the EPA. The EPA sets annual quotas for the percentage of biofuels that must be blended into transportation fuels consumed in the U.S. and, as a producer of motor fuels from petroleum, the Company is required to blend biofuels into the fuel products it produces at a rate that will meet the EPA’s annual quota. To the extent the Company is unable to blend biofuels at that rate, it must purchase RINs in the open market to satisfy the annual requirement. The Company’s RINs Obligation is based on the amount of RINs it must purchase and the price of those RINs as of the balance sheet date.
The Company uses the inventory model to account for RINs, measuring acquired RINs at weighted-average cost. The cost of RINs used each period is charged to cost of sales with cash inflows and outflows recorded in the operating cash flow section of the unaudited condensed consolidated statements of cash flows. The liability is calculated by multiplying the RINs shortage (based on actual results) by the period end RIN spot price. The Company recognizes an asset at the end of each reporting period in which it has generated RINs in excess of its RINs Obligation. The asset is initially recorded at cost at the time the Company acquires them and are subsequently revalued at the lower of cost or market as of the last day of each accounting period and the resulting adjustments are reflected in costs of sales for the period in the unaudited condensed consolidated statements of operations. The value of RINs in excess of the RINs Obligation, if any, would be reflected in other current assets on the condensed consolidated balance sheets. RINs generated in excess of the Company’s current RINs Obligation may be sold or held to offset future RINs Obligations. Any such sales of excess RINs are recorded in cost of sales in the unaudited condensed consolidated statements of operations. The assets and liabilities associated with the Company’s RINs Obligation are considered recurring fair value measurements. See Note 7 - “Commitments and Contingencies” for further information on the Company’s RINs Obligation.
Restricted Cash
The sale of the Superior Refinery resulted in restricted cash and was based upon the value of collateral under the Company’s debt agreements. Under the indentures governing the Company’s senior notes, proceeds from Asset Sales (as defined in the indentures) can only be used for, among other things, to repay, redeem or repurchase debt; to make certain acquisitions or investments; and to make capital expenditures. On April 9, 2018, the Company redeemed all of the 2021 Secured Notes (defined below) using the restricted cash from the sale of the Superior Refinery.
New Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718) (“ASU 2018-07”). This update simplifies the guidance related to nonemployee share-based payments by superseding ASC 505-50 and expanding the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. Prior to the issuance of this standard update, nonemployee share-based payments were subject to ASC 505-50 requirements while employee shared-based payments were subject to ASC 718 requirements. ASU 2018-07 is effective for fiscal years (including interim periods) beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2018-07 will not have an impact on the Company’s consolidated financial statements.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes the lease accounting requirements in Accounting Standards Codification (“ASC”) Topic 840, Leases. ASU 2016-02 provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. In December 2017 and January 2018, the FASB released ASU 2017-13 and ASU 2018-01, respectively, which contain modifications to ASU 2016-02. The amendments in these standards are effective for fiscal years (including interim periods) beginning after December 15, 2018, with early adoption permitted and modified retrospective application required.
As a result of adoption of ASU 2016-02, the Company anticipates it will recognize a right of use asset and lease liability on the adoption date. The Company plans to apply practical expedients provided in the standard that allow, amongst others, not to reassess contracts that commenced prior to the adoption. The Company also anticipates to elect a policy not to recognize right of use assets and lease liabilities related to short-term leases. The Company continues to evaluate its contracts and is gathering the necessary data to determine the financial impact of ASU 2016-02 on its consolidated financial statements and related disclosures. The Company is also evaluating its systems, processes, internal controls and technology requirements and solutions needed to comply with the requirements of this standard. While the Company cannot currently estimate the financial impact of ASU 2016-02 on its consolidated financial statements, the adoption is anticipated to result in an increase in both assets and liabilities related to its leases.

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In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 requires that (i) equity investments in unconsolidated entities that are not accounted for under the equity method of accounting generally be measured at fair value with changes recognized in net income (loss) and (ii) when the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk be recognized separately in other comprehensive income (loss). Additionally, ASU 2016-01 changes the presentation and disclosure requirements for financial instruments. In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2018-03”). ASU 2018-03 clarifies certain aspects of the guidance issued in ASU 2016-01. The adoption of ASU 2016-01 did not have an impact on the Company’s consolidated financial statements.
On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue - Revenue from Contracts with Customers (Topic 606) (“ASC 606”) and all the related amendments to all contracts using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of ASC 606 did not have a material impact to our revenue recognition. See Note 3 - “Revenue Recognition” for further information.
3. Revenue Recognition
The following is a description of principal activities from which the Company generates revenue. Revenues are recognized when control of the promised goods are transferred to the customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods promised within each contract and determines the performance obligations and assesses whether each promised good is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Products
The Company is engaged in the production and marketing of crude oil-based specialty products including lubricating oils, solvents, waxes, synthetic lubricants and other products which comprise the specialty products segment. The Company is also engaged in the production of fuel and fuel related products including gasoline, diesel, jet fuel, asphalt and other products which comprise the fuel products segment.
The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction price the Company evaluates whether the price is subject to variable consideration such as product returns, rebates or other discounts to determine the net consideration to which the Company expects to be entitled. The Company transfers control and recognizes revenue upon shipment to the customer or, in certain cases, upon receipt by the customer in accordance with contractual terms.
Excise and Sales Taxes
The Company excludes excise taxes and sales taxes that are collected from customers from the transaction price in its contracts with customers.  Accordingly, revenue from contracts with customers is net of sales-based taxes that are collected from customers and remitted to taxing authorities.
Shipping and Handling Costs
Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are included in transportation expense. The Company has elected to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfillment activities rather than a separate distinct performance obligation.
Cost of Obtaining Contracts
The Company may incur incremental costs to obtain a sales contract, which under ASC 606 should be capitalized and amortized over the life of the contract. The Company has elected to apply the practical expedient in ASC 340-40-50-5 allowing the Company to expense these costs since the contracts are short-term in nature with a contract term of one year or less.

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Disaggregation of Revenue
The following table reflects the disaggregation of revenue by major source (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Sales by major source
 
 
 
 
 
 
 
Standard specialty products
$
309.7

 
$
269.9

 
$
563.5

 
$
537.8

Packaged and synthetic specialty products
72.9

 
73.2

 
140.9

 
142.5

Total specialty products
$
382.6

 
$
343.1

 
$
704.4

 
$
680.3

 
 
 
 
 
 
 
 
Fuel and fuel related products
$
500.8

 
$
533.5

 
$
896.3

 
$
1,039.6

Asphalt
62.1

 
90.4

 
95.3

 
133.6

Total fuel products
$
562.9

 
$
623.9

 
$
991.6

 
$
1,173.2

 
 
 
 
 
 
 
 
Total sales
$
945.5

 
$
967.0

 
$
1,696.0

 
$
1,853.5

Revenue is recognized when obligations under the terms of a contract with a customer are satisfied; recognition generally occurs with the transfer of control at a point in time. The contract with the customer states the final terms of the sale, including the description, quantity and price of each product or service purchased. For fuel products, payment is typically due in full between 2 to 30 days of delivery or the start of the contract term, such that payment is typically collected 2 to 30 days subsequent to the satisfaction of performance obligations. For specialty products, payment is typically due in full between 30 to 90 days of delivery or the start of the contract term, such that payment is typically collected 30 to 90 days subsequent to the satisfaction of performance obligations. In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured. The expected costs associated with a product assurance warranty continues to be recognized as expense when products are sold. The Company does not offer promised services that could be considered warranties that are sold separately or provide a service in addition to assurance that the related product complies with agreed upon specifications. The Company establishes provisions based on the methods described in ASC 606 for estimated returns and warranties as variable consideration when determining the transaction price.
Contract Balances
Under product sales contracts, the Company invoices customers for performance obligations that have been satisfied, at which point payment is unconditional. Accordingly, a product sales contract does not give rise to contract assets or liabilities under ASC 606. The Company’s receivables, net of allowance for doubtful accounts, from contracts with customers as of June 30, 2018 and December 31, 2017 was $269.9 million and $265.4 million, respectively.
Transaction Price Allocated to Remaining Performance Obligations
The Company’s product sales are short-term in nature with a contract term of one year or less. The Company has utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. Additionally, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
There were no material differences under ASC 606 compared to ASC 605 for the three and six months ended June 30, 2018.
4. Inventories
The cost of inventory is recorded using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. Costs include crude oil and other feedstocks, labor, processing costs and refining overhead costs. Inventories are valued at the lower of cost or market value. The replacement cost of these inventories, based on current market values, would have been $0.6 million and $4.6 million lower as of June 30, 2018 and December 31, 2017, respectively.
On March 31, 2017 and June 19, 2017, the Company sold inventory comprised of crude oil and refined products to Macquarie Energy North America Trading Inc. (“Macquarie”) under Supply and Offtake Agreements as described in Note 8 — “Inventory Financing Agreements” related to the Great Falls and Shreveport refineries, respectively. The crude oil remains in the legal title of Macquarie and is stored in the Company’s refinery storage tanks governed by storage agreements. Legal title to the crude oil passes to the Company at the storage tank outlet for processing into refined products. After processing, Macquarie takes title to the refined products stored in the Company’s storage tanks until sold to third parties. While title to certain inventories will reside

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with Macquarie, the Supply and Offtake Agreements are accounted for by the Company similar to a product financing arrangement; therefore, the inventories sold to Macquarie will continue to be included in the Company’s consolidated balance sheets until processed and sold to a third party. The Company is obligated to repurchase the inventory in certain scenarios.
Inventories consist of the following (in millions):
 
June 30, 2018
 
December 31, 2017
 
Titled
Inventory
 
Supply and Offtake
Agreements (1)
 
Total
 
Titled
Inventory
 
Supply and Offtake
Agreements (1)
 
Total
Raw materials
$
47.3

 
$
18.2

 
$
65.5

 
$
42.0

 
$
17.6

 
$
59.6

Work in process
45.4

 
27.7

 
73.1

 
34.4

 
23.7

 
58.1

Finished goods
136.2

 
59.3

 
195.5

 
139.4

 
57.3

 
196.7

 
$
228.9

 
$
105.2

 
$
334.1

 
$
215.8

 
$
98.6

 
$
314.4

 
(1) 
Amounts represent LIFO value and do not necessarily represent the value of product financing. Refer to Note 8 - “Inventory Financing Agreements” for further information.
Under the LIFO inventory method, the most recently incurred costs are charged to cost of sales and inventories are valued at the earliest acquisition costs. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. Such write downs are subject to reversal in subsequent periods, not to exceed LIFO cost, if prices recover. During the three months ended June 30, 2018 and 2017, the Company recorded decreases of $11.9 million and $3.8 million, respectively, in cost of sales in the unaudited condensed consolidated statements of operations due to the lower of cost or market (“LCM”) valuation. During the six months ended June 30, 2018 and 2017, the Company recorded decreases of $15.0 million and $9.2 million, respectively, in cost of sales in the unaudited condensed consolidated statements of operations due to the LCM valuation.
5. Discontinued Operations
On November 21, 2017, Calumet Operating, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company, completed the sale to a subsidiary of Q’Max Solutions Inc. (“Q’Max”) of all of the issued and outstanding membership interests in Anchor, for total consideration of approximately $88.4 million (subject to further post-closing adjustments) including a base price of $50.0 million, $13.0 million to be paid at various times over the next two years for net working capital and other items and 10% equity ownership in Fluid Holding Corp. (“FHC”), the parent company of Q’Max (the “Anchor Transaction”). Effective in its fourth quarter of 2017, the Company classified its results of operations for all periods presented to reflect Anchor as a discontinued operation and classified the assets and liabilities of Anchor as discontinued operations. Prior to being reported as discontinued operations, Anchor was included as its own reportable segment as oilfield services.
As of June 30, 2018 and December 31, 2017, the Company had an $8.2 million and a $15.1 million receivable respectively, in other accounts receivable in the consolidated balance sheet for the remaining payment of the base price and working capital.
As of June 30, 2018 and December 31, 2017, the Company had a $7.1 million receivable in other noncurrent assets, net in the consolidated balance sheet for the remaining payment of working capital.
The following table summarizes the results of discontinued operations for the periods presented (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Sales
$
—

 
$
63.9

 
$
—

 
$
114.8

Cost of sales
—

 
(47.2
)
 
—

 
(88.1
)
Selling
—

 
(13.1
)
 
—

 
(24.3
)
Other
(0.7
)
 
(6.9
)
 
(2.6
)
 
(13.4
)
Net loss from discontinued operations before income taxes
$
(0.7
)
 
$
(3.3
)
 
$
(2.6
)
 
$
(11.0
)
Income tax benefit
—

 
0.9

 
—

 
0.9

Net loss from discontinued operations net of income taxes
$
(0.7
)
 
$
(2.4
)
 
$
(2.6
)
 
$
(10.1
)

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6. Investment In Unconsolidated Affiliates
The following table summarizes the Company’s investments in unconsolidated affiliates (in millions):
 
June 30, 2018
 
December 31, 2017
 
Investment
 
Percent Ownership
 
Investment
 
Percent Ownership
Pacific New Investment Limited
$
—

 
—
%
 
$
9.6

 
23.8
%
Fluid Holding Corp.
25.4

 
10.0
%
 
25.4

 
10.0
%
Total
$
25.4

 
 
 
$
35.0

 
 
Pacific New Investment Limited and Shandong Hi-Speed Hainan Development Co., Ltd.
In 2015, the Company and The Heritage Group (“Heritage Group”), a related party, formed Pacific New Investment Limited (“PACNIL”) for the purpose of investing in a joint venture with Shandong Hi-Speed Materials Group Corporation and China Construction Installation Engineering Co., Ltd. to construct, develop and operate a solvents refinery in mainland China. The joint venture is named Shandong Hi-Speed Hainan Development Co., Ltd. (“Hi-Speed”). The Company invested $4.8 million in June 2016 and $4.8 million in October 2016. Through the Company’s ownership of an equity interest in PACNIL, the Company previously owned an equity interest of approximately 6.0% in Hi-Speed. During the three months ended June 30, 2018, PACNIL sold its investment in Hi-Speed to the other owners. The Company received proceeds of $9.9 million for the sale.
Fluid Holding Corp.
In connection with the Anchor Transaction in November 2017, the Company received an investment in FHC as part of the total consideration for Anchor. FHC provides oilfield services and products to customers globally.  The Company’s investment in FHC is a non-marketable equity security without a readily determinable fair value. The Company records this investment without a readily determinable fair value using a measurement alternative which measures the security at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes with a same or similar security from the same issuer.
Biosyn Holdings, LLC and Biosynthetic Technologies
In 2018, the Company and Heritage Group formed Biosyn Holdings, LLC (“Biosyn”) for the purpose of acquiring Biosynthetic Technologies, LLC (“Biosynthetic Technologies”), a startup company which developed an intellectual property portfolio for the manufacture of renewable-based and biodegradable esters. The Company incurred approximately $4.0 million in related expenditures. The Company, through Biosyn, intends to explore a range of alternatives to maximize the value of the acquired intellectual property. This could include internal or external licensing or the sale of the technology for applications across a diverse portfolio of products and solutions in a variety of end-markets. The Company is designing a commercial scale test at its existing esters manufacturing plant in Missouri. The Company accounts for its ownership in Biosyn under the equity method of accounting.
7. Commitments and Contingencies
From time to time, the Company is a party to certain matters, claims and litigation incidental to its business, including claims made by various regulatory and taxation authorities, such as the EPA, the SEC, various state environmental regulatory bodies, the Internal Revenue Service, various state and local departments of revenue and the U.S. Occupational Safety and Health Administration (“OSHA”), as the result of audits or reviews of the Company’s business. In addition, the Company has property, business interruption, general liability and various other insurance policies that may result in certain losses or expenditures being reimbursed to the Company.
Environmental
The Company conducts crude oil and specialty hydrocarbon refining, blending and terminal operations and such activities are subject to stringent 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 impose obligations that are applicable to the Company’s operations, such as requiring the acquisition of permits to conduct regulated activities, restricting the manner in which the Company may release materials into the environment, requiring remedial activities or capital expenditures to mitigate pollution from former or current operations, requiring the application of specific health and safety criteria addressing worker protection and imposing substantial liabilities for pollution resulting from its operations. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil and criminal penalties; the imposition of investigatory, remedial or corrective action obligations or the incurrence of capital expenditures; the occurrence of delays in the permitting, development or expansion of projects and the issuance of injunctive relief limiting or prohibiting Company activities. Moreover, certain of these laws impose joint and several, strict liability for costs required to remediate and restore sites where petroleum hydrocarbons, wastes or other materials have been released or disposed. In addition, new laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement or other developments, some of which legal requirements are discussed below, could significantly increase the Company’s operational or compliance expenditures.

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Remediation of subsurface contamination is in process at certain of the Company’s refinery sites and is being overseen by the appropriate state agencies. Based on current investigative and remedial activities, the Company believes that the soil and groundwater contamination at these refineries can be controlled or remediated without having a material adverse effect on the Company’s financial condition. However, such costs are often unpredictable and, therefore, there can be no assurance that the future costs will not become material.
Great Falls Refinery
In connection with the acquisition of the Great Falls refinery from Connacher Oil and Gas Limited (“Connacher”), the Company became a party to an existing 2002 Refinery Initiative Consent Decree (the “Great Falls Consent Decree”) with the EPA and the Montana Department of Environmental Quality. The material obligations imposed by the Great Falls Consent Decree have been completed. On September 27, 2012, Montana Refining Company, Inc. received a final Corrective Action Order on Consent, replacing the refinery’s previously held hazardous waste permit. This Corrective Action Order on Consent governs the investigation and remediation of contamination at the Great Falls refinery. The Company believes the majority of damages related to such contamination at the Great Falls refinery are covered by a contractual indemnity provided by HollyFrontier Corporation (“Holly”), the owner and operator of the Great Falls refinery prior to its acquisition by Connacher, under an asset purchase agreement between Holly and Connacher, pursuant to which Connacher acquired the Great Falls refinery. Under this asset purchase agreement, Holly agreed to indemnify Connacher and Montana Refining Company, Inc., subject to timely notification, certain conditions and certain monetary baskets and caps, for environmental conditions arising under Holly’s ownership and operation of the Great Falls refinery and existing as of the date of sale to Connacher. During 2014, Holly provided the Company a notice challenging the Company’s position that Holly is obligated to indemnify the Company’s remediation expenses for environmental conditions to the extent arising under Holly’s ownership and operation of the refinery and existing as of the date of sale to Connacher, which expenditures totaled approximately $17.0 million as of June 30, 2018, of which $14.6 million was capitalized into the cost of the Company’s recently completed refinery expansion project and $2.4 million was expensed. The Company continues to believe that Holly is responsible to indemnify the Company for these remediation expenses disputed by Holly and on September 22, 2015, the Company initiated a lawsuit against Holly and the sellers of the Great Falls refinery under the asset purchase agreement. On November 24, 2015, Holly and the sellers of the Great Falls refinery under the asset purchase agreement filed a motion to dismiss the case pending arbitration. On February 10, 2016, the court ordered that all of the claims be addressed in arbitration. The arbitration panel conducted the first phase of the arbitration in July 2018.  The Company expects that the arbitration panel will render its decision with respect to the issues addressed in the first phase of the arbitration this Fall. The second phase of the arbitration regarding damages is scheduled to occur in early 2019. In the event the Company is unsuccessful in the legal dispute with Holly, the Company will be responsible for the remediation expenses. The Company expects that it may incur costs to remediate other environmental conditions at the Great Falls refinery; however, the costs cannot be estimated at this time. The Company believes at this time that these other costs it may incur will not be material to its financial position or results of operations.
Renewable Identification Numbers Obligation
In March 2018, the EPA granted the Company’s fuel products refineries a “small refinery exemption” under the RFS for the compliance year 2017, as provided for under the federal Clean Air Act, as amended (“CAA”). In granting those exemptions, the EPA in consultation with the Department of Energy determined that for the compliance year 2017, compliance with the RFS would represent a “disproportionate economic hardship” for these small refineries.
In February 2017 and in May 2017, the EPA granted the Company’s fuel products refineries a “small refinery exemption” under the RFS for the compliance year 2016, as provided for under the CAA. In granting those exemptions, the EPA in consultation with the Department of Energy determined that for the compliance year 2016, compliance with the RFS would represent a “disproportionate economic hardship” for these small refineries.
The RINs exemption resulted in a decrease in the RINs Obligation and is charged to cost of sales in the unaudited condensed consolidated statement of operations with the exception of the June 30, 2018 portion related to the Superior Refinery which is charged to other (income) expense within operating income in the unaudited condensed consolidated statement of operations. As of June 30, 2018 and December 31, 2017, the Company had a RINs Obligation of $5.8 million and $59.1 million, respectively.
Occupational Health and Safety
The Company is subject to various laws and regulations relating to occupational health and safety, including the federal Occupational Safety and Health Act and comparable state laws. These laws and regulations strictly govern the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in the Company’s 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 promote compliance with applicable laws and regulations. The Company conducts periodic audits of Process Safety Management (“PSM”) systems at each of its locations subject to the PSM standard. The Company’s compliance with applicable health and safety laws and regulations has required and continues to require, substantial expenditures. Changes in occupational safety and health laws and regulations or a finding of non-compliance with current laws and regulations could

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result in additional capital expenditures or operating expenses, as well as civil penalties and, in the event of a serious injury or fatality, criminal charges.
In the first quarter of 2011, OSHA conducted an inspection of the Cotton Valley refinery’s PSM 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 $0.2 million. The Company has contested the Cotton Valley Citation and the parties have reached a tentative settlement with OSHA on the matter, which the Company does not believe will have a material adverse effect on its financial position or results of operations.
Other Matters, Claims and Legal Proceedings
On May 4, 2018, the SEC requested that the Company and certain of its executives voluntarily produce certain communications and documents prepared or maintained from January 2017 to May 2018 and generally related to the Company’s finance and accounting staff, financial reporting, public disclosures, accounting policies, disclosure controls and procedures and internal controls. Beginning on July 11, 2018, the SEC issued several subpoenas formally requesting the same documents previously subject to the same voluntary production requests by the SEC as well as additional, related documents. The Company has, from the outset, cooperated with the SEC’s requests and intends to continue to do so. Currently, the Company cannot estimate the timing, or ultimate outcome, including financial impact, if any, resulting from the SEC’s investigation.

The Company is subject to other matters, claims and litigation incidental to its business. The Company has recorded accruals with respect to certain of its matters, claims and litigation where appropriate, that are reflected in the unaudited condensed consolidated financial statements but are not individually considered material. For other matters, claims and litigation, the Company has not recorded accruals because it has not yet determined that a loss is probable or because the amount of loss cannot be reasonably estimated. While the ultimate outcome of matters, claims and litigation currently pending cannot be determined, the Company currently does not expect these outcomes, individually or in the aggregate (including matters for which the Company has recorded accruals), to have a material adverse effect on its financial position, results of operations or cash flows. The outcome of any matter, claim or litigation is inherently uncertain, however and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on its financial position, results of operations or cash flows.
Standby Letters of Credit
The Company has agreements with various financial institutions for standby letters of credit, which have been issued primarily to vendors. As of June 30, 2018 and December 31, 2017, the Company had outstanding standby letters of credit of $30.8 million and $67.3 million, respectively, under its revolving credit facility. Refer to Note 9 - “Long-Term Debt” for additional information regarding the Company’s revolving credit facility. At June 30, 2018 and December 31, 2017, the maximum amount of letters of credit the Company could issue under its revolving credit facility was subject to borrowing base limitations, with a maximum letter of credit sublimit equal to $300.0 million and $600.0 million, respectively, which amount may be increased with the consent of the Agent (as defined in the revolving credit facility agreement) to 90% of revolver commitments then in effect ($600.0 million and $900.0 million at June 30, 2018 and December 31, 2017, respectively).
8. Inventory Financing Agreements
On March 31, 2017, the Company entered into several agreements with Macquarie to support the operations of the Great Falls refinery (the “Great Falls Supply and Offtake Agreements”). The Great Falls Supply and Offtake Agreements expire on September 30, 2019. On July 27, 2017, the Company amended the Great Falls Supply and Offtake Agreements to provide Macquarie the option to terminate the Great Falls Supply and Offtake Agreements with nine months’ notice any time prior to June 2019 and the Company the option to terminate with ninety days’ notice at any time.
On June 19, 2017, the Company entered into several agreements with Macquarie to support the operations of the Shreveport refinery (the “Shreveport Supply and Offtake Agreements” and together with the Great Falls Supply and Offtake Agreements, the “Supply and Offtake Agreements”). The Shreveport Supply and Offtake Agreements expire on June 30, 2020; however, Macquarie has the option to terminate the Shreveport Supply and Offtake Agreements with nine months’ notice any time prior to June 2019 and the Company has the option to terminate with ninety days’ notice at any time.
During the terms of the Supply and Offtake Agreements, the Company may purchase crude oil from Macquarie or one of its affiliates. Per the Supply and Offtake Agreements, Macquarie will provide up to 30,000 barrels per day of crude oil to the Great Falls refinery and 60,000 barrels per day of crude oil to the Shreveport refinery. The Company agreed to purchase the crude oil on a just-in-time basis to support the production operations at the Great Falls and Shreveport refineries. Additionally, the Company agreed to sell, and Macquarie agreed to buy, at market prices, refined products produced at the Great Falls and Shreveport refineries. For Shreveport, finished products consisting of finished fuel products (other than jet fuel), lubricants and waxes, Macquarie may (but is not required to) sell such products to the sales intermediation party (“SIP”), and the SIP may (but is not required to) sell such products to Shreveport, as applicable, for sale in turn to third parties. For jet fuel and certain intermediate products, Macquarie

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may (but is not required to) sell such products to Shreveport for sale thereby to third parties. The Company will then repurchase the refined products from Macquarie or the SIP prior to selling the refined products to third parties.
The Supply and Offtake Agreements are subject to minimum and maximum inventory levels. The agreements also provide for the lease to Macquarie of crude oil and certain refined product storage tanks located at the Great Falls and Shreveport refineries and certain offsite locations. Following expiration or termination of the agreements, Macquarie has the option to require the Company to purchase the crude oil and refined product inventories then owned by Macquarie and located at the leased storage tanks at then current market prices. In addition, barrels owned by the Company are pledged as collateral to support the Deferred Payment Arrangement (defined below) obligations under these agreements.
While title to certain inventories will reside with Macquarie, the Supply and Offtake Agreements are accounted for by the Company similar to a product financing arrangement; therefore, the inventories sold to Macquarie will continue to be included in the Company’s condensed consolidated balance sheets until processed and sold to a third party. Each reporting period, the Company will record liabilities in an amount equal to the amount the Company expects to pay to repurchase the inventory held by Macquarie based on market prices at the termination date included in obligations under inventory financing agreements in the condensed consolidated balance sheets. The Company has determined that the redemption feature on the initially recognized liabilities related to the Supply and Offtake Agreements is an embedded derivative indexed to commodity prices. As such, the Company has accounted for these embedded derivatives at fair value with changes in the fair value, if any, recorded in gain (loss) on derivative instruments in the Company’s unaudited condensed consolidated statements of operations. For more information on the valuation of the associated derivatives, see Note 10 - “Derivatives” and Note 11 - “Fair Value Measurements.” The embedded derivatives will be recorded in obligations under inventory financing agreements on the condensed consolidated balance sheets. The cash flow impact of the embedded derivatives will be classified as a change in derivative activity in the financing activities section in the unaudited condensed consolidated statements of cash flows.
For the three and six months ended June 30, 2018, the Company incurred $5.4 million and $7.1 million, respectively, for financing costs related to the Supply and Offtake Agreements and is included in interest expense in the Company’s unaudited condensed consolidated statements of operations. The Company incurred $0.4 million of financing costs for the three and six months ended June 30, 2017.
The Company has provided collateral of $6.8 million related to the initial purchase of the Great Falls and Shreveport inventory to cover credit risk for future crude oil deliveries and potential liquidation risk if Macquarie exercises its rights and sells the inventory to third parties. The collateral was recorded as a reduction to the obligations under inventory financing agreements pursuant to a master netting agreement.
The Supply and Offtake Agreements also include a deferred payment arrangement (“Deferred Payment Arrangement”) whereby the Company can defer payments on just-in-time crude oil purchases from Macquarie owed under the agreements up to the value of the collateral provided (90% of the collateral inventory). The deferred amounts under the Deferred Payment Arrangement will bear interest at a rate equal to LIBOR plus 3.25% per annum for both Shreveport and Great Falls. Amounts outstanding under the Deferred Payment Arrangement are included in obligations under inventory financing agreements in the Company’s condensed consolidated balance sheets. Changes in the amount outstanding under the Deferred Payment Arrangement are included within cash flows from financing activities on the unaudited condensed consolidated statements of cash flows. As of June 30, 2018 and December 31, 2017, the capacity of the Deferred Payment Arrangement was $10.9 million and $17.8 million, respectively, and the Company had $11.4 million and $11.3 million deferred payments outstanding, respectively. In addition to the Deferred Payment Arrangement, Macquarie has advanced the Company an additional $5.0 million which remains outstanding as of June 30, 2018.

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9. Long-Term Debt
Long-term debt consisted of the following (in millions):
 
June 30, 2018
 
December 31, 2017
Borrowings under third amended and restated senior secured revolving credit agreement with third-party lenders, interest payments quarterly, borrowings due February 2023, weighted average interest rate of 6.2% and 8.4% for the six months ended June 30, 2018 and year ended December 31, 2017, respectively.
$
0.1

 
$
0.2

Borrowings under 2021 Secured Notes, interest at a fixed rate of 11.5%, interest payments semiannually, borrowings due January 2021, effective interest rate of 12.3% for the six months ended June 30, 2018 and the year ended December 31, 2017.
—

 
400.0

Borrowings under 2021 Notes, interest at a fixed rate of 6.5%, interest payments semiannually, borrowings due April 2021, effective interest rate of 6.8% for each the six months ended June 30, 2018 and the year ended December 31, 2017.
900.0


900.0

Borrowings under 2022 Notes, interest at a fixed rate of 7.625%, interest payments semiannually, borrowings due January 2022, effective interest rate of 8.0% for each the six months ended June 30, 2018 and the year ended December 31, 2017. (1)
351.8

 
352.1

Borrowings under 2023 Notes, interest at a fixed rate of 7.75%, interest payments semiannually, borrowings due April 2023, effective interest rate of 8.0% for each the six months ended June 30, 2018 and the year ended December 31, 2017.
325.0

 
325.0

Other
5.9

 
6.6

Capital lease obligations, at various interest rates, interest and principal payments monthly through November 2034.
42.2

 
44.0

Less unamortized debt issuance costs (2)
(18.2
)
 
(25.9
)
Less unamortized discounts
(4.3
)
 
(9.7
)
Total long-term debt
$
1,602.5

 
$
1,992.3

Less current portion of long-term debt
2.9

 
354.1

 
$
1,599.6

 
$
1,638.2

 
(1) 
The balance includes a fair value interest rate hedge adjustment, which increased the debt balance by $1.8 million and $2.1 million as of June 30, 2018 and December 31, 2017, respectively.
(2) 
Deferred debt issuance costs are being amortized by the effective interest rate method over the lives of the related debt instruments. These amounts are net of accumulated amortization of $21.1 million and $21.8 million at June 30, 2018 and December 31, 2017, respectively.
Senior Notes
11.50% Senior Secured Notes (the “2021 Secured Notes”)
On April 20, 2016, the Company issued and sold $400.0 million in aggregate principal amount of 11.50% Senior Secured Notes due January 15, 2021, in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), to eligible purchasers at a discounted price of 98.273 percent of par. Subject to certain exceptions, the 2021 Secured Notes were secured by a lien on all of the fixed assets that secure the Company’s obligations under its secured hedge agreements, including certain present and future real property, fixtures and equipment; all U.S. registered patents and patent license rights, trademarks and trademark license rights, copyrights and copyright license rights and trade secrets; chattel paper, documents and instruments; certain cash deposits in the property, plant and equipment proceeds account; certain books and records; and all accessions and proceeds of any of the foregoing. Interest on the 2021 Secured Notes was paid semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2016. In April 2018, the Company redeemed all of the 2021 Secured Notes. In conjunction with the redemption, the Company incurred debt extinguishment costs of $58.2 million, including $11.6 million of non-cash charges.

18
Table of Contents

2021 Notes, 2022 Notes and 2023 Notes
In accordance with SEC Rule 3-10 of Regulation S-X, unaudited condensed consolidated financial statements of non-guarantors are not required. The Company has no assets or operations independent of its subsidiaries. Obligations under its 2021, 2022 and 2023 Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by the Company’s current 100%-owned operating subsidiaries and certain of the Company’s future operating subsidiaries, with the exception of the Company’s “minor” subsidiaries (as defined by Rule 3-10 of Regulation S-X), including Calumet Finance Corp. (100%-owned Delaware corporation that was organized for the sole purpose of being a co-issuer of certain of the Company’s indebtedness, including the 2021, 2022 and 2023 Notes). There are no significant restrictions on the ability of the Company or subsidiary guarantors for the Company to obtain funds from its subsidiary guarantors by dividend or loan. None of the subsidiary guarantors’ assets represent restricted assets pursuant to SEC Rule 4-08(e)(3) of Regulation S-X.
The 2021, 2022 and 2023 Notes are subject to certain automatic customary releases, including the sale, disposition or transfer of capital stock or substantially all of the assets of a subsidiary guarantor, designation of a subsidiary guarantor as unrestricted in accordance with the applicable indenture, exercise of legal defeasance option or covenant defeasance option, liquidation or dissolution of the subsidiary guarantor and a subsidiary guarantor ceases to both guarantee other Company debt and to be an obligor under the revolving credit facility. The Company’s operating subsidiaries may not sell or otherwise dispose of all or substantially all of their properties or assets to, or consolidate with or merge into, another company if such a sale would cause a default under the indentures governing the 2021, 2022 and 2023 Notes.
The indentures governing the 2021, 2022 and 2023 Notes contain covenants that, among other things, restrict the Company’s ability and the ability of certain of the Company’s subsidiaries to: (i) sell assets; (ii) pay distributions on, redeem or repurchase the Company’s common units or redeem or repurchase its subordinated debt; (iii) make investments; (iv) incur or guarantee additional indebtedness or issue preferred units; (v) create or incur certain liens; (vi) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (vii) consolidate, merge or transfer all or substantially all of the Company’s assets; (viii) engage in transactions with affiliates and (ix) create unrestricted subsidiaries. These covenants are subject to important exceptions and qualifications. At any time when the 2021, 2022 and 2023 Notes are rated investment grade by either Moody’s Investors Service, Inc. (“Moody’s”) or S&P Global Ratings (“S&P”) and no Default or Event of Default, each as defined in the indentures governing the 2021, 2022 and 2023 Notes, has occurred and is continuing, many of these covenants will be suspended. As of June 30, 2018, the Company’s Fixed Charge Coverage Ratio (as defined in the indentures governing the 2021, 2022 and 2023 Notes) was 1.6 to 1.0. As of June 30, 2018, the Company was in compliance with all covenants under the indentures governing the 2021, 2022 and 2023 Notes.
Third Amended and Restated Senior Secured Revolving Credit Facility
On February 23, 2018, the Company entered into a third amended and restated senior secured revolving credit facility which provides maximum availability of credit under the revolving credit facility of $600.0 million, subject to borrowing base limitations, and includes a $500.0 million incremental uncommitted expansion feature. The revolving credit facility includes a $25.0 million senior secured first loaned in and last to be repaid out (“FILO”) revolving credit facility limited by a FILO borrowing base calculation. The FILO commitment reduces ratably each quarter starting in November 2019 and ending in August 2021. The reductions in FILO commitments covert to revolving credit facility base commitments over the same period. Lenders under the revolving credit facility have a first priority lien on, among other things, the Company’s accounts receivable and inventory and substantially all of its cash. The revolving credit facility, which is the Company’s primary source of liquidity for cash needs in excess of cash generated from operations, matures in February 2023 and bears interest at a rate equal to prime plus a basis points margin or LIBOR plus a basis points margin, at the Company’s option. The margin can fluctuate quarterly based on the Company’s average availability for additional borrowings under the revolving credit facility in the preceding calendar quarter as follows:
 
 
Base Loans
 
FILO Loans
Quarterly Average Availability Percentage 
 
Prime Rate Margin
 
LIBOR Rate Margin
 
Prime Rate Margin
 
LIBOR Rate Margin
≥ 66%
 
0.50%
 
1.50%
 
1.50%
 
2.50%
≥ 33% and < 66%
 
0.75%
 
1.75%
 
1.75%
 
2.75%
< 33%
 
1.00%
 
2.00%
 
2.00%
 
3.00%
As of June 30, 2018, the margin was 50 basis points for prime rate based revolver loans, 150 basis points for LIBOR based revolver loans, 150 basis points for prime rate based FILO loans and 250 basis points for LIBOR based FILO loans. In addition, if the Leverage Ratio (as defined in the revolving credit facility agreement) is less than 5.5 to 1.0 for any four fiscal quarter period ending on or after August 23, 2018, then, after such fiscal quarter, the margins otherwise applicable will be reduced by 25 basis points. Letters of credit issued under the revolving credit facility accrue fees at a rate equal to the margin (measured in basis points) applicable to LIBOR revolver loans.

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Table of Contents

In addition to paying interest quarterly on outstanding borrowings under the revolving credit facility, the Company is required to pay a commitment fee to the lenders under the revolving credit facility with respect to the unutilized commitments thereunder at a rate equal to 0.250% or 0.375% per annum depending on the average daily available unused borrowing capacity for the preceding month. The Company also pays a customary letter of credit fee, including a fronting fee of 0.125% per annum of the stated amount of each outstanding letter of credit, and customary agency fees.
In addition, the revolving credit facility contains various covenants that limit, among other things, the Company’s ability to: incur indebtedness; grant liens; dispose of certain assets; make certain acquisitions and investments; redeem or prepay other debt or make other restricted payments such as distributions to unitholders; enter into transactions with affiliates; and enter into a merger, consolidation or sale of assets. Further, the revolving credit facility contains one springing financial covenant: if the availability of loans under the revolving credit facility falls below the sum of the amount of FILO Loans outstanding plus the greater of (i) 10% of the Borrowing Base (as defined in the revolving credit facility agreement) and (ii) $35 million (which amount is subject to increase in proportion to revolving commitment increases), the Company will be required to maintain as of the end of each fiscal quarter a Fixed Charge Coverage Ratio (as defined in the revolving credit facility agreement) of at least 1.0 to 1.0. As of June 30, 2018, the Company was in compliance with all covenants under the revolving credit facility.
Capital Lease
The Company is a party to a Throughput and Deficiency Agreement with TexStar Midstream Logistics, L.P. (“TexStar”) under which TexStar owns and operates a crude oil pipeline system delivering crude oil to the Company’s San Antonio refinery (the “Pipeline Agreement”). The Pipeline Agreement has an initial term of 20 years (through August 2034) and is accounted for as a capital lease on the Company’s consolidated balance sheets. TexStar and the Company have each terminated the Pipeline Agreement for alleged breaches of the Pipeline Agreement. The parties are currently operating under the Pipeline Agreement as TexStar and the Company are discussing potential alternatives to the Pipeline Agreement. However, there can be no guarantee that the Company will reach a new agreement or that, if an agreement is reached, that it will include more favorable terms. In the event the parties do not enter into a new agreement and their dispute relating to the Pipeline Agreement is litigated, the Company believes it will be successful, in which case the Company will be relieved of future payment obligations under the Pipeline Agreement.  In the event the Company is not successful in the dispute, the Company may be obligated to continue making certain, minimum payments over the remaining term of the Pipeline Agreement. As of June 30, 2018, the total capital lease obligation under the Pipeline Agreement recorded on the Company’s consolidated balance sheets was $38.1 million.
Maturities of Long-Term Debt
As of June 30, 2018, principal payments on debt obligations and future minimum rentals on capital lease obligations are as follows (in millions):
Year
Maturity
2018
$
1.5

2019
2.8

2020
2.4

2021
903.3

2022
351.2

Thereafter
362.0

Total
$
1,623.2

10. Derivatives
The Company is exposed to price risks due to fluctuations in the price of crude oil, refined products (primarily in the Company’s fuel products segment), natural gas and precious metals. The Company uses various strategies to reduce its exposure to commodity price risk. The strategies to reduce the Company’s risk utilize both physical forward contracts and financially settled derivative instruments, such as swaps, collars, options and futures, to attempt to reduce the Company’s exposure with respect to:
•
crude oil purchases and sales;
•
fuel product sales and purchases;
•
natural gas purchases;
•
precious metals purchases; and
•
fluctuations in the value of crude oil between geographic regions and between the different types of crude oil such as New York Mercantile Exchange West Texas Intermediate (“NYMEX WTI”), Light Louisiana Sweet (“LLS”), Western Canadian Select (“WCS”), WTI Midland, Mixed Sweet Blend (“MSW”) and ICE Brent (“Brent”).

20
Table of Contents

The Company manages its exposure to commodity markets, credit, volumetric and liquidity risks to manage its costs and volatility of cash flows as conditions warrant or opportunities become available. These risks may be managed in a variety of ways that may include the use of derivative instruments. Derivative instruments may be used for the purpose of mitigating risks associated with an asset, liability and anticipated future transactions and the changes in fair value of the Company’s derivative instruments will affect its earnings and cash flows; however, such changes should be offset by price or rate changes related to the underlying commodity or financial transaction that is part of the risk management strategy. The Company does not speculate with derivative instruments or other contractual arrangements that are not associated with its business objectives. Speculation is defined as increasing the Company’s natural position above the maximum position of its physical assets or trading in commodities, currencies or other risk bearing assets that are not associated with the Company’s business activities and objectives. The Company’s positions are monitored routinely by a risk management committee to ensure compliance with its stated risk management policy and documented risk management strategies. All strategies are reviewed on an ongoing basis by the Company’s risk management committee, which will add, remove or revise strategies in anticipation of changes in market conditions and/or its risk profiles. Such changes in strategies are to position the Company in relation to its risk exposures in an attempt to capture market opportunities as they arise. 
The Company is obligated to repurchase crude oil and refined products from Macquarie at the termination of the Supply and Offtake Agreements in certain scenarios. The Company has determined that the redemption feature on the initially recognized liability related to the Supply and Offtake Agreements is an embedded derivative indexed to commodity prices. As such, the Company has accounted for this embedded derivative at fair value with changes in the fair value, if any, recorded in gain (loss) on derivative instruments in the Company’s unaudited condensed consolidated statement of operations.
The Company recognizes all derivative instruments at their fair values (see Note 11 - “Fair Value Measurements”) as either current assets or current liabilities in the condensed consolidated balance sheets. Fair value includes any premiums paid or received and unrealized gains and losses. Fair value does not include any amounts receivable from or payable to counterparties, or collateral provided to counterparties. Derivative asset and liability amounts with the same counterparty are netted against each other for financial reporting purposes.
The following tables summarize the Company’s gross fair values of its derivative instruments, presenting the impact of offsetting derivative assets in the Company’s condensed consolidated balance sheets (in millions):
 
 
 
 
June 30, 2018
 
December 31, 2017
 
 
Balance Sheet Location
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Assets Presented
in the Condensed Consolidated Balance Sheets
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Assets Presented
in the Condensed Consolidated Balance Sheets
Derivative instruments not designated as hedges:
 
 
 
 
 
 
 
 
 
 
Fuel products segment:
 
 
 
 
 
 
 


 
 
 
 
 
 
Crude oil swaps
 
Derivative assets
 
$
—

 
$
—

 
$
—

 
$
0.3

 
$
(0.3
)
 
$
—

WCS crude oil basis swaps
 
Derivative assets
 
0.8

 
(0.2
)
 
0.6

 
—

 
—

 
—

WCS crude oil percentage basis swaps
 
Derivative assets
 
0.6

 
(1.1
)
 
(0.5
)
 
—

 
—

 
—

Midland crude oil basis swaps
 
Derivative assets
 
3.7

 
(1.6
)
 
2.1

 
—

 
—

 
—

Diesel crack spread swap
 
Derivative assets
 
1.9

 
(0.1
)
 
1.8

 
—

 
—

 
—

Diesel percentage basis crack spread swap
 
Derivative assets
 
1.1

 
(1.3
)
 
(0.2
)
 
—

 
—

 
—

Total derivative instruments
 
 
 
$
8.1


$
(4.3
)

$
3.8


$
0.3


$
(0.3
)

$
—


21
Table of Contents

The following tables summarize the Company’s gross fair values of its derivative instruments, presenting the impact of offsetting derivative liabilities in the Company’s condensed consolidated balance sheets (in millions):
 
 
 
 
June 30, 2018
 
December 31, 2017
 
 
Balance Sheet Location
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented
in the Condensed Consolidated Balance Sheets
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented
in the Condensed Consolidated Balance Sheets
Derivative instruments not designated as hedges:
 
 
 
 
 
 
 
 
 
 
Fuel products segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Inventory financing obligation
 
Obligations under inventory financing agreements
 
$
(11.3
)
 
$
—

 
$
(11.3
)
 
$
(4.4
)
 
$
—

 
$
(4.4
)
Crude oil swaps
 
Derivative liabilities
 
—

 
—

 
—

 
—

 
0.3

 
0.3

WCS crude oil basis swaps
 
Derivative liabilities
 
(0.2
)
 
0.2

 
—

 
—

 
—

 
—

WCS crude oil percentage basis swaps
 
Derivative liabilities
 
(1.4
)
 
1.1

 
(0.3
)
 
—

 
—

 
—

Midland crude oil basis swaps
 
Derivative liabilities
 
(0.8
)
 
1.6

 
0.8

 
—

 
—

 
—

Gasoline swaps
 
Derivative liabilities
 
—

 
—

 
—

 
(0.2
)
 
—

 
(0.2
)
Gasoline crack spread swaps
 
Derivative liabilities
 
—

 
—

 
—

 
(1.8
)
 
—

 
(1.8
)
Diesel swaps
 
Derivative liabilities
 
—

 
—

 
—

 
(0.2
)
 
—

 
(0.2
)
Diesel crack spread swaps
 
Derivative liabilities
 
(0.1
)
 
0.1

 
—

 
(4.1
)
 
—

 
(4.1
)
Diesel percentage basis crack spread swaps
 
Derivative liabilities
 
(1.9
)
 
1.3

 
(0.6
)
 
—

 
—

 
—

Total derivative instruments
 
 
$
(15.7
)
 
$
4.3

 
$
(11.4
)
 
$
(10.7
)
 
$
0.3

 
$
(10.4
)
The Company is exposed to credit risk in the event of nonperformance by its counterparties on these derivative transactions. The Company does not expect nonperformance on any derivative instruments, however, no assurances can be provided. The Company’s credit exposure related to these derivative instruments is represented by the fair value of contracts reported as derivative assets. As of June 30, 2018, the Company had four counterparties in which the derivatives held were in net assets totaling $3.8 million. As of December 31, 2017, the Company had no counterparties in which the derivatives held were net assets. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings. The Company primarily executes its derivative instruments with large financial institutions that have ratings of at least A3 and BBB+ by Moody’s and S&P, respectively. In the event of default, the Company would potentially be subject to losses on derivative instruments with mark-to-market gains. The Company requires collateral from its counterparties when the fair value of the derivatives exceeds agreed-upon thresholds in its master derivative contracts with these counterparties. No such collateral was held by the Company as of June 30, 2018 or December 31, 2017. Collateral received from counterparties is reported in other current liabilities, and collateral held by counterparties is reported in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets and is not netted against derivative assets or liabilities. Any outstanding collateral is released to the Company upon settlement of the related derivative instrument liability. As of June 30, 2018 and December 31, 2017, the Company had provided no collateral to its counterparties.
Certain of the Company’s outstanding derivative instruments are subject to credit support agreements with the applicable counterparties which contain provisions setting certain credit thresholds above which the Company may be required to post agreed-upon collateral, such as cash or letters of credit, with the counterparty to the extent that the Company’s mark-to-market net liability, if any, on all outstanding derivatives exceeds the credit threshold amount per such credit support agreement. The majority of the credit support agreements covering the Company’s outstanding derivative instruments also contain a general provision stating that if the Company experiences a material adverse change in its business, in the reasonable discretion of the counterparty, the Company’s credit

22
Table of Contents

threshold could be lowered by such counterparty. The Company does not expect that it will experience a material adverse change in its business.
The cash flow impact of the Company’s derivative activities is classified primarily as a change in derivative activity in the operating activities section in the unaudited condensed consolidated statements of cash flows.
Derivative Instruments Not Designated as Hedges
For derivative instruments not designated as hedges, the change in fair value of the asset or liability for the period is recorded to gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. Upon the settlement of a derivative not designated as a hedge, the gain or loss at settlement is recorded to gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. The Company has entered into crude oil basis swaps that do not qualify as cash flow hedges for accounting purposes as they were not entered into simultaneously with a corresponding NYMEX WTI derivative contract. Additionally, the Company has entered into gasoline swaps, diesel swaps and certain other crude oil swaps that do not qualify as cash flow hedges for accounting purposes. However, these instruments provide economic hedges of the Company’s crude oil and natural gas purchases and gasoline and diesel sales.
The Company recorded the following gains (losses) in its unaudited condensed consolidated statements of operations, related to its derivative instruments not designated as hedges (in millions):
Type of Derivative
Amount of Realized Gain (Loss) Recognized in Gain on Derivative Instruments
 
Amount of Unrealized Gain (Loss) Recognized in Gain on Derivative Instruments
Three Months Ended June 30,
 
Three Months Ended June 30,
2018
 
2017
 
2018
 
2017
Specialty products segment:
 
 
 
 
 
 
 
Natural gas swaps
$
—

 
$
(0.9
)
 
$
—

 
$
0.2

Fuel products segment:
 
 
 
 
 
 
 
Inventory financing obligation
—

 
—

 
(2.9
)
 
(0.9
)
Crude oil swaps
—

 
(1.1
)
 
—

 
(1.5
)
WCS crude oil basis swaps
—

 
1.4

 
0.6

 
3.2

WCS crude oil percentage basis swaps
—

 
0.6

 
(1.1
)
 
0.3

Midland crude oil basis swaps
—

 
—

 
2.9

 
—

Diesel crack spread swaps
—

 
—

 
1.7

 
—

Diesel percentage basis crack spread swaps
—

 
—

 
(0.4
)
 
—

Total
$
—

 
$
—

 
$
0.8

 
$
1.3


23
Table of Contents

The Company recorded the following gains (losses) in its unaudited condensed consolidated statements of operations for the six months ended June 30, 2018 and 2017, related to its derivative instruments not designated as hedges (in millions):
Type of Derivative
Amount of Realized Gain (Loss) Recognized in Gain on Derivative Instruments
 
Amount of Unrealized Gain (Loss) Recognized in Gain on Derivative Instruments
Six Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
Specialty products segment:
 
 
 
 
 
 
 
Natural gas swaps
$
—

 
$
(1.7
)
 
$
—

 
$
(0.6
)
Fuel products segment:
 
 
 
 
 
 
 
Inventory financing obligation
—

 
—

 
(6.9
)
 
(0.9
)
Crude oil swaps
—

 
(1.5
)
 
(0.3
)
 
(4.8
)
WCS crude oil basis swaps
—

 
0.6

 
0.6

 
9.4

WCS crude oil percentage basis swaps
—

 
0.6

 
(0.8
)
 
1.3

Midland crude oil basis swaps
—

 
—

 
2.9

 
—

Gasoline swaps
—

 
—

 
0.2

 
—

Gasoline crack spread swaps
(1.0
)
 
(1.6
)
 
1.8

 
4.8

2/1/1 crack spread swaps
—

 
(1.0
)
 
—

 
—

Diesel swaps
—

 
—

 
0.2

 
—

Diesel crack spread swaps
(1.1
)
 
(0.3
)
 
5.9

 
2.7

Diesel percentage basis crack spread swaps
—

 
—

 
(0.8
)
 
—

Total
$
(2.1
)
 
$
(4.9
)
 
$
2.8

 
$
11.9


Derivative Positions — Fuel Products Segment
Crude Oil Swap Contracts
At December 31, 2017, the Company had the following derivatives related to crude oil purchases in its fuel products segment, none of which are designated as hedges:
Crude Oil Swap Contracts by Expiration Dates
Barrels Purchased
 
BPD
 
Average Swap
($/Bbl)
First Quarter 2018
28,000

 
311

 
$
48.25

Total
28,000

 
 
 
 
Average price
 
 
 
 
$
48.25

WCS Crude Oil Basis Swap Contracts
The Company has entered into crude oil basis swaps to mitigate the risk of future changes in pricing differentials between WCS and NYMEX WTI. At June 30, 2018, the Company had the following derivatives related to crude oil basis swaps in its fuel products segment, none of which are designated as hedges:
WCS Crude Oil Basis Swap Contracts by Expiration Dates
Barrels Purchased
 
BPD
 
Average Swap
($/Bbl)
Third Quarter 2018
184,000

 
2,000

 
$
24.98

Fourth Quarter 2018
184,184

 
2,002

 
$
26.13

First Quarter 2019
90,000

 
1,000

 
$
22.20

Second Quarter 2019
91,000

 
1,000

 
$
22.20

Third Quarter 2019
92,000

 
1,000

 
$
22.20

Fourth Quarter 2019
92,000

 
1,000

 
$
22.20

Total
733,184

 
 
 
 
Average price


 


 
$
23.32


24
Table of Contents

WCS Crude Oil Percentage Basis Swap Contracts
The Company has entered into derivative instruments to secure a percentage differential of WCS crude oil to NYMEX WTI. At June 30, 2018, the Company had the following derivatives related to crude oil percentage basis swaps in its fuel products segment, none of which are designated as hedges:
WCS Crude Oil Percentage Basis Swap Contracts by Expiration Dates
Barrels Purchased
 
BPD
 
Fixed Percentage of NYMEX WTI
(Average % of WTI/Bbl)
First Quarter 2019
450,000

 
5,000

 
66.68
%
Second Quarter 2019
455,000

 
5,000

 
66.68
%
Third Quarter 2019
460,000

 
5,000

 
66.68
%
Fourth Quarter 2019
460,000

 
5,000

 
66.68
%
Total
1,825,000

 
 
 
 
Average percentage
 
 
 
 
66.68
%
Midland Crude Oil Basis Swap Contracts
The Company has entered into crude oil basis swaps to mitigate the risk of future changes in pricing differentials between WTI Midland and NYMEX WTI. At June 30, 2018, the Company had the following derivatives related to Midland crude oil basis swaps in its fuel products segment, none of which are designated as hedges:
Midland Crude Oil Basis Swap Contracts by Expiration Dates
Barrels Purchased
 
BPD
 
Average Swap
($/Bbl)
Third Quarter 2018
782,000

 
8,500

 
$
11.39

Fourth Quarter 2018
874,000

 
9,500

 
$
15.13

First Quarter 2019
765,000

 
8,500

 
$
13.01

Second Quarter 2019
773,500

 
8,500

 
$
11.88

Total
3,194,500

 
 
 
 
Average price
 
 
 
 
$
12.85

Gasoline Crack Spread Swap Contracts
At December 31, 2017, the Company had the following derivatives related to gasoline crack spread sales in its fuel products segment, none of which are designated as hedges:
Gasoline Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
BPD
 
Average Swap
($/Bbl)
First Quarter 2018
826,000

 
9,178

 
$
12.27

Total
826,000

 
 
 
 
Average price
 
 
 
 
$
12.27

Gasoline Swap Contracts
At December 31, 2017, the Company had the following derivatives related to gasoline swap sales in its fuel products segment, none of which are designated as hedges:
Gasoline Swap Contracts by Expiration Dates
Barrels Sold
 
 BPD
 
Average Swap
($/Bbl)
First Quarter 2018
14,000

 
156

 
$
61.35

Total
14,000

 
 
 
 
Average price
 
 
 
 
$
61.35


25
Table of Contents

Diesel Crack Spread Swap Contracts
At June 30, 2018, the Company had the following derivatives related to diesel crack spread sales in its fuel products segment, none of which are designated as hedges:
Diesel Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
BPD
 
Average Swap
($/Bbl)
Third Quarter 2018
184,000

 
2,000

 
$
24.30

Fourth Quarter 2018
184,000

 
2,000

 
$
24.75

First Quarter 2019
90,000

 
1,000

 
$
26.80

Second Quarter 2019
91,000

 
1,000

 
$
26.80

Third Quarter 2019
92,000

 
1,000

 
$
26.80

Fourth Quarter 2019
92,000

 
1,000

 
$
26.80

Total
733,000

 
 
 
 
Average price
 
 
 
 
$
26.04

At December 31, 2017, the Company had the following derivatives related to diesel crack spread sales in its fuel products segment, none of which are designated as hedges:
Diesel Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
BPD
 
Average Swap
($/Bbl)
First Quarter 2018
826,000

 
9,178

 
$
17.58

Total
826,000

 
 
 
 
Average price
 
 
 
 
$
17.58

Diesel Swap Contracts
At December 31, 2017, the Company had the following derivatives related to diesel swap sales in its fuel products segment, none of which are designated as hedges:
Diesel Swap Contracts by Expiration Dates
Barrels Sold
 
 BPD
 
Average Swap
($/Bbl)
First Quarter 2018
14,000

 
156

 
$
66.35

Total
14,000

 
 
 
 
Average price
 
 
 
 
$
66.35

Diesel Percentage Basis Crack Spread Swap Contracts
The Company has entered into crack spread derivative instruments to secure a fixed percentage of gross profit on diesel in excess of the floating value of NYMEX WTI crude oil. At June 30, 2018, the Company had the following derivatives related to diesel percent basis crack spread swap sales in its fuel products segment, none of which are designated as hedges:
Diesel Percentage Basis Crack Spread Swap Contracts by Expiration Dates
Barrels Sold
 
 BPD
 
Fixed Percentage of NYMEX WTI
(Average % of WTI/Bbl)
First Quarter 2019
450,000

 
5,000

 
138.75
%
Second Quarter 2019
455,000

 
5,000

 
138.75
%
Third Quarter 2019
460,000

 
5,000

 
138.75
%
Fourth Quarter 2019
460,000

 
5,000

 
138.75
%
Total
1,825,000

 
 
 
 
Average percentage
 
 
 
 
138.75
%


26
Table of Contents

11. Fair Value Measurements
The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Observable inputs are from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. These tiers include the following:
•
Level 1 — inputs include observable unadjusted quoted prices in active markets for identical assets or liabilities
•
Level 2 — inputs include other than quoted prices in active markets that are either directly or indirectly observable
•
Level 3 — inputs include unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
In determining fair value, the Company uses various valuation techniques and prioritizes the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded and other characteristics particular to the instrument. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants and the valuation does not require significant management judgment. For other financial instruments, pricing inputs are less observable in the marketplace and may require management judgment.
Recurring Fair Value Measurements
Derivative Assets and Liabilities
Derivative instruments are reported in the accompanying unaudited condensed consolidated financial statements at fair value. The Company’s derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange. Substantially all of the Company’s derivative instruments are with counterparties that have long-term credit ratings of at least A3 and BBB+ by Moody’s and S&P, respectively.
Commodity derivative instruments are measured at fair value using a market approach. To estimate the fair values of the Company’s commodity derivative instruments, the Company uses the forward rate, the strike price, contractual notional amounts, the risk free rate of return and contract maturity. Various analytical tests are performed to validate the counterparty data. The fair values of the Company’s derivative instruments are adjusted for nonperformance risk and creditworthiness of the counterparty through the Company’s credit valuation adjustment (“CVA”). The CVA is calculated at the counterparty level utilizing the fair value exposure at each payment date and applying a weighted probability of the appropriate survival and marginal default percentages. The Company uses the counterparty’s marginal default rate and the Company’s survival rate when the Company is in a net asset position at the payment date and uses the Company’s marginal default rate and the counterparty’s survival rate when the Company is in a net liability position at the payment date. As a result of applying the applicable CVA at June 30, 2018, the Company’s net assets and liabilities were impacted by an immaterial amount. As a result of applying the CVA at December 31, 2017, the Company’s net liabilities were reduced by an immaterial amount.
Observable inputs utilized to estimate the fair values of the Company’s derivative instruments were based primarily on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Based on the use of various unobservable inputs, principally non-performance risk, creditworthiness of the counterparties and unobservable inputs in the forward rate, the Company has categorized these derivative instruments as Level 3. Significant increases (decreases) in any of those unobservable inputs in isolation would result in a significantly lower (higher) fair value measurement. The Company believes it has obtained the most accurate information available for the types of derivative instruments it holds. See Note 10 - “Derivatives” for further information on derivative instruments.
Pension Assets
Pension assets are reported at fair value in the accompanying unaudited condensed consolidated financial statements. At June 30, 2018, the Company’s investments associated with its pension plan primarily consisted of mutual funds. The mutual funds are valued at the net asset value of shares in each fund held by the Pension Plan at quarter end as provided by the respective investment sponsors or investment advisers. Plan investments can be redeemed within a short time frame (approximately 10 business days), if requested.
Liability Awards
Unit based compensation liability awards are awards that are expected to be settled in cash on their vesting dates, rather than in equity units (“Liability Awards”). The Liability Awards are categorized as Level 1 because the fair value of the Liability Awards is based on the Company’s quoted closing unit price as of each balance sheet date.
Renewable Identification Numbers Obligation
The Company’s RINs Obligation is categorized as Level 2 and is measured at fair value using the market approach based on quoted prices from an independent pricing service. See Note 7 - “Commitments and Contingencies” for further information on the Company’s RINs Obligation.
Hierarchy of Recurring Fair Value Measurements
The Company’s recurring assets and liabilities measured at fair value were as follows (in millions):
 
June 30, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diesel crack spread swaps
$
—

 
$
—

 
$
1.8

 
$
1.8

 
$
—

 
$
—

 
$
—

 
$
—

Diesel percentage basis crack spread swaps
—

 
—

 
(0.2
)
 
(0.2
)
 
—

 
—

 
—

 
—

WCS crude oil basis swaps
—

 
—

 
0.6

 
0.6

 
—

 
—

 
—

 
—

WCS crude oil percentage basis swaps
—

 
—

 
(0.5
)
 
(0.5
)
 
—

 
—

 
—

 
—

Midland crude oil basis swaps
—

 
—

 
2.1

 
2.1

 
—

 
—

 
—

 
—

Total derivative assets
—


—


3.8


3.8

 
—

 
—

 
—

 
—

Pension plan investments
0.1

 
—

 
—

 
0.1

 
0.2

 
—

 
—

 
0.2

Total recurring assets at fair value
$
0.1


$
—


$
3.8


$
3.9


$
0.2


$
—


$
—


$
0.2

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Inventory financing obligation
$
—

 
$
—

 
$
(11.3
)
 
$
(11.3
)
 
$
—

 
$
—

 
$
(4.4
)
 
$
(4.4
)
Crude oil swaps
—

 
—

 
—

 
—

 
—

 
—

 
0.3

 
0.3

WCS crude oil percentage basis swaps
—

 
—

 
(0.3
)
 
(0.3
)
 
—

 
—

 
—

 
—

Midland crude oil basis swaps
—

 
—

 
0.8

 
0.8

 
—

 
—

 
—

 
—

Gasoline swaps
—

 
—

 
—

 
—

 
—

 
—

 
(0.2
)
 
(0.2
)
Gasoline crack spread swaps
—

 
—

 
—

 
—

 
—

 
—

 
(1.8
)
 
(1.8
)
Diesel swaps
—

 
—

 
—

 
—

 
—

 
—

 
(0.2
)
 
(0.2
)
Diesel crack spread swaps
—

 
—

 
—

 
—

 
—

 
—

 
(4.1
)
 
(4.1
)
Diesel percentage basis crack spread swaps
—

 
—