e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008.
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 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)
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Delaware
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37-1516132 |
(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number) |
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2780 Waterfront Pkwy E. Drive, Suite 200
Indianapolis, Indiana
(Address of principal executive officers)
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46214
(Zip code) |
Registrants telephone number including area code (317) 328-5660
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
At August 1, 2008, the registrant had 19,166,000 common units and 13,066,000 subordinated
units outstanding.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
FORM 10-Q June 30, 2008 QUARTERLY REPORT
Table of Contents
2
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements can be identified by the use of forward-looking terminology including
may, believe, expect, anticipate, estimate, continue, or other similar words. The
statements regarding (i) the Shreveport refinery expansion projects resulting increases in
production levels, (ii) expected settlements with the Louisiana Department of Environmental Quality
(LDEQ) or other environmental liabilities, (iii) the expected purchase price, goodwill, and
future benefits and risks of the Penreco acquisition and (iv) future compliance with our debt
covenants, as well as other matters discussed in this Form 10-Q that are not purely historical
data, are forward-looking statements. These statements discuss future expectations or state other
forward-looking information and involve risks and uncertainties. When considering these
forward-looking statements, unitholders should keep in mind the risk factors and other cautionary
statements included in this Form 10-Q and in our Annual Report
on Form 10-K for the year ended December 31, 2007, filed on
March 4, 2008. These risk factors and cautionary statements noted throughout this Form 10-Q could
cause our actual results to differ materially from those contained in any forward-looking
statement. These factors include, but are not limited to:
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the overall demand for specialty hydrocarbon products, fuels and other refined products; |
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our ability to produce specialty products and fuels that meet our customers unique and
precise specifications; |
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the impact of crude oil and crack spread price fluctuations and rapid increases or
decreases; |
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the results of our hedging and other risk management activities; |
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risks associated with our Shreveport expansion project; |
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difficulties in successfully integrating Penreco; |
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our ability to comply with the financial covenants contained in our credit agreements; |
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the availability of, and our ability to consummate, acquisition or combination
opportunities; |
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labor relations; |
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our access to capital to fund expansions or acquisitions and our ability to obtain debt
or equity financing on satisfactory terms; |
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successful integration and future performance of acquired assets or businesses; |
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environmental liabilities or events that are not covered by an indemnity, insurance or
existing reserves; |
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maintenance of our credit ratings and ability to receive open credit from our suppliers
and hedging counterparties; |
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demand for various grades of crude oil and resulting changes in pricing conditions; |
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fluctuations in refinery capacity; |
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the effects of competition; |
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continued creditworthiness of, and performance by, counterparties; |
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the impact of current and future laws, rulings and governmental regulations; |
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shortages or cost increases of power supplies, natural gas, materials or labor; |
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weather interference with business operations or project construction; |
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fluctuations in the debt and equity markets; and |
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general economic, market or business conditions. |
Other factors described herein, or factors that are unknown or unpredictable, could also have
a material adverse effect on future results. Please read Part I Item 3 Quantitative and
Qualitative Disclosures About Market Risk. We will not update these statements unless securities
laws require us to do so.
References in this Form 10-Q to 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 on Form 10-Q to our general partner refer to Calumet GP, LLC.
4
PART I
Item 1. Financial Statements
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, 2008 |
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December 31, 2007 |
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(Unaudited) |
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(In thousands) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
454 |
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$ |
35 |
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Accounts receivable: |
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Trade |
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209,453 |
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109,501 |
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Other |
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1,924 |
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4,496 |
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211,377 |
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113,997 |
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Inventories |
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113,300 |
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107,664 |
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Prepaid expenses and other current assets |
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3,308 |
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7,588 |
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Total current assets |
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328,439 |
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229,284 |
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Property, plant and equipment, net |
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669,353 |
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442,882 |
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Goodwill |
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48,960 |
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Other intangible assets, net |
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55,532 |
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2,460 |
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Other noncurrent assets, net |
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11,046 |
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4,231 |
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Total assets |
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$ |
1,113,330 |
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$ |
678,857 |
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LIABILITIES AND PARTNERS CAPITAL |
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Current liabilities: |
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Accounts payable |
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$ |
253,894 |
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$ |
167,977 |
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Accrued salaries, wages and benefits |
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7,032 |
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2,745 |
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Taxes payable |
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8,188 |
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6,215 |
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Other current liabilities |
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6,951 |
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4,882 |
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Current portion of long-term debt |
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4,792 |
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943 |
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Derivative liabilities |
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132,328 |
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57,503 |
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Total current liabilities |
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413,185 |
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240,265 |
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Pension and postretirement benefit obligations |
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4,672 |
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Long-term debt, less current portion |
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384,835 |
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38,948 |
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Total liabilities |
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802,692 |
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279,213 |
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Commitments and contingencies |
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Partners capital: |
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Common unitholders (19,166,000 units issued and outstanding) |
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389,670 |
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375,925 |
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Subordinated unitholders (13,066,000 units issued and outstanding) |
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33,034 |
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43,996 |
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General partners interest |
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18,404 |
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19,364 |
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Accumulated other comprehensive loss |
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(130,470 |
) |
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(39,641 |
) |
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Total partners capital |
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310,638 |
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399,644 |
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Total liabilities and partners capital |
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$ |
1,113,330 |
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$ |
678,857 |
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See accompanying notes to unaudited condensed consolidated financial statements.
5
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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For the Three Months Ended |
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For the Six Months Ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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(In thousands, except per unit data) |
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(In thousands, except per unit data) |
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Sales |
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$ |
671,220 |
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$ |
421,726 |
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$ |
1,265,943 |
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$ |
772,839 |
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Cost of sales |
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610,338 |
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361,255 |
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1,170,227 |
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657,333 |
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Gross profit |
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60,882 |
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60,471 |
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95,716 |
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115,506 |
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Operating costs and expenses: |
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Selling, general and administrative |
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9,419 |
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6,435 |
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17,671 |
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11,834 |
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Transportation |
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21,169 |
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14,048 |
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45,029 |
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27,617 |
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Taxes other than income taxes |
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1,007 |
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884 |
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2,062 |
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1,796 |
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Other |
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341 |
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162 |
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564 |
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342 |
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Operating income |
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28,946 |
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38,942 |
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30,390 |
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73,917 |
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Other income (expense): |
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Interest expense |
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(8,536 |
) |
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(1,113 |
) |
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(13,702 |
) |
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(2,128 |
) |
Interest income |
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107 |
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569 |
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323 |
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1,559 |
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Debt extinguishment costs |
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(373 |
) |
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(898 |
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Realized gain (loss) on derivative instruments |
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2,526 |
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(4,052 |
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(351 |
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(5,788 |
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Unrealized gain (loss) on derivative instruments |
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13,456 |
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3,285 |
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17,025 |
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(1,492 |
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Gain on sale of mineral rights |
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5,770 |
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5,770 |
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Other |
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63 |
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42 |
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18 |
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(136 |
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Total other income (expense) |
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13,013 |
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(1,269 |
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8,185 |
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(7,985 |
) |
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Net income before income taxes |
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41,959 |
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37,673 |
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38,575 |
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65,932 |
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Income tax expense |
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151 |
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255 |
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159 |
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305 |
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Net income |
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$ |
41,808 |
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$ |
37,418 |
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$ |
38,416 |
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$ |
65,627 |
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Minimum quarterly distribution to common unitholders |
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(8,625 |
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(7,365 |
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(17,250 |
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(14,730 |
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General partners incentive distribution rights |
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(10,658 |
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(9,353 |
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(10,658 |
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(14,102 |
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General partners interest in net income |
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(326 |
) |
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(297 |
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(258 |
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(594 |
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Common unitholders share of net income in excess of
minimum quarterly distribution |
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(9,704 |
) |
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(8,076 |
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(9,704 |
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(13,592 |
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Subordinated unitholders interest in net income |
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$ |
12,495 |
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$ |
12,327 |
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$ |
546 |
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$ |
22,609 |
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Basic and diluted net income per limited partner unit: |
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Common |
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$ |
0.96 |
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$ |
0.94 |
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$ |
1.41 |
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$ |
1.73 |
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Subordinated |
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$ |
0.96 |
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$ |
0.94 |
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$ |
0.05 |
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$ |
1.73 |
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Weighted average limited partner common units outstanding
basic |
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19,166 |
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16,366 |
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19,166 |
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16,366 |
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Weighted average limited partner subordinated units
outstanding basic |
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13,066 |
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13,066 |
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13,066 |
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13,066 |
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Weighted average limited partner common units outstanding
diluted |
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19,166 |
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16,368 |
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19,166 |
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16,368 |
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Weighted average limited partner subordinated units
outstanding diluted |
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13,066 |
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13,066 |
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13,066 |
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13,066 |
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Cash distributions declared per common and subordinated unit |
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$ |
0.45 |
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$ |
0.63 |
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$ |
1.08 |
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$ |
1.23 |
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See accompanying notes to unaudited condensed consolidated financial statements.
6
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
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Accumulated Other |
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Partners' Capital |
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Comprehensive |
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General |
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Limited Partners |
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Loss |
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Partner |
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Common |
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Subordinated |
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Total |
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(In thousands) |
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Balance at December 31, 2007 |
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$ |
(39,641 |
) |
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$ |
19,364 |
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$ |
375,925 |
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$ |
43,996 |
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$ |
399,644 |
|
Comprehensive loss: |
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Net income |
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|
|
|
|
|
768 |
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|
34,499 |
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|
|
3,149 |
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|
38,416 |
|
Cash flow hedge loss reclassified to net income |
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5,140 |
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|
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|
|
|
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|
5,140 |
|
Change in fair value of cash flow hedges |
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(95,969 |
) |
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(95,969 |
) |
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Comprehensive loss |
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(52,413 |
) |
Common units repurchased for phantom unit grants |
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(115 |
) |
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(115 |
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Amortization of phantom units |
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|
61 |
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|
61 |
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Distributions to partners |
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(1,728 |
) |
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(20,700 |
) |
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|
(14,111 |
) |
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(36,539 |
) |
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Balance at June 30, 2008 |
|
$ |
(130,470 |
) |
|
$ |
18,404 |
|
|
$ |
389,670 |
|
|
$ |
33,034 |
|
|
$ |
310,638 |
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See accompanying notes to unaudited condensed consolidated financial statements.
7
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the Six Months Ended |
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June 30, |
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|
2008 |
|
|
2007 |
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|
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(In thousands) |
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Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
38,416 |
|
|
$ |
65,627 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
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|
|
|
|
|
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Depreciation and amortization |
|
|
26,193 |
|
|
|
7,454 |
|
Amortization of turnaround costs |
|
|
737 |
|
|
|
1,862 |
|
Non-cash debt extinguishment costs |
|
|
898 |
|
|
|
|
|
Unrealized (gain) loss on derivative instruments |
|
|
(17,025 |
) |
|
|
1,492 |
|
Gain on sale of mineral rights |
|
|
(5,770 |
) |
|
|
|
|
Other non-cash activities |
|
|
1,194 |
|
|
|
47 |
|
Changes in operating assets and liabilities, net of business acquisition: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(55,896 |
) |
|
|
(29,787 |
) |
Inventories |
|
|
60,756 |
|
|
|
8,534 |
|
Prepaid expenses and other current assets |
|
|
4,350 |
|
|
|
838 |
|
Derivative activity |
|
|
1,021 |
|
|
|
101 |
|
Intangible assets |
|
|
(1,437 |
) |
|
|
|
|
Other noncurrent assets |
|
|
990 |
|
|
|
(4,238 |
) |
Accounts payable |
|
|
56,903 |
|
|
|
31,207 |
|
Accrued salaries, wages and benefits |
|
|
(1,393 |
) |
|
|
(1,374 |
) |
Taxes payable |
|
|
1,973 |
|
|
|
873 |
|
Other current liabilities |
|
|
(205 |
) |
|
|
(520 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
111,705 |
|
|
|
82,116 |
|
Investing activities |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(152,547 |
) |
|
|
(103,109 |
) |
Acquisition of Penreco, net of cash acquired |
|
|
(269,118 |
) |
|
|
|
|
Proceeds from sale of mineral rights |
|
|
6,065 |
|
|
|
|
|
Proceeds from disposal of property, plant and equipment |
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(415,600 |
) |
|
|
(103,060 |
) |
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from borrowings, net revolving credit facility |
|
|
18,969 |
|
|
|
27 |
|
Repayments of borrowings prior term loan credit facility |
|
|
(30,099 |
) |
|
|
(250 |
) |
Proceeds
from borrowings, net new term loan credit facility |
|
|
367,600 |
|
|
|
|
|
Debt issuance costs |
|
|
(9,633 |
) |
|
|
|
|
Repayments of borrowings new term loan credit facility |
|
|
(7,990 |
) |
|
|
|
|
Change in bank overdraft |
|
|
2,121 |
|
|
|
|
|
Purchase of common units for phantom unit grants |
|
|
(115 |
) |
|
|
|
|
Distributions to partners |
|
|
(36,539 |
) |
|
|
(37,346 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
304,314 |
|
|
|
(37,569 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
419 |
|
|
|
(58,513 |
) |
Cash at beginning of period |
|
|
35 |
|
|
|
80,955 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
454 |
|
|
$ |
22,442 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
14,645 |
|
|
$ |
4,087 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
13 |
|
|
$ |
100 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
8
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except operating, unit, per unit and per barrel data)
1. Partnership Organization and Basis of Presentation
Calumet Specialty Products Partners, L.P. (Calumet, Partnership, or the Company) is a Delaware
limited partnership. The general partner is Calumet GP, LLC, a Delaware limited liability company.
On January 31, 2006, the Partnership completed the initial public offering of its common units. At
that time, substantially all of the assets and liabilities of Calumet Lubricants Co., Limited
Partnership and its subsidiaries were contributed to Calumet. On July 5, 2006 and November 20,
2007, the Partnership completed follow-on public offerings of its common units. As of June 30,
2008, Calumet had 19,166,000 common units, 13,066,000 subordinated units, and 657,796 general
partner equivalent units outstanding. The general partner owns 2% of Calumet while the remaining
98% is owned by limited partners. On January 3, 2008 the Company closed on the acquisition of
Penreco, a Texas general partnership, for approximately $269,118. See Note 4 for further discussion
of this acquisition. As a result, the assets and liabilities previously held by Penreco and results
of the operation of these assets are included within the Companys unaudited condensed consolidated
balance sheet as of June 30, 2008 and the unaudited condensed
consolidated statements of operations
for the three and six months ended June 30, 2008. Calumet is engaged in the production and
marketing of crude oil-based specialty lubricating oils, white mineral oils, solvents, petrolatums,
waxes and fuels. Calumet owns facilities located in Princeton, Louisiana, Cotton Valley, Louisiana,
Shreveport, Louisiana, Karns City, Pennsylvania, and Dickinson, Texas, and a terminal located in
Burnham, Illinois.
The unaudited condensed consolidated financial statements of the Company as of June 30, 2008
and for the three and six months ended June 30, 2008 and 2007 included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures normally included in the consolidated financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations, although the Company
believes that the following disclosures are adequate to make the information presented not
misleading. These unaudited condensed consolidated financial statements reflect all adjustments
that, in the opinion of management, are necessary to present fairly the results of operations for
the interim periods presented. All adjustments are of a normal nature, unless otherwise disclosed.
The results of operations for the three and six months ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2008. These
unaudited condensed consolidated financial statements should be read in conjunction with the
Companys Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 4,
2008.
2. New Accounting Pronouncements
In April 2007, the FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB
Interpretation No. 39 (the Position), which amends certain aspects of FASB Interpretation Number
39, Offsetting of Amounts Related to Certain Contracts. The Position permits companies to offset
fair value amounts recognized for the right to reclaim cash collateral or the obligation to return
cash collateral against fair value amounts recognized for derivative instruments executed with the
same counterparty under a master netting arrangement. The Position is effective for fiscal years
beginning after November 15, 2007. The Company adopted the Position on January 1, 2008 and the
adoption did not have a material effect on its financial position, results of operations, or cash
flows.
In December 2007, the FASB issued FASB Statement No. 141(R), Business Combinations (the
Statement). The Statement applies to the financial accounting and reporting of business
combinations. The Statement is effective for business combination transactions for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The Company anticipates that the Statement will not have a material effect
on its financial position, results of operations, or cash flows.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161
requires entities that utilize derivative instruments to provide qualitative disclosures about
their objectives and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within derivatives. SFAS 161 also requires
entities to disclose additional information about the amounts and location of derivatives located
within the financial statements, how the provisions of SFAS 133 have been applied, and the impact
that hedges have on an entitys financial position, results of operations, and cash flows. SFAS 161
is effective for fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. The Company currently provides an abundance of information about its
hedging activities and use of derivatives in its quarterly and annual filings with the SEC,
including many of the disclosures contained within SFAS 161. Thus, the Company currently does not
anticipate the adoption of SFAS 161 will have a material impact on the disclosures already
provided.
9
In March 2008, FASB issued Emerging Issues Task Force Issue No. 07-4, Application of the
Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships (EITF 07-4). EITF
07-4 requires master limited partnerships to treat incentive distribution rights (IDRs) as
participating securities for the purposes of computing earnings per unit in the period that the
general partner becomes contractually obligated to pay IDRs. EITF 07-4 requires that undistributed
earnings be allocated to the partnership interests based on the allocation of earnings to capital
accounts as specified in the respective partnership agreement. When distributions exceed earnings,
EITF 07-4 requires that net income be reduced by the actual distributions with the resulting net
loss being allocated to capital accounts as specified in the respective partnership agreement. EITF
07-4 is effective for fiscal years and interim periods beginning after December 15, 2008. The
Company is evaluating the potential impacts of EITF 07-4.
3.
Inventories
The cost of inventories is determined using the last-in, first-out (LIFO) method.
Inventories are valued at the lower of cost or market value.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
11,281 |
|
|
$ |
20,887 |
|
Work in process |
|
|
39,329 |
|
|
|
21,325 |
|
Finished goods |
|
|
62,690 |
|
|
|
65,452 |
|
|
|
|
|
|
|
|
|
|
$ |
113,300 |
|
|
$ |
107,664 |
|
|
|
|
|
|
|
|
The replacement cost of these inventories, based on current market values, would have been
$144,100 and $107,885 higher at June 30, 2008 and December 31, 2007, respectively. For the three
months ended June 30, 2008 and 2007, the Company recorded a
reduction to cost of sales of $60,224 and $777, respectively, in the
unaudited condensed consolidated statements of operations due to the
liquidation of lower cost inventory layers as a result of the
Companys working capital reduction initiative. For the six months ended June 30, 2008 and 2007, the Company
recorded a reduction to cost of sales of $69,344 and $1,095, respectively, in the unaudited condensed consolidated
statements of operations due to the liquidation of lower cost
inventory layers.
4. Acquisition of Penreco
On January 3, 2008 the Company closed on the acquisition of Penreco, a Texas general
partnership, for $269,118, net of the cash balance in Penrecos accounts at closing. Penreco was
owned by ConocoPhillips Company and M.E. Zukerman Specialty Oil Corporation. Penreco manufactures
and markets highly-refined products and specialty solvents, including white mineral oils,
petrolatums, natural petroleum sulfonates, cable-filling compounds, refrigeration oils, food-grade
compressor lubricants and gelled products. The acquisition included facilities in Karns City,
Pennsylvania and Dickinson, Texas, as well as several long-term supply agreements with
ConocoPhillips Company.
The Company believes that this acquisition will provide several key strategic benefits,
including market synergies within its solvents and lubricating oil product lines as well as
additional operational and logistical flexibility. The acquisition will also broaden the Companys
customer base and give the Company access to new markets.
As a result of the acquisition, the assets and liabilities previously held by Penreco and
results of the operation of these assets have been included in the Companys unaudited condensed
consolidated balance sheet and unaudited condensed consolidated statements of operations since the
date of acquisition. The unaudited pro forma summary results of operations for the three and six
months ended June 30, 2007 below combine the results of operations of Calumet and Penreco as if the
acquisition had occurred on January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six Months |
|
|
Months Ended |
|
Ended |
|
|
June 30, 2007 |
|
June 30, 2007 |
|
|
(Unaudited) |
|
(Unaudited) |
Sales |
|
$ |
526,328 |
|
|
$ |
976,352 |
|
Net income |
|
$ |
42,260 |
|
|
$ |
77,587 |
|
Basic and diluted net income per limited partner unit |
|
$ |
1.03 |
|
|
$ |
1.94 |
|
The Company is negotiating the final settlement with ConocoPhillips Company and M.E. Zukerman
Specialty Oil Corporation for working capital adjustments which is unlikely to result in a material
change to the purchase price. The Company recorded $48,960 of goodwill as a result of this
acquisition, all of which was recorded within the Companys specialty products segment. The
preliminary
10
allocation of the aggregate purchase price, which is preliminary pending the working capital
adjustment and the finalization of fair value appraisals of assets acquired, is as follows:
|
|
|
|
|
Accounts receivable |
|
|
42,049 |
|
Inventories |
|
|
66,392 |
|
Prepaid expenses and other current assets |
|
|
70 |
|
Property, plant and equipment |
|
|
91,790 |
|
Other noncurrent assets |
|
|
288 |
|
Intangibles |
|
|
58,604 |
|
Goodwill |
|
|
48,960 |
|
Accounts payable |
|
|
(29,014 |
) |
Other current liabilities |
|
|
(5,833 |
) |
Other noncurrent liabilities |
|
|
(4,188 |
) |
|
|
|
|
Total purchase price, net of cash acquired |
|
$ |
269,118 |
|
|
|
|
|
The components of intangible assets listed in the table above as of January 3, 2008, based
upon a preliminary appraisal, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Life |
|
Customer relationships |
|
$ |
27,998 |
|
|
|
20 |
|
Supplier agreements |
|
|
21,341 |
|
|
|
4 |
|
Patents |
|
|
1,573 |
|
|
|
12 |
|
Non-competition agreements |
|
|
5,732 |
|
|
|
5 |
|
Distributor agreements |
|
|
1,960 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total |
|
$ |
58,604 |
|
|
|
|
|
Weighted average amortization period |
|
|
|
|
|
|
12 |
|
The Company formulated its plan associated with the involuntary termination of certain Penreco
employees and had accrued $1,901 for such costs, all of which have been included in the acquisition
cost allocation. The majority of affected employees had been terminated as of June 30, 2008, with
the remaining affected employees terminated in early July 2008. For the three and six months ended
June 30, 2008, the Company paid $941 and $1,714, respectively, of termination benefits against the
liability and has $187 of remaining liability for termination costs, all of which were
recorded in connection with the acquisition.
5. Sale of Mineral Rights
In June 2008, the Company received one-time lease bonuses of $6,065 associated with the lease
of mineral rights on the real property at the Shreveport and Princeton refineries to an
unaffiliated third party which have been accounted for as a sale. The Company has retained a
royalty interest in any future production associated with these mineral rights. As a result of these
transactions, the Company recorded a gain of $5,770 in other income (expense) in the unaudited
condensed consolidated statements of operations. Under the New Term Loan agreement, cash proceeds
resulting from the disposition of property, plant and equipment must be used as a mandatory
prepayment of the New Term Loan. As a result, the Company made a prepayment of $6,065 in June 2008 on the
New Term Loan.
6. Shreveport Refinery Expansion
As of December 31, 2007, the Company had invested $254,414 in its Shreveport refinery
expansion project. Through June 30, 2008, the Company has invested an additional $115,550 for a
total of $369,964 in its Shreveport refinery expansion project. The project was completed and
operational in May 2008. The total cost of the Shreveport refinery expansion project is
approximately $375,000.
Additionally, for the year ended December 31, 2007 and the six months ended June 30, 2008, the
Company had invested $65,633 and $32,190, respectively, in the Shreveport refinery for other
capital expenditures including projects to improve efficiency, de-bottleneck certain operating
units and for new product development.
11
7. Goodwill and Intangible Assets
The Company has preliminarily recorded $48,960 of goodwill as a result of the Penreco
acquisition, all of which is recorded within the Companys specialty products segment. The Company
had none recorded as of December 31, 2007.
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Weighted |
|
|
Gross |
|
|
Accumulated |
|
|
Gross |
|
|
Accumulated |
|
|
|
Average Life |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Customer relationships |
|
|
20 |
|
|
$ |
30,274 |
|
|
$ |
(4,267 |
) |
|
$ |
2,276 |
|
|
$ |
(2,165 |
) |
Supplier agreements |
|
|
4 |
|
|
|
21,341 |
|
|
|
(3,745 |
) |
|
|
|
|
|
|
|
|
Patents |
|
|
12 |
|
|
|
1,573 |
|
|
|
(156 |
) |
|
|
|
|
|
|
|
|
Non-competition agreements |
|
|
5 |
|
|
|
5,732 |
|
|
|
(384 |
) |
|
|
|
|
|
|
|
|
Distributor agreements |
|
|
3 |
|
|
|
1,960 |
|
|
|
(368 |
) |
|
|
|
|
|
|
|
|
Royalty agreements |
|
|
19 |
|
|
|
4,116 |
|
|
|
(544 |
) |
|
|
2,680 |
|
|
|
(331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
$ |
64,996 |
|
|
$ |
(9,464 |
) |
|
$ |
4,956 |
|
|
$ |
(2,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets associated with supplier agreements, non-competition agreements, patents and
distributor agreements are being amortized using the discounted estimated future cash flows over
the term of the related agreements. Intangible assets associated with customer relationships of
Penreco are being amortized using the discounted estimated future cash flows based upon an assumed
rate of annual customer attrition. For the three and six months ended June 30, 2008, the Company
recorded amortization expense of intangible assets of $4,366 and
$6,968, respectively, as compared
to $242 and $476 for the three and six months ended June 30, 2007. The Company estimates that
amortization of intangible assets will be $6,746 for the remainder of 2008, with annual
amortization of $11,279, $8,703, $6,901, and $5,671 for the years ended December 31, 2009, 2010,
2011, and 2012, respectively.
8. Fair Value of Financial Instruments
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. The Company has adopted the provisions of SFAS 157 as of January 1, 2008, for
financial instruments. Although the adoption of SFAS 157 did not materially impact its financial
condition, results of operations, or cash flows, the Company is now required to provide additional
disclosures as part of its financial statements. In February 2008, the FASB agreed to defer for one
year the effective date of SFAS 157 for certain nonfinancial assets and liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a recurring basis.
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted
prices in active markets; Level 2, defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in
which little or no market data exists, therefore requiring an entity to develop its own
assumptions.
As of June 30, 2008, the Company held certain assets that are required to be measured at fair
value on a recurring basis. These included the Companys derivative instruments related to crude
oil, gasoline, diesel, natural gas and interest rates, and investments associated with the
Companys Non-Contributory Defined Benefit Plan (Pension Plan).
The Companys derivative instruments consist of over-the-counter (OTC) contracts, which are
not traded on a public exchange. These contracts include both swaps as well as different types of
option contracts. See Note 9 for further information on the Companys derivative instruments and
hedging activities. The fair values of swap contracts for crude oil, natural gas and interest rates
are determined based on inputs that are readily available in public markets or can be derived from
information available in publicly quoted markets. Therefore, the Company has categorized these swap
contracts as Level 2. The Company determines the fair value of its crude oil option contracts
utilizing a standard option pricing model based on inputs that can be derived from information
available in publicly quoted markets, or are quoted by counterparties to these contracts. In
situations where the Company obtains inputs via quotes from its counterparties, it verifies the
reasonableness of these quotes via similar quotes from another counterparty as of each date for
which financial statements are prepared. The Company has consistently applied these valuation
techniques in all periods presented and believes it has obtained the most accurate information
available for the types of derivative contracts it holds. Due to the fact that certain of the
inputs utilized to determine the fair value of option contracts are unobservable (principally
volatility), the Company has categorized these option contracts as Level 3. In addition to these
option contracts, the Company determines the value of its diesel and
gasoline swap contracts using certain unobservable inputs in forward years (principally no
observable forward curve). Thus, these swap contracts are categorized as Level 3.
12
The Companys investments associated with its Pension Plan consist of mutual funds that are
publicly traded and for which market prices are readily available, thus these investments are
categorized as Level 1.
The Companys assets measured at fair value on a recurring basis subject to the disclosure
requirements of SFAS 157 at June 30, 2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil swaps |
|
$ |
|
|
|
$ |
1,567,772 |
|
|
$ |
|
|
|
$ |
1,567,772 |
|
Gasoline swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas swaps |
|
|
|
|
|
|
2,988 |
|
|
|
|
|
|
|
2,988 |
|
Crude oil options |
|
|
|
|
|
|
|
|
|
|
8,824 |
|
|
|
8,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plan investments |
|
|
18,142 |
|
|
|
|
|
|
|
|
|
|
|
18,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
18,142 |
|
|
$ |
1,570,760 |
|
|
$ |
8,824 |
|
|
$ |
1,597,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Gasoline swaps |
|
|
|
|
|
|
|
|
|
|
(554,549 |
) |
|
|
(554,549 |
) |
Diesel swaps |
|
|
|
|
|
|
|
|
|
|
(1,154,934 |
) |
|
|
(1,154,934 |
) |
Natural gas swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
|
(2,429 |
) |
|
|
|
|
|
|
(2,429 |
) |
Pension plan investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
|
|
|
$ |
(2,429 |
) |
|
$ |
(1,709,483 |
) |
|
$ |
(1,711,912 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth a summary of net changes in fair value of the Companys Level 3
financial assets and liabilities for the six months ended June 30, 2008:
|
|
|
|
|
|
|
Derivative |
|
|
|
Instruments, Net |
|
Fair value at January 1, 2008 |
|
$ |
(600,051 |
) |
Realized losses |
|
|
6,538 |
|
Unrealized gains (losses) |
|
|
12,441 |
|
Comprehensive income (loss) |
|
|
(1,270,829 |
) |
Purchases, issuances and settlements |
|
|
151,242 |
|
Transfers in (out) of Level 3 |
|
|
|
|
|
|
|
|
Fair value at June 30, 2008 |
|
$ |
(1,700,659 |
) |
|
|
|
|
Total gains or losses included in net income
attributable to changes in unrealized gains (losses)
relating to financial assets and liabilities held as
of June 30, 2008 |
|
$ |
17,025 |
|
All settlements from derivative contracts that are deemed effective as defined in SFAS 133,
are included in sales for gasoline and diesel derivatives, cost of sales for crude oil and natural
gas derivatives, and interest expense for interest rate derivatives in the period that the hedged
cash flow occurs. Any ineffectiveness associated with these derivative contracts, as defined in
SFAS 133, are recorded in earnings immediately in unrealized gain (loss) on derivative instruments.
See Note 9 for further information on SFAS 133 and hedging.
9. Derivatives
The Company utilizes derivative instruments to minimize its price risk and volatility of cash
flows associated with the purchase of crude oil and natural gas, the sale of fuel products and
interest payments.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was amended in June 2000 by SFAS No. 138 and
in May 2003 by SFAS No. 149 (collectively referred to as SFAS 133), the Company recognizes all
derivative instruments as either assets or liabilities at fair value
on the consolidated balance sheets. The Company utilized third party valuations and published market data to determine the
fair value of these derivatives. The Company considers its derivative instrument valuations to be
either Level 2 or Level 3 fair value measurements under SFAS 157 (see
Note 8).
13
To the extent a derivative instrument is designated effective as a cash flow hedge of an
exposure to changes in the fair value of a future transaction, the change in fair value of the
derivative is deferred in accumulated other comprehensive income (loss), a component of partners
capital in the condensed consolidated balance sheets, until the underlying transaction hedged is recognized in the unaudited condensed
consolidated statements of operations. The Company accounts for certain derivatives hedging
purchases of crude oil and natural gas, the sale of gasoline, diesel and jet fuel and the payment
of interest as cash flow hedges. The derivatives hedging purchases and sales are recorded to cost
of sales and sales in the unaudited condensed consolidated statements of operations, respectively,
upon recording the related hedged transaction in sales or cost of sales. The derivatives hedging
payments of interest are recorded in interest expense in the unaudited condensed consolidated
statements of operations.
For the three months ended June 30, 2008 and 2007, the Company has recorded derivative losses
of $133,201 and $9,399, respectively, to sales and a derivative gain of $135,114 and a derivative
loss of $7,637, respectively, to cost of sales. For the six months ended June 30, 2008 and 2007,
the Company recorded a derivative loss of $196,078 and a derivative gain of $8,398, respectively,
to sales and a derivative gain of $198,928 and a derivative loss of $28,596, respectively, to cost
of sales. During the three months ended June 30, 2008 and 2007, the Company recorded a gain of
$5,109 and $0, respectively, of crude oil collar derivative settlements in realized gain (loss) on
derivative instruments due to the derivative transactions not being designated as cash flow hedges.
An interest rate swap loss of $37 and $1 for the three months ended June 30, 2008 and 2007,
respectively, was recorded to interest expense. An interest rate swap loss of $76 and $2 for the
six months ended June 30, 2008 and 2007, respectively, was recorded to interest expense. For
derivative instruments not designated as cash flow hedges and the portion of any cash flow hedge
that is determined to be ineffective, the change in fair value of the asset or liability for the
period is recorded to unrealized gain (loss) on derivative instruments in the unaudited condensed
consolidated statements of operations. Upon the settlement of a derivative not designated as a cash
flow hedge, the gain or loss at settlement is recorded to realized gain (loss) on derivative
instruments in the unaudited condensed consolidated statements of operations.
The Company assesses, both at inception of the hedge and on an on-going basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting changes in
cash flows of hedged items. The Companys estimate of the ineffective portion of the hedges for the
six months ended June 30, 2008 and 2007 were gains of $2,640 and $3,514, respectively, which were
recorded to unrealized gain on derivative instruments in the unaudited condensed consolidated
statements of operations. The Company recorded the time value on its crude oil collars, which is
excluded from the assessment of hedge effectiveness, of a gain of $0 and $692, respectively, to
unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated statements
of operations, for the six months ended June 30, 2008 and 2007.
Comprehensive income (loss) for the Company includes the changes in fair value of cash flow
hedges that have not been reclassified to net income (loss). Comprehensive income (loss) for the
three and six months ended June 30, 2008 and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
41,808 |
|
|
$ |
37,418 |
|
|
$ |
38,416 |
|
|
$ |
65,627 |
|
Cash flow hedge (gain) loss reclassified to net income |
|
|
4,462 |
|
|
|
230 |
|
|
|
5,140 |
|
|
|
(5,221 |
) |
Change in fair value of cash flow hedges |
|
|
(40,387 |
) |
|
|
(22,045 |
) |
|
|
(95,969 |
) |
|
|
(83,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
5,883 |
|
|
$ |
15,603 |
|
|
$ |
(52,413 |
) |
|
$ |
(23,493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The effective portion of the hedges classified in accumulated other comprehensive loss is
$130,470 as of June 30, 2008 and, absent a change in the fair market value of the underlying
transactions, will be reclassified to earnings by December 31, 2012 with balances being recognized
as follows:
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
Comprehensive |
|
Year |
|
Income (Loss) |
|
2008 |
|
$ |
(12,653 |
) |
2009 |
|
|
(56,024 |
) |
2010 |
|
|
(45,880 |
) |
2011 |
|
|
(16,065 |
) |
2012 |
|
|
152 |
|
|
|
|
|
Total |
|
$ |
(130,470 |
) |
|
|
|
|
The Company is exposed to credit risk in the event of nonperformance with its counterparties
on these derivative transactions. The Company executes all of its derivative instruments with a
small number of counterparties, the majority of which are large financial institutions with ratings
of at least A1 and A+ by Moodys and S&P, respectively. In the event of default, the Company would
potentially be subject to losses on derivative instruments with mark to market gains. The Company
requires collateral from its counterparties when the fair value of the derivatives crosses agreed
upon thresholds in its contracts with these counterparties. The Companys contracts with these
counterparties allow for netting of derivative instrument positions executed under each contract.
The Company does not expect nonperformance on any derivative contract.
Crude Oil Collar and Swap Contracts - Specialty Products Segment
The Company utilizes combinations of options and swaps to manage crude oil price risk and
volatility of cash flows in its specialty products segment. These derivatives are designated as
cash flow hedges of the future purchase of crude oil if they meet the hedge criteria of SFAS 133.
The Companys policy is generally to enter into crude oil derivative contracts that match expected future cash out flows for up to 75% of anticipated crude oil purchases related to specialty products production.
Generally, the Companys policy is that these positions will be short term in nature
and expire within three to nine months from execution; however, the
Company may execute derivative contracts
for up to two years forward if expected future cash flows support
lengthening the Companys position.
At June 30, 2008, the Company had the following derivatives related to crude oil purchases in
the table below, all of which are designated as hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Bought Put |
|
|
Sold Put |
|
|
Bought Call |
|
|
Sold Call |
|
Crude Oil Put/Call Spread Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
August 2008 |
|
|
62,000 |
|
|
|
2,000 |
|
|
|
74.30 |
|
|
|
84.30 |
|
|
|
94.30 |
|
|
|
104.30 |
|
September 2008 |
|
|
60,000 |
|
|
|
2,000 |
|
|
|
74.30 |
|
|
|
84.30 |
|
|
|
94.30 |
|
|
|
104.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
122,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
74.30 |
|
|
$ |
84.30 |
|
|
$ |
94.30 |
|
|
$ |
104.30 |
|
At June 30, 2008, the Company had the following three-way crude collar derivatives related to
crude oil purchases in its specialty products segment, none of which are designated as hedges. As a
result of these barrels not being designated as hedges, the Company recognized $3,360 of gains in
unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated statements
of operations for the three and six months ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Sold Put |
|
|
Bought Call |
|
|
Sold Call |
|
Crude Oil Put/Call Spread Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
Third Quarter 2008 |
|
|
1,225,000 |
|
|
|
13,315 |
|
|
$ |
120.83 |
|
|
$ |
131.14 |
|
|
$ |
139.06 |
|
Fourth Quarter 2008 |
|
|
276,000 |
|
|
|
3,000 |
|
|
$ |
118.00 |
|
|
$ |
137.33 |
|
|
$ |
145.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
1,501,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
120.31 |
|
|
$ |
132.28 |
|
|
$ |
140.28 |
|
At
June 30, 2008, the Company had the following two-way crude oil collar derivatives related to
crude oil purchases in its specialty products segment, none of which are designated as hedges. As a
result of these barrels not being designated as hedges, the Company recognized $4,296 of gains in
unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated statements
of operations for the three and six months ended June 30, 2008.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Sold Put |
|
|
Bought Call |
|
Crude Oil Put/Call Spread Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
Fourth Quarter 2008 |
|
|
276,000 |
|
|
|
3,000 |
|
|
$ |
98.85 |
|
|
$ |
135.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
276,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
98.85 |
|
|
$ |
135.00 |
|
At June 30, 2008, the Company had the following crude oil swap derivatives related to crude
oil purchases in its specialty products segment, all of which are designated as hedges except for
62,000 barrels in 2008. As a result of certain of these barrels not being designated as hedges, the
Company recognized $399 of gains in unrealized gain (loss) on derivative instruments in the
unaudited condensed consolidated statements of operations for the three and six months ended June
30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
Third Quarter 2008 |
|
|
108,000 |
|
|
|
1,174 |
|
|
$ |
119.55 |
|
Fourth Quarter 2008 |
|
|
46,000 |
|
|
|
500 |
|
|
|
100.45 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
154,000 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
113.85 |
|
At
December 31, 2007, the Company had the following derivatives related to crude oil purchases
in its specialty products segment, all of which are designated as hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
Crude Oil Put/Call Spread |
|
|
|
|
|
|
|
|
|
Bought Put |
|
|
Sold Put |
|
|
Bought Call |
|
|
Sold Call |
|
Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
January 2008 |
|
|
248,000 |
|
|
|
8,000 |
|
|
$ |
67.85 |
|
|
$ |
77.85 |
|
|
$ |
87.85 |
|
|
$ |
97.85 |
|
February 2008 |
|
|
232,000 |
|
|
|
8,000 |
|
|
|
76.13 |
|
|
|
86.13 |
|
|
|
96.13 |
|
|
|
106.13 |
|
March 2008 |
|
|
248,000 |
|
|
|
8,000 |
|
|
|
77.63 |
|
|
|
87.63 |
|
|
|
97.63 |
|
|
|
107.63 |
|
April 2008 |
|
|
60,000 |
|
|
|
2,000 |
|
|
|
74.30 |
|
|
|
84.30 |
|
|
|
94.30 |
|
|
|
104.30 |
|
May 2008 |
|
|
62,000 |
|
|
|
2,000 |
|
|
|
74.30 |
|
|
|
84.30 |
|
|
|
94.30 |
|
|
|
104.30 |
|
June 2008 |
|
|
60,000 |
|
|
|
2,000 |
|
|
|
74.30 |
|
|
|
84.30 |
|
|
|
94.30 |
|
|
|
104.30 |
|
July 2008 |
|
|
62,000 |
|
|
|
2,000 |
|
|
|
74.30 |
|
|
|
84.30 |
|
|
|
94.30 |
|
|
|
104.30 |
|
August 2008 |
|
|
62,000 |
|
|
|
2,000 |
|
|
|
74.30 |
|
|
|
84.30 |
|
|
|
94.30 |
|
|
|
104.30 |
|
September 2008 |
|
|
60,000 |
|
|
|
2,000 |
|
|
|
74.30 |
|
|
|
84.30 |
|
|
|
94.30 |
|
|
|
104.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
1,094,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
74.01 |
|
|
$ |
84.01 |
|
|
$ |
94.01 |
|
|
$ |
104.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil Swap Contracts by Expiration Dates |
|
Barrels |
|
BPD |
|
($/Bbl) |
First Quarter 2008
|
|
|
91,000 |
|
|
|
1,000 |
|
|
|
90.92 |
|
Crude Oil Swap Contracts - Fuel Products Segment
The Company utilizes swap contracts to manage crude oil price risk and volatility of cash
flows in its fuel products segment. The Companys policy is generally to enter into crude oil swap
contracts for a period no greater than five years forward and for no more than 75% of crude
purchases used in fuels production. At June 30, 2008, the Company had the following derivatives
related to crude oil purchases in its fuel products segment, all of which are designated as hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
Third Quarter 2008 |
|
|
2,208,000 |
|
|
|
24,000 |
|
|
|
66.54 |
|
Fourth Quarter 2008 |
|
|
2,116,000 |
|
|
|
23,000 |
|
|
|
66.49 |
|
Calendar Year 2009 |
|
|
8,212,500 |
|
|
|
22,500 |
|
|
|
66.26 |
|
Calendar Year 2010 |
|
|
7,482,500 |
|
|
|
20,500 |
|
|
|
67.27 |
|
Calendar Year 2011 |
|
|
3,009,000 |
|
|
|
8,244 |
|
|
|
76.98 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
23,028,000 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
68.04 |
|
16
At December 31, 2007, the Company had the following derivatives related to crude oil purchases
in its fuel products segment, all of which are designated as hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
First Quarter 2008 |
|
|
2,184,000 |
|
|
|
24,000 |
|
|
|
67.87 |
|
Second Quarter 2008 |
|
|
2,184,000 |
|
|
|
24,000 |
|
|
|
67.87 |
|
Third Quarter 2008 |
|
|
2,208,000 |
|
|
|
24,000 |
|
|
|
66.54 |
|
Fourth Quarter 2008 |
|
|
2,116,000 |
|
|
|
23,000 |
|
|
|
66.49 |
|
Calendar Year 2009 |
|
|
8,212,500 |
|
|
|
22,500 |
|
|
|
66.26 |
|
Calendar Year 2010 |
|
|
7,482,500 |
|
|
|
20,500 |
|
|
|
67.27 |
|
Calendar Year 2011 |
|
|
2,096,500 |
|
|
|
5,744 |
|
|
|
67.70 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
26,483,500 |
|
|
|
|
|
|
|
|
|
Average Price |
|
|
|
|
|
|
|
|
|
$ |
66.97 |
|
Fuel Products Swap Contracts
The Company utilizes swap contracts to manage diesel, gasoline and jet fuel price risk and
volatility of cash flows in its fuel products segment. The Companys policy is generally to enter
into diesel and gasoline swap contracts for a period no greater than five years forward and for no
more than 75% of forecasted fuel sales.
Diesel and Jet Fuel Swap Contracts
At June 30, 2008, the Company had the following derivatives related to diesel and jet fuel
sales in its fuel products segment, all of which are designated as hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel and Jet Fuel Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
Third Quarter 2008 |
|
|
1,334,000 |
|
|
|
14,500 |
|
|
$ |
81.42 |
|
Fourth Quarter 2008 |
|
|
1,334,000 |
|
|
|
14,500 |
|
|
|
81.42 |
|
Calendar Year 2009 |
|
|
4,745,000 |
|
|
|
13,000 |
|
|
|
80.51 |
|
Calendar Year 2010 |
|
|
4,745,000 |
|
|
|
13,000 |
|
|
|
80.41 |
|
Calendar Year 2011 |
|
|
2,371,000 |
|
|
|
6,496 |
|
|
|
90.58 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
14,529,000 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
82.29 |
|
At December 31, 2007, the Company had the following derivatives related to diesel and jet fuel
sales in its fuel products segment, all of which are designated as hedges except for 42,520 barrels
in 2008. As a result of these 42,520 barrels not being designated as hedges, the Company recognized
$941 of losses in unrealized gain (loss) on derivative instruments in the consolidated statements
of operations during the year ended December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel and Jet Fuel Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
First Quarter 2008 |
|
|
1,319,500 |
|
|
|
14,500 |
|
|
|
82.81 |
|
Second Quarter 2008 |
|
|
1,319,500 |
|
|
|
14,500 |
|
|
|
82.81 |
|
Third Quarter 2008 |
|
|
1,334,000 |
|
|
|
14,500 |
|
|
|
81.42 |
|
Fourth Quarter 2008 |
|
|
1,334,000 |
|
|
|
14,500 |
|
|
|
81.42 |
|
Calendar Year 2009 |
|
|
4,745,000 |
|
|
|
13,000 |
|
|
|
80.51 |
|
Calendar Year 2010 |
|
|
4,745,000 |
|
|
|
13,000 |
|
|
|
80.41 |
|
Calendar Year 2011 |
|
|
1,641,000 |
|
|
|
4,496 |
|
|
|
79.93 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
16,438,000 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
80.94 |
|
Gasoline Swap Contracts
At June 30, 2008, the Company had the following derivatives related to gasoline sales in its
fuel products segment, all of which are designated as hedges.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
Third Quarter 2008 |
|
|
874,000 |
|
|
|
9,500 |
|
|
$ |
74.79 |
|
Fourth Quarter 2008 |
|
|
782,000 |
|
|
|
8,500 |
|
|
|
74.62 |
|
Calendar Year 2009 |
|
|
3,467,500 |
|
|
|
9,500 |
|
|
|
73.83 |
|
Calendar Year 2010 |
|
|
2,737,500 |
|
|
|
7,500 |
|
|
|
75.10 |
|
Calendar Year 2011 |
|
|
638,000 |
|
|
|
1,748 |
|
|
|
83.42 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
8,499,000 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
75.13 |
|
At December 31, 2007, the Company had the following derivatives related to gasoline sales in
its fuel products segment, all of which are designated as hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
First Quarter 2008 |
|
|
864,500 |
|
|
|
9,500 |
|
|
|
76.98 |
|
Second Quarter 2008 |
|
|
864,500 |
|
|
|
9,500 |
|
|
|
76.98 |
|
Third Quarter 2008 |
|
|
874,000 |
|
|
|
9,500 |
|
|
|
74.79 |
|
Fourth Quarter 2008 |
|
|
782,000 |
|
|
|
8,500 |
|
|
|
74.62 |
|
Calendar Year 2009 |
|
|
3,467,500 |
|
|
|
9,500 |
|
|
|
73.83 |
|
Calendar Year 2010 |
|
|
2,737,500 |
|
|
|
7,500 |
|
|
|
75.10 |
|
Calendar Year 2011 |
|
|
455,500 |
|
|
|
1,248 |
|
|
|
74.98 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
10,045,500 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
74.91 |
|
Natural Gas Swap Contracts
The Company utilizes swap contracts to manage natural gas price risk and volatility of cash
flows. Certain of these swap contracts are designated as cash flow hedges of the future purchase of
natural gas. The Companys policy is generally to enter into natural gas derivative contracts to
hedge approximately 50% or more of its upcoming fall and winter months anticipated natural gas
requirement with time to expiration not to exceed three years. At June 30, 2008, the Company had
the following derivatives related to natural gas purchases, all of which are designated as hedges
except for 640,000 Mmbtus. As a result of these barrels not being designated as hedges, the Company
recognized $1,678 of gains in unrealized gain (loss) on derivative instruments in the unaudited
condensed consolidated statements of operations for the three and six months ended June 30, 2008.
|
|
|
|
|
|
|
|
|
Natural Gas Swap Contracts by Expiration Dates |
|
MMbtus |
|
|
$/MMbtu |
|
Third Quarter 2008 |
|
|
220,000 |
|
|
$ |
10.38 |
|
Fourth Quarter 2008 |
|
|
330,000 |
|
|
$ |
10.38 |
|
First Quarter 2009 |
|
|
330,000 |
|
|
$ |
10.38 |
|
|
|
|
|
|
|
|
Totals |
|
|
880,000 |
|
|
|
|
|
Average price |
|
|
|
|
|
$ |
10.38 |
|
At December 31, 2007, the Company had the following derivatives related to natural gas
purchases, all of which are designated as hedges.
|
|
|
|
|
|
|
|
|
Natural Gas Swap Contracts by Expiration Dates |
|
MMbtus |
|
|
$/MMbtu |
|
First Quarter 2008 |
|
|
850,000 |
|
|
$ |
8.76 |
|
Third Quarter 2008 |
|
|
60,000 |
|
|
$ |
8.30 |
|
Fourth Quarter 2008 |
|
|
90,000 |
|
|
$ |
8.30 |
|
First Quarter 2009 |
|
|
90,000 |
|
|
$ |
8.30 |
|
|
|
|
|
|
|
|
Totals |
|
|
1,090,000 |
|
|
|
|
|
Average price |
|
|
|
|
|
$ |
8.66 |
|
Interest Rate Swap Contracts
In 2008, the Company entered into a forward swap contract to manage interest rate risk related
to its current variable rate senior secured first lien term loan which closed January 3, 2008. The
Company has hedged the future interest payments related to $100,000, $150,000 and $50,000 of the
total outstanding term loan indebtedness in 2008, 2009 and 2010, respectively, pursuant to this
forward swap contract.
18
This swap contract is designated as a cash flow hedge of the future payment of
interest with three-month LIBOR fixed at 3.37%, 3.09%, and 3.66% per annum in 2008, 2009 and 2010,
respectively.
In 2006, the Company entered into a forward swap contract to manage interest rate risk related
to its then existing variable rate senior secured first lien term loan. Due to the repayment of
$19,000 of the outstanding balance of the Companys then existing term loan facility in August 2007
and subsequent refinancing of the remaining term loan balance, this swap contract was not
designated as a cash flow hedge of the future payment of interest. The entire change in the fair
value of this interest rate swap is recorded to unrealized gain (loss) on derivative instruments in
the unaudited condensed consolidated statements of operations. For the three and six months ended
June 30, 2008, the Company recorded an unrealized (gain) loss on this interest rate swap derivative
instrument of $(250) and $3,113, respectively. In the first quarter of 2008, the Company fixed its
unrealized loss on this interest rate swap derivative instrument by entering into an offsetting
interest rate swap which is not designated as a cash flow hedge.
10. Commitments and Contingencies
From time to time, the Company is a party to certain claims and litigation incidental to its
business, including claims made by various taxing and regulatory authorities, such as the Louisiana
Department of Environmental Quality (LDEQ), Environmental Protection Agency (EPA), Internal
Revenue Service (IRS) and Occupational Safety and Health Administration (OSHA), as the result
of audits or reviews of the Companys business. Management is of the opinion that the ultimate
resolution of any known claims, either individually or in the aggregate, will not have a material
adverse impact on the Companys financial position, results of operations or cash flow.
Environmental
The Company operates crude oil and specialty hydrocarbon refining and terminal operations,
which are subject to stringent and complex federal, state, and local laws and regulations governing
the discharge of materials into the environment or otherwise relating to environmental protection.
These laws and regulations can impair the Companys operations that affect the environment in many
ways, such as requiring the acquisition of permits to conduct regulated activities; restricting the
manner in which the Company can release materials into the environment; requiring remedial
activities or capital expenditures to mitigate pollution from former or current operations; and
imposing substantial liabilities for pollution resulting from its operations. Certain environmental
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.
Failure to comply with environmental laws and regulations may result in the triggering of
administrative, civil and criminal measures, including the assessment of monetary penalties, the
imposition of remedial obligations, and the issuance of injunctions limiting or prohibiting some or
all of the Companys operations. On occasion, the Company receives notices of violation,
enforcement and other complaints from regulatory agencies alleging non-compliance with applicable
environmental laws and regulations. In particular, the LDEQ has proposed penalties totaling $391
and supplemental projects for the following alleged violations: (i) a May 2001 notification
received by the Cotton Valley refinery from the LDEQ regarding several alleged violations of
various air emission regulations, as identified in the course of the Companys Leak Detection and
Repair program, and also for failure to submit various reports related to the facilitys air
emissions; (ii) a December 2002 notification received by the Companys Cotton Valley refinery from
the LDEQ regarding alleged violations for excess emissions, as identified in the LDEQs file review
of the Cotton Valley refinery; (iii) a December 2004 notification received by the Cotton Valley
refinery from the LDEQ regarding alleged violations for the construction of a multi-tower pad and
associated pump pads without a permit issued by the agency; and (iv) a number of similar matters at
the Princeton refinery. The Company anticipates that any penalties that may be assessed due to the
alleged violations will be consolidated in a settlement agreement that the Company anticipates
executing with the LDEQ in connection with the agencys Small Refinery and Single Site Refinery
Initiative described below. The Company has recorded a liability for the proposed penalty within
other current liabilities on the condensed consolidated balance sheets. Environmental expenses are
recorded within other operating expenses on the unaudited condensed consolidated statements of operations.
The Company is party to ongoing discussions on a voluntary basis with the LDEQ regarding the
Companys participation in that agencys Small Refinery and Single Site Refinery Initiative. This
state initiative is patterned after the EPAs National Petroleum Refinery Initiative, which is a
coordinated, integrated compliance and enforcement strategy to address federal Clean Air Act
compliance issues at the nations largest petroleum refineries. The Company expects that the LDEQs
primary focus under the state initiative will be on four compliance and enforcement concerns: (i)
Prevention of Significant Deterioration/New Source Review; (ii) New Source Performance Standards
for fuel gas combustion devices, including flares, heaters and boilers; (iii) Leak Detection and
Repair requirements; and (iv) Benzene Waste Operations National Emission Standards for Hazardous
Air Pollutants. While no significant compliance and enforcement expenditures have been requested as a result of the
Companys discussions with the LDEQ, the Company anticipates that it will ultimately be required to
make emissions reductions requiring capital investments between approximately $1,000 and $3,000
over a three to five year period at the Companys three Louisiana refineries.
19
Voluntary remediation of subsurface contamination is in process at each of the Companys
facilities. The remedial projects are being overseen by the appropriate state agencies. Based on
current investigative and remedial activities, the Company believes that the groundwater
contamination at these facilities can be controlled or remedied without having a material adverse
effect on its financial condition. However, such costs are often unpredictable and, therefore,
there can be no assurance that the future costs will not become material.
The Company is indemnified by Shell Oil Company, as successor to Pennzoil-Quaker State Company
and Atlas Processing Company, for specified environmental liabilities arising from the operations
of the Shreveport refinery prior to the Companys acquisition of the facility. The indemnity is
unlimited in amount and duration, but requires the Company to contribute up to $1,000 of the first
$5,000 of indemnified costs for certain of the specified environmental liabilities.
The Company is indemnified on a limited basis by ConocoPhillips Company and M.E. Zuckerman
Specialty Oil Corporation, former owners of Penreco, for pending, threatened, contemplated or
contingent environmental claims against Penreco, if any, that were not known and identified as of
the Penreco acquisition date. A significant portion of these indemnifications will expire two years
from January 1, 2008 if there are no claims asserted by the Company and are generally subject to a
$2,000 limit.
Health and Safety
The Company received an OSHA citation in the fourth quarter of 2007 for various process safety
violations at its Shreveport refinery which resulted in a penalty. During the first quarter of
2008, the Company settled this penalty for $100. With the exception of this citation, the Company
believes that its operations are in substantial compliance with OSHA and similar state laws.
Standby Letters of Credit
The Company has agreements with various financial institutions for standby letters of credit
which have been issued to domestic vendors. As of June 30, 2008 and December 31, 2007, the Company
had outstanding standby letters of credit of $124,999 and $96,676, respectively, under its senior
secured revolving credit facility. As of June 30, 2008 and December 31, 2007, the Company had
availability to issue letters of credit of $175,001 and $103,324, respectively, under its senior
secured revolving credit facility. The Company also had a $50,000 letter of credit outstanding
under the senior secured first lien letter of credit facility for its fuels hedging program, which
bears interest at 4.0%.
11. Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Borrowings under new senior secured first lien term loan with third-party lenders, interest
at rate of three-month LIBOR plus 4.00% (6.68% at June 30, 2008), interest and principal
payments quarterly with borrowings due January 3, 2015, effective interest rate of
8.16% |
|
$ |
377,010 |
|
|
|
|
|
Borrowings under senior secured first lien term loan with third-party lenders, interest at
rate of three-month LIBOR plus 3.50% (8.74% at December 31, 2007), interest and principal
payments quarterly with borrowings due December 2012 |
|
|
|
|
|
|
30,099 |
|
Borrowings under senior secured revolving credit agreement with third-party lenders,
interest at prime plus 0.50% (5.50% and 7.25% at June 30, 2008 and December 31, 2007,
respectively), interest payments monthly, borrowings due January 2013 |
|
|
25,927 |
|
|
|
6,958 |
|
Capital
lease obligations, interest at 8.25%, interest and principal payments quarterly with
borrowings due January 2012 |
|
|
2,896 |
|
|
|
2,834 |
|
Less unamortized discount on new senior secured first lien term loan with third-party lenders |
|
|
(16,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
389,627 |
|
|
|
39,891 |
|
Less current portion of long-term debt |
|
|
4,792 |
|
|
|
943 |
|
|
|
|
|
|
|
|
|
|
$ |
384,835 |
|
|
$ |
38,948 |
|
|
|
|
|
|
|
|
20
The maximum borrowing capacity at June 30, 2008 under the senior secured revolving credit
agreement was $335,296, with $184,370 available for additional borrowings based on collateral and
specified availability limitations. The amended revolving credit facility has a first priority lien
on the Companys cash, accounts receivable and inventory and a second priority lien on the Companys fixed assets.
On January 3, 2008, the Partnership closed a new $435,000 senior secured first lien term loan
facility (the New Term Loan Facility) which includes a $385,000 term loan (the New Term Loan)
and a $50,000 prefunded letter of credit facility to support crack spread hedging. In addition, the
Company incurred $17.4 million of issuance discount in connection with the New Term Loan Facility.
The proceeds of the term loan were used to (i) finance a portion of the acquisition of Penreco,
(ii) fund the anticipated growth in working capital and remaining capital expenditures associated
with the Shreveport refinery expansion project, (iii) refinance the existing term loan and (iv) to
the extent available, for general partnership purposes. The New Term Loan bears interest at a rate
equal (i) with respect to a LIBOR Loan, the LIBOR Rate plus 400 basis points (as defined in the New
Term Loan Facility) and (ii) with respect to a Base Rate Loan, the Base Rate plus 300 basis points
(as defined in the New Term Loan Facility). The letter of credit facility to support crack spread
hedging bears interest at 4.0%. Lenders under the New Term Loan Facility have a first priority lien
on the Companys fixed assets and a second priority lien on its cash, accounts receivable,
inventory and other personal property. The New Term Loan Facility matures in January 2015. The New
Term Loan Facility requires quarterly principal payments of $963 until September 30, 2014, with the
remaining balance due at maturity on January 3, 2015. In June 2008, the Company received $6,065
associated with the lease of mineral rights on the real property at its Shreveport and Princeton
refineries to an unaffiliated third party which have been accounted
for as a sale. As a result of
these transactions, the Company recorded a gain of $5,770 in other income (expense) in the
unaudited condensed consolidated statements of operations. Under the New Term Loan agreement, cash
proceeds resulting from the disposition of the Companys property, plant and equipment must be used
as a mandatory prepayment of the New Term Loan. As a result, the Company made a prepayment of
$6,065 in June 2008 on the New Term Loan.
On January 3, 2008, the Partnership amended its existing senior secured revolving credit
facility dated as of December 9, 2005 (the Revolver). Pursuant to this amendment, the Revolver
lenders agreed to, among other things, (i) increase the total availability under the Revolver up to
$375,000 and (ii) conform certain of the financial covenants and other terms in the Revolver to
those contained in the New Term Loan Credit Agreement. The amended existing senior secured
revolving credit facility matures on January 3, 2013.
The Company has experienced recent adverse financial conditions primarily associated with
historically high crude oil costs, which have negatively affected specialty products gross profit.
Also contributing to these adverse financial conditions have been the significant cost overruns and
delays in the startup of the Shreveport refinery expansion project. Compliance with the financial
covenants pursuant to the Companys credit agreements is tested quarterly, and as of June 30, 2008,
the Company was in compliance with all financial covenants. The Company is taking steps to ensure
that it continues to meet the requirements of its credit agreements and currently forecasts that it
will be in compliance for all future measurement dates. These steps include increasing specialty
products sales prices, increased crude oil price hedging for the specialty products segment,
reductions in working capital and operating cost reductions.
While assurances cannot be made regarding its future compliance with these covenants, the
Company anticipates that its specialty product pricing strategies, the completed Shreveport
refinery expansion project and additional production, continued integration of the Penreco
acquisition and other strategic initiatives will allow it to maintain compliance with such
financial covenants and to continue to improve its Adjusted EBITDA, liquidity and distributable
cash flows.
Failure to achieve the Companys anticipated results may result in a breach of certain of the
financial covenants contained in its credit agreements. If this occurs, the Company will enter into
discussions with its lenders to either modify the terms of the existing credit facilities or obtain
waivers of non-compliance with such covenants. There can be no assurances of the timing of the
receipt of any such modification or waiver, the term or costs associated therewith or our ultimate
ability to obtain the relief sought. The Companys failure to obtain a waiver of non-compliance
with certain of the financial covenants or otherwise amend the credit facilities would constitute
an event of default under its credit facilities and would permit the lenders to pursue remedies.
These remedies could include acceleration of maturity under the credit facilities and limitations
or the elimination of the Companys ability to make distributions to its unitholders. If the
Companys lenders accelerate maturity under its credit facilities, a significant portion of its
indebtedness may become due and payable immediately. The Company might not have, or be able to
obtain, sufficient funds to make these accelerated payments. If the Company is unable to make these
accelerated payments, its lenders could seek to foreclose on its assets.
21
As of June 30, 2008, maturities of the Companys long-term debt are as follows:
|
|
|
|
|
Year |
|
Maturity |
|
2008 |
|
$ |
2,628 |
|
2009 |
|
|
4,705 |
|
2010 |
|
|
4,463 |
|
2011 |
|
|
4,424 |
|
Thereafter |
|
|
389,613 |
|
|
|
|
|
Total |
|
$ |
405,833 |
|
|
|
|
|
12. Employee Benefit Plans
The Company has a noncontributory defined benefit plan (Pension Plan) for both those
salaried employees as well as those employees represented by either the United Steelworkers (USW)
or the International Union of Operating Engineers (IUOE) who were formerly employees of Penreco
and who became employees of the Company as a result of the Penreco acquisition on January 3, 2008.
The Company also has a contributory defined benefit postretirement medical plan for both those
salaried employees as well as those employees represented by either the International Brotherhood
of Teamsters (IBT), USW or IUOE who were formerly employees of Penreco and who became employees
of the Company as a result of the Penreco acquisition, as well as a non-contributory disability
plan for those salaried employees who were formerly employees of Penreco (collectively, Other
Plans). The pension benefits are based primarily on years of service for USW and IUOE represented
employees and both years of service and the employees final 60 months average compensation for
salaried employees. The funding policy is consistent with funding requirements of applicable laws
and regulations. The assets of these plans consist of corporate equity securities, municipal and
government bonds, and cash equivalents.
The components of net periodic pension and other post retirement benefits cost for the three
and six months ended June 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2008 |
|
|
June 30, 2008 |
|
|
|
|
|
|
|
Other Post |
|
|
|
|
|
|
Other Post |
|
|
|
Pension |
|
|
Retirement |
|
|
Pension |
|
|
Retirement |
|
|
|
Benefits |
|
|
Employee Benefits |
|
|
Benefits |
|
|
Employee Benefits |
|
Service cost |
|
$ |
118 |
|
|
$ |
2 |
|
|
$ |
472 |
|
|
$ |
5 |
|
Interest cost |
|
|
301 |
|
|
|
12 |
|
|
|
649 |
|
|
|
25 |
|
Expected return on assets |
|
|
(332 |
) |
|
|
|
|
|
|
(668 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
87 |
|
|
$ |
14 |
|
|
$ |
453 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, the Company expects to contribute approximately $1,670 and $114, respectively, to its
Pension Plan and Other Plans. During the three and six months ended June 30, 2008, the Company made
no contributions to its Pension Plan and Other Plans.
22
The benefit obligations, plan assets, funded status, and amounts recognized in the condensed
consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post |
|
|
|
Pension |
|
|
Retirement |
|
|
|
Benefits |
|
|
Employee Benefits |
|
Change in projected benefit obligation (PBO): |
|
|
|
|
|
|
|
|
Benefit obligation at January 3, 2008 |
|
$ |
21,421 |
|
|
$ |
910 |
|
Service cost |
|
|
472 |
|
|
|
5 |
|
Interest cost |
|
|
649 |
|
|
|
25 |
|
Expected return on assets |
|
|
(668 |
) |
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at June 30, 2008 |
|
$ |
21,874 |
|
|
$ |
940 |
|
Fair value
of plan assets at January 3, 2008 |
|
|
18,142 |
|
|
|
|
|
|
|
|
|
|
|
|
Funded statusbenefit obligation in excess of plan assets |
|
|
(3,732 |
) |
|
|
(940 |
) |
Reconciliation of funded status: |
|
|
|
|
|
|
|
|
Funded statusbenefit obligation in excess of plan assets |
|
|
(3,732 |
) |
|
|
(940 |
) |
Unrecognized prior service cost |
|
|
|
|
|
|
|
|
Unrecognized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued) pension cost |
|
|
(3,732 |
) |
|
|
(940 |
) |
Accrued benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized on condensed consolidated balance sheet at June 30, 2008 |
|
$ |
(3,732 |
) |
|
$ |
(940 |
) |
|
|
|
|
|
|
|
The accumulated benefit obligation for the Pension Plan and Other Plans was $17,547 as of
January 3, 2008. The accumulated benefit obligations for the
Pension Plan and Other Plans were less
than plan assets by $636 as of January 3, 2008. As of January 3, 2008, the Company had no prior
service costs, actuarial gains (losses) or transition gains (losses) recorded in accumulated other
comprehensive income (loss).
The significant weighted average assumptions used for the three and six months ended June 30,
2008 and as of January 3, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
Other Post Retirement |
|
|
Benefits |
|
Employee Benefits |
Discount rate for benefit obligations |
|
|
6.58 |
% |
|
|
6.20 |
% |
Discount rate for net periodic benefit costs |
|
|
5.94 |
% |
|
|
5.74 |
% |
Expected return on plan assets for net periodic benefit costs |
|
|
7.50 |
% |
|
|
0.00 |
% |
Rate of compensation increase for benefit obligations |
|
|
4.50 |
% |
|
|
0.00 |
% |
Rate of compensation increase for net periodic benefit costs |
|
|
4.50 |
% |
|
|
0.00 |
% |
The Company uses a measurement date of December 31 for the plans. For measurement purposes, a
9.50% annual rate of increase in the per capita cost of covered health care benefits was assumed
for 2008. The rate was assumed to decrease by .75% per year for an ultimate rate of 5% for 2014 and
remain at that level thereafter. An increase or decrease by one percentage point in the assumed
healthcare cost trend rates would not have a material effect on the benefit obligation and service
and interest cost components of benefit costs for the Other Plans as of January 3, 2008. The
Company considered the historical returns and the future expectation for returns for each asset
class, as well as the target asset allocation of the Pension Plan portfolio, to develop the
expected long-term rate of return on plan assets.
The Companys Pension Plan and Other Plans asset allocations, as of January 3, 2008 by asset
category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
Other Post Retirement |
|
|
Benefits |
|
Employee Benefits |
Cash |
|
|
3 |
% |
|
|
100 |
% |
U.S equities |
|
|
60 |
% |
|
|
0 |
% |
Foreign equities |
|
|
20 |
% |
|
|
0 |
% |
Fixed income |
|
|
17 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
23
Investment Policy
The investment objective of the Penreco Pension Plan Trust (the Trust) is to generate a
long-term rate of return which will fund the related pension liabilities and minimize the Companys
contributions to the Trust. Trust assets are to be invested with an emphasis on providing a high
level of current income through fixed income investments and longer-term capital appreciation
through equity investments. Trust assets are targeted to achieve an investment return of 7.75% or
more compounded annually over any 5-year period. Due to the long-term nature of pension
liabilities, the Trust will assume moderate risk only to the extent necessary to achieve its return
objective.
The Trust pursues its investment objectives by investing in a customized profile of asset
allocation which corresponds to the investment return target. Full discretion in portfolio
investment decisions is given to Wells Fargo & Company or its affiliates (the Manager), subject
to the investment policy guidelines. The Manager is required to utilize fiduciary care in all
investment decisions and is expected to minimize all costs and expenses involved with the managing
of these assets.
With consideration given to the long-term goals of the Trust, the following ranges reflect the
long-term strategy for achieving the stated objectives:
|
|
|
|
|
|
|
|
|
|
|
Range of |
|
|
Asset Class |
|
Asset Allocations |
|
Target Allocation |
Cash |
|
|
0 5 |
% |
|
Minimal |
Fixed income |
|
|
20 50 |
% |
|
|
35 |
% |
Equities |
|
|
50 80 |
% |
|
|
65 |
% |
Trust assets will be invested in accordance with the prudent expert standard as mandated by
ERISA. In the event market environments create asset exposures outside of the policy guidelines,
reallocations will be made in an orderly manner.
Fixed Income Guidelines
U.S. Treasury, agency securities, and corporate bond issues rated investment grade or higher
are considered appropriate for this portfolio. Written approval will be obtained to hold securities
downgraded below investment grade by either Moodys or Standard & Poors. Money market and
fixed-income funds that are consistent with the stated investment objective of the Trust are also
considered acceptable.
Excluding U.S. Treasury and agency obligations, money market or fixed-income mutual funds, no
single issuer shall exceed more than 10% of the total portfolio market value. The average maturity
range shall be consistent with the objective of providing a high level of current income and
long-term growth within the acceptable risk level established for the Trust.
Equity Guidelines
Any equity security that is on the Managers working list is considered appropriate for this
portfolio. Equity mutual funds that are consistent with the stated investment objective of the
Trust are also considered acceptable. No individual equity position, with the exception of equity
mutual funds, should exceed 10% of the total market value of the Trusts assets.
Performance of investment results will be reviewed, at least semi-annually, by the Calumet
Retirement Savings Committee (CRSC) and annually at a joint meeting between the CRSC and the
Manager. Written communication regarding investment performance occurs quarterly. Any major changes
in the Managers investment strategy will be communicated to the Chairman of the CRSC on an ongoing
basis and as frequently as necessary. The Manager shall be informed of special situations affecting
Trust investments including substantial withdrawal or funding pattern changes and changes in
investment policy guidelines and objectives.
24
The following benefit payments, which reflect expected future service, as appropriate, are
expected to be paid in the years indicated as of January 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
Other Post Retirement |
|
|
Benefits |
|
Employee Benefits |
2008 |
|
$ |
527 |
|
|
$ |
114 |
|
2009 |
|
|
602 |
|
|
|
106 |
|
2010 |
|
|
711 |
|
|
|
77 |
|
2011 |
|
|
820 |
|
|
|
90 |
|
2012 |
|
|
955 |
|
|
|
98 |
|
2013 to 2017 |
|
|
7,661 |
|
|
|
347 |
|
|
|
|
Total |
|
$ |
11,276 |
|
|
$ |
832 |
|
|
|
|
13. Partners Capital
Calumets distribution policy is defined in the Partnership Agreement. During the six months
ended June 30, 2008 and 2007, the Company made distributions of $36,539 and $37,346, respectively,
to its partners.
14. Segments and Related Information
a. Segment Reporting
Under the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, the Company has two reportable segments: Specialty Products and Fuel Products. The
Specialty Products segment, which includes Penreco from the date of acquisition, produces a variety
of lubricating oils, solvents and waxes. These products are sold to customers who purchase these
products primarily as raw material components for basic automotive, industrial and consumer goods.
The Fuel Products segment produces a variety of fuel and fuel-related products including gasoline,
diesel and jet fuel. Because of the similar economic characteristics, certain operations have been
aggregated for segment reporting purposes.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies except that the Company evaluates segment performance based on
income from operations. The Company accounts for intersegment sales and transfers at cost plus a
specified mark-up. Reportable segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
Fuel |
|
|
Combined |
|
|
|
|
|
|
Consolidated |
|
Three Months Ended June 30, 2008 |
|
Products |
|
|
Products |
|
|
Segments |
|
|
Eliminations |
|
|
Total |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers |
|
$ |
403,984 |
|
|
$ |
267,236 |
|
|
$ |
671,220 |
|
|
$ |
|
|
|
$ |
671,220 |
|
Intersegment sales |
|
|
356,020 |
|
|
|
8,730 |
|
|
|
364,750 |
|
|
|
(364,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
760,004 |
|
|
$ |
275,966 |
|
|
$ |
1,035,970 |
|
|
$ |
(364,750 |
) |
|
$ |
671,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
15,250 |
|
|
|
|
|
|
|
15,250 |
|
|
|
|
|
|
|
15,250 |
|
Income (loss) from operations |
|
|
(7,485 |
) |
|
|
36,431 |
|
|
|
28,946 |
|
|
|
|
|
|
|
28,946 |
|
Reconciling items to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,536 |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
Debt extinguishment costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(373 |
) |
Gain on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,982 |
|
Gain on sale of mineral rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,770 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
62,273 |
|
|
$ |
|
|
|
$ |
62,273 |
|
|
$ |
|
|
|
$ |
62,273 |
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
Fuel |
|
|
Combined |
|
|
|
|
|
|
Consolidated |
|
Three Months Ended June 30, 2007 |
|
Products |
|
|
Products |
|
|
Segments |
|
|
Eliminations |
|
|
Total |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers |
|
$ |
227,215 |
|
|
$ |
194,511 |
|
|
$ |
421,726 |
|
|
$ |
|
|
|
$ |
421,726 |
|
Intersegment sales |
|
|
155,085 |
|
|
|
8,266 |
|
|
|
163,351 |
|
|
|
(163,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
382,300 |
|
|
$ |
202,777 |
|
|
$ |
585,077 |
|
|
$ |
(163,351 |
) |
|
$ |
421,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
4,775 |
|
|
|
|
|
|
|
4,775 |
|
|
|
|
|
|
|
4,775 |
|
Income from operations |
|
|
21,019 |
|
|
|
17,923 |
|
|
|
38,942 |
|
|
|
|
|
|
|
38,942 |
|
Reconciling items to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,113 |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
569 |
|
Loss on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(767 |
) |
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
64,912 |
|
|
$ |
|
|
|
$ |
64,912 |
|
|
$ |
|
|
|
$ |
64,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
Fuel |
|
|
Combined |
|
|
|
|
|
|
Consolidated |
|
Six Months Ended June 30, 2008 |
|
Products |
|
|
Products |
|
|
Segments |
|
|
Eliminations |
|
|
Total |
|
Sales: External customers |
|
$ |
782,463 |
|
|
$ |
483,480 |
|
|
$ |
1,265,943 |
|
|
$ |
|
|
|
$ |
1,265,943 |
|
Intersegment sales |
|
|
613,122 |
|
|
|
19,780 |
|
|
|
632,902 |
|
|
|
(632,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
1,395,585 |
|
|
$ |
503,260 |
|
|
$ |
1,898,845 |
|
|
$ |
(632,902 |
) |
|
$ |
1,265,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
26,930 |
|
|
|
|
|
|
|
26,930 |
|
|
|
|
|
|
|
26,930 |
|
Income from operations |
|
|
(16,544 |
) |
|
|
46,934 |
|
|
|
30,390 |
|
|
|
|
|
|
|
30,390 |
|
Reconciling items to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,702 |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323 |
|
Debt extinguishment costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(898 |
) |
Gain on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,674 |
|
Gain on sale of mineral rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,770 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
152,547 |
|
|
$ |
|
|
|
$ |
152,547 |
|
|
$ |
|
|
|
$ |
152,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
Fuel |
|
|
Combined |
|
|
|
|
|
|
Consolidated |
|
Six Months Ended June 30, 2007 |
|
Products |
|
|
Products |
|
|
Segments |
|
|
Eliminations |
|
|
Total |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers |
|
$ |
428,968 |
|
|
$ |
343,871 |
|
|
$ |
772,839 |
|
|
$ |
|
|
|
$ |
772,839 |
|
Intersegment sales |
|
|
279,976 |
|
|
|
16,071 |
|
|
|
296,047 |
|
|
|
(296,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
708,944 |
|
|
$ |
359,942 |
|
|
$ |
1,068,886 |
|
|
$ |
(296,047 |
) |
|
$ |
772,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
9,316 |
|
|
|
|
|
|
|
9,316 |
|
|
|
|
|
|
|
9,316 |
|
Income from operations |
|
|
43,592 |
|
|
|
30,325 |
|
|
|
73,917 |
|
|
|
|
|
|
|
73,917 |
|
Reconciling items to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,128 |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,559 |
|
Loss on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,280 |
) |
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136 |
) |
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
106,646 |
|
|
$ |
|
|
|
$ |
106,646 |
|
|
$ |
|
|
|
$ |
106,646 |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Segment assets: |
|
|
|
|
|
|
|
|
Specialty Products |
|
$ |
2,065,466 |
|
|
$ |
1,462,996 |
|
Fuel Products |
|
|
1,228,186 |
|
|
|
1,019,149 |
|
|
|
|
|
|
|
|
Combined segments |
|
|
3,293,652 |
|
|
|
2,482,145 |
|
Eliminations |
|
|
(2,180,322 |
) |
|
|
(1,803,288 |
) |
|
|
|
|
|
|
|
Total assets |
|
$ |
1,113,330 |
|
|
$ |
678,857 |
|
|
|
|
|
|
|
|
26
b. Geographic Information
International sales accounted for less than 10% of consolidated sales for each of the three
and six months ended June 30, 2008 and 2007.
c. Product Information
The Company offers products primarily in four general categories consisting of fuels,
lubricating oils, waxes , solvents and asphalt and by-products. Fuel products consist of gasoline,
diesel and jet fuel. The following table sets forth major product category sales (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
Specialty products: |
|
|
|
|
|
|
|
|
Lubricating oils |
|
$ |
206,672 |
|
|
$ |
124,610 |
|
Solvents |
|
|
112,187 |
|
|
|
52,344 |
|
Waxes |
|
|
37,189 |
|
|
|
15,278 |
|
Fuels |
|
|
7,386 |
|
|
|
14,508 |
|
Asphalt and other by-products |
|
|
40,550 |
|
|
|
20,475 |
|
|
|
|
|
|
|
|
Total |
|
$ |
403,984 |
|
|
$ |
227,215 |
|
|
|
|
|
|
|
|
Fuel products: |
|
|
|
|
|
|
|
|
Gasoline |
|
$ |
85,709 |
|
|
$ |
76,306 |
|
Diesel |
|
|
124,120 |
|
|
|
50,040 |
|
Jet fuel |
|
|
51,709 |
|
|
|
53,388 |
|
By-products |
|
|
5,698 |
|
|
|
14,777 |
|
|
|
|
|
|
|
|
Total |
|
$ |
267,236 |
|
|
$ |
194,511 |
|
|
|
|
|
|
|
|
Consolidated sales |
|
$ |
671,220 |
|
|
$ |
421,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
Specialty products: |
|
|
|
|
|
|
|
|
Lubricating oils |
|
$ |
400,594 |
|
|
$ |
241,340 |
|
Solvents |
|
|
225,008 |
|
|
|
101,375 |
|
Waxes |
|
|
71,344 |
|
|
|
25,634 |
|
Fuels |
|
|
19,506 |
|
|
|
26,027 |
|
Asphalt and other by-products |
|
|
66,011 |
|
|
|
34,592 |
|
|
|
|
|
|
|
|
Total |
|
$ |
782,463 |
|
|
$ |
428,968 |
|
|
|
|
|
|
|
|
Fuel products: |
|
|
|
|
|
|
|
|
Gasoline |
|
$ |
176,938 |
|
|
$ |
130,298 |
|
Diesel |
|
|
206,393 |
|
|
|
100,172 |
|
Jet fuel |
|
|
91,618 |
|
|
|
92,672 |
|
By-products |
|
|
8,531 |
|
|
|
20,729 |
|
|
|
|
|
|
|
|
Total |
|
$ |
483,480 |
|
|
$ |
343,871 |
|
|
|
|
|
|
|
|
Consolidated sales |
|
$ |
1,265,943 |
|
|
$ |
772,839 |
|
|
|
|
|
|
|
|
d. Major Customers
During the three and six months ended June 30, 2008, the Company had one customer, Murphy Oil
U.S.A., that represented approximately 13% and 12%, respectively, of consolidated sales due to
rising gasoline and diesel prices and increased fuel sales to this customer. No other customer
represented 10% or greater of consolidated sales in each of the three months and six months ended
June 30, 2008 and 2007.
15. Related Party Transactions
During the three and six months ended June 30, 2008, the Company had sales of $142 and $537,
respectively, to a new related party owned by one of its limited partners. The Company had no sales
to this related party in 2007. The related party was a customer of our Dickinson facility, which
the Company acquired on January 3, 2008.
27
In May 2008, the Company began purchasing all of its crude oil
requirements for its Princeton refinery on a just in time basis utilizing a market-based pricing mechanism from Legacy
Resources Co., L.P. (Legacy). Because Legacy is owned in part by one of the Companys limited
partners, an affiliate of our general partner, and our chief executive officer and president, F.
William Grube, the terms of the agreement were reviewed by the conflicts committee of the board of
directors of the Companys general partner, which consists entirely of independent directors. The
conflicts committee approved the agreement after determining that the terms of the agreement are
fair and reasonable to the Company. Based on historical usage, the estimated volume of crude oil to
be sold by Legacy and purchased by the Company is approximately 7,000 barrels per day. During the
three and six months ended June 30, 2008, the Company had crude
oil purchases of $25,894 and $26,337,
respectively, from Legacy.
16. Subsequent Events
On July 15, 2008, the Company declared a quarterly cash distribution of $0.45 per unit on all
outstanding units, or $14,800, for the quarter ended June 30, 2008. The distribution will be paid
on August 14, 2008 to unitholders of record as of the close of business on August 4, 2008. This
quarterly distribution of $0.45 per unit equates to $1.80 per unit, or $59,202, on an annualized
basis.
28
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The historical unaudited condensed consolidated financial statements included in this Quarterly
Report on Form 10-Q reflect all of the assets, liabilities and results of operations of Calumet
Specialty Products Partners, L.P. (Calumet). The following discussion analyzes the financial
condition and results of operations of Calumet for the three and six months ended June 30, 2008 and
2007. Unitholders should read the following discussion and analysis of the financial condition and
results of operations for Calumet in conjunction with the historical unaudited condensed
consolidated financial statements and notes of Calumet included elsewhere in this Quarterly Report
on Form 10-Q.
Overview
We are a leading independent producer of high-quality, specialty hydrocarbon products in North
America. We own plants located in Princeton, Louisiana, Cotton Valley, Louisiana, Shreveport,
Louisiana, Karns City, Pennsylvania, and Dickinson, Texas, and a terminal located in Burnham,
Illinois. Our business is organized into two segments: specialty products and fuel products. In our
specialty products segment, we process crude oil and other feedstocks into a wide variety of
customized lubricating oils, white mineral oils, solvents, petrolatums and waxes. Our specialty
products are sold to domestic and international customers who purchase them primarily as raw
material components for basic industrial, consumer and automotive goods. In our fuel products
segment, we process crude oil into a variety of fuel and fuel-related products, including gasoline,
diesel and jet fuel. In connection with our production of specialty products and fuel products, we
also produce asphalt and a limited number of other by-products. The asphalt and other by-products
produced in connection with the production of specialty products at the Princeton, Cotton Valley
and Shreveport refineries are included in our specialty products segment. The by-products produced
in connection with the production of fuel products at the Shreveport refinery are included in our
fuel products segment. The fuels produced in connection with the production of specialty products
at the Princeton and Cotton Valley refineries are included in our specialty products segment. For
the three and six months ended June 30, 2008, approximately 35.3% and 45.8%, respectively, of our
gross profit was generated from our specialty products segment and approximately 64.7% and 54.2%,
respectively, of our gross profit was generated from our fuel products segment.
Our fuel products segment began operations in 2004, when we substantially completed the
reconfiguration of the Shreveport refinery to add motor fuels production, including gasoline,
diesel and jet fuel, to its existing specialty products slate, as well as to increase overall
feedstock throughput. The project was fully completed in February 2005. The reconfiguration was
undertaken to capitalize on strong fuels refining margins, or crack spreads, relative to historical
levels, to utilize idled assets, and to enhance the profitability of the Shreveport refinerys
specialty products segment by increasing overall refinery throughput. Further, in the second
quarter of 2008 we completed an expansion project at our Shreveport refinery to increase throughput
capacity and feedstock flexibility. Please read Liquidity and Capital Resources Capital
Expenditures.
On January 3, 2008, we closed the acquisition of Penreco, a Texas general partnership, for a
purchase price of approximately $269.1 million. Penreco was owned by ConocoPhillips Company and
M.E. Zukerman Specialty Oil Corporation. Penreco manufactures and markets highly refined products
and specialty solvents including white mineral oils, petrolatums, natural petroleum sulfonates,
cable-filling compounds, refrigeration oils, food-grade compressor lubricants and gelled products.
The acquisition includes facilities in Karns City, Pennsylvania and Dickinson, Texas, as well as
several long-term supply agreements with ConocoPhillips Company. We funded the transaction using a
percentage of the proceeds from a public equity offering and a percentage of the proceeds from a
new senior secured first lien term loan facility. For further discussion please read Liquidity and
Capital Resources Debt and Credit Facilities. The Company believes that this acquisition will
provide several key strategic benefits, including market synergies within our solvents and process
oil product lines and additional operational and logistics flexibility. The acquisition will also
broaden the Companys customer base and give the Company access to new markets.
Our sales and net income are principally affected by the price of crude oil, demand for
specialty and fuel products, prevailing crack spreads for fuel products, the price of natural gas
used as fuel in our operations and our results from derivative instrument activities.
Historically high crude oil prices have posed significant challenges for us during the last
three quarters. We have implemented multiple rounds of specialty product price increases to
customers during this volatile period.
In addition to our completion of the Shreveport refinery expansion project in May 2008 and the
continued integration of this years Penreco acquisition, we are working diligently on other
strategic initiatives, including increased hedging of specialty products input prices and working
capital reductions. For further discussion of our strategic initiatives and our progress on such
initiatives during the second quarter of 2008, please read Liquidity and Capital Resources Debt
and Credit Facilities. While we are taking steps to mitigate the adverse impact of this
environment on our operating results, we can provide no assurances as
to the timing or magnitude of any improvement in our operating results and, to the extent we
experience continued rapid escalation of crude oil prices, our operating results could be adversely
affected.
29
As announced on July 15, 2008, we declared a quarterly cash distribution of $0.45 per unit on
all outstanding units for the three months ended June 30, 2008. Our general partner determined that
maintaining the distribution at $0.45 per unit consistent with the prior quarter was prudent given
our current financial condition.
Our primary raw materials are crude oil and other specialty feedstocks and our primary outputs
are specialty petroleum and fuel products. The prices of crude oil, specialty products and fuel
products are subject to fluctuations in response to changes in supply, demand, market uncertainties
and a variety of additional factors beyond our control. We monitor these risks and enter into
financial derivatives designed to mitigate the impact of commodity price fluctuations on our
business. The primary purpose of our commodity risk management activities is to economically hedge
our cash flow exposure to commodity price risk so that we can meet our cash distribution, debt
service and capital expenditure requirements despite fluctuations in crude oil and fuel products
prices. We enter into derivative contracts for future periods in quantities which do not exceed our
projected purchases of crude oil and natural gas and sales of fuel products. Please read Item 3
Quantitative and Qualitative Disclosures about Market Risk Commodity Price Risk. As of June
30, 2008, we have hedged approximately 23.0 million barrels of fuel products through December 2011
at an average refining margin of $11.61 per barrel and average refining margins range from a low of
$11.20 in 2010 to a high of $12.33 for the remainder of 2008. Please refer to Item 3 Quantitative
and Qualitative Disclosures About Market Risk Commodity Price Risk Existing Commodity
Derivative Instruments for a detailed listing of our derivative instruments.
Our management uses several financial and operational measurements to analyze our performance.
These measurements include the following:
|
|
|
sales volumes; |
|
|
|
|
production yields; and |
|
|
|
|
specialty products and fuel products gross profit. |
Sales volumes. We view the volumes of specialty products and fuel products sold as an
important measure of our ability to effectively utilize our refining assets. Our ability to meet
the demands of our customers is driven by the volumes of crude oil and feedstocks that we run at
our facilites. Higher volumes improve profitability both through the spreading of fixed costs over
greater volumes and the additional gross profit achieved on the incremental volumes.
Production yields. We seek the optimal product mix for each barrel of crude oil we refine,
which we refer to as production yield, in order to maximize our gross profit and minimize lower
margin by-products.
Specialty products and fuel products gross profit. Specialty products and fuel products gross
profit are important measures of our ability to maximize the profitability of our specialty
products and fuel products segments. We define specialty products and fuel products gross profit as
sales less the cost of crude oil and other feedstocks and other production-related expenses, the
most significant portion of which include labor, plant fuel, utilities, contract services,
maintenance, depreciation and processing materials. We use specialty products and fuel products
gross profit as indicators of our ability to manage our business during periods of crude oil and
natural gas price fluctuations, as the prices of our specialty products and fuel products generally
do not change immediately with changes in the price of crude oil and natural gas. The increase in
selling prices typically lags behind the rising costs of crude oil feedstocks for specialty
products. Other than plant fuel, production-related expenses generally remain stable across broad
ranges of throughput volumes, but can fluctuate depending on maintenance activities performed
during a specific period.
In addition to the foregoing measures, we also monitor our selling, general and administrative
expenditures, substantially all of which are incurred through our general partner, Calumet GP, LLC.
30
Three and Six Months Ended June 30, 2008 and 2007 Results of Operations
The following table sets forth information about our combined refinery operations. Refining
production volume differs from sales volume due to changes in inventory.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Total sales volume (bpd)(1) |
|
|
60,374 |
|
|
|
49,736 |
|
|
|
59,890 |
|
|
|
46,586 |
|
Total feedstock runs (bpd)(2) |
|
|
60,702 |
|
|
|
49,488 |
|
|
|
58,350 |
|
|
|
47,465 |
|
Facility production (bpd)(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lubricating oils |
|
|
12,943 |
|
|
|
11,495 |
|
|
|
13,032 |
|
|
|
10,795 |
|
Solvents |
|
|
8,813 |
|
|
|
4,994 |
|
|
|
8,847 |
|
|
|
5,095 |
|
Waxes |
|
|
1,983 |
|
|
|
1,337 |
|
|
|
2,019 |
|
|
|
1,121 |
|
Fuels |
|
|
843 |
|
|
|
2,022 |
|
|
|
1,165 |
|
|
|
2,080 |
|
Asphalt and other by-products |
|
|
7,171 |
|
|
|
6,723 |
|
|
|
6,965 |
|
|
|
5,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
31,753 |
|
|
|
26,571 |
|
|
|
32,028 |
|
|
|
24,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline |
|
|
8,304 |
|
|
|
6,660 |
|
|
|
8,758 |
|
|
|
7,245 |
|
Diesel |
|
|
12,826 |
|
|
|
5,433 |
|
|
|
10,597 |
|
|
|
5,281 |
|
Jet fuel |
|
|
5,752 |
|
|
|
7,962 |
|
|
|
5,825 |
|
|
|
7,563 |
|
By-products |
|
|
559 |
|
|
|
2,255 |
|
|
|
381 |
|
|
|
1,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
27,441 |
|
|
|
22,310 |
|
|
|
25,561 |
|
|
|
21,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total facility production |
|
|
59,194 |
|
|
|
48,881 |
|
|
|
57,589 |
|
|
|
46,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total sales volume includes sales from the production of our facilities and sales of
inventories. |
|
(2) |
|
Total feedstock runs represent the barrels per day of crude oil and other feedstocks
processed at our facilities The increase in feedstock runs for the three and six months ended
June 30, 2008 was primarily due to feedstock runs at our Karns City and Dickinson facilities,
which we acquired on January 3, 2008, as well as increased sour crude oil runs at our
Shreveport refinery in the second quarter of 2008 due to the startup of the Shreveport
refinery expansion. |
|
(3) |
|
Total facility production represents the barrels per day of specialty products and fuel
products yielded from processing crude oil and other feedstocks at our facility. The
difference between total facility production and total feedstock runs is primarily a result of
the time lag between the input of feedstock and production of end products and volume loss. |
The following table reflects our consolidated results of operations and includes the non-GAAP
financial measures EBITDA and Adjusted EBITDA. For a reconciliation of EBITDA and Adjusted EBITDA
to net income and net cash provided by operating activities, our most directly comparable financial
performance and liquidity measures calculated in accordance with GAAP, please read Non-GAAP
Financial Measures.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
Sales |
|
$ |
671.2 |
|
|
$ |
421.7 |
|
|
$ |
1,265.9 |
|
|
$ |
772.8 |
|
Cost of sales |
|
|
610.3 |
|
|
|
361.3 |
|
|
|
1,170.2 |
|
|
|
657.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
60.9 |
|
|
|
60.4 |
|
|
|
95.7 |
|
|
|
115.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
9.4 |
|
|
|
6.4 |
|
|
|
17.7 |
|
|
|
11.8 |
|
Transportation |
|
|
21.2 |
|
|
|
14.0 |
|
|
|
45.0 |
|
|
|
27.6 |
|
Taxes other than income taxes |
|
|
1.0 |
|
|
|
0.9 |
|
|
|
2.1 |
|
|
|
1.8 |
|
Other |
|
|
0.4 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
28.9 |
|
|
|
38.9 |
|
|
|
30.4 |
|
|
|
73.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(8.5 |
) |
|
|
(1.1 |
) |
|
|
(13.7 |
) |
|
|
(2.2 |
) |
Interest income |
|
|
0.1 |
|
|
|
0.6 |
|
|
|
0.3 |
|
|
|
1.6 |
|
Debt extinguishment costs |
|
|
(0.4 |
) |
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
Realized gain (loss) on derivative instruments |
|
|
2.5 |
|
|
|
(4.0 |
) |
|
|
(0.4 |
) |
|
|
(5.8 |
) |
Unrealized gain (loss) on derivative instruments |
|
|
13.5 |
|
|
|
3.3 |
|
|
|
17.0 |
|
|
|
(1.5 |
) |
Gain on sale of mineral rights |
|
|
5.8 |
|
|
|
|
|
|
|
5.8 |
|
|
|
|
|
Other |
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
13.1 |
|
|
|
(1.2 |
) |
|
|
8.2 |
|
|
|
(8.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes |
|
|
42.0 |
|
|
|
37.7 |
|
|
|
38.6 |
|
|
|
65.9 |
|
Income taxes |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41.8 |
|
|
$ |
37.4 |
|
|
$ |
38.4 |
|
|
$ |
65.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
65.5 |
|
|
$ |
42.5 |
|
|
$ |
77.8 |
|
|
$ |
75.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
48.0 |
|
|
$ |
43.5 |
|
|
$ |
62.9 |
|
|
$ |
75.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures
We include in this Quarterly Report on Form 10-Q the non-GAAP financial measures EBITDA and
Adjusted EBITDA, and provide reconciliations of EBITDA and Adjusted EBITDA to net income and net
cash provided by operating activities, our most directly comparable financial performance and
liquidity measures calculated and presented in accordance with GAAP.
EBITDA and Adjusted EBITDA are used as supplemental financial measures by our management and
by external users of our financial statements such as investors, commercial banks, research
analysts and others, to assess:
|
|
|
the financial performance of our assets without regard to financing methods, capital
structure or historical cost basis; |
|
|
|
|
the ability of our assets to generate cash sufficient to pay interest costs, support our
indebtedness, and meet minimum quarterly distributions; |
|
|
|
|
our operating performance and return on capital as compared to those of other companies
in our industry, without regard to financing or capital structure; and |
|
|
|
|
the viability of acquisitions and capital expenditure projects and the overall rates of
return on alternative investment opportunities. |
We define EBITDA as net income plus interest expense (including debt issuance, discount and
extinguishment costs), taxes and depreciation and amortization. We define Adjusted EBITDA to be
Consolidated EBITDA as defined in our credit facilities. Consistent with that definition, Adjusted
EBITDA means, for any period: (1) net income plus (2)(a) interest expense; (b) taxes; (c)
depreciation and amortization; (d) unrealized losses from mark to market accounting for hedging
activities; (e) unrealized items decreasing net income (including the non-cash impact of
restructuring, decommissioning and asset impairments in the periods presented); (f) other
non-recurring expenses reducing net income which do not represent a cash item for such period; and
(g) all non-recurring restructuring charges associated with the Penreco acquisition minus (3)(a)
tax credits; (b) unrealized items increasing net income (including the non-cash impact of
restructuring, decommissioning and asset impairments in the periods presented); (c) unrealized
gains from mark to market accounting for hedging activities; and (d) other non-recurring expenses
and unrealized items that reduced net income for a prior period, but represent a cash item in the current period.
32
We are required to report
Adjusted EBITDA to our lenders under our credit facilities and it is used to determine our
compliance with the consolidated leverage test thereunder. On January 3, 2008, we entered into a
new senior secured term loan credit facility and amended our existing senior secured revolving
credit facility. Our new agreements require us to maintain a consolidated leverage ratio of
consolidated debt to Adjusted EBITDA, after giving effect to any proposed distributions, of no
greater than 4.0 to 1 in order to make distributions to our unitholders, with a step down to a
ratio of 3.75 to 1 starting with the quarter ended June 30, 2009. Please refer to Liquidity and
Capital Resources Debt and Credit Facilities within this item for additional details regarding
debt covenants.
EBITDA and Adjusted EBITDA should not be considered alternatives to net income, operating
income, net cash provided by (used by) operating activities or any other measure of financial
performance presented in accordance with GAAP. Our EBITDA and Adjusted EBITDA may not be comparable
to similarly titled measures of another company because all companies may not calculate EBITDA and
Adjusted EBITDA in the same manner. The following table presents a reconciliation of both net
income to EBITDA and Adjusted EBITDA and Adjusted EBITDA and EBITDA to net cash provided by
operating activities, our most directly comparable GAAP financial performance and liquidity
measures, for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Reconciliation of Net Income to EBITDA and Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41.8 |
|
|
$ |
37.4 |
|
|
$ |
38.4 |
|
|
$ |
65.6 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and debt extinguishment costs |
|
|
8.9 |
|
|
|
1.1 |
|
|
|
14.6 |
|
|
|
2.2 |
|
Depreciation and amortization |
|
|
14.6 |
|
|
|
3.7 |
|
|
|
24.6 |
|
|
|
7.2 |
|
Income tax expense |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
65.5 |
|
|
$ |
42.5 |
|
|
$ |
77.8 |
|
|
$ |
75.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss from mark to market accounting for hedging activities |
|
$ |
(18.7 |
) |
|
$ |
(2.2 |
) |
|
$ |
(18.2 |
) |
|
$ |
1.5 |
|
Prepaid non-recurring expenses and accrued non-recurring expenses, net of
cash outlays |
|
|
1.2 |
|
|
|
3.2 |
|
|
|
3.3 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
48.0 |
|
|
$ |
43.5 |
|
|
$ |
62.9 |
|
|
$ |
75.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
Reconciliation of Adjusted EBITDA and EBITDA to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
62.9 |
|
|
$ |
75.9 |
|
Add: |
|
|
|
|
|
|
|
|
Unrealized gain (loss) from mark to market accounting for hedging activities |
|
$ |
18.2 |
|
|
$ |
(1.5 |
) |
Prepaid non-recurring expenses and accrued non-recurring expenses, net of cash outlays |
|
|
(3.3 |
) |
|
|
0.9 |
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
77.8 |
|
|
$ |
75.3 |
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
Interest expense and debt extinguishment costs, net |
|
|
(12.9 |
) |
|
|
(2.1 |
) |
Unrealized (gain) loss from mark to market accounting for hedging activities |
|
|
(17.0 |
) |
|
|
1.5 |
|
Income tax expense |
|
|
(0.2 |
) |
|
|
(0.3 |
) |
Provision for doubtful accounts |
|
|
0.6 |
|
|
|
|
|
Debt extinguishment costs |
|
|
0.9 |
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(55.9 |
) |
|
|
(29.7 |
) |
Inventories |
|
|
60.8 |
|
|
|
8.5 |
|
Other current assets |
|
|
4.4 |
|
|
|
0.8 |
|
Derivative activities |
|
|
1.0 |
|
|
|
0.1 |
|
Accounts payable |
|
|
56.9 |
|
|
|
31.2 |
|
Other current liabilities |
|
|
0.4 |
|
|
|
(1.0 |
) |
Other, including changes in noncurrent assets and liabilities |
|
|
(5.1 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
111.7 |
|
|
$ |
82.1 |
|
|
|
|
|
|
|
|
33
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Sales. Sales increased $249.5 million, or 59.2%, to $671.2 million in the three months ended
June 30, 2008 from $421.7 million in the three months ended June 30, 2007. Sales for each of our
principal product categories in these periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(Dollars in millions) |
|
Sales by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Specialty products: |
|
|
|
|
|
|
|
|
|
|
|
|
Lubricating oils |
|
$ |
206.7 |
|
|
$ |
124.6 |
|
|
|
65.9 |
% |
Solvents |
|
|
112.2 |
|
|
|
52.3 |
|
|
|
114.3 |
% |
Waxes |
|
|
37.2 |
|
|
|
15.3 |
|
|
|
143.4 |
% |
Fuels (1) |
|
|
7.4 |
|
|
|
14.5 |
|
|
|
(49.1 |
)% |
Asphalt and by-products (2) |
|
|
40.5 |
|
|
|
20.5 |
|
|
|
98.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total specialty products |
|
$ |
404.0 |
|
|
$ |
227.2 |
|
|
|
77.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total specialty products volume (in barrels) |
|
|
2,740,000 |
|
|
|
2,247,000 |
|
|
|
21.9 |
% |
Fuel products: |
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline |
|
$ |
85.7 |
|
|
$ |
76.3 |
|
|
|
12.3 |
% |
Diesel |
|
|
124.1 |
|
|
|
50.0 |
|
|
|
148.0 |
% |
Jet fuel |
|
|
51.7 |
|
|
|
53.4 |
|
|
|
(3.1 |
)% |
By-products (3) |
|
|
5.7 |
|
|
|
14.8 |
|
|
|
(61.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total fuel products |
|
$ |
267.2 |
|
|
$ |
194.5 |
|
|
|
37.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total fuel products sales volumes (in barrels) |
|
|
2,754,000 |
|
|
|
2,279,000 |
|
|
|
20.8 |
% |
Total sales |
|
$ |
671.2 |
|
|
$ |
421.7 |
|
|
|
59.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total sales volumes (in barrels) |
|
|
5,494,000 |
|
|
|
4,526,000 |
|
|
|
21.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents fuels produced in connection with the production of specialty products at the
Princeton and Cotton Valley refineries. |
|
(2) |
|
Represents asphalt and other by-products produced in connection with the production of
specialty products at the Princeton, Cotton Valley, Shreveport, Karns City, and Dickinson
facilities. |
|
(3) |
|
Represents by-products produced in connection with the production of fuels at the Shreveport
refinery. |
This $249.5 million increase in sales resulted from a $176.8 million increase in sales in the
specialty products segment and a $72.7 million increase in sales in the fuel products segment.
Specialty products segment sales for the three months ended June 30, 2008 increased $176.8
million, or 77.8%, primarily due to a 21.9% increase in sales volume, from approximately 2.2
million barrels in the second quarter of 2007 to 2.7 million barrels in the second quarter of 2008,
primarily due to an additional 0.6 million barrels of sales volume of lubricating oils, solvents
and waxes from our Karns City and Dickinson facilities acquired on January 3, 2008 in the Penreco
acquisition. Sales volume for our other refineries decreased by approximately 4.2%, primarily due
to a decrease in fuels sold in our specialty products segment due to lower production at our
Princeton refinery. Specialty segment sales were also positively affected by a 37.0% increase in
the average selling price per barrel of specialty products from our other refineries as compared to
the prior period, primarily driven by price increases for lubricating oils and solvents. Average
selling prices per barrel for specialty products increased at rates below the overall 88.2%
increase in our cost of crude oil per barrel over the prior period as we were unable to increase
selling prices at a rate comparable to the increase in the cost of crude oil.
Fuel products segment sales for the three months ended June 30, 2008 increased $72.7 million,
or 37.4%, primarily due to a 62.5% increase in the average selling price per barrel for fuel
products as compared to a 86.9% increase in the average cost of crude oil primarily driven by
increases in diesel and jet fuel sales prices due to market conditions. During the quarter, we
experienced a decline in fuel products refining margins as market prices for our fuel products did
not keep pace with the rising cost of crude oil. Fuel products sales were also positively affected
by a 20.8% increase in fuel products sales volume, from approximately 2.3 million barrels in the
second quarter of 2007 to approximately 2.8 million barrels in the second quarter of 2008,
primarily driven by gasoline and diesel sales volume. The increase in gasoline and diesel sales
volume was primarily due to the startup of the Shreveport refinery expansion project in the second
quarter of 2008. These increases in sales due to pricing and volume were partially offset by
increased derivative losses of $123.8 million on our fuel products hedges in the second quarter of 2008
as compared to the same period in the prior year.
34
Gross
Profit. Gross profit increased $0.4 million, or 0.7%, to
$60.9 million for the three
months ended June 30, 2008 from $60.5 million for the three months ended June 30, 2007. Gross
profit for our specialty and fuel products segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
2008 |
|
2007 |
|
% Change |
|
|
(Dollars in millions) |
Gross profit by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Specialty products |
|
$ |
21.5 |
|
|
$ |
40.6 |
|
|
|
(47.0 |
)% |
Percentage of sales |
|
|
5.3 |
% |
|
|
17.9 |
% |
|
|
|
|
Fuel products |
|
$ |
39.4 |
|
|
$ |
19.9 |
|
|
|
97.9 |
% |
Percentage of sales |
|
|
14.7 |
% |
|
|
10.2 |
% |
|
|
|
|
Total gross profit |
|
$ |
60.9 |
|
|
$ |
60.5 |
|
|
|
0.7 |
% |
Percentage of sales |
|
|
9.1 |
% |
|
|
14.3 |
% |
|
|
|
|
This $0.4 million increase in total gross profit includes a decrease in gross profit of $19.1
million in the specialty products segment and a $19.5 million increase in gross profit in the fuel
products segment.
The decrease in the specialty products segment gross profit was primarily due to the rising
cost of crude oil as we were unable to increase selling prices at a rate comparable to increases in
crude oil costs. Excluding sales resulting from the Penreco acquisition, the average cost of crude
oil increased by approximately 88.2% from the second quarter of 2007 to the second quarter of 2008
while the average selling price per barrel of our specialty products increased by only 37.0%,
primarily driven by price increases in lubricating oils and solvents. Specialty products segment
gross profit was also positively affected by increased derivative gains of $10.8 million in the
second quarter of 2008 as compared to the same period in the prior year. In addition, we recognized
lower cost of sales of $49.8 million in the second quarter of 2008 from the same period in the prior
year in our specialty products segment from the liquidation of lower
cost inventory layers as
a result of the Companys working capital reduction initiative. Specialty products gross profit was also negatively affected by
increased operating costs, primarily driven by plant fuel.
The increase in fuel products segment gross profit was primarily due to a 20.8% increase in
fuel products sales volume, from approximately 2.3 million barrels in the second quarter of 2007 to
approximately 2.8 million barrels in the second quarter of 2008, primarily driven by gasoline and
diesel sales volume. The increase in diesel sales volume was primarily due to the startup of the
Shreveport refinery expansion project in the second quarter of 2008. The increase due to sales
volume was partially offset by the rising cost of crude oil outpacing increases in the selling
price per barrel of our fuel products. The average cost of crude oil increased by approximately
86.9% from the second quarter of 2007 to the second quarter of 2008 while the average selling price
per barrel of our fuel products increased by only 62.5%, primarily driven by gasoline and diesel
selling prices due to market conditions. Fuel products segment gross profit was also positively
affected by decreased derivative losses of $8.1 million in the second quarter of 2008 as compared
to the same period in the prior year. In addition, during the second quarter of 2008 we recognized
lower cost of sales of $9.6 million compared to the same period in the prior year in our fuel products
segment from the liquidation of lower cost inventory layers.
Selling, general and administrative. Selling, general and administrative expenses increased
$3.0 million, or 46.4%, to $9.4 million in the three months ended June 30, 2008 from $6.4 million
in the three months ended June 30, 2007. This increase is primarily due additional selling, general
and administrative expenses associated with the Penreco acquisition, which closed on January 3,
2008, with no similar expenses in the comparable period in the prior year.
Transportation. Transportation expenses increased $7.1 million, or 50.7%, to $21.2 million in
the three months ended June 30, 2008 from $14.0 million in the three months ended June 30, 2007.
This increase is primarily related to additional transportation expenses associated with increased
sales from the Penreco acquisition, which closed on January 3, 2008, with no similar expenses in
the comparable period in the prior year.
Interest expense. Interest expense increased $7.4 million to $8.5 million in the three months
ended June 30, 2008 from $1.1 million in the three months ended June 30, 2007. This increase was
primarily due to an increase in indebtedness as a result of our new senior secured term loan
facility, which closed on January 3, 2008 which includes a $385.0 million term loan partially used
to finance the acquisition of Penreco. This increase was partially offset by an increase in
capitalized interest as a result of increased capital expenditures on the Shreveport refinery
expansion project.
35
Interest income. Interest income decreased $0.5 million to $0.1 million in the three months
ended June 30, 2008 from $0.6 million in the three months ended June 30, 2007. This decrease was
primarily due to a larger average cash and cash equivalents balance during the second quarter of
2007 as compared to the same period in 2008 due to the utilization of cash for capital expenditures
on the Shreveport refinery expansion project.
Debt extinguishment costs. Debt extinguishment costs increased $0.4 million in the three
months ended June 30, 2008 as compared to $0 million in the three months ended June 30, 2007. This
increase was primarily due to the repayment of a portion of our new senior secured term loan
facility using the proceeds of the sale of mineral rights on our real property at our Shreveport
and Princeton refineries.
Realized gain (loss) on derivative instruments. Realized loss on derivative instruments
decreased $6.6 million to a realized gain of $2.5 million in the three months ended June 30, 2008
from a loss of $4.1 million for the three months ended June 30, 2007. This increased gain primarily
was the result of the favorable settlement in the second quarter of 2008 of certain derivative
instruments not designated as cash flow hedges as compared to 2007, including certain crude collars
related to our increased derivative activity in our specialty products segment.
Unrealized gain (loss) on derivative instruments. Unrealized gain on derivative instruments
increased $10.2 million to a $13.5 million gain in the three months ended June 30, 2008 from a $3.3
million loss for the three months ended June 30, 2007. This increase is primarily due to the
favorable mark-to-market change for certain crude oil collars in our specialty products segment not
designated as cash flow hedges, including crude collars, diesel swaps, and interest rate swaps, in
the second quarter of 2008 as compared to 2007.
Gain on sale of mineral rights. Gain on sale of mineral rights was $5.8 million for the
quarter ended June 30, 2008 as compared to $0 million for the quarter ended June 30, 2007. This
increase was due to a one-time gain of $5.8 million resulting from the lease of mineral rights on
the real property at our Shreveport and Princeton refineries to an unaffiliated third party which
has been accounted for as a sale. We have retained a royalty interest in
any future production associated with these mineral rights.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Sales. Sales increased $493.1 million, or 63.8%, to $1,265.9 million in the six months ended
June 30, 2008 from $772.8 million in the six months ended June 30, 2007. Sales for each of our
principal product categories in these periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(Dollars in millions) |
|
Sales by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Specialty products: |
|
|
|
|
|
|
|
|
|
|
|
|
Lubricating oils |
|
$ |
400.6 |
|
|
$ |
241.3 |
|
|
|
66.0 |
% |
Solvents |
|
|
225.0 |
|
|
|
101.4 |
|
|
|
122.0 |
% |
Waxes |
|
|
71.3 |
|
|
|
25.6 |
|
|
|
178.3 |
% |
Fuels(1) |
|
|
19.5 |
|
|
|
26.0 |
|
|
|
(25.1 |
)% |
Asphalt and by-products(2) |
|
|
66.0 |
|
|
|
34.6 |
|
|
|
90.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total specialty products |
|
$ |
782.4 |
|
|
$ |
428.9 |
|
|
|
82.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total specialty products volume (in barrels) |
|
|
5,660,000 |
|
|
|
4,319,000 |
|
|
|
31.0 |
% |
Fuel products: |
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline |
|
$ |
176.9 |
|
|
$ |
130.3 |
|
|
|
35.8 |
% |
Diesel |
|
|
206.4 |
|
|
|
100.2 |
|
|
|
106.0 |
% |
Jet fuel |
|
|
91.6 |
|
|
|
92.7 |
|
|
|
(1.1) |
% |
By-products(3) |
|
|
8.6 |
|
|
|
20.7 |
|
|
|
(58.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total fuel products |
|
$ |
483.5 |
|
|
$ |
343.9 |
|
|
|
40.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total fuel products sales volumes (in barrels) |
|
|
5,240,000 |
|
|
|
4,113,000 |
|
|
|
27.4 |
% |
Total sales |
|
$ |
1,265.9 |
|
|
$ |
772.8 |
|
|
|
63.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total sales volumes (in barrels) |
|
|
10,900,000 |
|
|
|
8,432,000 |
|
|
|
29.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents fuels produced in connection with the production of specialty products at the
Princeton and Cotton Valley refineries. |
36
|
|
|
(2) |
|
Represents asphalt and other by-products produced in connection with the production of
specialty products at the Princeton, Cotton Valley and Shreveport refineries. |
|
(3) |
|
Represents by-products produced in connection with the production of fuels at the Shreveport
refinery. |
This $493.1 million increase in sales resulted from a $353.5 million increase in sales by our
specialty products segment and a $139.6 million increase in our fuel products segment.
Specialty products segment sales for the six months ended June 30, 2008 increased $353.5
million, or 82.4%, primarily due to a 31.0% increase in volumes sold, from approximately 4.3
million barrels in the six months ended June 30, 2007 to 5.7 million barrels in the six months
ended June 30, 2008 primarily due to an additional 1.3 million barrels of sales volume of
lubricating oils, solvents and waxes from our Karns City and Dickinson facilities acquired on
January 3, 2008 in the Penreco acquisition. Sales volume for our other refineries increased by
0.9%, primarily due to a decrease in fuels sold in our specialty products segment due to lower
production at our Princeton refinery. Specialty products segment sales were also positively
affected by a 29.4% increase in the average selling price per barrel as compared to a 77.6%
increase in the overall cost of crude per barrel. This increase in the average selling price per
barrel was primarily due to sales price increases for lubricating oils and solvents due to market
conditions
Fuel products segment sales for the six months ended June 30, 2008 increased $139.6 million,
or 40.6%, primarily due to a 59.0% increase in the average selling price per barrel as compared to
a 77.4% increase in the overall cost of crude oil. The increase sales price per barrel was
primarily a result of increased commodity prices for diesel and jet fuel. Fuel products segment
sales were also positively affected by a 27.4% increase in sales volumes, from approximately 4.1
million barrels in the six months ended June 30, 2007 to 5.2 million barrels in the six months
ended June 30, 2008, primarily due to increases in diesel and gasoline sales volume as a result of
the startup of the Shreveport refinery expansion project in the second quarter of 2008. The
increase due to increased sales volume and sales prices was offset by a $204.5 million increase in
derivative losses on our fuel products cash flow hedges recorded in sales.
Gross
Profit. Gross profit decreased $19.8 million, or 17.1%, to
$95.7 million for the six
months ended June 30, 2008 from $115.5 million for the six months ended June 30, 2007. Gross profit
for our specialty and fuel products segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
% Change |
|
|
(Dollars in millions) |
Gross profit by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Specialty products |
|
$ |
43.8 |
|
|
$ |
81.4 |
|
|
|
(46.1 |
)% |
Percentage of sales |
|
|
5.6 |
% |
|
|
19.0 |
% |
|
|
|
|
Fuel products |
|
$ |
51.9 |
|
|
$ |
34.1 |
|
|
|
52.1 |
% |
Percentage of sales |
|
|
10.7 |
% |
|
|
9.9 |
% |
|
|
|
|
Total gross profit |
|
$ |
95.7 |
|
|
$ |
115.5 |
|
|
|
(17.1 |
)% |
Percentage of sales |
|
|
7.6 |
% |
|
|
14.9 |
% |
|
|
|
|
This $19.8 million decrease in total gross profit includes a decrease in gross profit of $37.6
million in our specialty product segment and a $17.8 million increase in gross profit in our fuels
product segment.
The decrease in the specialty products segment gross profit was primarily due to the rising
cost of crude oil as we were unable to increase selling prices at a rate comparable to increases in
crude oil costs. Excluding sales resulting from the Penreco acquisition, the average cost of crude
oil increased by approximately 77.6% from the six months ended June 30, 2007 to the six months
ended June 30, 2008 while the average selling price per barrel of our specialty products increased
by only 29.4%, primarily driven by price increases in lubricating oils and solvents. These
decreases in gross profit were partially offset by the incremental sales volume generated by our
Karns City and Dickinson facilities, which were marginally profitable for the six months ended June
30, 2008. Specialty products segment gross profit was also positively affected by increased
derivative gains of $19.0 million in the six months ended June 30, 2008 as compared to the same
period in the prior year. In addition, we recognized lower cost of
sales of $55.5 million in the six
months ended June 30, 2008 from the same period in the prior year in our specialty products segment
from the liquidation of lower cost inventory layers as a result of
the Companys working capital reduction initiative. Specialty
products gross profit was also negatively affected by increased operating costs, primarily driven
by plant fuel.
The increase in fuel products segment gross profit was primarily due to a 27.4% increase in
fuel products sales volume, from approximately 4.1 million barrels in the six months ended June 30,
2007 to approximately 5.2 million barrels in the six months
ended June 30, 2008, primarily driven by gasoline and diesel sales volume. The increase in gasoline
and diesel sales volumes was primarily due to the startup of the Shreveport refinery expansion
project in the second quarter of 2008. The increase due to sales volume was partially offset by the
rising cost of crude oil outpacing increases in the selling price per barrel of our fuel products.
The average cost of crude oil increased by approximately 77.4% from the six months ended June 30,
2007 to the same period in 2008 while the average selling price per barrel of our fuel products
increased by only 59.0%, primarily driven by gasoline and diesel selling prices due to market
conditions. Fuel products segment gross profit was also positively affected by decreased derivative
losses of $4.0 million in the six months ended June 30, 2008 as compared to the same period in the
prior year. In addition, during the second quarter of 2008 we
recognized lower cost of sales of $12.7 million in the second quarter of 2008 from the same period in the prior year in our fuel products
segment from the liquidation of lower cost inventory layers.
37
Selling, general and administrative. Selling, general and administrative expenses increased
$5.8 million, or 49.3%, to $17.7 million in the six months ended June 30, 2008 from $11.8 million
in the six months ended June 30, 2007. This increase is primarily due additional selling, general
and administrative expenses associated with the Penreco acquisition, which closed on January 3,
2008, with no similar expenses in the comparable period in the prior year.
Transportation. Transportation expenses increased $17.4 million, or 63.0%, to $45.0 million in
the six months ended June 30, 2008 from $27.6 million in the six months ended June 30, 2007. This
increase is primarily related to additional transportation expenses associated with increased sales
from the Penreco acquisition, which closed on January 3, 2008, with no similar expenses in the
comparable period in the prior year.
Interest expense. Interest expense increased $11.6 million, or 543.9%, to $13.7 million in the
six months ended June 30, 2007 from $2.1 million in the six months ended June 30, 2007. This
increase was primarily due an increase in indebtedness as a result of a new senior secured term
loan facility, which closed on January 3, 2008 which includes a $385.0 million term loan partially
used to finance the acquisition of Penreco. This increase was partially offset by an increase in
capitalized interest as a result of increased capital expenditures on the Shreveport refinery
expansion project.
Interest income. Interest income decreased $1.2 million to $0.3 million in the six months
ended June 30, 2008 from $1.6 million in the six months ended June 30, 2007. This decrease was
primarily due to a larger average cash and cash equivalents balance during the six months ended
June 30, 2007 as compared to the same period in 2008 due to the utilization of cash for capital
expenditures on the Shreveport refinery expansion project.
Debt extinguishment costs. Debt extinguishment costs increased $0.9 million in the six months
ended June 30, 2008 as compared to $0 million in the six months ended June 30, 2007. This increase
was primarily due to the repayment of our prior senior secured term loan facility with a portion of
the proceeds of our new senior secured term loan facility, which closed on January 3, 2008. The
increase was also the result of the repayment of a portion of our new senior secured term loan
facility using the proceeds of the sale of mineral rights on our real property at our Shreveport
and Princeton refineries.
Realized loss on derivative instruments. Realized loss on derivative instruments decreased
$5.4 million to $0.4 million in the six months ended June 30, 2008 from $5.8 million in the six
months ended June 30, 2007. This decreased loss was primarily the result of the more favorable
settlement of certain derivative instruments not designated as cash flow hedges in the six months
ended June 30, 2008 as compared to the same period in 2007, including certain crude collars related
to our increased derivative activity in our specialty products segment
Unrealized gain (loss) on derivative instruments. Unrealized gain on derivative instruments
increased $18.5 million, to a gain of $17.0 million in the six months ended June 30, 2008 from a
loss of $1.5 million for the six months ended June 30, 2007. This decrease was primarily due to the
favorable market change of certain crude oil collars in our specialty products segment not
designated as cash flow hedges being recorded to unrealized loss on derivative instruments in the
prior year with no similar derivative instruments designated as cash flow hedges during the same
period in 2007.
Gain on sale of mineral rights. Gain on sale of mineral rights was $5.8 million for the six
months ended June 30, 2008 as compared to expense of $0 million for the six months ended June 30,
2007. This increase was due to a one-time gain of $5.8 million resulting from the lease of mineral
rights on the real property at our Shreveport and Princeton refineries to an unaffiliated third
party which has been accounted for as a sale. We has retained a
royalty interest in any future
production associated with these mineral rights.
38
Liquidity and Capital Resources
Our principal sources of cash have included cash flow from operations, proceeds from public
equity offerings, issuance of private debt, and bank borrowings. Principal uses of cash have
included capital expenditures, growth in working capital, distributions and debt service. We expect
that our principal uses of cash in the future will be for working capital, distributions to our
limited partners and general partner, debt service, expenditures related to internal growth
projects and acquisitions from third parties or affiliates. Future internal growth projects or
acquisitions may require expenditures in excess of our then-current cash flow from operations and
cause us to issue debt or equity securities in public or private offerings or incur additional
borrowings under bank credit facilities to meet those costs. We frequently enter into
confidentiality agreements, letters of intent and other preliminary agreements with third parties
in the ordinary course of business as we evaluate potential growth opportunities for our business.
Our compliance with these agreements could result in additional costs, such as engineering fees,
legal fees, consulting fees, and/or termination fees that we do not anticipate to be material to
our liquidity or operations.
Cash Flows
We believe that we have sufficient cash flow from operations and borrowing capacity to meet
our financial commitments, debt service obligations, contingencies and anticipated capital
expenditures. However, we are subject to business and operational risks that could materially
adversely affect our cash flows. A material decrease in our cash flow from operations would likely
produce a corollary material adverse effect on our borrowing capacity.
The following table summarizes our primary sources and uses of cash in the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(In millions) |
Net cash provided by operating activities |
|
$ |
111.7 |
|
|
$ |
82.1 |
|
Net cash used in investing activities |
|
$ |
(415.6 |
) |
|
|
(103.1 |
) |
Net cash used in financing activities |
|
$ |
304.3 |
|
|
$ |
(37.6 |
) |
Operating Activities. Operating activities provided $111.7 million in cash during the six
months ended June 30, 2008 compared to $82.1 million during the six months ended June 30, 2007. The
increase in cash provided by operating activities during the six months ended June 30, 2008 was
primarily due to increased working capital reductions of $61.4 million, offset by reduced net
income, after adjusting for non-cash items, of $31.8 million. The reduction in working capital of
$61.4 million was due primarily to the decrease in inventory and increase in accounts payable
outpacing the increase in our accounts receivable as we focused on reducing inventory levels due to
the rising cost of crude oil. Net income, after adjustments for non-cash items, decreased by $31.8
million for the six months ended June 30, 2008 from $76.5 million in the same period in 2007
primarily due to the rising cost of crude oil outpacing increases in selling prices of products.
Investing Activities. Cash used in investing activities increased to $415.6 million during the
six months ended June 30, 2008 compared to $103.1 million during the six months ended June 30,
2007. This increase was primarily due to the acquisition of the asset and liabilities of Penreco on
January 3, 2008 for $269.1 million, net of cash received, with no similar acquisition activities in
the prior year. Cash used in investing activities also increased due to $49.4 million of additional
capital expenditures in the six months ended June 30, 2008 over the same period in 2007. The
majority of the capital expenditures were incurred at our Shreveport refinery, with $115.6 million
related to the Shreveport refinery expansion project incurred in the six months ended June 30, 2008
as compared to $89.5 million incurred during the comparable period in 2007. The remaining increase
of $23.3 million primarily relates to various other capital projects at our Shreveport refinery to
replace certain, improve efficiency, de-bottleneck certain specialty products operating units and
for new product development. The increases in cash used in investing activities for both the
purchase of Penreco and capital expenditures were partially offset by $6.1 million of cash proceeds
received as a result of selling the mineral rights on our real property at our Shreveport and
Princeton refineries to a third party during the second quarter of 2008.
Financing Activities. Financing activities provided cash of $304.3 million for the six months
ended June 30, 2008 compared to using cash of $37.6 million for the six months ended June 30, 2007.
This change is primarily due to borrowings under the new senior secured term loan credit facility,
which closed on January 3, 2008, along with associated debt issuance costs. A portion of the new
term loan proceeds of $385.0 million was used to finance the acquisition of Penreco. The increase
was also due to a $18.9 million increase in borrowings on our revolving credit facility, primarily
due to spending on the Shreveport refinery expansion project. This increase was offset by a
decrease in distributions to partners of $0.8 million.
39
Capital Expenditures
Our capital expenditure requirements consist of capital improvement expenditures, replacement
capital expenditures and environmental capital expenditures. Capital improvement expenditures
include expenditures to acquire assets to grow our business and to expand existing facilities, such
as projects that increase operating capacity. Replacement capital expenditures replace worn out or
obsolete equipment or parts. Environmental capital expenditures include asset additions to meet or
exceed environmental and operating regulations.
The following table sets forth our capital improvement expenditures, replacement capital
expenditures and environmental capital expenditures in each of the periods shown.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in millions) |
|
Capital improvement |
|
$ |
148.5 |
|
|
$ |
99.1 |
|
Replacement capital |
|
|
2.7 |
|
|
$ |
5.0 |
|
Environmental capital |
|
|
1.3 |
|
|
$ |
2.5 |
|
|
|
|
|
|
|
|
Total |
|
$ |
152.5 |
|
|
$ |
106.6 |
|
|
|
|
|
|
|
|
We anticipate that future capital improvement requirements will be provided through long-term
borrowings, other debt financings, equity offerings and/or cash provided by operations. Until the
Shreveport expansion project and the Penreco acquisition are demonstrated to increase cash flow
from operations on a per unit basis our ability to raise additional capital through the sale of
common units in certain circumstances is limited to 2,551,144 common units.
During 2008 and 2007, we have invested significantly in expanding and enhancing the operations
of our Shreveport refinery. We have invested approximately $147.7 million and $102.0 million during
the six months ended June 30, 2008 and 2007, respectively. Of these investments during these
periods, $205.1 million relates to our Shreveport expansion project. From December 31, 2005 through
June 30, 2008, the Company has invested approximately $473.2 million in the Shreveport refinery, of
which $370.0 million relates to the Shreveport refinery expansion project.
The Shreveport expansion project was completed and operational in May 2008. The Shreveport
expansion project has increased this refinerys throughput capacity from 42,000 bpd to 60,000 bpd.
For the three months ended June 30, 2008, the Shreveport refinery had total feedstock runs of
41,000 bpd, which represents an increase of approximately 6,000 bpd from the first quarter of 2008.
As part of this project, we have enhanced the Shreveport refinerys ability to process sour crude
oil. As of June 30, 2008, we were processing approximately 13,000 bpd of sour crude oil at the
Shreveport refinery. In certain operating scenarios where overall throughput is reduced, we expect
we will be able to increase sour crude oil throughput rates up to approximately 25,000 bpd. The
total cost of the Shreveport refinery expansion project will be approximately $375.0 million, an
increase of $25.0 million from our previous estimate. This increase is primarily due to increased
construction labor costs to avoid further delays in the projects completion.
Additionally, for the year ended December 31, 2007 and the six months ended June 30, 2008, we
had invested $65.6 million and $32.2 million, respectively, in our Shreveport refinery for other
capital expenditures including projects to improve efficiency, de-bottleneck certain operating
units and for new product development. These expenditures are anticipated to enhance and improve
our product mix and operating cost leverage, but will not significantly increase the feedstock
throughput capacity of the Shreveport refinery. The remaining expenditures related to these
projects are expected to be less than $5.0 million.
Debt and Credit Facilities
On January 3, 2008, we repaid all of our indebtedness under our previous senior secured first
lien term loan credit facility, entered into new senior secured first lien term loan facility and
amended our existing senior secured revolving credit facility. As of June 30, 2008, our credit
facilities consist of:
|
|
|
a $375.0 million senior secured revolving credit facility, subject to borrowing base
restrictions, with a standby letter of credit sublimit of $300.0 million; and |
40
|
|
|
a $435.0 million senior secured first lien term loan credit facility consisting of a
$385.0 million term loan facility and a $50.0 million letter of credit facility to support
crack spread hedging. In connection with the execution of the above senior secured first
lien credit facility, we incurred total debt issuance costs of $23.4 million, including
$17.4 million of issuance discounts. |
Borrowings under the amended revolving credit facility are limited by advance rates of
percentages of eligible accounts receivable and inventory (the borrowing base) as defined by the
revolving credit agreement.
The amended revolving credit facility currently bears interest at prime plus a basis points
margin or LIBOR plus a basis points margin. This margin is currently at 175 basis points; however,
it fluctuates based on measurement of our Consolidated Leverage Ratio discussed below. The amended
revolving credit facility has a first priority lien on our cash, accounts receivable and inventory
and a second priority lien on our fixed assets and matures in January 2013. On June 30, 2008, we
had availability on our amended revolving credit facility of $184.4 million, based upon a $335.3
million borrowing base, $125.0 million in outstanding letters of credit, and outstanding borrowings
of $25.9 million.
The new term loan facility, fully drawn at $385.0 million on January 3, 2008, bears interest
at a rate of LIBOR plus 400 basis points or prime plus 300 basis points. Each lender under this
facility has a first priority lien on our fixed assets and a second priority lien on our cash,
accounts receivable and inventory. Our new term loan facility matures in January 2015. Under the
terms of our new term loan facility, we applied a portion of the net proceeds to the acquisition of
Penreco. We are required to make mandatory repayments of approximately $1.0 million at the end of
each fiscal quarter, beginning with the fiscal quarter ended March 31, 2008 and ending with the
fiscal quarter ending September 30, 2014, with the remaining balance due at maturity on January 3,
2015. In June 2008, we received lease bonuses of $6.1 million associated with the sale of mineral
rights on our real property at our Shreveport and Princeton refineries to a non-affiliated third
party. As a result of these transactions, we recorded a gain of $5.8 million in other income
(expense) in the unaudited condensed consolidated statements of operations. Under the New Term Loan
agreement, cash proceeds resulting from the disposition of our property, plant and equipment must
be used as a mandatory prepayment of the New Term Loan. As a result, we made a prepayment of $6.1
million in June 2008 on the New Term Loan.
Our letter of credit facility to support crack spread hedging bears interest at a rate of 4.0%
and is secured by a first priority lien on our fixed assets. We have issued a letter of credit in
the amount of $50.0 million, the full amount available under this letter of credit facility, to one
counterparty. As long as this first priority lien is in effect and such counterparty remains the
beneficiary of the $50.0 million letter of credit, we will have no obligation to post additional
cash, letters of credit or other collateral with such counterparty to provide additional credit
support for a mutually-agreed maximum volume of executed crack spread hedges. In the event such
counterpartys exposure exceeds $100.0 million, we would be required to post additional credit
support to enter into additional crack spread hedges up to the aforementioned maximum volume. In
addition, we have other crack spread hedges in place with other approved counterparties under the
letter of credit facility whose credit exposure to us is also secured by a first priority lien on
our fixed assets.
The credit facilities permit us to make distributions to our unitholders as long as we are not
in default and would not be in default following the distribution. Under the credit facilities, we
are obligated to comply with certain financial covenants requiring us to maintain a Consolidated
Leverage Ratio of no more than 4.0 to 1 and a Consolidated Interest Coverage Ratio of no less than
2.50 to 1 (as of the end of each fiscal quarter and after giving effect to a proposed distribution
or other restricted payments as defined in the credit agreement) and available liquidity of at
least $35.0 million (after giving effect to a proposed distribution or other restricted payments as
defined in the credit agreements). The Consolidated Leverage Ratio steps down from 4.0 to 1 to 3.75
to 1 and the Consolidated Interest Coverage Ratio steps up from 2.50 to 1 to 2.75 to 1 effective
with the quarter ended June 30, 2009. The Consolidated Leverage Ratio is defined under our credit
agreements to mean the ratio of our Consolidated Debt (as defined in the credit agreements) as of
the last day of any fiscal quarter to our Adjusted EBITDA (as defined below) for the last four
fiscal quarter periods ending on such date. For fiscal year 2008, the credit facilities permit the
inclusion of a prorated portion of Penrecos estimated Adjusted EBITDA from 2007 in measuring
compliance with this covenant. The Consolidated Interest Coverage Ratio is defined as the ratio of
Consolidated EBITDA for the last four fiscal quarters to Consolidated Interest Charges for the same
period. Available Liquidity is a measure used under our revolving credit facility and is the sum of
the cash and borrowing capacity that we have as of a given date. Adjusted EBITDA means Consolidated
EBITDA as defined in our credit facilities to mean, for any period: (1) net income plus (2)(a)
interest expense; (b) taxes; (c) depreciation and amortization; (d) unrealized losses from mark to
market accounting for hedging activities; (e) unrealized items decreasing net income (including the
non-cash impact of restructuring, decommissioning and asset impairments in the periods presented);
(f) other non-recurring expenses reducing net income which do not represent a cash item for such
period; and (g) all non-recurring restructuring charges associated with the Penreco acquisition
minus (3)(a) tax credits; (b) unrealized items increasing net income (including the non-cash impact
of restructuring, decommissioning and asset impairments in the periods presented); (c) unrealized
gains from mark to market accounting for hedging activities; and (d) other non-recurring expenses
and unrealized items that reduced net income for a prior period, but represent a cash item in the
current period.
41
In addition, if at any time that our borrowing capacity under our revolving credit facility
falls below $35.0 million, meaning we have available liquidity of less than $35.0 million, we will
be required to maintain a Fixed Charge Coverage Ratio of at least 1 to 1 (as of the end of each
fiscal quarter). The Fixed Charge Coverage Ratio is defined under our credit agreements to mean the
ratio of (a) Adjusted EBITDA minus Consolidated Capital Expenditures minus Consolidated Cash Taxes,
to (b) Fixed Charges (as each such term is defined in our credit agreements).
We have experienced recent adverse financial conditions primarily associated with historically
high crude oil costs, which have negatively affected specialty products gross profit. Also
contributing to these adverse financial conditions have been the significant cost overruns and
delays in the startup of the Shreveport refinery expansion project. Compliance with the financial
covenants pursuant to our credit agreements is tested quarterly, and as of June 30, 2008, we were
in compliance with all financial covenants. Our ability to maintain compliance with these financial
covenants in the quarter ended June 30, 2008 was substantially assisted by both reductions in our
inventory levels, which resulted in LIFO inventory gains, and a one-time benefit from the lease of
mineral rights on the real property at our Shreveport and Princeton refineries to an unaffiliated
third party which have been accounted for as sale. We are taking steps to ensure that we continue
to meet the requirements of our credit agreements and currently forecast that we will be in
compliance. In addition to continuing to implement multiple specialty product price increases
during this volatile period as conditions warrant, these steps include the following:
Continued Integration of the Penreco Acquisition
Since the acquisition of Penreco on January 3, 2008, we have implemented multiple price
increases for these various specialty product lines to attempt to keep pace with rising feedstock
costs. In addition, we have implemented a pricing policy which we believe is more responsive to
rising feedstock prices to limit the time between feedstock price increases and product price
increases to customers. Calumet is also implementing operational strategies, including using
various existing Calumet refinery products as feedstocks in the acquired Penreco plant operations
and reducing headcount by approximately 50 employees.
Increased Crude Oil Price Hedging for Specialty Products Segment
We remain committed to an active hedging program to manage commodity price risk in both our
specialty products and fuel products segments. Due to the current volatility in the crude oil price
environment and the impact such volatility has had on our short-term cash flows while our product
pricing is adjusted, we are implementing modifications to our hedging strategy to increase the
overall portion of input prices for specialty products we have hedged. Specifically, we are
targeting to hedge crude oil prices for up to 75% of our specialty products production. We continue
to believe that a shorter-term time horizon of hedging crude oil purchases for 3 to 9 months
forward for the specialty products segment is appropriate given our ability to increase specialty
products prices within this timeframe. During the second quarter of 2008, we settled 1,088,000
barrels of crude oil collar derivative instruments, representing an increase of 360,000 barrels
from the first quarter of 2008. As a result of this increased specialty products crude oil hedging
activity, we recorded $11.3 million and $5.1 million, respectively, to cost of goods sold and
realized gain (loss) on derivative instruments in the unaudited condensed consolidated statements
of operations for the three months ended June 30, 2008. Please read Item 3 Quantitative and
Qualitative Disclosures about Market Risk Existing Commodity Derivative Instruments for
derivative instruments outstanding as of June 30, 2008.
Working Capital Reduction
We are continuing to implement strategies to minimize inventory levels across all of our
facilities to reduce working capital needs, especially given the impact of increased crude oil
prices on inventories. As an example, effective May 1, 2008, we have entered into a crude oil
supply agreement with an affiliate of our general partner to purchase crude oil used at our
Princeton refinery on a just-in-time basis, which will significantly reduce crude oil inventory
historically maintained for this facility by approximately 200,000 barrels. During the second
quarter of 2008, we reduced our overall inventory levels by approximately 600,000 barrels, or
approximately 30.0%, from inventory levels as of March 31, 2008.
Operating Cost Reductions
We are also continuing to implement operating cost reductions related to several areas
including maintenance and utility costs.
While assurances cannot be made regarding our future compliance with these covenants, we
anticipate that our product pricing strategies, our completion of the Shreveport refinery expansion
project, continued integration of the Penreco acquisition and other strategic initiatives discussed above will allow us to maintain compliance with such financial
covenants and improve our Adjusted EBITDA and distributable cash flows.
42
Failure to achieve our anticipated results may result in a breach of certain of the financial
covenants contained in our credit agreements. If this occurs, we will enter into discussions with
our lenders to either modify the terms of the existing credit facilities or obtain waivers of
non-compliance with such covenants. There can be no assurances of the timing of the receipt of any
such modification or waiver, the term or costs associated therewith or our ultimate ability to
obtain the relief sought. Our failure to obtain a waiver of non-compliance with certain of the
financial covenants or otherwise amend the credit facilities would constitute an event of default
under our credit facilities and would permit the lenders to pursue remedies. These remedies could
include acceleration of maturity under our credit facilities and limitations of the elimination of
our ability to make distributions to our unitholders. If our lenders accelerate maturity under our
credit facilities, a significant portion of our indebtedness may become due and payable
immediately. We might not have, or be able to obtain, sufficient funds to make these accelerated
payments. If we are unable to make these accelerated payments, our lenders could seek to foreclose
on our assets.
In addition, our credit agreements contain various covenants that limit our ability, among
other things, to: incur indebtedness; grant liens; make certain acquisitions and investments; make
capital expenditures above specified amounts; redeem or prepay other debt or make other restricted
payments such as distributions to unitholders; enter into transactions with affiliates; enter into
a merger, consolidation or sale of assets; and cease our refining margin hedging program (our
lenders have required us to obtain and maintain derivative contracts for fuel products margins in
our fuel products segment for a rolling period of 1 to 12 months for at least 60% and no more than
90% of our anticipated fuels production, and for a rolling 13-24 months forward for at least 50%
and no more than 90% of our anticipated fuels production).
If an event of default exists under our credit agreements, the lenders will be able to
accelerate the maturity of the credit facilities and exercise other rights and remedies. An event
of default is defined as nonpayment of principal interest, fees or other amounts; failure of any
representation or warranty to be true and correct when made or confirmed; failure to perform or
observe covenants in the credit agreement or other loan documents, subject to certain grace
periods; payment defaults in respect of other indebtedness; cross-defaults in other indebtedness if
the effect of such default is to cause the acceleration of such indebtedness under any material
agreement if such default could have a material adverse effect on us; bankruptcy or insolvency
events; monetary judgment defaults; asserted invalidity of the loan documentation; and a change of
control in us. We believe we are in compliance with all debt covenants and have adequate liquidity
to conduct our business as of June 30, 2008.
Contractual Obligations and Commercial Commitments
Certain of our contractual commitments have materially changed since December 31, 2007. Our
long-term debt obligations have materially changed due to our new $385.0 million senior secured
term loan credit facility as compared to total long-term debt of $39.9 million as of December 31,
2007. Our operating lease obligations have materially changed due to our acquisition of Penreco on
January 3, 2008, which had a substantial amount of railcar leases. A summary of these contractual
cash obligations as of June 30, 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
1-3 |
|
|
3-5 |
|
|
More Than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
(In thousands) |
|
Long-term debt obligations |
|
$ |
377,010 |
|
|
$ |
3,850 |
|
|
$ |
7,700 |
|
|
$ |
7,700 |
|
|
$ |
357,760 |
|
Capital lease obligations |
|
|
2,896 |
|
|
|
942 |
|
|
|
1,510 |
|
|
|
444 |
|
|
|
|
|
Operating lease obligations(1) |
|
|
51,081 |
|
|
|
13,049 |
|
|
|
19.869 |
|
|
|
12,714 |
|
|
|
5,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations |
|
$ |
430,987 |
|
|
$ |
17,841 |
|
|
$ |
29,079 |
|
|
$ |
20,858 |
|
|
$ |
363,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have various operating leases for the use of land, storage tanks, pressure stations,
railcars, equipment, precious metals and office facilities that extend through September 2015. |
43
Critical Accounting Policies and Estimates
Fair Value of Financial Instruments
In accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was amended in June 2000 by SFAS No. 138 and
in May 2003 by SFAS No. 149 (collectively referred to as SFAS 133), the Company recognizes all
derivative transactions as either assets or liabilities at fair value on the condensed consolidated
balance sheets. The Company utilized third party valuations and published market data to determine
the fair value of these derivatives and thus does not directly rely on market indices. The Company
performs an independent verification of the third party valuation statements to validate inputs for
reasonableness and completes a comparison of implied crack spread
mark-to-market valuations amongst our
counterparties.
The Companys derivative instruments, consisting of derivative assets and derivative
liabilities of $132.3 million as of June 30, 2008, are valued at Level 1, Level 2, and Level 3 fair
value measurement under SFAS 157, depending upon the degree by which inputs are observable. The
Companys derivative instruments are the only assets and liabilities measured at fair value as of
June 30, 2008. The Company recorded unrealized gains of derivative instruments and realized gains
on derivative instruments of $13.5 million and $2.5 million, respectively, on our derivative
instruments for the three months ended June 30, 2008. The decrease in the fair market value of our
outstanding derivative instruments from a net liability of $57.5 million as of December 31, 2007 to
a net liability of $132.3 million as of June 30, 2008 was primarily due to increases in the forward
market values of fuel products margins, or cracks spreads, relative to our hedged fuel products
margins. The Company believes that the fair values of our derivative instruments may diverge
materially from the amounts currently recorded to fair value at settlement due to the volatility of
commodity prices.
Holding all other variables constant, we expect a $1 increase in these commodity prices would
change our recorded mark-to market valuation by the following amounts based upon the volume hedged
as of June 30, 2008:
|
|
|
|
|
|
|
In millions |
Crude oil swaps |
|
$ |
23.2 |
|
Diesel swaps |
|
$ |
(14.5 |
) |
Gasoline swaps |
|
$ |
(8.5 |
) |
Crude oil collars |
|
$ |
1.9 |
|
Natural gas swaps |
|
$ |
0.9 |
|
The Company enters into crude oil, gasoline, and diesel hedges to hedge an implied crack
spread. Therefore, any increase in crude swap mark-to-markets due to changes in commodity prices
will generally be accompanied by a decrease in gasoline and diesel swap mark-to-markets.
Recent Accounting Pronouncements
In September 2006, the FASB issued statement No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. We have adopted the provisions of SFAS 157 as of January 1, 2008, for financial
instruments. Although the adoption of SFAS 157 did not materially impact our financial condition,
results of operations, or cash flow, we are now required to provide additional disclosures as part
of our financial statements.
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted
prices in active markets; Level 2, defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in
which little or no market data exists, therefore requiring an entity
to develop its own assumptions.
As of June 30, 2008, the Company held certain assets that are required to be measured at fair
value on a recurring basis. These included the Companys derivative instruments related to crude
oil, gasoline, diesel, natural gas and interest rates, and investments associated with the
Companys Non-Contributory Defined Benefit Plan (Pension Plan).
The Companys derivative instruments consist of over-the-counter (OTC) contracts, which are
not traded on a public exchange. These contracts include both swaps as well as different types of
option contracts. See Note 8 for further information on the Companys
44
derivative instruments and hedging activities. The fair values of swap contracts for crude
oil, natural gas and interest rates are determined based on inputs that are readily available in
public markets or can be derived from information available in publicly quoted markets. Therefore,
the Company has categorized these swap contracts as Level 2. The Company determines the value of
our crude oil option contracts utilizing a standard option pricing model based on inputs that can
be derived from information available in publicly quoted markets, or are quoted by counterparties
to these contracts. In situations where the Company obtains inputs via quotes from our
counterparties, it verifies the reasonableness of these quotes via similar quotes from another
counterparty as of each date for which financial statements are prepared. The Company has
consistently applied these valuation techniques in all periods presented and believes it has
obtained the most accurate information available for the types of derivative contracts it holds.
Due to the fact that certain of the inputs utilized to determine the fair value of option contracts
are unobservable (principally volatility), the Company has categorized these option contracts as
Level 3. In addition to these option contracts, the Company determines the value of our diesel and
gasoline contracts using certain unobservable inputs in forward years (principally no observable
forward curve). Thus, these swaps are categorized as Level 3. The Companys investments associated
with our Pension Plan consist of mutual funds that are publicly traded and for which market prices
are readily available, thus these investments are categorized as Level 1.
All settlements from derivative contracts that are deemed effective as defined in SFAS 133,
are included in sales for gasoline and diesel derivatives, cost of sales for crude oil and natural
gas derivatives and interest expense for interest rate derivatives in the period that the
underlying fuel is consumed in operations. Any ineffectiveness associated with these derivative
contracts, as defined in SFAS 133, are recorded in earnings immediately in unrealized gain/(loss)
on derivative instruments. See Note 8 for further information on SFAS 133 and hedging.
In April 2007, the FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB
Interpretation No. 39 (the Position), which amends certain aspects of FASB Interpretation Number
39, Offsetting of Amounts Related to Certain Contracts. The Position permits companies to offset
fair value amounts recognized for the right to reclaim cash collateral or the obligation to return
cash collateral against fair value amounts recognized for derivative instruments executed with the
same counterparty under a master netting arrangement. The Position is effective for fiscal years
beginning after November 15, 2007. We adopted the Position on January 1, 2008 and the adoption did
not have a material effect on our financial position, results of operations, or cash flows.
In December 2007, the FASB issued FASB Statement No. 141(R), Business Combinations (the
Statement). The Statement applies to the financial accounting and reporting of business
combinations. The Statement is effective for business combination transactions for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. We anticipate that the Statement will not have a material effect on our
financial position, results of operations, or cash flows.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161
requires entities that utilize derivative instruments to provide qualitative disclosures about
their objectives and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within derivatives. SFAS 161 also requires
entities to disclose additional information about the amounts and location of derivatives located
within the financial statements, how the provisions of SFAS 133 have been applied, and the impact
that hedges have on an entitys financial position, financial performance, and cash flows. SFAS 161
is effective for fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. We currently provide an abundance of information about our hedging
activities and use of derivatives in our quarterly and annual filings with the SEC, including many
of the disclosures contained within SFAS 161. Thus, we currently do not anticipate the adoption of
SFAS 161 will have a material impact on the disclosures already provided
In March 2008, the FASB issued Emerging Issues Task Force Issue No. 07-4, Application of the
Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships (EITF 07-4). EITF
07-4 requires master limited partnerships to treat incentive distribution rights (IDRs) as
participating securities for the purposes of computing earnings per unit in the period that the
general partner becomes contractually obligated to pay IDRs. EITF 07-4 requires that undistributed
earnings be allocated to the partnership interests based on the allocation of earnings to capital
accounts as specified in the respective partnership agreement. When distributions exceed earnings,
EITF 07-4 requires that net income be reduced by actual distributions and the resulting net loss be
allocated to capital accounts as specified in our partnership agreement. EITF 07-4 is effective for
fiscal years and interim periods beginning after December 15, 2008. The Company is evaluating the
potential impacts of EITF 07-4.
45
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our profitability and cash flows are affected by changes in interest rates, specifically LIBOR
and prime rates. The primary purpose of our interest rate risk management activities is to hedge
our exposure to changes in interest rates.
We are exposed to market risk from fluctuations in interest rates. As of June 30, 2008, we had
approximately $402.9 million of variable rate debt. Holding other variables constant (such as debt
levels) a one hundred basis point change in interest rates on our variable rate debt as of June 30,
2008 would be expected to have an impact on net income and cash flows for 2008 of approximately
$4.0 million.
We have a $375.0 million revolving credit facility as of June 30, 2008, bearing interest at
the prime rate or LIBOR, at our option. We had borrowings of $25.9 outstanding under this facility
as of June 30, 2008, bearing interest at the prime rate or LIBOR, at our option.
Commodity Price Risk
Both our profitability and our cash flows are affected by volatility in prevailing crude oil,
gasoline, diesel, jet fuel, and natural gas prices. The primary purpose of our commodity risk
management activities is to hedge our exposure to price risks associated with the cost of crude oil
and natural gas and sales prices of our fuel products.
Crude Oil Price Volatility
We are exposed to significant fluctuations in the price of crude oil, our principal raw material.
Given the historical volatility of crude oil prices, this exposure can significantly impact product
costs and gross profit. Holding all other variables constant, and excluding the impact of our
current hedges, we expect a $1.00 change in the per barrel price of crude oil would change our
specialty product segment cost of sales by $11.3 million and our fuel product segment cost of
sales by $11.3 million on an annual basis based on our results for the three months ended June 30,
2008.
Crude Oil Hedging Policy
Because we typically do not set prices for our specialty products in advance of our crude oil
purchases, we can generally take into account the cost of crude oil in setting our specialty
products prices. We further manage our exposure to fluctuations in crude oil prices in our
specialty products segment through the use of derivative instruments, which can include both swaps
and options, generally executed in the over-the-counter (OTC) market. Our policy is generally to
enter into crude oil derivative contracts that match our expected future cash out flows for up to
75% of our anticipated crude oil purchases related to our specialty products production. The tenor
of these positions generally will be short term in nature and expire within three to nine months
from execution; however, we may execute derivative contracts for up to two years forward if our
expected future cash flows support lengthening our position. Our fuel products sales are based on
market prices at the time of sale. Accordingly, in conjunction with our fuel products hedging
policy discussed below, we enter into crude oil derivative contracts for up to five years and no
more than 75% of our fuel products sales on average for each fiscal year.
Natural Gas Price Volatility
Since natural gas purchases comprise a significant component of our cost of sales, changes in
the price of natural gas also significantly affect our profitability and our cash flows. Holding
all other cost and revenue variables constant, and excluding the impact of our current hedges, we
expect a $0.50 change per MMBtu (one million British Thermal Units) in the price of natural gas
would change our cost of sales by $3.4 million on an annual basis based on our results for the
three months ended June 30, 2008.
Natural Gas Hedging Policy
We enter into derivative contracts to manage our exposure to natural gas prices. Our policy is
generally to enter into natural gas swap contracts during the summer months for approximately 50%
of our anticipated natural gas requirements for the upcoming fall and winter months with time to
expiration not to exceed three years.
46
Fuel Products Selling Price Volatility
We are exposed to significant fluctuations in the prices of gasoline, diesel, and jet fuel.
Given the historical volatility of gasoline, diesel, and jet fuel prices, this exposure can
significantly impact sales and gross profit. Holding all other variables constant, and excluding
the impact of our current hedges, we expect that a $1.00 change in the per barrel selling price of
gasoline, diesel, and jet fuel would change our fuel products segment sales by $11.0 million on an
annual basis based on our results for the three months ended June 30, 2008.
Fuel Products Hedging Policy
In order to manage our exposure to changes in gasoline, diesel, and jet fuel selling prices,
our policy is generally to enter into derivative contracts to hedge our fuel products sales for a
period no greater than five years forward and for no more than 75% of anticipated fuels sales on
average for each fiscal year, which is consistent with our crude purchase hedging policy for our
fuel products segment discussed above. We believe this policy lessens the volatility of our cash
flows. In addition, in connection with our credit facilities, our lenders require us to obtain and
maintain derivative contracts to hedge our fuels product margins for a rolling period of 1 to 12
months forward for at least 60% and no more than 90% of our anticipated fuels production, and for a
rolling 13 to 24 months forward for at least 50% and no more than 90% of our anticipated fuels
production.
The unrealized gain or loss on derivatives at a given point in time is not necessarily
indicative of the results realized when such contracts mature. The decrease in the fair market
value of our outstanding derivative instruments from a net liability of $57.5 million as of
December 31, 2007 to a net liability of $132.3 million as of June 30, 2008 was primarily due to
increases in the forward market values of fuel products margins, or cracks spreads, relative to our
hedged fuel products margins. Please read Derivatives in
Note 9 to our unaudited condensed
consolidated financial statements for a discussion of the accounting treatment for the various
types of derivative transactions, and a further discussion of our hedging policies.
Existing Commodity Derivative Instruments
The following tables provide information about our derivative instruments related to our fuel
products segment as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
Third Quarter 2008 |
|
|
2,208,000 |
|
|
|
24,000 |
|
|
|
66.54 |
|
Fourth Quarter 2008 |
|
|
2,116,000 |
|
|
|
23,000 |
|
|
|
66.49 |
|
Calendar Year 2009 |
|
|
8,212,500 |
|
|
|
22,500 |
|
|
|
66.26 |
|
Calendar Year 2010 |
|
|
7,482,500 |
|
|
|
20,500 |
|
|
|
67.27 |
|
Calendar Year 2011 |
|
|
3,009,000 |
|
|
|
8,244 |
|
|
|
76.98 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
23,028,000 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
68.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
Third Quarter 2008 |
|
|
1,334,000 |
|
|
|
14,500 |
|
|
$ |
81.42 |
|
Fourth Quarter 2008 |
|
|
1,334,000 |
|
|
|
14,500 |
|
|
|
81.42 |
|
Calendar Year 2009 |
|
|
4,745,000 |
|
|
|
13,000 |
|
|
|
80.51 |
|
Calendar Year 2010 |
|
|
4,745,000 |
|
|
|
13,000 |
|
|
|
80.41 |
|
Calendar Year 2011 |
|
|
2,371,000 |
|
|
|
6,496 |
|
|
|
90.58 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
14,529,000 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
82.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
Third Quarter 2008 |
|
|
874,000 |
|
|
|
9,500 |
|
|
$ |
74.79 |
|
Fourth Quarter 2008 |
|
|
782,000 |
|
|
|
8,500 |
|
|
|
74.62 |
|
Calendar Year 2009 |
|
|
3,467,500 |
|
|
|
9,500 |
|
|
|
73.83 |
|
Calendar Year 2010 |
|
|
2,737,500 |
|
|
|
7,500 |
|
|
|
75.10 |
|
Calendar Year 2011 |
|
|
638,000 |
|
|
|
1,748 |
|
|
|
83.42 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
8,499,000 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
75.13 |
|
47
The following table provides a summary of these derivatives and implied crack spreads for the
crude oil, diesel and gasoline swaps disclosed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Implied Crack |
|
Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
Spread ($/Bbl) |
|
Third Quarter 2008 |
|
|
2,208,000 |
|
|
|
24,000 |
|
|
$ |
12.25 |
|
Fourth Quarter 2008 |
|
|
2,116,000 |
|
|
|
23,000 |
|
|
|
12.42 |
|
Calendar Year 2009 |
|
|
8,212,500 |
|
|
|
22,500 |
|
|
|
11.43 |
|
Calendar Year 2010 |
|
|
7,482,500 |
|
|
|
20,500 |
|
|
|
11.20 |
|
Calendar Year 2011 |
|
|
3,009,000 |
|
|
|
8,244 |
|
|
|
12.08 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
23,028,000 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
11.61 |
|
The following tables provide information about our derivative instruments related to our
specialty products segment as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Bought Put |
|
|
Sold Put |
|
|
Bought Call |
|
|
Sold Call |
|
Crude Oil Put/Call Spread Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
August 2008 |
|
|
62,000 |
|
|
|
2,000 |
|
|
|
74.30 |
|
|
|
84.30 |
|
|
|
94.30 |
|
|
|
104.30 |
|
September 2008 |
|
|
60,000 |
|
|
|
2,000 |
|
|
|
74.30 |
|
|
|
84.30 |
|
|
|
94.30 |
|
|
|
104.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
122,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
74.30 |
|
|
$ |
84.30 |
|
|
$ |
94.30 |
|
|
$ |
104.30 |
|
At June 30, 2008, the Company had the following three-way crude collar derivatives related to
crude oil purchases in our specialty products segment, none of which are designated as hedges. As a
result of these barrels not being designated as hedges, the Company recognized $3.4 million of
gains in unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated
statements of operations for the three months ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Sold Put |
|
|
Bought Call |
|
|
Sold Call |
|
Crude Oil Put/Call Spread Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
|
($/Bbl) |
|
Third Quarter 2008 |
|
|
1,225,000 |
|
|
|
13,315 |
|
|
$ |
120.83 |
|
|
$ |
131.14 |
|
|
$ |
139.06 |
|
Fourth Quarter 2008 |
|
|
276,000 |
|
|
|
3,000 |
|
|
$ |
118.00 |
|
|
$ |
137.33 |
|
|
$ |
145.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
1,501,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
120.31 |
|
|
$ |
132.28 |
|
|
$ |
140.28 |
|
At June 30, 2008, the Company had the following two-way crude collar derivatives related to
crude oil purchases in our specialty products segment, none of which are designated as hedges. As a
result of these barrels not being designated as hedges, the Company recognized $4.3 million of
gains in unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated
statements of operations for the three months ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
|
|
|
|
|
Sold Put |
|
Bought Call |
Crude Oil Put/Call Spread Contracts by Expiration Dates |
|
Barrels |
|
BPD |
|
($/Bbl) |
|
($/Bbl) |
Fourth Quarter 2008
|
|
|
276,000 |
|
|
|
3,000 |
|
|
$ |
98.85 |
|
|
$ |
135.00 |
|
At June 30, 2008, the Company had the following crude oil swap derivatives related to crude
oil purchases in our specialty products segment, all of which are designated as hedges except for
62,000 barrels in 2008. As a result of certain of these barrels not being designated as hedges,
the Company recognized $0.4 million of gains in unrealized gain (loss) on derivative instruments in
the unaudited condensed consolidated statements of operations for the three months ended June 30,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil Swap Contracts by Expiration Dates |
|
Barrels |
|
|
BPD |
|
|
($/Bbl) |
|
Third Quarter 2008 |
|
|
108,000 |
|
|
|
1,174 |
|
|
$ |
119.55 |
|
Fourth Quarter 2008 |
|
|
46,000 |
|
|
|
500 |
|
|
|
100.45 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
154,000 |
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
113.85 |
|
At June 30, 2008, the Company had the following derivatives related to natural gas purchases,
of which 240,000 Mmbtus are designated as hedges. As a result of these barrels not being designated
as hedges, the Company recognized $1.7 million of gains in
unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated
statements of operations for the three months ended June 30, 2008.
48
|
|
|
|
|
|
|
|
|
Natural Gas Swap Contracts by Expiration Dates |
|
MMbtus |
|
|
$/MMbtu |
|
Third Quarter 2008 |
|
|
220,000 |
|
|
$ |
10.38 |
|
Fourth Quarter 2008 |
|
|
330,000 |
|
|
$ |
10.38 |
|
First Quarter 2009 |
|
|
330,000 |
|
|
$ |
10.38 |
|
|
|
|
|
|
|
|
Totals |
|
|
880,000 |
|
|
|
|
|
Average price |
|
|
|
|
|
$ |
10.38 |
|
As of July 31, 2008, we have added the following derivative instruments to the above
transactions for our specialty products segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Average |
|
Average |
|
|
|
|
|
|
|
|
|
|
Sold Put |
|
Bought Call |
|
Sold Call |
Crude Oil Put/Call Spread Contracts by Expiration Dates |
|
Barrels |
|
BPD |
|
($/Bbl) |
|
($/Bbl) |
|
($/Bbl) |
August 2008 |
|
|
186,000 |
|
|
|
6,000 |
|
|
$ |
127.50 |
|
|
$ |
136.50 |
|
|
$ |
145.17 |
|
September 2008 |
|
|
30,000 |
|
|
|
1,000 |
|
|
|
100.00 |
|
|
|
122.00 |
|
|
|
131.00 |
|
October 2008 |
|
|
186,000 |
|
|
|
6,000 |
|
|
|
107.13 |
|
|
|
125.21 |
|
|
|
134.21 |
|
November 2008 |
|
|
150,000 |
|
|
|
5,000 |
|
|
|
107.20 |
|
|
|
125.73 |
|
|
|
134.73 |
|
December 2008 |
|
|
155,000 |
|
|
|
5,000 |
|
|
|
107.20 |
|
|
|
125.73 |
|
|
|
134.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
707,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
112.22 |
|
|
$ |
128.27 |
|
|
$ |
137.18 |
|
The above three-way crude collar derivatives related to crude oil purchases in our specialty
products segment, none of which are designated as hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
|
|
|
|
|
Sold Put |
|
Bought Call |
Crude Oil Put/Call Spread Contracts by Expiration Dates |
|
Barrels |
|
BPD |
|
($/Bbl) |
|
($/Bbl) |
First Quarter 2009 |
|
|
180,000 |
|
|
|
2,000 |
|
|
$ |
112.05 |
|
|
$ |
145.00 |
|
Second Quarter 2009 |
|
|
91,000 |
|
|
|
1,000 |
|
|
|
111.45 |
|
|
|
145.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
271,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price |
|
|
|
|
|
|
|
|
|
$ |
111.85 |
|
|
$ |
145.00 |
|
For the third quarter and fourth quarter combined, we had a total of 76,500 barrels hedged of crude
oil swaps. We settled all of these positions in July 2008 by entering into offsetting trades, which
yielded proceeds of approximately $1.7 million, or $21.65 per barrel.
|
|
|
|
|
|
|
|
|
Natural Gas Swap Contracts by Expiration Dates |
|
MMbtus |
|
$/MMbtu |
Third Quarter 2008 |
|
|
100,000 |
|
|
$ |
11.61 |
|
Fourth Quarter 2008 |
|
|
50,000 |
|
|
$ |
11.61 |
|
|
|
|
|
|
|
|
Totals |
|
|
150,000 |
|
|
|
|
|
Average price |
|
|
|
|
|
$ |
11.61 |
|
The Company had the above derivatives related to natural gas purchases, all of which are designated
as hedges.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our principal executive officer and principal financial officer have evaluated, as required by
Rule 13a-15(b) under the Securities Exchange Act of 1934 (the Exchange Act), our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the principal
executive officer and principal financial officer concluded that the design and operation of our
disclosure controls and procedures are effective in ensuring that information we are required to
disclose in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.
49
(b) Changes in Internal Controls
During the fiscal quarter covered by this report, there were no changes in our internal
control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of
1934) that materially affected, or were reasonably likely to materially affect, our internal
control over financial reporting, except that, during the fiscal quarter covered by this report, we
were still in the process of integrating the Penreco acquisition and were incorporating Penrecos
operations as part of our internal controls. For purposes of this evaluation, the impact of this
acquisition on our internal controls over financial reporting was excluded. See Note 4 to the
unaudited condensed consolidated financial statements included in Item 1 for a discussion of the Penreco
acquisition.
PART II
Item 1. Legal Proceedings
We are not a party to any material litigation. Our operations are subject to a variety of
risks and disputes normally incident to our business. As a result, we may, at any given time, be a
defendant in various legal proceedings and litigation arising in the ordinary course of business.
Please see Note 8 Commitments and Contingencies in Part I Item 1 Financial Statements for a
description of our current regulatory matters related to the environment.
Item 1A. Risk Factors
In addition to the other information included in this Quarterly Report on Form 10-Q and the
risk factors reported in our Annual Report on Form 10-K for the period ended December 31, 2007, you
should consider the following risk factors in evaluating our business and future prospects. If any
of the risks contained in this Quarterly Report or our Annual Report occur, our business, results
of operations, financial condition and ability to make cash distributions to our unitholders could
be materially adversely affected.
If we continue to experience adverse financial conditions, primarily associated with
historically high crude oil costs, we may not be able to maintain compliance with certain financial
covenants contained in our credit agreements.
Compliance with the financial covenants pursuant to our credit agreements is tested quarterly,
and as of June 30, 2008, we were in compliance with all financial covenants. We have experienced
recent adverse financial conditions primarily associated with historically high crude oil costs,
which have negatively affected specialty products gross profit. Also contributing to these adverse
financial conditions have been the significant cost overruns and delays in the startup of the
Shreveport refinery expansion project. We are taking steps such as increased crude oil price
hedging, reductions in working capital and operating cost reductions to ensure that we continue to
meet the requirements of our credit agreements and we currently forecast that we will be in
compliance in future periods; however, the failure of these steps, continued increases in crude oil
costs, difficulties integrating the Penreco acquisition or challenges ramping-up after the
Shreveport refinery expansion project may result in non-compliance with certain covenants due to
insufficient Adjusted EBITDA and/or higher levels of indebtedness.
If this occurs, we will enter into discussions with our lenders to either modify the terms of
the existing credit facilities or obtain waivers of non-compliance with such covenants in the event
we fail to comply with a financial covenant. There can be no assurances of the timing of the
receipt of any such modification or waiver, the term or costs associated therewith or our ultimate
ability to obtain the relief sought. Our failure to obtain a waiver of non-compliance with certain
of the financial covenants or otherwise amend the credit facilities would constitute an event of
default under our credit facilities and would permit the lenders to pursue remedies. These remedies
could include acceleration of maturity under the credit facilities and limitations or the
elimination of our ability to make distributions to our unitholders. If our lenders accelerate
maturity under our credit facilities, a significant portion of our indebtedness may become due and
payable immediately. We might not have, or be able to obtain, sufficient funds to make these
accelerated payments. If we are unable to make these accelerated payments, our lenders could seek
to foreclose on our assets.
50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the purchases of equity securities by Calumet GP, LLC, the
general partner of Calumet, and by certain affiliates of Calumet GP, LLC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units |
|
|
Maximum Number of |
|
|
|
Total Number of |
|
|
|
|
|
|
Purchased as a |
|
|
Common Units that |
|
|
|
Common Units |
|
|
Average Price Paid |
|
|
Part of Publicly |
|
|
May Yet be |
|
|
|
Purchased |
|
|
per Common Unit |
|
|
Announced Plans |
|
|
Purchased Under Plans |
|
On February 22, 2008 (1) |
|
|
3,444 |
|
|
$ |
33.26 |
|
|
|
|
|
|
|
|
|
From May 15, 2008 to May 23, 2008 (2) |
|
|
459,000 |
|
|
$ |
14.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
462,444 |
|
|
$ |
14.71 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
None of the common units were purchased pursuant to publicly announced
plans or programs. The common units were purchased through a single
broker in open market transactions. A total of 1,824 common units were
purchased by Calumet GP, LLC, our general partner, related to the
Calumet GP, LLC Long-Term Incentive Plan (the Plan). The Plan
provides for the delivery of up to 783,960 common units to satisfy
awards of phantom units, restricted units or unit options to the
employees, consultants or directors of Calumet. Such units may be
newly issued by Calumet or purchased in the open market. For more
information on the Plan, which did not require approval by our limited
partners, refer to Item 11 Executive and Director Compensation
Compensation Discussion and Analysis Elements of Executive
Compensation Long-Term, Unit-Based Awards in the Partnerships
Annual Report on Form 10-K for the year ended December 31, 2007. |
|
(2) |
|
These common unit purchases were made by The Heritage Group, the Maggie Fehsenfeld
Trust No. 106, dated December 30, 1974 (for the benefit of Fred
Mehlert Fehsenfeld Jr. and his issue), the Irrevocable Intervivos
Trust for the Benefit of Fred Mehlert Fehsenfeld Jr. and his issue,
dated December 27, 1973, and F. William Grube, all of whom are
affiliates of Calumet GP, LLC. These purchases were made through a
single broker in open market transactions. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
The following documents are filed as exhibits to this Form 10-Q:
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
3.1 |
|
|
Amendment No. 2 to the First Amended and Restated Agreement of Limited
Partnership of Calumet Specialty Products Partners, L.P., dated April
15, 2008 (incorporated by reference to Exhibit 3.1 to the Current Report
on Form 8-K filed with the Commission on April 18, 2008 (File No
000-51734)). |
|
|
|
|
|
|
10.1 |
|
|
Crude Oil Supply Agreement, effective May 1, 2008, between Legacy
Resources Co., L.P. and Calumet Lubricants Co., Limited Partnership
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed with the Commission on May 6, 2008 (File No 000-51734)). |
|
|
|
|
|
|
31.1 |
|
|
Sarbanes-Oxley Section 302 certification of F. William Grube. |
|
|
|
|
|
|
31.2 |
|
|
Sarbanes-Oxley Section 302 certification of R. Patrick Murray, II. |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 certification of F. William Grube and R. Patrick Murray, II. |
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
By: CALUMET GP, LLC,
its general partner
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By: |
/s/ R. Patrick Murray, II
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R. Patrick Murray, II |
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Vice President, Chief Financial Officer and
Secretary of Calumet GP, LLC, general partner of
Calumet Specialty Products Partners, L.P.
(Authorized Person and Principal Accounting
Officer) |
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Date:
August 11, 2008
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Index to Exhibits
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Exhibit |
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Number |
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Description |
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3.1 |
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Amendment No. 2 to the First Amended and Restated Agreement of Limited Partnership of Calumet
Specialty Products Partners, L.P., dated April 15, 2008 (incorporated by reference to Exhibit
3.1 to the Current Report on Form 8-K filed with the Commission on April 18, 2008 (File No
000-51734)). |
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10.1 |
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Crude Oil Supply Agreement, effective May 1, 2008, between Legacy Resources Co., L.P. and
Calumet Lubricants Co., Limited Partnership (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed with the Commission on May 6, 2008 (File No 000-51734)). |
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31.1 |
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Sarbanes-Oxley Section 302 certification of F. William Grube. |
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31.2 |
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Sarbanes-Oxley Section 302 certification of R. Patrick Murray, II. |
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32.1 |
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Section 1350 certification of F. William Grube and R. Patrick Murray, II. |
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