The historical consolidated financial statements included in this Annual Report reflect all of the assets, liabilities and results of operations ofCalumet Specialty Products Partners, L.P. and its consolidated subsidiaries ("Calumet," the "Company," "we," "our," or "us"). The following discussion analyzes the financial condition and results of operations of the Company for the years endedDecember 31, 2019 , 2018 and 2017. In addition, as discussed in Note 4 and Note 5 to the Consolidated Financial Statements, we closed the San Antonio Transaction, Superior Transaction and the Anchor Transaction onNovember 10, 2019 ;November 8, 2017 andNovember 21, 2017 , respectively. The historical results of operations of theSan Antonio Refinery and theSuperior Refinery are contained in our financial position and results throughNovember 10, 2019 andNovember 7, 2017 , respectively. As a result of the Anchor Transaction, we classified its results of operations and the assets and liabilities of Anchor for all periods presented to reflect Anchor as a discontinued operation. Prior to being reported as discontinued operations, Anchor was included as its own reportable segment as oilfield services. Unitholders should read the following discussion and analysis of the financial condition and results of operations of the Company in conjunction with the historical consolidated financial statements and notes of the Company included elsewhere in this Annual Report. Overview We are a leading independent producer of high-quality, specialty hydrocarbon products inNorth America . We are headquartered inIndianapolis, Indiana , and own specialty and fuel products facilities primarily located in northwestLouisiana , northernMontana , westernPennsylvania ,Texas ,New Jersey and easternMissouri . We own and lease additional facilities, primarily related to production and distribution of specialty and fuel products, throughoutthe United States ("U.S."). Our business is organized into three segments: our core specialty products segment, fuel products segment and corporate segment. In our specialty products segment, we process crude oil and other feedstocks into a wide variety of customized lubricating oils, solvents, waxes, synthetic lubricants, and other products. Our specialty products are sold to domestic and international customers who purchase them primarily as raw material components for basic industrial, consumer and automotive goods. We also blend and market specialty products through ourRoyal Purple , Bel-Ray and TruFuel brands. In our fuel products segment, we process crude oil into a variety of fuel and fuel-related products, including gasoline, diesel, jet fuel, asphalt and other products, and from time to time resell purchased crude oil to third-party customers. Our corporate segment, which was added during the third quarter of 2019, primarily consists of general and administrative expenses not allocated to the specialty products or fuel products segments. Please read Note 20 - "Segments and Related Information" under Part II, Item 8 "Financial Statements and Supplementary Data" for further information. 2019 Update Outlook and Trends Commodity markets and corresponding refined product margins were volatile during 2019 and 2018, with the average price per barrel ofNew York Mercantile Exchange West Texas Intermediate ("NYMEX WTI") crude oil decreasing approximately 12% during 2019 versus increasing approximately 28% during 2018. We expect this volatility to continue into 2020. Below are factors that have impacted our results of operations during 2019: • Specialty product margins improved in 2019 as a result of better asset performance from theShreveport andPrinceton refineries and the rationalization of low margin products in the lubricating oils and packaged and synthetic specialty products divisions. We expect our
specialty product margins to remain stable in the near term. We continue
to consider our specialty products segment our core business over the long
term, and we plan to seek appropriate ways to further invest in our specialty products segment. Accordingly, we continue to evaluate opportunities to divest non-core businesses and assets in line with our
strategy of preserving liquidity and streamlining our business to better
focus on the advancement of our core business. However, we may also
consider the disposition of certain core assets or businesses, to the
extent such a transaction would improve our capital structure or otherwise
be accretive to the Company. There can be no assurance as to the timing or
success of any such potential transaction, or any other transaction, or
that we will be able to sell these assets or businesses on satisfactory
terms, if at all. In addition, our acquisition program targets assets that
management believes will be financially accretive, and we intend to focus
on targeted strategic acquisitions of specialty products assets that leverage our existing core competency and that have an identifiable competitive advantage we can exploit as the new owner.
• We continue to focus on improving operations. Our average feedstock runs
were 103,603 barrels per day ("bpd") in 2019, compared to 94,137 bpd in 2018. The increase is primarily attributable to theShreveport crude and
propane deasphalting unit debottlenecking projects completed at the end of
2018, higher utilization rates across
anticipate seeing improvement in our utilization rates in 2020 as we
continue to seek to minimize unplanned downtime at our facilities which
negatively affected our current year earnings. • Refined fuel product margins tightened in 2019 as compared to 2018 predominately driven by the decrease in the Western Canadian Select ("WCS") discount versus NYMEX WTI decreasing to approximately$14 per barrel on average below 57
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NYMEX WTI in comparison to$27 per barrel on average below NYMEX WTI in 2018. Late in the fourth quarter of 2018, the government ofAlberta issued mandated oil production cuts of 325,000 bpd, which caused the WCS discount to decline. The price of domestically produced mid-continent crude is expected to continue to trade at a discount relative to internationally produced crude reflecting increased domestic production combined with transportation constraints inthe United States . Processing heavy sour crude at ourGreat Falls refinery resulted in delivering a lower overall cost of crude oil in 2019 than 2018. Late in the fourth quarter of 2019, the Canadian heavy sour crude oil discounts began to widen to the highest discount of 2019, but overall remained significantly tighter in 2019. • Environmental regulations continue to affect our margins in the form of
RINs. To the extent we are unable to blend biofuels, we must purchase RINs
in the open market to satisfy our annual requirement. The approximate 63%
decrease in the price of RINs in 2019 favorably affected our results of
operations. It is not possible to predict what future volumes or costs may
be, but given the volatile price of RINs, we continue to anticipate that
RINs have the potential to remain a significant expense for our fuel
products segment, assuming current market prices for RINs continue,
inclusive of the favorable impact of any exemptions received from the EPA.
• On
reduce overall operating expenses, including the reduction of outside
services, facility fixed costs and corporate staffing costs (the "Cost
Reduction Plan"). These cost reductions are designed to right-size general
and administrative spending. The Company expects to incur approximately
Cost Reduction Plan, a significant portion of which are expected to result
in cash expenditures.
• The Company has taken the next step in our portfolio transformation and
started the process of reviewing strategic options for our remaining fuels
refinery in
which could occur as early as this year.
Key Matters , Claims and Legal Proceedings OnOctober 31, 2018 , the Company received an indemnity claim notice (the "Claim Notice") fromHusky Superior Refining Holding Corp. ("Husky") under the Membership Interest Purchase Agreement, datedAugust 11, 2017 ("MIPA"), which was entered into in connection with the Superior Transaction. The Claim Notice relates to alleged losses Husky incurred in connection with a fire at theHusky Superior refinery onApril 26, 2018 , over five months after Calumet sold Husky 100% of the membership interests in the entity that owns theHusky Superior refinery . Based on public reports, Calumet understands the fire occurred during a turnaround of theHusky Superior refinery at a time when Husky owned, operated, and supervised the refinery. Calumet was not involved with the turnaround. TheU.S. Chemical Safety and Hazard Investigation Board ("CSB") is currently investigating the fire, but has not contacted Calumet in connection with that investigation or suggested that Calumet is responsible for the fire. Husky's Claim Notice alleges that Husky "has become aware of facts which may give rise to losses" for which it reserved the right to seek indemnification at a later date. The Claim Notice further alleges breaches of certain representations, warranties, and covenants contained in the MIPA. The information currently available about the fire and the CSB investigation does not support Husky's threatened claims, and Husky has not filed a lawsuit against Calumet. If Husky were to assert such claims, they would be subject to certain limits on indemnification liability under the MIPA that may reduce or eliminate any potential indemnification liability. OnMay 4, 2018 , theSEC requested that the Company and certain of its executives voluntarily produce certain communications and documents prepared or maintained fromJanuary 2017 toMay 2018 and generally related to the Company's finance and accounting staff, financial reporting, public disclosures, accounting policies, disclosure controls and procedures and internal controls. Beginning onJuly 11, 2018 , theSEC issued several subpoenas formally requesting the same documents previously subject to the voluntary production requests by theSEC as well as additional, related documents and information. TheSEC has also interviewed and taken testimony from current and former Company employees and other individuals. The Company has, from the outset, cooperated with theSEC's requests. InNovember 2019 , the Company and theSEC settled the matter. The matter was settled without the Company admitting or denying any charges arising from theSEC's investigation and the Company paid a penalty of less than$0.3 million . Financial Results We reported a net loss from continuing operations of$43.6 million in 2019, versus a net loss from continuing operations of$51.0 million in 2018. We reported Adjusted EBITDA from continuing operations (as defined in Item 6 "Selected Financial Data - Non-GAAP Financial Measures") of$304.6 million in 2019, versus$263.9 million in 2018. Our net loss from continuing operations and Adjusted EBITDA for the full-year 2019 includes the impact of a favorable LCM inventory adjustment of$35.8 million and$6.0 million of gains related to liquidation of last-in, first-out ("LIFO") inventory layers while our net loss from continuing operations and Adjusted EBITDA for the full year 2018 included the impact of an unfavorable LCM inventory adjustment of$30.6 million and$6.3 million of losses related to liquidation of LIFO inventory layers. 58
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Please read Item 6 "Selected Financial Data - Non-GAAP Financial Measures" for a reconciliation of EBITDA and Adjusted EBITDA to Net Loss, our most directly comparable financial performance measure calculated and presented in accordance with GAAP. Commodity markets remained volatile in 2019, contributing to fluctuations in refined product margins. The average price of NYMEX WTI crude oil averaged approximately$57 per barrel in 2019 compared to approximately$65 per barrel in 2018. With respect to the average price differential per barrel between WCS and NYMEX WTI, WCS averaged approximately$14 per barrel below NYMEX WTI in 2019 compared to approximately$27 per barrel below NYMEX WTI in 2018. Given our access to cost-advantaged, heavy Canadian crude oil in ourGreat Falls refinery , we have embarked on a multi-year plan to increase our ability to process this crude oil grade. In the full-year 2019, we processed 24,800 bpd of heavy Canadian crude oil, versus 24,700 bpd in the full-year 2018. The increase from 2018 to 2019 was primarily attributed to less unplanned downtime in 2019. Gross profit per barrel for our specialty products segment was$35.74 in 2019, versus$31.41 in the prior year. Specialty products segment Adjusted EBITDA was$220.2 million in 2019 compared to$162.2 million in the prior year. Specialty products segment Adjusted EBITDA Margin was 16.3% in 2019, compared to 11.7% in 2018. Specialty products segment results for fiscal year 2019 benefited from higher production volumes at ourShreveport refinery and higher sales volumes at ourPrinceton refinery , strong performance from our solvents products, and the rationalization of low margin products within both lubricating oils and packaged and synthetic specialty products. Results were also impacted by a$9.3 million favorable LCM inventory adjustment in 2019 compared to a$3.4 million unfavorable LCM inventory adjustment in 2018 and$2.8 million of gains related to the liquidation of LIFO inventory layers in 2019 compared to$2.7 million of losses in 2018. Specialty products represented approximately 24% of total production in 2019, compared to 26.3% in 2018. Gross profit per barrel for our fuel products segment was$4.35 per barrel in 2019, versus$6.07 per barrel in the prior year. Fuel products segment Adjusted EBITDA was$182.0 million in 2019 compared to$199.2 million in 2018. Fuel products segment Adjusted EBITDA Margin was 8.7% in 2019 compared to 9.4% in 2018. Fuel products segment results for fiscal year 2019 were impacted by lower margins, predominately driven by the decrease in the WCS discount versus NYMEX WTI. Results were also impacted by a$26.3 million favorable LCM inventory adjustment in 2019 compared to a$27.2 million unfavorable LCM inventory adjustment in 2018 and$3.2 million of gains related to the liquidation of LIFO inventory layers in 2019 compared to$3.6 million of losses in 2018. Fuel products represented approximately 76% of total production during the year, compared to 73.7% in 2018. For benchmarking purposes, we compare our per barrel refined fuel products margin to theGulf Coast crack spread. TheGulf Coast crack spread represents the approximate gross margin per barrel that results from processing two barrels of crude oil into one barrel of gasoline and one barrel of ultra-low sulfur diesel fuel. TheGulf Coast crack spread is calculated using the near-month futures price of NYMEX WTI crude oil, the price ofU.S. Gulf Coast Pipeline 87 Octane Conventional Gasoline and the price ofU.S. Gulf Coast Pipeline Ultra-Low Sulfur Diesel ("ULSD"). During 2019, theGulf Coast crack spread averaged$18 per barrel as compared to averaging approximately$17 per barrel in the prior year. The Gulf Coast ULSD crack spread averaged approximately$22 per barrel during 2019, compared to approximately$21 per barrel in the prior year. TheGulf Coast gasoline crack spread remained flat during 2019, and averaged approximately$14 per barrel. The average WCS discount versus NYMEX WTI averaged approximately$14 per barrel during 2019, compared to approximately$27 per barrel during 2018. Included within our fuel products segment gross profit per barrel calculation are the realized cost of crude oil and other feedstocks and other production-related expenses, the most significant portion of which includes labor, plant fuel, utilities, contract services, maintenance, depreciation and process materials. Our gross profit per barrel calculation may not be comparable to similar calculations published by our competitors. There are several factors that impact our refined product margin when compared to the benchmark crack spread. For example, several of our fuel products refineries produce asphalt and other residual products that may carry an average per barrel sales price below that ofU.S. Gulf Coast gasoline orU.S. Gulf Coast ULSD. Alternatively, many of our fuel products refineries purchase select quantities of crude oil at a discount to NYMEX WTI, which helps support a higher capture rate, relative to the crack spread benchmark. Finally, ourShreveport refinery produces both fuel and specialty products; given that our specialty products facilities generally operate at lower utilization rates than our fuel products facilities, facilities producing specialty products may incur higher operating expenses when compared to refineries that produce fuels exclusively, such as ourGreat Falls refinery . Based on our system-wide crude purchasing behaviors and overall production slate, we believe theGulf Coast crack spread remains a meaningful indicator in tracking directional shifts in our refined product margins. Business Divestitures InMarch 2019 , we sold our interest inBiosyn Holdings, LLC ("Biosyn") toThe Heritage Group , a related party, for total proceeds of$5.0 million which was recorded in the "other" component of other income (expense) on the consolidated statements of operations. 59
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InNovember 2019 , we completed the sale of all of the issued and outstanding membership interests inCalumet San Antonio Refining, LLC , which owned theSan Antonio Refinery . The sale included the refinery and related assets, including associated hydrocarbon inventories, a crude oil terminal and pipeline toStarlight Relativity Acquisition Company LLC ("Starlight"), aDelaware limited liability company (the "San Antonio Transaction"). Total consideration received was$59.1 million , which consisted of a base sales price of$63.0 million minus an adjustment of$3.9 million for net working capital, inventories and reimbursement of certain transaction costs.The San Antonio refinery was included in the Company's fuel products segment. The Company recognized a net loss of$8.7 million in Gain (loss) on sale of business in the consolidated statements of operations for the year endedDecember 31, 2019 , related to the San Antonio Transaction. InFebruary 2020 , the Company and Starlight agreed to the final purchase price adjustment payment related to net working capital and inventory to Starlight of$ 4.5 million , which has been reflected in the net loss recognized by the Company. In connection with the San Antonio Transaction, the Partnership, Calumet San Antonio,TexStar Midstream Logistics, L.P. ("TexStar") ,TexStar Midstream Logistics Pipeline, LP andTailwater Capital, LLC entered into a Settlement and Release Agreement (the "Settlement Agreement"), pursuant to which the Partnership agreed to pay TexStar and its affiliates a cash payment of$1.0 million and the parties mutually agreed to dismiss the litigation and release each other with respect to the legal dispute relating to the termination of the Throughput and Deficiency Agreement (the "Pipeline Agreement"). As a result of the Settlement Agreement, we included the$38.1 million liability related to the Pipeline Agreement in the Gain (loss) on sale of business calculation for the San Antonio Transaction. InNovember 2017 , we completed the sale of all of the issued and outstanding membership interests inCalumet Superior, LLC , which owns theSuperior, Wisconsin refinery ("Superior Refinery "). The sale included the associated working capital, theSuperior Refinery's wholesale marketing business and related assets, including certain owned or leased product terminals, and certain crude gathering assets and line space inNorth Dakota to Husky (the "Superior Transaction"). Total consideration received was$533.1 million which consisted of a base price of$435.0 million and$98.1 million for net working capital and reimbursement of certain capital spending.The Superior Refinery was included in our fuel products segment. For the years endedDecember 31, 2018 and 2017, we recognized a net gain of$4.8 million and$236.0 million , respectively, in Gain (loss) on sale of business in the consolidated statements of operations related to the Superior Transaction. Please read Note 5 - "Divestitures" under Part II, Item 8 "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements." InNovember 2017 , we completed the sale to a subsidiary ofQ'Max Solutions Inc. ("Q'Max") of all of the issued and outstanding membership interests in Anchor , for total consideration of approximately$89.6 million including a base price of$50.0 million ,$14.2 million for net working capital and other items and a 10% equity interest inFluid Holding Corp. ("FHC"), the parent company of Q'Max (the "Anchor Transaction"). Effective in the fourth quarter of 2017, we classified its results of operations for all periods presented to reflect Anchor as a discontinued operation and classified the assets and liabilities of Anchor as discontinued operations. Prior to being reported as discontinued operations, Anchor was included as its own reportable segment as oilfield services. Liquidity Update As ofDecember 31, 2019 , we had total liquidity of$378.5 million comprised of$19.1 million of cash and availability under our revolving credit facility of$359.4 million . As ofDecember 31, 2019 , our revolving credit facility had a$401.9 million borrowing base,$42.5 million in outstanding standby letters of credit and no outstanding borrowings. We believe we will continue to have sufficient liquidity from cash on hand, cash flow from operations, borrowing capacity and other means by which to meet our financial commitments, debt service obligations, anticipated capital expenditures and contingencies. On a continuous basis, we will focus on various initiatives, including working capital initiatives, to further enhance our liquidity over time, given current market conditions. In 2019, we redeemed$900 million in aggregate principal amount of our 6.5% Notes dueApril 2021 ("2021 Notes") with the net proceeds from the issuance of$550.0 million of 11.00% senior notes due 2025 ("2025 Notes"), together with borrowings under our revolving credit facility and cash on hand. In conjunction with the redemption, we incurred net, debt extinguishment costs of$2.2 million . Renewable Fuel Standard Update We, along with the broader refining industry, remain subject to compliance costs under the RFS. Under the regulation of the EPA, the RFS provides annual requirements for the total volume of renewable transportation fuels which are mandated to be blended into finished petroleum fuels. If a refiner does not meet its required annual Renewable Volume Obligation, the refiner can purchase blending credits in the open market, referred to as RINs. For the year endedDecember 31, 2019 , our RINs gain was$6.0 million , as compared to a RINs gain for the year endedDecember 31, 2018 of$31.4 million . Our gross RINs Obligation, which includes RINs that are required to be secured through either blending or through the purchase of RINs in the open market, was approximately 87 million RINs in 2019 including ourSan Antonio refinery (throughOctober 31, 2019 ). For the full-year 2020, we anticipate our gross RINs obligation will be approximately 83.1 million RINs. 60
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During 2019 and 2018, the EPA granted our fuel product refineries a "small refinery exemption" under the RFS for the 2018 calendar year and the 2017 calendar year, respectively, as provided for under the CAA. In granting this exemption, the EPA determined that for the 2018 calendar year and the 2017 calendar year, compliance with the RFS would represent a "disproportionate economic hardship" for these refineries. Because we generally maximize ethanol blending, the effect of a small refinery exemption is to allow us to bank RINs that we generated against future obligations for up to one year, or to sell them. We continue to anticipate that expenses related to RFS compliance have the potential to remain a significant expense for our fuel products segment, assuming current market prices for RINs. Estimated RINs obligations remain subject to fluctuations in both fuels production volumes and RINS prices during the 2020 calendar year. Key Performance Measures Our sales and net loss are principally affected by the price of crude oil, demand for specialty products and fuel products, prevailing crack spreads for fuel products, the price of natural gas used as fuel in our operations and our results from derivative instrument activities. Our primary raw materials are crude oil and other specialty feedstocks, and our primary outputs are specialty petroleum products and fuel products. The prices of crude oil, specialty products and fuel products are subject to fluctuations in response to changes in supply, demand, market uncertainties and a variety of factors beyond our control. We monitor these risks and from time-to-time enter into derivative instruments designed to help mitigate the impact of commodity price fluctuations on our business. The primary purpose of our commodity risk management activities is to economically hedge our cash flow exposure to commodity price changes so that we can meet our debt service and capital expenditure requirements despite fluctuations in crude oil and fuel products prices. We also may hedge when market conditions exist that we believe to be out of the ordinary and particularly supportive of our financial goals. We enter into derivative contracts for future periods for quantities that do not exceed our projected purchases of crude oil and sales of fuel products. Please read Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk - Commodity Price Risk" and Note 11 - "Derivatives" under Part II, Item 8 "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements." Our management uses several financial and operational measurements to analyze our performance. These measurements include the following: • sales volumes; • segment gross profit;
• segment Adjusted EBITDA; and
• selling, general and administrative expenses.
Sales volumes. We view the volumes of specialty products and fuel products sold as an important measure of our ability to effectively utilize our operating assets. Our ability to meet the demands of our customers is driven by the volumes of crude oil and feedstocks that we run through our facilities. Higher volumes improve profitability both through the spreading of fixed costs over greater volumes and the additional gross profit achieved on the incremental volumes. Segment gross profit. Specialty products and fuel products gross profit are important measures of our ability to maximize the profitability of our specialty products and fuel products segments. We define gross profit as sales less the cost of crude oil and other feedstocks and other production-related expenses, the most significant portion of which includes labor, plant fuel, utilities, contract services, maintenance, depreciation and processing materials. We use gross profit as an indicator of our ability to manage our business during periods of crude oil and natural gas price fluctuations, as the prices of our specialty products and fuel products generally do not change immediately with changes in the price of crude oil and natural gas. The increase or decrease in selling prices typically lags behind the rising or falling costs, respectively, of crude oil feedstocks for specialty products. Other than plant fuel, production-related expenses generally remain stable across broad ranges of specialty products and fuel products throughput volumes but can fluctuate depending on maintenance activities performed during a specific period. Our fuel products segment gross profit per barrel may differ from standardU.S. Gulf Coast , PADD 4Billings, Montana or 3/2/1 and 2/1/1 market crack spreads due to many factors, including our fuel products mix as shown in our production table being different than the ratios used to calculate such market crack spreads, LCM and LIFO inventory adjustments reflected in gross profit, operating costs including fixed costs, actual crude oil costs differing from market indices and our local market pricing differentials for fuel products in theShreveport, Louisiana andGreat Falls, Montana vicinities as compared toU.S. Gulf Coast and PADD 4Billings, Montana postings. Segment Adjusted EBITDA. We believe that specialty products and fuel products segment Adjusted EBITDA measures are useful as they exclude transactions not related to our core cash operating activities and provide metrics to analyze our ability to pay distributions to our unitholders and pay interest to our noteholders as Adjusted EBITDA is a component in the calculation of Distributable Cash Flow and allows us to meaningfully analyze the trends and performance of our core cash operations as well as 61
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to make decisions regarding the allocation of resources to segments. The corporate segment Adjusted EBITDA primarily reflects general and administrative costs not related to our core cash operating activities.
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Results of Operations The following table sets forth information about our continuing operations. Facility production volume differs from sales volume due to changes in inventories and the sale of purchased fuel product blendstocks, such as ethanol and biodiesel, and the resale of crude oil in our fuel products segment. The historical results of operations of theSan Antonio Refinery and theSuperior Refinery are included through the effective date of the disposition of each,November 10, 2019 andNovember 7, 2017 , respectively. Year Ended December 31, 2019 2018 2017 (In bpd) Total sales volume (1) 104,734 97,104 132,082 Total feedstock runs (2) 103,603 94,137 128,624 Total facility production: (3) Specialty products: Lubricating oils 11,506 11,931 14,606 Solvents 7,526 7,649 7,761 Waxes 1,315 1,279 1,423 Packaged and synthetic specialty products (4) 1,540 2,129 2,206 Other 1,764 2,113 1,811 Total specialty products 23,651 25,101 27,807 Fuel products: Gasoline 22,877 20,323 35,713 Diesel 28,709 27,367 33,277 Jet fuel 4,506 2,895 5,368 Asphalt, heavy fuel oils and other 20,286 19,612 29,396 Total fuel products 76,378 70,197 103,754 Total facility production (3) 100,029 95,298 131,561
(1) Total sales volume includes sales from the production at our facilities
and certain third-party facilities pursuant to supply and/or processing
agreements, sales of inventories and the resale of crude oil to third-party customers. Total sales volume also includes the sale of purchased fuel product blendstocks, such as ethanol and biodiesel, as
components of finished fuel products in our fuel products segment sales.
The increase in total sales volume in 2019 compared to 2018 is primarily due to increased production at theShreveport Refinery andPrinceton Refinery in the current year as a result of the successful completion of maintenance activities in 2018, partially offset by the divestiture of theSan Antonio Refinery inNovember 2019 . The decrease in total sales volume in 2018 compared to 2017 is due primarily to the divestiture of theSuperior Refinery inNovember 2017 and decreased production due to increased maintenance activities at our facilities during 2018. (2) Total feedstock runs represent the barrels per day of crude oil and other feedstocks processed at our facilities and at certain third-party facilities pursuant to supply and/or processing agreements. The increase in total feedstock runs in 2019 compared to 2018 is primarily due to increased production at theShreveport Refinery andPrinceton Refinery in the current year as a result of the successful completion of maintenance activities in 2018, partially offset by the divestiture of theSan Antonio Refinery inNovember 2019 . The decrease in total feedstock runs in 2018 compared to 2017 is primarily due to the divestiture of theSuperior Refinery inNovember 2017 and decreased production due to maintenance activities at our facilities during 2018. (3) Total facility production represents the barrels per day of specialty
products and fuel products yielded from processing crude oil and other
feedstocks at our facilities and at certain third-party facilities
pursuant to supply and/or processing agreements. The difference between
total facility production and total feedstock runs is primarily a result
of the time lag between the input of feedstocks and the production of finished products and volume loss. The changes in total facility production in 2019 over 2018 and 2018 over 2017 are due primarily to the operational items discussed above in footnotes 2 and 3 of this table. (4) Represents production of finished lubricants and specialty chemicals products, including the products from ourRoyal Purple , Bel-Ray andCalumet Packaging facilities. 63
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The following table reflects our consolidated results of operations and includes the non-GAAP financial measures EBITDA, Adjusted EBITDA and Distributable Cash Flow. For a reconciliation of EBITDA, Adjusted EBITDA and Distributable Cash Flow to Net loss and Net cash provided by (used in) operating activities, our most directly comparable financial performance and liquidity measures calculated and presented in accordance with GAAP, please read Item 6 "Selected Financial Data - Non-GAAP Financial Measures." Year Ended December 31, 2019 2018 2017 (In millions) Sales$ 3,452.6 $ 3,497.5 $ 3,763.8 Cost of sales 3,000.9 3,060.8 3,265.6 Gross profit 451.7 436.7 498.2 Operating costs and expenses: Selling 53.1 58.2 65.7 General and administrative 136.7 122.5 138.7 Transportation 122.9 137.2 137.1 Taxes other than income taxes 20.5 18.1 24.1 Loss on impairment and disposal of assets 37.0 -
207.3
(Gain) loss on sale of business, net 8.7 (4.8 ) (236.0 ) Other operating (income) expense (3.5 ) (17.4 ) 3.3 Operating income 76.3 122.9 158.0 Other income (expense): Interest expense (134.6 ) (155.5 ) (183.1 ) Debt extinguishment costs (2.2 ) (58.8 ) - Gain (loss) on derivative instruments 9.0 33.8 (9.6 ) Gain (loss) from unconsolidated affiliates 3.8 (3.7 ) - Gain on sale of unconsolidated affiliates 1.2 0.2 - Other 3.4 10.8 3.3 Total other expense (119.4 ) (173.2 ) (189.4 ) Net loss from continuing operations before income taxes (43.1 ) (50.3 ) (31.4 ) Income tax expense (benefit) from continuing operations 0.5 0.7 (0.1 ) Net loss from continuing operations (43.6 ) (51.0 ) (31.3 ) Net loss from discontinued operations, net of income taxes - (4.1 ) (72.5 ) Net loss$ (43.6 ) $ (55.1 ) $ (103.8 ) EBITDA$ 201.6 $ 219.2 $ 246.7 Adjusted EBITDA$ 304.6 $ 263.9 $ 317.2 Distributable Cash Flow$ 104.0 $ 67.0 $ 89.3 64
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Year EndedDecember 31, 2019 , Compared to Year EndedDecember 31, 2018 Sales. Sales from continuing operations decreased$44.9 million , or 1.3%, to$3,452.6 million in 2019 from$3,497.5 million in 2018. Sales for each of our principal product categories in these periods were as follows: Year Ended December 31, 2019 2018 % Change (In millions, except barrel and per barrel data) Sales by segment: Specialty products: Lubricating oils $ 593.1$ 600.1 (1.2 )% Solvents 325.9 331.9 (1.8 )% Waxes 119.3 117.0 2.0 % Packaged and synthetic specialty products (1) 230.8 256.8 (10.1 )% Other (2) 85.0 76.6 11.0 % Total specialty products $ 1,354.1$ 1,382.4 (2.0 )% Total specialty products sales volume (in barrels) 9,087,000 8,742,000 3.9 % Average specialty products sales price per barrel $ 149.02$ 158.13 (5.8 )% Fuel products: Gasoline $ 679.6$ 683.1 (0.5 )% Diesel 859.1 910.0 (5.6 )% Jet fuel 134.6 100.1 34.5 % Asphalt, heavy fuel oils and other (3) 425.2 421.9 0.8 % Total fuel products $ 2,098.5$ 2,115.1 (0.8 )% Total fuel products sales volume (in barrels) 29,141,000 26,701,000 9.1 % Average fuel products sales price per barrel $ 72.01$ 79.21 (9.1 )% Total sales $ 3,452.6$ 3,497.5 (1.3 )% Total specialty and fuel products sales volume (in barrels) 38,228,000 35,443,000 7.9 % (1) Represents finished lubricants and chemicals specialty products at ourRoyal Purple , Bel-Ray andCalumet Packaging facilities. (2) Represents (a) by-products, including fuels and asphalt, produced in
connection with the production of specialty products at the
Cotton Valley refineries andDickinson andKarns City facilities and (b) polyolester synthetic lubricants produced at theMissouri facility. (3) Represents asphalt, heavy fuel oils and other products produced in
connection with the production of fuels at the
and
The components of the$28.3 million specialty products segment sales decrease in 2019 were as follows: Dollar Change (In millions) Sales price$ (82.7 ) Volume 54.4
Total Specialty Products segment sales decrease
Specialty products segment sales for 2019 decreased$28.3 million , or 2.0%, primarily due to a decrease in the average selling price per barrel, partially offset by higher sales volume. The average selling price per barrel decreased by$9.11 , or 5.8%, resulting in an$82.7 million decrease in sales. The decrease in the average selling price per barrel was driven by the 12% decrease in NYMEX WTI, which is a proxy for the cost of crude oil per barrel for the period. Average selling price per barrel decreased in each of our product lines, with the exception of packaged and synthetic specialty products, the least commoditized products of the specialty products segment. The increase in sales volume is due to higher production rates from theShreveport ,Princeton andCotton Valley refineries. 65
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The components of the$16.6 million fuel products segment sales decrease in 2019 were as follows: Dollar Change (In millions) Sales price$ (227.3 ) Divestiture impact (55.8 ) Volume 266.5
Total Fuel Products segment sales decrease
Fuel products segment sales for 2019 decreased$16.6 million , or 0.8%, due primarily to the sale of theSan Antonio Refinery inNovember 2019 and the change in the overall price of commodity fuel products as a result of the decrease in NYMEX WTI. The average selling price per barrel decreased$7.20 , or 9.1%, the impact of which resulted in a$227.3 million decrease in sales. The impact of the increase in sales volume of$266.5 million is primarily the result of debottlenecking projects at theShreveport refinery and less downtime across all of our fuel segment refineries. Gross Profit. Gross profit from continuing operations increased$15.0 million , or 3.4%, to$451.7 million in 2019 from$436.7 million in 2018. Gross profit for our specialty and fuel products segments was as follows: Year Ended December 31, 2019 2018 % Change (Dollars in millions, except per barrel data) Gross profit by segment: Specialty products: Gross profit excluding hedging activities$ 325.0 $ 274.6 18.4 % Hedging activities (0.2 ) - - % Gross profit 324.8 274.6 18.3 % Percentage of sales 24.0 % 19.9 % 4.1 % Specialty products gross profit per barrel$ 35.77 $ 31.41 13.9 % Specialty products gross profit per barrel (including hedging activities) 35.74 31.41 13.8 % Fuel products: Gross profit$ 126.9 $ 162.1 (21.7 )% Percentage of sales 6.0 % 7.7 % (1.7 )%
Fuel products gross profit per barrel $ 4.35 $ 6.07
(28.3 )% Fuel products gross profit per barrel (including hedging activities) $ 4.35 $ 6.07 (28.3 )% Total gross profit$ 451.7 $ 436.7 3.4 % Percentage of sales 13.1 % 12.5 % 0.6 %
The components of the
Dollar Change (In millions) 2018 reported gross profit$ 274.6 Sales price (82.7 ) Operating costs 1.9 LCM / LIFO inventory adjustments 18.2 Volume 19.2 Cost of materials 93.6 2019 reported gross profit$ 324.8 The increase in specialty products segment gross profit of$50.2 million year-over-year was primarily due to decreased cost of materials, increased sales volumes, a$18.2 million favorable LCM / LIFO inventory impact and decreased operating costs, partially offset by a decrease in the average selling price per barrel. Sales price and cost of materials net, increased gross profit by$10.9 million . The$1.9 million decrease in operating costs were primarily due to decreases in depreciation and amortization, repairs and maintenance and incentive compensation costs, partially offset by increases in utility costs. The increase in sales volume 66
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is primarily due to higher sales volumes in all product lines except packaged and synthetic specialty products as a result of debottlenecking projects at theShreveport refinery and less downtime at theShreveport andPrinceton refineries. The components of the$35.2 million decrease in the fuel products segment gross profit for 2019 were as follows: Dollar Change (In millions) 2018 reported gross profit$ 162.1 Sales price (227.3 ) RINs (25.4 ) Operating costs (3.2 ) Divestiture impact 2.4 Volume 53.0 LCM / LIFO inventory adjustments 60.3 Cost of materials 103.6
2019 reported gross profit
The decrease in fuel products segment gross profit of$35.2 million year-over-year was primarily due to a decrease in the average selling price per barrel and a lower RINs benefit in 2019 vs. 2018 as a result of the RINs exemption we received in 2018 for theSuperior Refinery , absent the RINs exemption we received in 2019. The impact of the aforementioned items were partially offset by decreases in cost of materials from the change in NYMEX WTI, a$60.3 million favorable LCM / LIFO inventory impact, increased sales volumes, and a$3.2 million decrease in operating costs. Selling. Selling expenses from continuing operations decreased$5.1 million , or 8.8%, to$53.1 million in 2019 from$58.2 million in 2018. The decrease was due primarily to a$3.1 million decrease in depreciation and amortization, a$1.6 million decrease in bad debt expense and a$1.6 million decrease in professional services fees, partially offset by a$1.0 million increase in labor and benefits and a$0.6 million increase in commissions. General and administrative. General and administrative expenses from continuing operations increased$14.2 million , or 11.6%, to$136.7 million in 2019 from$122.5 million in 2018. The increase was due primarily to an$7.2 million increase in incentive compensation costs, driven by phantom unit amortization and a 65.2% increase in our unit price during the year, a$6.0 million increase in professional services fees, and a$5.0 million increase in labor and benefits, partially offset by a$2.8 million decrease in other expenses, mostly for information technology costs, a$1.0 million decrease in depreciation and amortization, a$2.8 million decrease in maintenance costs, and a$0.5 million decrease in utilities costs. Transportation. Transportation decreased$14.3 million , or 10.4%, to$122.9 million in 2019 from$137.2 million in 2018. Transportation expense in 2019 benefited from favorable trucking rates, increased rail efficiencies, and decreased reliance on direct pipeline sales at theShreveport refinery . Taxes other than income taxes. Taxes other than income taxes increased$2.4 million , or 13.3%, to$20.5 million in 2019 from$18.1 million in 2018. The increase is due primarily to 2018 benefiting from lower than anticipated 2017 excise tax liabilities as well as an increase in property taxes at ourShreveport refinery in 2019. Loss on impairment and disposal of assets. Loss on impairment and disposal of assets increased to$37.0 million in 2019 due primarily to the$25.4 million impairment charge of our FHC investment and the write-off of the TexStar finance lease asset in the first quarter of 2019. There was no comparable activity in 2018. For a further discussion regarding the factors underlying these impairments, please read Item 8. "Financial Statements and Supplementary Data, Notes 6 and 8." (Gain) loss on sale of business, net. (Gain) loss on sale of business, net from continuing operations decreased$13.5 million , or 281.3%, to a loss of$8.7 million in 2019, compared to a gain of$4.8 million in 2018. The loss in the current year is the result of our divestment of the refinery inSan Antonio, Texas . We did not complete any business divestitures in the prior year and the small gain recognized in 2018 related to finalization of the remaining post-close working capital adjustments associated with theSuperior transaction. Other operating income. Other operating income from continuing operations decreased$13.9 million to$3.5 million in 2019 compared to$17.4 million in 2018. The change was primarily due to a 2018 operating income benefit from the reduction of the RINs liability associated with the sale of theSuperior Refinery , absent in the current year. Interest expense. Interest expense from continuing operations decreased$20.9 million , or 13.4%, to$134.6 million in 2019 from$155.5 million in 2018. The decrease is due primarily to the redemption of our 2021 Notes in 2019 and decreased revolving credit facility borrowings, partially offset by an increase in interest related to our Supply and Offtake Agreements. 67
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Debt extinguishment costs. We recognized a net loss on debt extinguishment costs from continuing operations of$2.2 million during 2019 related to the redemption of the 2021 Notes in 2019, compared to a net loss on debt extinguishment costs from continuing operations of$58.8 million in 2018 related to the redemption of the 11.50% Secured Notes dueJanuary 15, 2021 ("2021 Secured Notes") in the prior year. Other Income. Other income from continuing operations decreased$7.4 million , or 68.5%, to$3.4 million in 2019 from$10.8 million in 2018. The decrease is primarily due to the expiration of a transaction services agreement related to the Superior Transaction as well as reductions in tolling agreement income. Net loss from discontinued operations. There was no net loss from discontinued operations in 2019 compared to net loss of$4.1 million in 2018. InNovember 2017 , we completed the divestiture of Anchor. Prior to being reported as discontinued operations, Anchor was included as its own reportable segment as oilfield services. As a result, effective in the fourth quarter of 2017, we classified our results of operations for all periods presented to reflect Anchor as a discontinued operation. The prior year activity is related to the finalization of the remaining post-closing adjustments related to the Anchor Transaction. Please read Note 4 - "Discontinued Operations" in Part II, Item 8 "Financial Statements and Supplementary Data" for additional information. 68
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Year EndedDecember 31, 2018 , Compared to Year EndedDecember 31, 2017 Sales. Sales from continuing operations decreased$266.3 million , or 7.1%, to$3,497.5 million in 2018 from$3,763.8 million in 2017. Sales for each of our principal product categories in these periods were as follows: Year Ended December 31, 2018 2017 % Change (In millions, except barrel and per barrel data) Sales by segment: Specialty products: Lubricating oils $ 600.1$ 584.2 2.7 % Solvents 331.9 274.4 21.0 % Waxes 117.0 117.2 (0.2 )% Packaged and synthetic specialty products (1) 256.8 260.7 (1.5 )% Other (2) 76.6 63.9 19.9 % Total specialty products $ 1,382.4$ 1,300.4 6.3 % Total specialty products sales volume (in barrels) 8,742,000 9,407,000 (7.1 )% Average specialty products sales price per barrel $ 158.13$ 138.24 14.4 % Fuel products: Gasoline $ 683.1$ 948.5 (28.0 )% Diesel 910.0 877.9 3.7 % Jet fuel 100.1 135.0 (25.9 )% Asphalt, heavy fuel oils and other (3) 421.9 502.0 (16.0 )% Total fuel products $ 2,115.1$ 2,463.4 (14.1 )% Total fuel products sales volume (in barrels) 26,701,000 38,803,000 (31.2 )% Average fuel products sales price per barrel $ 79.21$ 63.48 24.8 % Total sales $ 3,497.5$ 3,763.8 (7.1 )% Total specialty and fuel products sales volume (in barrels) 35,443,000 48,210,000 (26.5 )% (1) Represents finished lubricants and chemicals specialty products at the Royal Purple, Bel-Ray andCalumet Packaging . (2) Represents (a) by-products, including fuels and asphalt, produced in
connection with the production of specialty products at the
Cotton Valley refineries andDickinson andKarns City facilities and (b) polyolester synthetic lubricants produced at theMissouri facility. (3) Represents asphalt, heavy fuel oils and other products produced in connection with the production of fuels at theShreveport ,Superior , San
Antonio and
and
The components of the$82.0 million specialty products segment sales increase in 2018 were as follows: Dollar Change (In millions) Sales price$ 174.0 Volume (92.0 )
Total specialty products segment sales increase
Specialty products segment sales for 2018 increased$82.0 million , or 6.3%, primarily due to an increase in the average selling price per barrel, partially offset by lower sales volume. The average selling price per barrel increased by$19.89 , or 14.4%, the impact of which resulted in a$174.0 million increase to sales. The increase in the average selling price per barrel was driven by a nearly$15.00 increase in the average cost of crude oil per barrel over the period. Average selling prices per barrel increased in all our product lines except for packaged and synthetic specialty products due to market conditions. The decrease in sales volume is due to lower sales volume in all product lines except for packaged and synthetic specialty products as a result of market conditions and maintenance activities at ourShreveport andPrinceton refineries during the prior year. 69
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The components of the$348.3 million fuel products segment sales decrease in 2018 were as follows: Dollar Change (In millions) Sales price$ 408.7 Divestiture impact (669.1 ) Volume (87.9 )
Total fuel products segment sales decrease
Fuel products segment sales for 2018 decreased$348.3 million , or 14.1%, due primarily to lower sales volumes as a result of the Superior Transaction inNovember 2017 , partially offset by an increase in the average selling price per barrel. The average selling price per barrel increased$15.73 , or 24.8%, resulting in a$408.7 million increase in sales. The increase in the average selling price per barrel was driven by an over$11.00 increase in the average cost of crude oil per barrel over the period. Gross Profit. Gross profit from continuing operations decreased$61.5 million , or 12.3%, to$436.7 million in 2018 from$498.2 million in 2017. Gross profit for our specialty and fuel products segments was as follows: Year Ended December 31, 2018 2017 % Change (Dollars in millions, except per barrel data) Gross profit by segment: Specialty products: Gross profit$ 291.1 $ 319.2 (8.8 )% Percentage of sales 21.1 % 24.5 % (13.9 )% Specialty products gross profit per barrel$ 33.30 $ 33.93 (1.9 )% Fuel products: Gross profit$ 145.6 $ 179.0 (18.7 )% Percentage of sales 6.9 % 7.3 % (5.5 )% Fuel products gross profit per barrel $ 5.45 $ 4.61 18.2 % Total gross profit$ 436.7 $ 498.2 (12.3 )% Percentage of sales 12.5 % 13.2 % (5.3 )%
The components of the
Dollar Change (In millions) 2017 reported gross profit$ 319.2 Cost of materials (147.5 ) Volume (37.1 ) LCM inventory adjustment (14.3 ) Operating costs (3.5 ) LIFO inventory layer adjustment 0.3 Sales price 174.0
2018 reported gross profit
The decrease in specialty products segment gross profit of$28.1 million year-over-year was primarily due to increased cost of materials, decreased sales volume, a$14.3 million unfavorable LCM inventory impact and increased operating costs, partially offset by an increase in the average selling price per barrel and a positive impact of$0.3 million related to the liquidation of LIFO inventory layers. Sales price and cost of materials net, increased gross profit by$26.5 million , as the average selling price per barrel increased$19.89 , which outpaced the increase in the average cost of materials. The$3.5 million increase in operating costs were primarily due to increases in depreciation and amortization, repairs and maintenance and incentive compensation costs, partially offset by decreases in utility costs. The decrease in sales volume is primarily due to lower sales volumes in all product lines except packaged and synthetic specialty products as a result of market conditions and maintenance activities at ourShreveport andPrinceton refineries during the year. 70
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The components of the
Dollar Change (In millions) 2017 reported gross profit$ 179.0 Cost of materials (281.5 ) Divestiture impact (110.0 ) LCM inventory adjustment (40.3 ) Volume (17.5 ) Operating costs (8.8 ) LIFO inventory layer adjustment (2.9 ) RINs 18.9 Sales price 408.7 2018 reported gross profit$ 145.6 The decrease in fuel products segment gross profit of$33.4 million year-over-year was primarily due to increased cost of materials, the sale of the refinery inSuperior, Wisconsin , a$40.3 million decrease in the favorable LCM impact, decreased sales volume, and increased operating costs. Decreased sales volumes and the reduced operating costs were the result of theSuperior Transaction in 2017. The decrease in RINs of$18.9 million primarily resulted from a reduction of the RINs liability as a result of an approval from the EPA of the small refinery exemption, decreased RINs market pricing and decreased production. Selling. Selling expenses from continuing operations decreased$7.5 million , or 11.4%, to$58.2 million in 2018 from$65.7 million in 2017. The decrease was due primarily to a$4.9 million decrease in bad debt expense, a$4.7 million decrease in depreciation and amortization, a$0.7 million decrease in commissions and a$0.5 million decrease in subscription fees, partially offset by a$2.9 million increase in labor and benefits and a$0.3 million increase in professional fees. General and administrative. General and administrative expenses from continuing operations decreased$16.2 million , or 11.7%, to$122.5 million in 2018 from$138.7 million in 2017. The decrease was due primarily to a$23.9 million decrease in incentive compensation costs primarily driven by a reduction in bonus costs and phantom unit amortization due to the decline in our unit price during the year, a$0.9 million decrease in communication costs and a$0.6 million decrease in insurance costs, partially offset by a$5.0 million increase in depreciation and amortization, a$3.8 million increase in information technology costs and a$0.3 million increase in professional fees. Taxes and other than income taxes. Taxes other than income taxes decreased$6.0 million , or 24.9%, to$18.1 million in 2018 from$24.1 million in 2017. The decrease is due primarily to reductions in property, excise and other taxes which were driven by the sale of theSuperior Refinery in 2017. Loss on impairment and disposal of assets. There were no asset impairment charges in 2018 compared to$207.3 million in asset impairment charges in 2017. In the prior year, we recorded impairment charges primarily related to long-lived assets including property, plant and equipment on theMissouri reporting unit of$59.2 million and on theSan Antonio reporting unit of$147.0 million as a result of lowered projections of future cash flows. In addition, in 2017 an impairment charge of$0.7 million for goodwill related to the specialty products segment was recorded based on updated financial projections on ourDickinson reporting unit. For a further discussion regarding the factors underlying these impairments, please read Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies and Estimates" and Item 8. "Financial Statements and Supplementary Data, Note 2." Gain on sale of business, net. Gain on sale of business, net from continuing operations decreased$231.2 million , or 98.0%, to a gain of$4.8 million in 2018 from a gain of$236.0 million in 2017. In the prior year, we completed the sale of theSuperior Refinery . We did not complete any business divestitures in 2018, and the small gain recognized relates to finalizing the remaining post-close working capital adjustments associated with theSuperior transaction. Other operating (income) expense. Other operating (income) expense from continuing operations increased$20.7 million to income of$17.4 million in 2018 from expense of$3.3 million in 2017. This increase was primarily due to a reduction of the RINs liability associated with theSuperior Refinery , which was sold inNovember 2017 , as a result of an approval from the EPA of the small refinery exemption for our fuel product refineries from the requirements of the RFS for the 2017 calendar year, decreased RINs pricing and decreased environmental reserves. Interest expense. Interest expense from continuing operations decreased$27.6 million , or 15.1%, to$155.5 million in 2018 from$183.1 million in 2017. The decrease is due primarily to the redemption of the 2021 Secured Notes inApril 2018 and decreased revolving credit facility borrowings, partially offset by an increase in interest related to the Supply and Offtake Agreements and decreased capitalized interest. 71
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Debt extinguishment costs. We incurred debt extinguishment costs from continuing operations of$58.8 million during 2018 primarily related to the redemption of the 2021 Secured Notes which were redeemed inApril 2018 . There was no comparable activity in 2017. Loss from unconsolidated affiliates. Loss from unconsolidated affiliates from continuing operations was$3.7 million in 2018, which primarily related to us incurring expenses related to our investment inBiosynthetic Technologies, LLC ("Biosynthetic Technologies"). There was no comparable activity in 2017. Please read Note 6 - "Investment in Unconsolidated Affiliates" in Part II, Item 8 "Financial Statements and Supplementary Data" for additional information. Other income. Other income from continuing operations increased$7.5 million , or 227.3%, to$10.8 million in 2018 from$3.3 million in 2017. The increase is primarily due to the receipt of favorable negotiated legal settlements. Net loss from discontinued operations. Net loss from discontinued operations was$4.1 million in 2018 compared to$72.5 million in 2017. InNovember 2017 , we completed the divestiture of Anchor. Prior to being reported as discontinued operations, Anchor was included as its own reportable segment as oilfield services. As a result, effective in the fourth quarter of 2017, we classified our results of operations for all periods presented to reflect Anchor as a discontinued operation. We recorded a net loss on the sale of Anchor of$62.6 million . Current year activity related to the finalization of the remaining post-closing adjustments related to the Anchor Transaction. Please read Note 4 - "Discontinued Operations" in Part II, Item 8 "Financial Statements and Supplementary Data" for additional information. Liquidity and Capital Resources Our principal sources of cash have historically included cash flow from operations, proceeds from public equity offerings, proceeds from notes offerings and bank borrowings. Principal uses of cash have included capital expenditures, acquisitions, distributions to our limited partners and general partner and debt service. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In addition, inMay 2018 The Heritage Group disclosed in a Schedule 13D filing that it is considering various alternatives with respect to its investment in us, including potential consolidation, acquisitions or sales of our assets or common units, as well as potential changes to our capital structure.The Heritage Group also disclosed that it may make formal proposals to us, holders of our common units or other third parties regarding such strategic alternatives. In general, we expect that our short-term liquidity needs, including debt service, working capital, replacement and environmental capital expenditures and capital expenditures related to internal growth projects, will be met primarily through projected cash flow from operations, borrowings under our revolving credit facility and asset sales. In 2019, we redeemed all of the 2021 Notes with the net proceeds from the issuance of the 2025 Notes, together with borrowings under the Company's revolving credit facility and cash on hand. In conjunction with the redemption, the Company incurred debt extinguishment costs of$2.2 million , net. Also in 2019, we sold our interest in Biosyn toThe Heritage Group , a related party, for total proceeds of$5.0 million . Lastly, in 2019, we received$59.1 million in cash for the San Antonio Transaction in 2019. We expect to fund planned capital expenditures in 2020 of approximately$80 million to$90 million primarily with cash on hand and cash flows from operations. Future internal growth projects or acquisitions may require expenditures in excess of our then-current cash flow from operations and borrowing availability under our revolving credit facility and may require us to issue debt or equity securities in public or private offerings or incur additional borrowings under bank credit facilities to meet those costs. The borrowing base on our revolving credit facility increased from approximately$330.8 million as ofDecember 31, 2018 , to approximately$401.9 million atDecember 31, 2019 , resulting in a corresponding increase in our borrowing availability from approximately$295.7 million atDecember 31, 2018 , to approximately$359.4 million atDecember 31, 2019 . Total liquidity, consisting of unrestricted cash and available funds under our revolving credit facility, decreased from$451.4 million atDecember 31, 2018 to$378.5 million atDecember 31, 2019 . Cash Flows from Operating, Investing and Financing Activities We believe that we have sufficient liquid assets, cash flow from operations, borrowing capacity and adequate access to capital markets to meet our financial commitments, debt service obligations and anticipated capital expenditures. We continue to seek to lower our operating costs, selling expenses and general and administrative expenses as a means to further improve our cash flow from operations with the objective of having our cash flow from operations support all of our capital expenditures and interest payments. However, we are subject to business and operational risks that could materially adversely affect our cash flows. A material decrease in our cash flow from operations including a significant, sudden decrease in crude oil prices would likely produce a corollary material adverse effect on our borrowing capacity under our revolving credit facility and potentially our ability to comply with the covenants under our revolving credit facility. A significant, sudden increase in crude oil prices, if sustained, would 72
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likely result in increased working capital requirements which would be funded by borrowings under our revolving credit facility. In addition, our cash flow from operations may be impacted by the timing of settlement of our derivative activities. Gains and losses from derivative instruments that do not qualify as cash flow hedges are recorded in unrealized gain (loss) on derivative instruments until settlement and will impact operating cash flow in the period settled. The following table summarizes our primary sources and uses of cash in each of the most recent three years: Year Ended December 31, 2019 2018 2017 (In millions)Net Cash provided by (used in) operating activities$ 191.9 $ 75.2 $ (26.5 ) Net Cash provided by investing activities 14.5 8.3
453.4
Net Cash provided by (used in) financing activities (343.0 ) (442.1 )
83.2
Net increase (decrease) in cash, cash equivalents and restricted cash$ (136.6 ) $ (358.6 )
Operating Activities. Operating activities provided cash of$191.9 million during 2019 compared to providing cash of$75.2 million during 2018. The increase in cash provided by operating activities is due to a reduction in working capital requirements of$136.5 million , lower year-over-year cash paid for interest of$36.8 million , and decreased operating losses, partially offset by a$27.9 million decrease in operating cash flow other than working capital adjustments and other adjustment items. The decrease in working capital requirements was primarily driven by the divestment of theSan Antonio Refinery , and its associated working capital. The decrease in operating cash flow for other than working capital adjustments was primarily driven by a favorable LCM / LIFO inventory adjustment in the current year, which was unfavorable in the prior year. Operating activities provided cash of$75.2 million during 2018 compared to a net use of cash of$26.5 million during 2017. The increase in cash provided by operating activities is primarily due to a reduction working capital requirements of$44.8 million , a$54.1 million increase in operating cash flow other than working capital adjustments and decreased net cash used in discontinued operations of$22.5 million , offset by an increase in net loss from continuing operations of$19.7 million . Working capital decreases were primarily driven by the sale of theSuperior Refinery inNovember 2017 and decreased accounts receivable due to timing of payments as a result of the stabilization of our ERP system, partially offset by decreased accounts payable due to timing of payments as a result of the stabilization of our ERP system, decreased accrued interest receivable due to timing of payments, increased turnaround activity in the 2018 fiscal year and a decrease in other liabilities predominately driven by a reduction in our RINs liability. The increase in operating cash flow other than working capital adjustments was primarily driven by reductions in depreciation and amortization, an increase in unrealized gains on derivatives and a decrease in asset impairment charges, partially offset by debt extinguishment costs, a decrease in the gain on sale of business and an unfavorable change in the LCM inventory adjustment. Investing Activities. Cash provided by investing activities increased to$14.5 million in 2019 compared to cash provided of$8.3 million in 2018. The increase is primarily due to increased proceeds on sale of business of$10.3 million in 2019 vs. 2018, as well as increased proceeds from the sale of property, plant and equipment of$3.3 million in 2019 vs. 2018. Cash provided by investing activities decreased to$8.3 million in 2018 compared to cash provided of$453.4 million in 2017. The decrease is primarily due to a reduction in proceeds from the Superior Transaction of$439.7 million , a reduction in cash provided by discontinued operations as a result of proceeds from the Anchor Transaction of$31.8 million and expenditures of$3.8 million related to the acquisition of Biosynthetic Technologies in 2018, partially offset by$9.9 million of cash received for the sale of PACNIL and a decrease in capital expenditures of$20.2 million in 2018. Financing Activities. Financing activities used cash of$343.0 million during 2019 compared to using cash of$442.1 million during 2018. The decrease is primarily due to the cash proceeds of the 2025 Notes of$550.0 million , off-set by the$498.5 million net effect of the redemption of$898.5 million in aggregate principal amount of the 2021 Notes in 2019 and$400.0 million in aggregate principal amount of the 2021 Secured Notes 2018, as well as the absence of the$46.6 million cash payment for debt extinguishment costs made 2018 in conjunction with the retirement of the 2021 Secured Notes. Financing activities used cash of$442.1 million during 2018 compared to providing cash of$83.2 million during 2017. This decrease is primarily due to the payment of$446.6 million for the redemption of the 2021 Secured Notes (including debt extinguishment costs) in 2018, decreased net proceeds from the Supply and Offtake Agreements of$93.1 million and increased debt issuance costs of$0.8 million , partially offset by decreased payments on revolving credit facility borrowings of$9.8 million , increased net proceeds from other financing obligations of$4.5 million , and decreased payments on capital lease obligations of$0.9 million . 73
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Investment in Unconsolidated Affiliate In connection with the Anchor Transaction inNovember 2017 , we received an equity investment in FHC as part of the total consideration for Anchor. FHC provides oilfield services and products to customers globally. Our investment in FHC is a non-marketable equity security without a readily determinable fair value. We record this investment using a measurement alternative which values the security at cost less impairment, if any, plus or minus changes resulting from qualifying observable price changes with a same or similar security from the same issuer. During the year endedDecember 31, 2019 , we determined the fair value of our investment in FHC was less than itsDecember 31, 2018 carrying value of$25.4 million after evaluating indicators of impairment and valuing the investment using projected future cash flows and other Level 3 inputs. Utilizing an income approach, value indications were developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation and risks associated with the company. As a result, we recorded an impairment charge of$25.4 million in loss on impairment and disposal of assets in the consolidated statements of operations for the period endedDecember 31, 2019 . Supply and Offtake Agreements OnMarch 31, 2017 , we entered into several agreements with Macquarie to support the operations of theGreat Falls refinery . OnJuly 27, 2017 , we amended the Great Falls Supply and Offtake Agreements to provide Macquarie the option to terminate the Great Falls Supply and Offtake Agreements effective nine months after the end of the applicable calendar quarter in which Macquarie elects to terminate and we have the option to terminate with ninety days' notice at any time. OnMay 9, 2019 , we entered into an amendment to the Great Falls Supply and Offtake Agreements to, among other things, extend the Expiration Date (as defined in the Great Falls Supply and Offtake Agreements) fromSeptember 30, 2019 toJune 30, 2023 . OnJune 19, 2017 , we entered into several agreements with Macquarie to support the operations of theShreveport refinery . Since inception the Shreveport Supply and Offtake Agreements were set to expire onJune 30, 2020 ; however, Macquarie has the option to terminate the Shreveport Supply and Offtake Agreements effective nine months after the end of the applicable calendar quarter in which Macquarie elects to terminate and we have the option to terminate with ninety days' notice at any time. OnMay 9, 2019 , we entered into an amendment to the Shreveport Supply and Offtake Agreements to, among other things, extend the Expiration Date (as defined in the Shreveport Supply and Offtake Agreements) fromJune 30, 2020 toJune 30, 2023 . The Supply and Offtake Agreements are subject to minimum and maximum inventory levels. The agreements also provide for the lease to Macquarie of crude oil and certain refined product storage tanks located at theGreat Falls andShreveport refineries. Following expiration or termination of the agreements, Macquarie has the option to require us to purchase the crude oil and refined product inventories then owned by Macquarie and located at the leased storage tanks at then current market prices. Our obligations under the agreements are secured by the inventory included in these agreements. Capital Expenditures Our property, plant and equipment capital expenditure requirements consist of capital improvement expenditures, replacement capital expenditures, environmental capital expenditures and turnaround capital expenditures. Capital improvement expenditures include expenditures to acquire assets to grow our business, to expand existing facilities, such as projects that increase operating capacity, or to reduce operating costs. Replacement capital expenditures replace worn out or obsolete equipment or parts. Environmental capital expenditures include asset additions to meet or exceed environmental and operating regulations. Turnaround capital expenditures represent capitalized costs associated with our periodic major maintenance and repairs. The following table sets forth our capital improvement expenditures, replacement capital expenditures, environmental capital expenditures and turnaround capital expenditures in each of the periods shown (including capitalized interest): Year Ended December 31, 2019 2018 2017 (In millions)
Capital improvement expenditures
16.9 30.5 Environmental capital expenditures 15.1 7.5 11.5 Turnaround capital expenditures 24.1 30.8 14.5 Total$ 89.2 $ 74.9 $ 79.9 The increase in capital improvement, replacement and environmental capital expenditures from 2018 to 2019 was primarily due to completion of certain 2018 forecasted projects that were delayed until 2019. The decrease in capital expenditures from 2017 to 2018 was primarily driven by our allocation of additional resources to turnaround activities and moving certain capital projects forecasted for 2018 to 2019 based on timing and priority of existing projects. 74
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2020 Capital Spending Forecast We are forecasting total capital expenditures of approximately$80 million to$90 million in 2020. We anticipate that capital expenditure requirements will be provided primarily through cash flow from operations, cash on hand, available borrowings under our revolving credit facility and by accessing capital markets as necessary. If future capital expenditures require expenditures in excess of our then-current cash flow from operations and borrowing availability under our revolving credit facility, we may be required to issue debt or equity securities in public or private offerings or incur additional borrowings under bank credit facilities to meet those costs. Debt and Credit Facilities As ofDecember 31, 2019 , our primary debt and credit instruments consisted of: •$600.0 million senior secured revolving credit facility maturing inFebruary 2023 , subject to borrowing base limitations, with a maximum letter of credit sub-limit equal to$300.0 million , which amount may be
increased to 90% of revolver commitments in effect with the consent of the
Agent (as defined in the Credit Agreement) ("revolving credit facility");
•
•
•
In 2019, we redeemed$900 million in aggregate principal amount of the 2021 Notes with the net proceeds from the issuance of the 2025 Notes, together with borrowings under our revolving credit facility and cash on hand. In conjunction with the redemption, we incurred debt extinguishment costs, net of$2.2 million . We were in compliance with all covenants under our debt instruments in place as ofDecember 31, 2019 , and believe we have adequate liquidity to conduct our business. Short-Term Liquidity As ofDecember 31, 2019 , our principal sources of short-term liquidity were (i) approximately$359.4 million of availability under our revolving credit facility, (ii) inventory financing agreements related to ourGreat Falls andShreveport refineries and (iii)$19.1 million of cash on hand. Borrowings under our revolving credit facility can be used for, among other things, working capital, capital expenditures, and other lawful partnership purposes including acquisitions. OnFebruary 23, 2018 , we entered into the Third Amended and Restated Credit Agreement (the "Credit Agreement"), which provided for our$600.0 million senior secured revolving credit facility maturing inFebruary 2023 . The revolving credit facility is subject to a borrowing base limitation, with a maximum letter of credit sub-limit of$300.0 million , which amount may be increased to 90% of revolver commitments in effect with the consent of the Agent (as defined in the Credit Agreement). OnSeptember 4, 2019 , we entered into the First Amendment to the Credit Agreement. The amendment expands the borrowing base by$99.6 million on the Effective Date ofOctober 11, 2019 , by adding the fixed assets of ourGreat Falls, MT refinery as collateral to the borrowing base. The$99.6 million expansion amortizes to zero on a straight-line basis over ten quarters starting in the first quarter of 2020. Additionally, while the fixed assets of theGreat Falls, MT refinery are included in the borrowing base, the first amendment provides for a 25 basis points increase in the applicable margin for loans, as well as increases the minimum availability under the revolving credit facility required for our Company to be able to perform certain actions, including to make restricted payments of other distributions, sell or dispose of certain assets, make acquisitions or investments, or prepay other indebtedness. Among other conditions precedent that were required to be satisfied before the Effective Date, we were required to consummate an offering of at least$450.0 million aggregate principal amount of senior unsecured notes. The conditions precedent were satisfied onOctober 11, 2019 . Borrowings under the revolving credit facility are limited to a borrowing base that is determined based on advance rates of percentages of Eligible Accounts and Eligible Inventory (each as defined in the Credit Agreement). As such, the borrowing base can fluctuate based on changes in selling prices of our products and our current material costs, primarily the cost of crude oil. The borrowing base is calculated in accordance with the terms of the Credit Agreement and agreed upon by us and the Agent (as defined in the revolving credit facility agreement). OnDecember 31, 2019 , we had availability on our revolving credit facility of approximately$359.4 million , based on a borrowing base of approximately$401.9 million ,$42.5 million in outstanding standby letters of credit and no outstanding borrowings. The borrowing base cannot exceed the revolving credit facility commitments then in effect. The lender group under our revolving credit facility is comprised of a syndicate of nine lenders with total commitments of$600.0 million . The lenders under our revolving credit facility have a first priority lien on our accounts receivable, certain inventory, the fixed assets of theGreat Falls, MT refinery and substantially all of our cash. Amounts outstanding under our revolving credit facility fluctuate materially during each quarter mainly due to cash flow from operations, normal changes in working capital, capital expenditures and debt service costs. Specifically, the amount borrowed 75
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under our revolving credit facility is typically at its highest level after we pay for the majority of our crude oil supply on the 20th day of every month per standard industry terms. The maximum revolving credit facility borrowings during the year endedDecember 31, 2019 , were$125.0 million . Our availability on our revolving credit facility during the peak borrowing days of the year has been ample to support our operations and service upcoming requirements. During the year endedDecember 31, 2019 , availability for additional borrowings under our revolving credit facility was$228.7 million at its lowest point. The revolving credit facility currently bears interest at a rate equal to prime plus a basis points margin or LIBOR plus a basis points margin, at our option which margin ranges between 50 basis points and 100 basis points for base rate loans and 150 basis points to 200 basis points for LIBOR loans, depending on our average availability for additional borrowings for the preceding quarter. The margin applicable to loans under the FILO tranche of the revolving credit facility range from 150 to 200 basis points for base rate FILO loans and 250 to 300 basis points for LIBOR based FILO loans. The agreement provides for a 25 basis point reduction in the applicable margin rates beginning in the quarter after our Leverage Ratio (as defined in the Credit Agreement) is less than 5.5 to 1.0. We have met this test consistently since the fiscal quarter endedJune 30, 2019 . As a result, our applicable margin for the quarter ended and includingDecember 31, 2019 , was 50 basis points for prime, 150 basis points for LIBOR, 150 basis points for prime rate based FILO loans and 250 basis points for LIBOR based FILO loans; however, the margin can fluctuate quarterly based on our average availability for additional borrowings under the revolving credit facility in the preceding calendar quarter. Letters of credit issued under the revolving credit facility accrue fees at a rate equal to the margin (measured in basis points) applicable to LIBOR revolver loans. In addition to paying interest on outstanding borrowings under the revolving credit facility, we are required to pay a commitment fee to the lenders under the revolving credit facility with respect to the unutilized commitments thereunder at a rate equal to either 0.250% or 0.375% per annum depending on the average daily available unused borrowing capacity for the preceding month. We also pay a customary letter of credit fee, including a fronting fee of 0.125% per annum of the stated amount of each outstanding letter of credit, and customary agency fees. Our revolving credit facility contains various covenants that limit, among other things, our ability to: incur indebtedness; grant liens; dispose of certain assets; make certain acquisitions and investments; redeem or prepay other debt or make other restricted payments such as distributions to unitholders; enter into transactions with affiliates; and enter into a merger, consolidation or sale of assets. The revolving credit facility generally permits us to make cash distributions to our unitholders as long as, after giving effect to such a cash distribution, we have availability under the revolving credit facility totaling at least equal to the sum of the amount of FILO loans outstanding plus the greater of (i) 15% of the Aggregate Borrowing Base (as defined in the revolving credit facility agreement) then in effect, or 25% while theGreat Falls, MT refinery is included in the borrowing base, and (ii)$60.0 million (which amount is subject to increase in proportion to revolving commitment increases) plus the amount of FILO loans outstanding. Further, the revolving credit facility contains one springing financial covenant which provides that only if our availability under the revolving credit facility falls below the greater of (a) 10% of the Borrowing Base (as defined in the credit agreement) then in effect, or 15% while theGreat Falls, MT refinery is included in the borrowing base, and (b)$35.0 million (which amount is subject to increase in in proportion to revolving commitment increases) plus the amount of FILO loans outstanding, we will be required to maintain as of the end of each fiscal quarter a Fixed Charge Coverage Ratio (as defined in the revolving credit facility agreement) of at least 1.0 to 1.0. If an event of default exists under the revolving credit facility, the lenders will be able to accelerate the maturity of the revolving credit facility and exercise other rights and remedies. An event of default includes, among other things, the nonpayment of principal, interest, fees or other amounts; failure of any representation or warranty to be true and correct when made or confirmed; failure to perform or observe covenants in the revolving credit facility or other loan documents, subject, in limited circumstances, to certain grace periods; cross-defaults in other indebtedness if the effect of such default is to cause, or permit the holders of such indebtedness to cause, the acceleration of such indebtedness under any material agreement; bankruptcy or insolvency events; monetary judgment defaults; asserted invalidity of the loan documentation; and a change of control (as defined in the Credit Agreement). As ofDecember 31, 2019 , we were in compliance with all covenants under the revolving credit facility. For additional information regarding our revolving credit facility, please read Note 10 "Long-Term Debt" in Part II, Item 8 "Financial Statements and Supplementary Data." Long-Term Financing In addition to our principal sources of short-term liquidity listed above, subject to market conditions, we may meet our cash requirements (other than distributions of Available Cash (as defined in our partnership agreement) to our common unitholders) through the issuance of long-term notes or additional common units. From time to time, we issue long-term debt securities referred to as our senior notes. All of our outstanding senior notes are unsecured obligations that rank equally with all of our other senior debt obligations to the extent they are unsecured. As ofDecember 31, 2019 , we had$350.0 million in 2022 Notes,$325.0 million in 2023 Notes and$550.0 million in 2025 Notes 76
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outstanding. OnDecember 31, 2018 , we had$900.0 million in 2021 Notes,$350.0 million in 2022 Notes and$325.0 million in 2023 Notes outstanding. For more information regarding our senior notes, please read Note 10 - "Long-Term Debt" under Part II, Item 8 "Financial Statements and Supplementary Data" in this Annual Report. The indentures governing our senior notes contain covenants that, among other things, restrict our ability and the ability of certain of our subsidiaries to: (i) sell assets; (ii) pay distributions on or redeem or repurchase our common units or redeem or repurchase our subordinated debt; (iii) make investments; (iv) incur or guarantee additional indebtedness or issue preferred units; (v) create or incur certain liens; (vi) enter into agreements that restrict distributions or other payments from our restricted subsidiaries to us; (vii) consolidate, merge or transfer all or substantially all of our assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. These covenants are subject to important exceptions and qualifications. At any time when the senior notes are rated investment grade by eitherMoody's Investors Service, Inc. ("Moody's") or S&P's Global Ratings ("S&P") and no Default or Event of Default, each as defined in the indentures governing the senior notes, has occurred and is continuing, many of these covenants will be suspended. As ofDecember 31, 2019 , our Fixed Charge Coverage Ratio (as defined in the indentures governing the 2022, 2023 and 2025 Notes) was 2.3. Upon the occurrence of certain change of control events, each holder of the senior notes will have the right to require that we repurchase all or a portion of such holder's senior notes in cash at a purchase price equal to 101% of the principal amount thereof, plus any accrued and unpaid interest to the date of repurchase. To date, our debt balances have not adversely affected our operations, our ability to repay or refinance our indebtedness. Based on our historical record, we believe that our capital structure will continue to allow us to achieve our business objectives. We are subject, however, to conditions in the equity and debt markets for our common units and long-term senior notes, and there can be no assurance we will be able or willing to access the public or private markets for our common units and/or senior notes in the future. If we are unable or unwilling to issue additional common units, we may be required to either restrict capital expenditures and/or potential future acquisitions or pursue debt financing alternatives, some of which could involve higher costs or negatively affect our credit ratings. Furthermore, our ability to access the public and private debt markets is affected by our credit ratings. For additional information regarding our credit ratings, see "Credit Ratings" below. For additional information regarding our senior notes, please read Note 10 "Long-Term Debt" in Part II, Item 8 "Financial Statements and Supplementary Data." Master Derivative Contracts and Collateral Trust Agreement Under our credit support arrangements, our payment obligations under all of our master derivatives contracts for commodity hedging generally are secured by a first priority lien on our and our subsidiaries' real property, plant and equipment, fixtures, intellectual property, certain financial assets, certain investment property, commercial tort claims, chattel paper, documents, instruments and proceeds of the foregoing (including proceeds of hedge arrangements). We had no additional letters of credit or cash margin posted with any hedging counterparty as ofDecember 31, 2019 . Our master derivatives contracts and Collateral Trust Agreement (as defined below) continue to impose a number of covenant limitations on our operating and financing activities, including limitations on liens on collateral, limitations on dispositions of collateral and collateral maintenance and insurance requirements. For financial reporting purposes, we do not offset the collateral provided to a counterparty against the fair value of our obligation to that counterparty. Any outstanding collateral is released to us upon settlement of the related derivative instrument liability. Our various hedging agreements contain language allowing our hedge counterparties to request additional collateral if a specified credit support threshold is exceeded. However, these credit support thresholds are set at levels that would require a substantial increase in hedge exposure to require us to post additional collateral. As a result, we do not expect further increases in fuel products crack spreads or interest rates to significantly impact our liquidity due to requirements to post additional collateral. Additionally, we have a collateral trust agreement (the "Collateral Trust Agreement") which governs how secured hedging counterparties share collateral pledged as security for the payment obligations owed by us to the secured hedging counterparties under their respective master derivatives contracts. The Collateral Trust Agreement limits to$150.0 million the extent to which forward purchase contracts for physical commodities are covered by, and secured under, the Collateral Trust Agreement and the Parity Lien Security Documents (as defined in the Collateral Trust Agreement). There is no such limit on financially settled derivative instruments used for commodity hedging. Subject to certain conditions set forth in the Collateral Trust Agreement, we have the ability to add secured hedging counterparties from time to time. Credit Ratings InMay 2018 , our senior unsecured notes ratings were upgraded by S&P to B- from CCC+, while the Company rating of B- and stable outlook remained unchanged from the prior year. InSeptember 2019 , concurrent with the issuance of our 2025 Notes, S&P revised the rating outlook to positive. InJuly 2019 , Moody's upgraded our Company rating from Caa1 to B3, and our senior 77
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unsecured bond rating from Caa2 to Caa1, with a stable outlook. InOctober 2018 , Fitch initiated coverage and assigned a rating of B- for the Company and our senior unsecured notes, bringing it in line with S&P's current ratings. Equity Transactions InApril 2016 , the board of directors of our general partner suspended payment of our quarterly cash distribution. The board of directors of our general partner will continue to evaluate our ability to reinstate the distribution. Seasonality Impacts on Liquidity The operating results for the fuel products segment, including the selling prices of asphalt products we produce, generally follow seasonal demand trends. Asphalt demand is generally lower in the first and fourth quarters of the year, as compared to the second and third quarters, due to the seasonality of the road construction and roofing industries we supply. Demand for gasoline and diesel is generally higher during the summer months than during the winter months due to seasonal increases in highway traffic. In addition, our natural gas costs can be higher during the winter months, as demand for natural gas as a heating fuel increases during the winter. As a result, our operating results for the first and fourth calendar quarters may be lower than those for the second and third calendar quarters of each year due to seasonality related to these and other products that we produce and sell. Contractual Obligations and Commercial Commitments A summary of our total contractual cash obligations as ofDecember 31, 2019 , at current maturities is as follows: Payments Due by Period Less Than 1-3 3-5 More Than Total 1 Year Years Years 5 Years (In millions) Operating Activities: Interest on long-term debt at contractual rates and maturities (1)$ 496.9 $ 116.2 $ 216.1 $ 134.3 $ 30.3 Operating lease obligations (2) 102.6 65.0 23.5 10.8 3.3 Letters of credit (3) 42.5 42.5 - - - Purchase commitments (4) 315.1 170.8 60.2 42.1 42.0 Throughput contract (5) 27.7 2.6 7.8 7.9 9.4 Employment agreements (6) 1.6 1.0 0.6 - - Financing Activities: Obligations under inventory financing agreements 134.3 134.3 - - - Finance lease obligations 2.7 0.3 0.6 0.8 1.0 Long-term debt obligations, excluding finance lease obligations 1,228.8 1.5 352.3 325.0 550.0 Total obligations$ 2,352.2 $ 534.2 $ 661.1 $ 520.9 $ 636.0
(1) Interest on long-term debt at contractual rates and maturities relates
primarily to interest on our senior notes, revolving credit facility
interest and fees, and interest on our finance lease obligations, which
excludes the adjustment for the interest rate swap agreement.
(2) We have various operating leases primarily for railcars, the use of land,
storage tanks, compressor stations, equipment, precious metals and office
facilities that extend through
(3) Letters of credit primarily supporting crude oil and feedstock purchases.
(4) Purchase commitments consist primarily of obligations to purchase fixed
volumes of crude oil, other feedstocks and finished products for resale
from various suppliers based on current market prices at the time of delivery. (5) Throughput commitments consist primarily of obligations to transport a minimum volume of crude oil through a pipeline. (6) Certain employment agreements may be terminated under certain
circumstances or at certain dates prior to expiration. We expect those
agreements will be renewed or replaced with similar agreements upon their
expiration. Amounts due under those agreements assume they are not
terminated prior to their expiration.
For additional information regarding our expected capital and turnaround expenditures, for which we are not contractually committed, refer to "Capital Expenditures" above. Off-Balance Sheet Arrangements We did not enter into any material off-balance sheet transactions during fiscal year 2019. 78
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Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements for the years endedDecember 31, 2019 , 2018 and 2017. These consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions given the level of complexity and subjectivity involved in forming these estimates. We consider an accounting estimate to be critical if: • The accounting estimate requires us to make assumptions about matters that are highly uncertain at the time the accounting estimate is made; and • We reasonably could have used different estimates in the current period,
or changes in these estimates are reasonably likely to occur from period
to period as new information becomes available, and a change in these
estimates would have a material impact on our financial condition or
results from operations.
We continually evaluate the estimates and judgments used to prepare the consolidated financial statements. Our estimates are based on historical experience, information from third-party professionals and various other assumptions that we believe to be reasonable under the circumstances. There are other items within our consolidated financial statements that require estimation, but are not deemed critical based on the above criteria. Changes in estimates used in these and other items could have a material impact on our consolidated financial statements in any one period. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 2 "Summary of Significant Accounting Policies" in Part II, Item 8 "Financial Statements and Supplementary Data." We believe that the following are the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations. Valuation of Definite Long-Lived Assets Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the estimated undiscounted future cash flows related to the asset are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the estimated fair value, usually determined by the estimated discounted future cash flows of the asset. When a decision has been made to dispose of property, plant and equipment prior to the end of the previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life. Significant Estimates and Assumptions Estimated undiscounted future cash flows are used for the purpose of testing our definite long-lived assets for impairment. Fair values calculated for the purpose of measuring impairments on definite long-lived assets are estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in estimating undiscounted future cash flows and performing these fair value estimates since the results are based on forecasted assumptions. Significant assumptions include: • Future margins on products produced and sold. Our estimates of future
product margins are based on our analysis of various supply and demand
factors, which include, among other things, industry-wide capacity, our
planned utilization rate, end-user demand, capital expenditures and
economic conditions. Such estimates are consistent with those used in our
planning and capital investment reviews.
• Future capital requirements. These are based on authorized spending and
internal forecasts.
• Discount rate commensurate with the risks involved. We apply a discount
rate to our cash flows based on a variety of factors, including market and
economic conditions, operational risk, regulatory risk and political risk.
This discount rate is also compared to recent observable market transactions, if possible. A higher discount rate decreases the net present value of cash flows. We base our estimated undiscounted future cash flows and fair value estimates on projected financial information which we believe to be reasonable. However, actual results may differ from these projections. 2017 Impairment Charge During the fourth quarter of 2017, we identified impairment indicators that suggested the carrying values of long-lived assets at theSan Antonio andMissouri asset groups within the fuel products and specialty products segments, respectively, may not be recoverable. The primary impairment indicators included projections of future cash flows and the associated impact on the long-range strategic plan forecasts, lower than expected cash flows attributed to these asset groups and poor local market conditions. Undiscounted cash flow tests performed for these asset groups indicated that the long-lived assets were not recoverable. The fair value of the asset groups was established using a discounted cash flow method which utilized Level 3 inputs in the fair value hierarchy. The principal parameters used to establish fair values included estimates of future margins on products produced and sold, future commodity prices, future capital expenditures and discount rates. As a result of the long-lived asset impairment assessment performed, we recorded property, plant and equipment impairment charges on ourSan Antonio asset group of$147.0 million and on ourMissouri asset group of$59.2 million . The discount rates used for ourSan Antonio andMissouri asset groups were 14.5% and 12.5%, respectively, per year. Revenue growth rates assumed for ourSan Antonio asset group was 42.2% for 2018 and 2.0% to 6.0% for 2019 and beyond. Revenue growth rates assumed for ourMissouri asset group was 12.6% for 2018 and 2.0% to 6.0% for 2019 and beyond. Sensitivity Analysis An estimate of the sensitivity to net income resulting from impairment calculations is not practicable, given the numerous assumptions (e.g., pricing, volumes and discount rates, etc.) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset by favorable adjustments in other assumptions. Valuation ofGoodwill We review goodwill for impairment annually onOctober 1 and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with ASC 350, Intangibles -Goodwill and Other (Topic 350): TestingGoodwill for Impairment ("ASU 2011-08"). Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary. In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we assess relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit's fair value or carrying amount involve significant judgment and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and Company specific events and the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact. If our qualitative assessment concludes that it is probable that an impairment exists or we skip the qualitative assessment, then we need to perform a quantitative assessment. In the first step of the quantitative assessment, our assets and liabilities, including existing goodwill and other intangible assets, are assigned to the identified reporting units to determine the carrying value of the reporting units. If the carrying value of a reporting unit is in excess of its fair value, an impairment may exist, and we must perform an impairment analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any. When performing the quantitative assessment, as required in the impairment test, the fair value of the reporting unit is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the reporting unit. If the carrying value of a reporting unit is in excess of its fair value, an impairment would be recognized in an amount equal to the excess that the carrying value exceeded the estimated fair value, limited to the carrying value of goodwill. Inputs used to estimate the fair value of the Company's reporting units are considered Level 3 inputs of the fair value hierarchy and include the following: • The Company's financial projections for its reporting units are based on
its analysis of various supply and demand factors which include, among
other things, industry-wide capacity, planned utilization rates, end-user
demand, crack spreads, capital expenditures and economic conditions. Such estimates are consistent with those used in the Company's planning and capital investment reviews and include recent historical prices and published forward prices.
• The discount rate used to measure the present value of the projected
future cash flows is based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible. For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement. Significant Estimates and Assumptions Fair values calculated for the purpose of testing our goodwill for impairment are estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in performing these fair value estimates since the results are based on forecasted assumptions. Significant assumptions include: • Future margins on products produced and sold. Our estimates of future
product margins are based on our analysis of various supply and demand
factors, which include, among other things, industry-wide capacity, our planned utilization rate, end-user demand, crack spreads, capital expenditures and economic conditions. Such estimates are consistent with
those used in our planning and capital investment reviews and include
recent historical prices and published forward prices.
• Discount rate commensurate with the risks involved. We apply a discount
rate to our cash flows based on a variety of factors, including market and
economic conditions, operational risk, regulatory risk and political risk.
This discount rate is also compared to recent observable market transactions, if possible. A higher discount rate decreases the net present value of cash flows.
• Future capital requirements. These are based on authorized spending and
internal forecasts.
We base our fair value estimates on projected financial information which we believe to be reasonable. However, actual results may differ from these projections. Sensitivity Analysis An estimate of the sensitivity to net income resulting from impairment calculations is not practicable, given the numerous assumptions (e.g., pricing, volumes and discount rates) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset by favorable adjustments in other assumptions. Recent Accounting Pronouncements For a summary of recently issued and adopted accounting standards applicable to us, please read Note 2 "Summary of Significant Accounting Policies" in Part II, Item 8 "Financial Statements and Supplementary Data." Item 7A. Quantitative and Qualitative Disclosures About Market Risk Commodity Price Risk Derivative Instruments We are exposed to price risks due to fluctuations in the price of crude oil, refined products (primarily in our fuel products segment) and precious metals. We use various strategies to reduce our exposure to commodity price risk. We do not attempt to eliminate all of our risk as the costs of such actions are believed to be too high in relation to the risk posed to our future cash flows, earnings and liquidity. The strategies we use to reduce our risk utilize both physical forward contracts and financially settled derivative instruments, such as swaps, to attempt to reduce our exposure with respect to: • crude oil purchases and sales;
• refined product sales and purchases;
• precious metals; and
• fluctuations in the value of crude oil between geographic regions and between the different types of crude oil such as NYMEX WTI, WCS, WTI Midland, Mixed Sweet Blend and ICE Brent. We manage our exposure to commodity markets, credit, volumetric and liquidity risks to manage our costs and volatility of cash flows as conditions warrant or opportunities become available. These risks may be managed in a variety of ways that may include the use of derivative instruments. Derivative instruments may be used for the purpose of mitigating risks associated with an asset, liability and anticipated future transactions and the changes in fair value of our derivative instruments will affect our earnings and cash flows; however, such changes should be offset by price or rate changes related to the underlying commodity or financial transaction that is part of the risk management strategy. We do not speculate with derivative instruments or other contractual arrangements that are not associated with our business objectives. Speculation is defined as increasing our natural position above the maximum position of our physical assets or trading in commodities, currencies or other risk bearing assets that are not associated with our business activities and objectives. Our positions are monitored routinely by a risk management committee and discussed with the board of directors of our general partner quarterly to ensure compliance with our stated risk management policy and documented risk management strategies. All strategies are reviewed on an ongoing basis by our risk management committee, 79
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which will add, remove or revise strategies in anticipation of changes in market conditions and/or in risk profiles. These changes in strategies are to position us in relation to our risk exposures in an attempt to capture market opportunities as they arise. Please read Note 11 "Derivatives" in the notes to our consolidated financial statements under Part II, Item 8 "Financial Statements and Supplementary Data" for a discussion of the accounting treatment for the various types of derivative instruments, for a further discussion of our hedging policies and for more information relating to our implied crack spreads of crude oil, diesel, and gasoline derivative instruments. Our derivative instruments and overall specialty products segment and fuel products segment hedging positions are monitored regularly by our risk management committee, which includes executive officers. The risk management committee reviews market information and our hedging positions regularly to determine if additional derivative activity is advised. A summary of derivative positions and a summary of hedging strategy are presented to our general partner's board of directors quarterly. The following table illustrates how a change in market price (holding all other variables constant and excluding the impact of our current hedges) would affect our sales and cost of sales in the consolidated statements of operations: Sales Cost of Sales Year Ended December 31, Year Ended December 31, 2019 2018 2019 2018 (In millions) Specialty Products:$1.00 change in per barrel price of crude oil (1) $ - $ -$ 9.1 $ 8.7 Fuel Products:$1.00 change in per barrel price of crude oil (1) - - 21.4 20.1$1.00 change in per barrel selling price of gasoline, diesel and jet fuel (1) 21.4 20.1 - - (1) Based on our 2019 and 2018 sales volumes. Revolving Credit Facility Borrowings under the revolving credit facility are limited by a borrowing base that is determined based on advance rates of percentages of Eligible Accounts and Eligible Inventory (as defined in the Credit Agreement). As such, the borrowing base can fluctuate based on changes in inventory and accounts receivable, as well as selling prices of our products and our current material costs, primarily the cost of crude oil. Our inventory is based on local crude oil prices at period end, which can materially fluctuate period to period. Pension Assets Volatility and Investment Policy Our Pension Plan assets are also subject to volatility that can be caused by fluctuation in general economic conditions. Plan assets are invested by the Plan's fiduciaries, which direct investments according to specific policies. Our consolidated statements of operations is currently shielded from volatility in plan assets due to the way accounting standards are applied for pension plans, although favorable or unfavorable investment performance over the long term will impact our pension expense if it deviates from our assumption related to the future rate of return. Please read Note 15 "Employee Benefit Plans" under Part II, Item 8 "Financial Statements and Supplementary Data" for a further discussion of our investment policies. Compliance Price Risk Renewable Identification Numbers We are exposed to market risks related to the volatility in the price of credits needed to comply with governmental programs. The EPA sets annual quotas for the percentage of biofuels that must be blended into transportation fuels consumed in theU.S. , and as a producer of motor fuels from petroleum, we are required to blend biofuels into the fuel products we produce at a rate that will meet theEPA's annual quota. To the extent we are unable to blend biofuels at that rate, we must purchase RINs in the open market to satisfy the annual requirement. We have not entered into any derivative instruments to manage this risk, but we have purchased RINs when the price of these instruments is deemed favorable. Holding other variables constant (RINs requirements), a$1.00 change in the price of RINs as ofDecember 31, 2019 , would be expected to have an impact on net income for 2019 of approximately$64.2 million . Interest Rate Risk Our exposure to interest rate changes is limited to the fair value of the debt issued, which would not have a material impact on our earnings or cash flows. The following table provides information about the fair value of our fixed rate debt obligations as 80
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ofDecember 31, 2019 and 2018, which we disclose in Note 10 "Long-Term Debt" and Note 12 "Fair Value Measurements" under Part II, Item 8 "Financial Statements and Supplementary Data." December 31, 2019 December 31, 2018 Fair Value Carrying Value Fair Value Carrying Value (In millions) Financial Instrument: 2021 Unsecured Notes $ - $ -$ 755.7 $ 894.7 2022 Unsecured Notes$ 351.2 $ 347.1$ 279.4 $ 345.9 2023 Unsecured Notes$ 325.2 $ 321.0$ 252.3 $ 320.1 2025 Unsecured Notes$ 598.8 $ 540.5 $ - $ - For our variable rate debt, if any, changes in interest rates generally do not impact the fair value of the debt instrument, but may impact our future earnings and cash flows. We had a$600.0 million revolving credit facility as ofDecember 31, 2019 , with borrowings bearing interest at the prime rate or LIBOR, at our option, plus the applicable margin. Borrowings under this facility are variable. We had no variable rate debt as ofDecember 31, 2019 . Holding other variables constant (such as debt levels), a 100 basis point change in interest rates on our variable rate debt as ofDecember 31, 2019 , would be expected to have no impact on net income and cash flows for 2019. We had no variable rate debt outstanding as ofDecember 31, 2018 . Foreign Currency Risk We have minimal exposure to foreign currency risk and as such the cost of hedging this risk is viewed to be in excess of the benefit of further reductions in our exposure to foreign currency exchange rate fluctuations. 81
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