Calumet Specialty Products Partners(CLMT) - 2023 Q4 - Annual Report

PART I This section provides an overview of the company's business, operational strategies, risk factors, and legal proceedings Business and Properties Calumet Specialty Products Partners manufactures and markets specialty products and renewable fuels from twelve North American facilities Overview The company manufactures specialty products and renewable fuels, operating twelve North American facilities across four reportable segments - The company's business is organized into four reportable segments: Specialty Products and Solutions, Montana/Renewables, Performance Brands, and Corporate[213] - In the Specialty Products and Solutions segment, the company manufactures and markets products like solvents, waxes, and customized lubricating oils[213] - The Performance Brands segment focuses on blending, packaging, and marketing high-performance products under the Royal Purple, Bel-Ray, and TruFuel brands[213] - The Montana/Renewables segment consists of two facilities: one for renewable fuels (renewable diesel, SAF) and another for specialty asphalt, serving local and regional markets[213] Business Strategies and Competitive Strengths Strategies prioritize asset profitability and liquidity, leveraging diverse products, flexible facilities, and renewable fuel leadership - Key business strategies include enhancing profitability, maintaining liquidity, expanding customer relationships, and considering disciplined acquisitions[243][217][218] - Competitive strengths are identified as diverse specialty products, flexible and scalable facilities, strong customer relationships, leadership in energy transition via the MRL facility, and an experienced management team[221][222][247] Our Operating Assets and Contractual Arrangements Operations involve twelve facilities with significant storage, showing shifts in sales volume and feedstock runs Key Operating Facilities and Products (2023 Sales Volume) | Facility | Location | Sales Volume (bpd) | Key Products | | :--- | :--- | :--- | :--- | | Shreveport | Louisiana | 42,400 | Specialty lubricating oils, waxes, gasoline, diesel, jet fuel, asphalt | | Montana Refining | Montana | 13,399 | Specialty asphalt, gasoline, diesel, jet fuel | | Montana Renewables | Montana | 6,188 | Renewable diesel, SAF, renewable hydrogen, etc. | | Princeton | Louisiana | 4,896 | Specialty lubricating oils, asphalt | | Cotton Valley | Louisiana | 4,743 | Specialty solvents | | Karns City | Pennsylvania | 1,486 | White mineral oils, solvents, petrolatums | | Calumet Packaging | Louisiana | 1,068 | Premium synthetic lubricants, fuels, solvents | | Dickinson | Texas | 562 | White mineral oils, compressor lubricants | | Royal Purple | Texas | 335 | Premium synthetic lubricants | | Missouri | Missouri | 212 | Polyol ester-based synthetic lubricants | Production and Feedstock Volumes (in bpd) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total sales volume | 79,805 | 82,946 | (3.8)% | | Total feedstock runs | 77,200 | 80,447 | (4.0)% | | Total facility production | 77,296 | 79,402 | (2.7)% | Sales by Segment (in $ millions) | Segment | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Specialty Products and Solutions | $2,876.9 | $3,508.0 | (18.0)% | | Montana/Renewables | $993.8 | $874.9 | 13.6% | | Performance Brands | $310.3 | $303.4 | 2.3% | | Consolidated Sales | $4,181.0 | $4,686.3 | (10.8)% | Facilities Key manufacturing facilities, including Louisiana and Montana sites, support specialty and renewable fuel production Shreveport Facility Production (in bpd) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Crude oil throughput capacity | 60,000 | 60,000 | 60,000 | | Total feedstock runs | 38,248 | 42,453 | 29,971 | | Total facility production | 40,677 | 45,525 | 31,835 | Cotton Valley Facility Production (in bpd) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Crude oil throughput capacity | 13,600 | 13,600 | 13,600 | | Total feedstock runs | 9,125 | 8,975 | 8,349 | | Total facility production | 5,520 | 5,317 | 4,698 | Great Falls Specialty Asphalt Facility Production (in bpd) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Crude oil throughput capacity | 15,000 | 15,000 | 30,000 | | Total feedstock runs | 11,982 | 17,599 | 25,614 | | Total facility production | 11,772 | 17,619 | 25,897 | - The Montana Renewables Facility, converted from a portion of the Great Falls site, has a permitted throughput capacity of 15,000 bpd to produce renewable fuels, including SAF and renewable diesel[180] Karns City, Dickinson & Other Facilities Production (in bpd) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Feedstock throughput capacity | 11,300 | 11,300 | 11,300 | | Total feedstock runs | 3,396 | 3,482 | 4,368 | | Total production | 3,419 | 3,582 | 4,269 | Our Crude Oil and Feedstock Supply The company heavily relies on a few key crude oil and feedstock suppliers, secured via term and evergreen contracts - In 2023, the company had a high concentration of crude oil suppliers[31] - BP Products North America Inc. (BP) supplied approximately 71.7% of total crude oil[31] - Macquarie Energy Canada LTD. (Macquarie) supplied approximately 18.5% of total crude oil[31] - The company utilizes a mix of short-term and long-term contracts, including month-to-month evergreen agreements with Plains and a renewing one-year term agreement with BP[181] - The Montana Renewables (MRL) facility has entered into various term supply agreements for its renewable feedstocks[34] Our Products, Markets, and Customers The company offers a diverse product portfolio, primarily fuels and lubricating oils, serving a broad North American customer base Product Sales Breakdown (Year Ended Dec 31, 2023) | Product Category | % of Total Sales | | :--- | :--- | | Fuels & Fuel Related Products | 47% | | Lubricating Oils | 19% | | Renewable Products | 12% | | Solvents | 10% | | Packaged and Synthetic Specialty Products | 8% | | Waxes | 4% | - The company has a diverse customer base with no significant concentration[67][43][44] - Products from the Shreveport facility are sold into Louisiana, Texas, and Arkansas, with excess volumes shipped to the Midwest via the TEPPCO pipeline[63][38] - Renewable fuels from the Montana Renewables facility are distributed into markets in the western half of North America[66][43] Competition The company faces intense competition from larger integrated petroleum companies, differentiating through flexibility and customer responsiveness - The company competes with large, integrated petroleum companies and independent refiners who may have greater resources and flexibility[45] - Primary competitors by product category include Exxon Mobil, Motiva, Phillips 66, HF Sinclair, Chevron, Ergon Refining, Cross Oil, San Joaquin Refining, CITGO, Total S.A., The International Group, Valvoline, Royal Dutch Shell, Delek US, and Cenex[46][70][47] - The company believes its flexibility and customer responsiveness differentiate it from larger competitors[75] Governmental Regulation Operations are subject to stringent environmental, health, and safety regulations, imposing significant compliance costs and liabilities - Operations are subject to stringent environmental, health, and safety laws which can result in significant sanctions, remedial obligations, and capital expenditures for non-compliance[50][78] - Air Emissions: The company must comply with the Clean Air Act (CAA), including National Ambient Air Quality Standards (NAAQS) for ozone and stringent fuel formulation standards like Tier 3 for gasoline sulfur content[82][56][84] - Climate Change: The company faces regulatory, political, litigation, and financial risks associated with greenhouse gas (GHG) emissions, including potential legislation and shifts in investor sentiment[114][60][115] - Hazardous Substances: The company is subject to liability under CERCLA ("Superfund") and RCRA for the cleanup of hazardous substance releases, potentially including contamination from prior owners[116][118][90] - Water Discharges: Compliance with the Clean Water Act and the Oil Pollution Act of 1990 (OPA) is required, imposing strict controls on pollutant discharges and liability for oil spills[120][92] - Great Falls Refinery: The company is involved in an ongoing legal process regarding indemnification from HF Sinclair Corporation for pre-closing environmental contamination at the Great Falls refinery[54][172] Human Capital Management The company employs approximately 1,580 people, with many under collective bargaining, emphasizing safety and competitive benefits - As of February 28, 2024, the company employed approximately 1,580 people, with around 600 covered by collective bargaining agreements[131] Collective Bargaining Agreements | Facility | Union | Expiration Date | | :--- | :--- | :--- | | Cotton Valley | International Union of Operating Engineers | Nov 19, 2026 | | Princeton | International Union of Operating Engineers | Aug 20, 2024 | | Dickinson | International Union of Operating Engineers | Dec 12, 2024 | | Shreveport | United Steelworkers | Apr 30, 2026 | | Missouri | United Steelworkers | Apr 30, 2025 | | Karns City | United Steelworkers | Jan 31, 2027 | | Great Falls | United Steelworkers | Jul 31, 2026 | - The company offers competitive salaries, comprehensive benefits (health, disability, 401(k)), and short- and long-term incentive programs to foster ownership and align employee interests with unitholders[105] - A core tenet is employee safety, with a goal of zero incidents and a culture that empowers employees to stop unsafe work[133][106] - The company is committed to a culture of diversity and inclusion in its hiring and advancement practices[157][108] Risk Factors The company faces significant risks from macroeconomic volatility, commodity prices, operational hazards, partnership structure, and tax implications Risks Related to our Business Business risks include macroeconomic volatility, commodity price fluctuations, operational dependencies, and regulatory compliance, especially RFS - Business performance is dependent on supply and demand fundamentals, which are affected by macroeconomic factors outside of the company's control[139][160] - Exposure to volatile commodity prices can negatively impact margins, profitability, and cash flows; the Gulf Coast 2/1/1 crack spread ranged from a high of $50.05 to a low of $13.98 per barrel in 2023[160][161][143] - Hedging activities may not be effective and could reduce earnings, as the company only hedges a portion of its expected requirements[163][146][164] - The company depends on third-party pipelines (e.g., Plains, Enterprise) for feedstock supply and product transportation, and their unavailability could significantly harm revenues[149][168] - The availability and cost of Renewable Identification Numbers (RINs) for RFS compliance, along with litigation over Small Refinery Exemption (SRE) petitions, could materially affect financial results[210][623][351] - A material weakness was identified in internal control over financial reporting related to the accounting for redeemable noncontrolling interests, which could affect the accuracy and timeliness of financial reporting[582][608][318] Risks Related to Our Partnership Structure The partnership structure presents risks from general partner conflicts, limited unitholder rights, and potential unit dilution - The general partner and its affiliates have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests over those of unitholders[237][336][373] - The partnership agreement reduces the standards to which the general partner is held by state fiduciary duty law and restricts remedies available to unitholders[339][424] - Unitholders have limited voting rights, are not entitled to elect the general partner or its directors, and require a 66 2/3% vote of all outstanding units to remove the general partner[341][342][473] - The company may issue an unlimited number of additional limited partner interests without unitholder approval, which would dilute current unitholders' ownership interests[478][398] Risks Related to the Corporate Conversion The proposed corporate conversion is subject to unitholder approval and conditions, with potential negative impacts if delayed - The Corporate Conversion is subject to conditions, including unitholder approval, and there is no guarantee it will be completed[236][393][88] - Failure to complete the conversion, or significant delays, could negatively affect the company's business, financial results, and the price of its common units[236][417] Tax Risks to Common Unitholders Unitholders face tax risks including potential entity-level taxation, tax obligations without cash distributions, and complex filing - The company's tax treatment depends on its status as a partnership for federal income tax purposes; if treated as a corporation, cash available for debt payments and distributions would be substantially reduced[330][331][332] - Unitholders may be required to pay taxes on their share of the company's income even if they do not receive any cash distributions[212][405][681] - Tax gain or loss on the disposition of common units could be more or less than expected, and a substantial portion of the amount realized may be taxed as ordinary income[406][682] - Tax-exempt entities and foreign persons face unique tax issues, including potential unrelated business taxable income and withholding taxes[212][408][432] - If the IRS makes audit adjustments, it may assess and collect taxes directly from the partnership, reducing cash available for distributions[409][452] Cybersecurity The company maintains a cyber risk management program and Incident Response Plan to mitigate threats, which have not materially impacted operations - The company maintains a cyber risk management program aligned with its enterprise risk management process, overseen by the Director of Information Technology and the Board's Risk Committee[454][412][456] - An Incident Response Plan (IRP) is in place to manage cybersecurity incidents, aligning with the NIST framework and covering preparation, detection, containment, and recovery[436] - The company has policies to oversee and mitigate cybersecurity risks associated with third-party service providers, requiring a formal IT Security Governance review[687] - To date, cybersecurity threats have not materially affected the company's business strategy, results of operations, or financial condition[689] Legal Proceedings The company is not involved in any material pending legal proceedings beyond routine litigation incidental to its business - The company is not a party to, and its property is not the subject of, any pending legal proceedings other than ordinary routine litigation incidental to its business[414] - The company does not expect the outcomes of current litigation, individually or in the aggregate, to have a material adverse effect on its financial position, results of operations, or cash flows[790]