Calumet Specialty Products Partners(CLMT) - 2024 Q1 - Quarterly Report

Part I: Financial Statements Condensed Consolidated Balance Sheets Total assets slightly decreased, liabilities increased, and partners' capital (deficit) further declined from Q4 2023 to Q1 2024 Condensed Consolidated Balance Sheets | Metric | March 31, 2024 (Millions) | December 31, 2023 (Millions) | | :------------------------------------ | :-------------------------- | :--------------------------- | | Cash and cash equivalents | $23.9 | $7.9 | | Accounts receivable, net | $339.0 | $286.2 | | Inventories | $403.1 | $439.4 | | Total current assets | $811.7 | $794.7 | | Property, plant and equipment, net | $1,486.0 | $1,506.3 | | Total assets | $2,731.6 | $2,751.3 | | Accounts payable | $321.1 | $322.0 | | Obligations under inventory financing | $55.6 | $190.4 | | Current portion of RINs obligation | $212.7 | $277.3 | | Total current liabilities | $824.4 | $1,112.7 | | Long-term debt, less current portion | $2,055.6 | $1,829.7 | | Total liabilities | $3,015.7 | $2,996.0 | | Partners' capital (deficit) | $(529.7) | $(490.3) | Unaudited Condensed Consolidated Statements of Operations Q1 2024 saw a net loss of $41.6 million, a reversal from Q1 2023 net income, driven by lower sales and derivative losses Unaudited Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2024 (Millions) | Three Months Ended March 31, 2023 (Millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Sales | $1,005.8 | $1,037.3 | | Cost of sales | $927.3 | $940.7 | | Gross profit | $78.5 | $96.6 | | Operating income | $36.3 | $43.0 | | Interest expense | $(60.8) | $(49.2) | | Gain (loss) on derivative instruments | $(16.9) | $25.5 | | Net income (loss) | $(41.6) | $18.6 | | Limited partners' interest basic per unit | $(0.51) | $0.23 | | Limited partners' interest diluted per unit | $(0.51) | $0.23 | Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) Q1 2024 comprehensive loss of $41.5 million reversed Q1 2023 income, mirroring the net income (loss) trend Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended March 31, 2024 (Millions) | Three Months Ended March 31, 2023 (Millions) | | :---------------------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Net income (loss) | $(41.6) | $18.6 | | Defined benefit pension and retiree health benefit plans | $0.1 | $0.0 | | Total other comprehensive income | $0.1 | $0.0 | | Comprehensive income (loss) attributable to partners' capital (deficit) | $(41.5) | $18.6 | Unaudited Condensed Consolidated Statements of Partners' Capital (Deficit) Partners' capital (deficit) declined to $(529.7) million by March 31, 2024, mainly due to the net loss attributable to partners Unaudited Condensed Consolidated Statements of Partners' Capital (Deficit) | Metric | December 31, 2023 (Millions) | March 31, 2024 (Millions) | | :---------------------------------------------------- | :--------------------------- | :------------------------ | | Balance at beginning of period | $(490.3) | $(484.4) | | Other comprehensive income | $0.0 | $0.1 | | Net loss attributable to partners | $18.6 | $(41.6) | | Settlement of tax withholdings on equity-based incentive compensation | $(7.9) | $(3.5) | | Settlement of phantom units | $(1.0) | $5.6 | | Balance at end of period | $(523.3) | $(529.7) | Unaudited Condensed Consolidated Statements of Cash Flows Operating cash outflow significantly increased in Q1 2024, while investing and financing activities saw minor changes, leading to a net cash increase Unaudited Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2024 (Millions) | Three Months Ended March 31, 2023 (Millions) | | :---------------------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Net cash used in operating activities | $(94.0) | $(26.7) | | Net cash used in investing activities | $(20.0) | $(130.4) |\n| Net cash provided by financing activities | $130.7 | $133.1 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $16.7 | $(24.0) | | Cash, cash equivalents and restricted cash at end of period | $31.4 | $11.2 | Notes to Unaudited Condensed Consolidated Financial Statements 1. Description of the Business Calumet Specialty Products Partners, L.P. manufactures and markets specialty products and renewable fuels across North America - Calumet Specialty Products Partners, L.P. is a publicly traded Delaware limited partnership (ticker: CLMT) with its general partner owning 2% and all incentive distribution rights, and limited partners owning 98%[217] - The company manufactures, formulates, and markets specialty branded products and renewable fuels across North America, serving various consumer-facing and industrial markets[244] 2. Summary of Significant Accounting Policies Key accounting policies include GAAP conformity, cash definitions, and RINs obligations, which are subject to litigation and regulatory changes - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP, with certain information condensed or omitted per SEC rules[218] - Restricted cash, legally restricted under the MRL Term Loan Credit Agreement, is included in prepaid expenses and other current assets[219] - The company's RINs Obligation is an estimated provision for future purchases of RINs to satisfy EPA requirements, recorded as a current liability and revalued periodically, impacting cost of sales[220][222] - The company has ongoing litigation regarding EPA's denial of Small Refinery Exemptions (SREs) for compliance years 2018-2022, with some appeals granted stays and one denial vacated by the Fifth Circuit[223][226][253] RINs Obligation | Metric | March 31, 2024 (Millions) | December 31, 2023 (Millions) | | :------------------- | :-------------------------- | :--------------------------- | | RINs Obligation | $212.7 | $277.3 | 3. Revenue Recognition Revenue is recognized upon transfer of control, with varying payment terms and expensed shipping/handling costs - Revenue is recognized upon transfer of control of promised goods to the customer, with performance obligations identified for distinct products[228][257] - Payment terms vary: 2-30 days for fuel products, 7-14 days for renewable fuel products, and 30-90 days for specialty products[230] - Shipping and handling costs are expensed, and excise/sales taxes are excluded from the transaction price[231][258][287] Accounts Receivable from Customers | Metric | March 31, 2024 (Millions) | December 31, 2023 (Millions) | | :------------------------------------ | :-------------------------- | :--------------------------- | | Receivables, net of allowance for expected credit losses | $289.4 | $252.4 | 4. Inventories Inventories are valued using LIFO, with adjustments impacting cost of sales, and influenced by Supply and Offtake Agreements - Inventories are valued using the LIFO method, with interim calculations based on management estimates[291] - The company recorded an increase in cost of sales due to LIFO inventory adjustments of $9.0 million in Q1 2024 and $19.7 million in Q1 2023[263] Inventory Composition | Category | March 31, 2024 (Millions) | December 31, 2023 (Millions) | | :------------------- | :-------------------------- | :--------------------------- | | Raw materials | $108.2 | $89.2 | | Work in process | $95.5 | $109.0 | | Finished goods | $199.4 | $241.2 | | Total | $403.1 | $439.4 | - The replacement cost of inventories was $75.5 million higher than carrying value at March 31, 2024, and $67.8 million higher at December 31, 2023[234] 5. Leases The company utilizes various operating and finance leases, with stable lease costs and weighted-average terms of 2.6-3.0 years - The company has operating and finance leases for land, storage tanks, railcars, equipment, precious metals, and office facilities, with terms up to 16 years[264] Total Lease Cost | Metric | Three Months Ended March 31, 2024 (Millions) | Three Months Ended March 31, 2023 (Millions) | | :------------------- | :----------------------------------------- | :----------------------------------------- | | Total lease cost | $24.1 | $24.2 | Weighted-Average Lease Terms and Discount Rates | Metric | March 31, 2024 | December 31, 2023 | | :------------------------------------ | :------------- | :---------------- | | Weighted-average remaining lease term (years): | | | | Operating leases | 2.6 | 2.6 | | Finance leases | 3.0 | 3.1 | | Weighted-average discount rate: | | | | Operating leases | 8.6% | 8.6% | | Finance leases | 7.5% | 7.3% | 6. Commitments and Contingencies The company faces environmental and litigation risks, with ongoing remediation, standby letters of credit, and purchase commitments - The company's operations are subject to stringent federal, regional, state, and local laws and regulations governing worker health and safety, environmental discharges, and protection[300] - Remediation of subsurface contamination is in process at certain refinery sites, with current belief that costs will not have a material adverse effect[302] - The company maintains safety and training programs and conducts periodic audits to comply with occupational health and safety laws[303] Standby Letters of Credit | Metric | March 31, 2024 (Millions) | December 31, 2023 (Millions) | | :-------------------------- | :-------------------------- | :--------------------------- | | Outstanding standby letters of credit | $43.6 | $29.9 | Unconditional Purchase Commitments (Throughput Contract) | Year | Commitment (Millions) | | :--- | :-------------------- | | 2024 | $3.0 | | 2025 | $4.0 | | 2026 | $4.0 | | 2027 | $2.4 | | Total | $13.4 | 7. Inventory Financing Agreements Inventory financing agreements, including a new Shreveport deal, led to increased financing costs in Q1 2024 - The Shreveport Supply and Offtake Agreement with J. Aron replaced the previous Macquarie agreement on January 17, 2024[92][307] - The MRL Supply and Offtake Agreement with Wells Fargo replaced MRL's previous Macquarie agreement on October 3, 2023[309][334] - Inventory financing arrangements are accounted for similar to product financing arrangements, with inventories remaining on the company's balance sheet[282] Financing Costs for Supply and Offtake Agreements | Metric | Three Months Ended March 31, 2024 (Millions) | Three Months Ended March 31, 2023 (Millions) | | :------------------- | :----------------------------------------- | :----------------------------------------- | | Financing costs | $8.4 | $7.0 | 8. Long-Term Debt Long-term debt increased to $2,081.9 million due to new 2029 Secured Notes, with all debt covenants in compliance - On March 7, 2024, the company issued $200.0 million in 9.25% Senior Secured First Lien Notes due 2029, using proceeds to redeem 2024 Secured Notes and $50.0 million of 2025 Notes[170][315] - The company's revolving credit facility was amended on January 17, 2024, increasing maximum availability to $650.0 million[139][346] - As of March 31, 2024, the company was in compliance with all covenants under its debt instruments[90][344][347] Long-Term Debt Overview | Debt Instrument | March 31, 2024 (Millions) | December 31, 2023 (Millions) | | :------------------------------------ | :-------------------------- | :--------------------------- | | Revolving credit facility | $309.8 | $136.7 | | MRL revolving credit agreement | $22.6 | $13.0 | | 2024 Secured Notes | $0.0 | $179.0 | | 2025 Notes | $413.5 | $413.5 | | 2027 Notes | $325.0 | $325.0 | | 2028 Notes | $325.0 | $325.0 | | 2029 Secured Notes | $200.0 | $0.0 | | MRL Term Loan Credit Agreement | $74.3 | $74.4 | | Shreveport terminal asset financing | $48.9 | $50.8 | | MRL asset financing arrangements | $380.6 | $384.6 | | Finance lease obligations | $2.7 | $3.0 | | Total debt | $2,081.9 | $1,885.4 | | Less current portion of long-term debt | $26.3 | $55.7 | | Total long-term debt | $2,055.6 | $1,829.7 | Maturities of Long-Term Debt and Finance Lease Obligations | Year | Maturity (Millions) | | :--- | :------------------ | | 2024 | $19.9 | | 2025 | $442.4 | | 2026 | $32.0 | | 2027 | $706.9 | | 2028 | $423.3 | | Thereafter | $477.9 | | Total | $2,102.4 | 9. Derivatives Derivatives manage commodity price risks, not for speculation, resulting in a $16.9 million loss from non-hedges in Q1 2024 - The company uses derivative instruments (physical forward contracts, financially settled derivatives like swaps, collars, options, futures) to reduce exposure to commodity price risks, including crude oil, refined products, natural gas, and precious metals[3][326][352][378] - The company does not speculate with derivative instruments; positions are monitored by a risk management committee[172][352][378] - Derivative instruments are recognized at fair value on the balance sheet, with changes in fair value for non-hedges recorded in the statements of operations[6][329][379] Gain (Loss) on Derivative Instruments Not Designated as Hedges | Segment | Three Months Ended March 31, 2024 (Millions) | Three Months Ended March 31, 2023 (Millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Specialty Products and Solutions segment: | | | | Inventory financing obligation | $(54.2) | $0.0 | | Crack spread swaps | $(0.8) | $(15.5) | | Montana/Renewables segment: | | | | Inventory financing obligation | $2.4 | $0.0 | | Total realized in Gain (Loss) | $(52.6) | $(15.5) | | Total unrealized in Gain (Loss) | $35.7 | $41.0 | Notional Contract Volumes for Derivative Instruments (March 31, 2024) | Derivative Type | Total Outstanding Notional | Notional Year of 2024 | Unit of Measure | | :------------------------------------ | :------------------------- | :-------------------- | :-------------- | | Crack spread swaps - sales | 2,200,000 | 2,200,000 | Barrels | 10. Fair Value Measurements Fair value measurements use a three-tier hierarchy, with most derivatives as Level 3 and pension assets as Level 1/2 - The company uses a three-tier fair value hierarchy (Level 1, 2, 3) for measuring fair value, prioritizing observable inputs[5][357] - Commodity derivative instruments are measured at fair value using a market approach, with most classified as Level 3 due to unobservable inputs like non-performance risk and creditworthiness[360][388] - Pension plan investments are classified as Level 1 (quoted prices) and Level 2 (independent pricing service)[389] Recurring Assets and Liabilities at Fair Value (March 31, 2024) | Category | Level 1 (Millions) | Level 2 (Millions) | Level 3 (Millions) | Total (Millions) | | :------------------------------------ | :----------------- | :----------------- | :----------------- | :--------------- | | Assets: | | | | | | Derivative assets: Crack spread swaps | $0.0 | $0.0 | $5.5 | $5.5 | | Pension plan investments | $3.6 | $23.3 | $0.0 | $26.9 | | Total recurring assets | $3.6 | $23.3 | $5.5 | $32.4 | | Liabilities: | | | | | | Derivative liabilities: Inventory financing obligation | $0.0 | $0.0 | $(10.9) | $(10.9) | | Precious metals obligations | $(6.3) | $0.0 | $0.0 | $(6.3) | | Liability awards | $(50.4) | $0.0 | $0.0 | $(50.4) | | Total recurring liabilities | $(56.7) | $0.0 | $(10.9) | $(67.6) | Estimated Fair Value of Financial Instruments (March 31, 2024) | Financial Instrument | Level | Fair Value (Millions) | Carrying Value (Millions) | | :------------------------------------ | :---- | :-------------------- | :------------------------ | | 2024 Secured Notes, 2025 Notes, 2027 Notes, 2028 Notes, and 2029 Secured Notes | 2 | $1,259.2 | $1,253.4 | | Revolving credit facility | 3 | $309.8 | $306.1 | | MRL revolving credit agreement | 3 | $22.6 | $22.0 | | MRL term loan credit agreement | 3 | $74.3 | $71.6 | | Shreveport terminal asset financing | 3 | $48.9 | $48.4 | | MRL asset financing arrangements | 3 | $380.6 | $377.7 | | Finance leases and other obligations | 3 | $2.7 | $2.7 | 11. Earnings Per Unit Q1 2024 saw a basic and diluted net loss per limited partner unit of $0.51, reflecting the overall net loss Earnings Per Limited Partner Unit | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 (Restated) | | :------------------------------------ | :-------------------------------- | :----------------------------------------- | | Net income (loss) | $(41.6) | $18.6 | | Net income (loss) attributable to partners | $(40.8) | $18.2 | | Basic weighted average limited partner units outstanding | 80,352,403 | 79,830,671 | | Diluted weighted average limited partner units outstanding | 80,352,403 | 79,939,985 | | Limited partners' interest basic per unit | $(0.51) | $0.23 | | Limited partners' interest diluted per unit | $(0.51) | $0.23 | - Total diluted weighted average limited partner units outstanding for Q1 2024 excluded a de-minimis amount of potentially dilutive phantom units that would have been anti-dilutive[13] 12. Segments and Related Information Four segments reported Q1 2024 Adjusted EBITDA of $21.6 million, a decline from prior year, with minimal international sales - The company's reportable segments are Specialty Products and Solutions, Montana/Renewables, Performance Brands, and Corporate[14][25][367] - International sales accounted for less than ten percent of consolidated sales in Q1 2024 and Q1 2023[49] - No single customer represented 10% or greater of consolidated sales in Q1 2024 or Q1 2023[401] - Two suppliers provided approximately 88.1% of crude oil supply in Q1 2024 and 94.4% in Q1 2023[372] Segment Adjusted EBITDA | Segment | Three Months Ended March 31, 2024 (Millions) | Three Months Ended March 31, 2023 (Millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Specialty Products and Solutions | $41.8 | $76.0 | | Performance Brands | $13.4 | $16.4 | | Montana/Renewables | $(14.5) | $4.8 | | Corporate | $(19.1) | $(19.9) | | Consolidated Total Adjusted EBITDA | $21.6 | $77.3 | Segment Sales by Product Category | Product Category | March 31, 2024 Sales (Millions) | March 31, 2023 Sales (Millions) | | :------------------------------------ | :------------------------------ | :------------------------------ | | Specialty Products and Solutions: | | | | Lubricating oils | $189.7 | $215.2 | | Solvents | $102.4 | $106.6 | | Waxes | $39.0 | $44.2 | | Fuels, asphalt and other by-products | $350.5 | $372.7 | | Total SPS | $681.6 | $738.7 | | Montana/Renewables: | | | | Gasoline | $31.6 | $42.9 | | Diesel | $27.9 | $32.9 | | Jet fuel | $4.6 | $4.9 | | Asphalt, heavy fuel oils and other | $30.1 | $20.5 | | Renewable fuels | $150.3 | $118.6 | | Total Montana/Renewables | $244.5 | $219.8 | | Performance Brands: | | | | Total Performance Brands | $79.7 | $78.8 | | Consolidated Sales | $1,005.8 | $1,037.3 | 13. Unrestricted Subsidiaries MRHL and MRL are the sole unrestricted subsidiaries, adhering to specific non-recourse debt and affiliate agreement criteria - MRHL and MRL are the company's only unrestricted subsidiaries as of March 31, 2024, and December 31, 2023[20] - Unrestricted subsidiaries must meet criteria such as having no indebtedness other than non-recourse debt, not entering into unfavorable affiliate agreements, and not guaranteeing company debt[434] Financial Information of Unrestricted Subsidiaries (March 31, 2024) | Metric | Unrestricted Subsidiaries (Millions) | | :------------------------------------ | :--------------------------------- | | Cash and cash equivalents | $1.6 | | Accounts receivable - trade | $36.0 | | Inventory | $73.2 | | Property, plant and equipment, net | $763.0 | | Accounts payable | $410.8 | | Obligations under inventory financing | $55.6 | | Long-term debt | $554.0 | | Redeemable noncontrolling interest | $245.6 | 14. Redeemable Noncontrolling Interest MRHL issued preferred units for $250.0 million, with a preferred return, recorded as temporary equity at $245.6 million - MRHL issued 12,500,000 preferred units to an affiliate of Warburg Pincus LLC for $250.0 million, carrying certain minimum return thresholds (Preferred Return)[375][405] - The Preferred Units are entitled to a preferred return equal to the greater of an 8.0% IRR or a MOIC initially at 1.35, increasing to 1.40 after five years[405] - The redeemable noncontrolling interest is reflected as temporary equity at $245.6 million as of March 31, 2024, and December 31, 2023[437] 15. Subsequent Events Post-Q1 2024, the fair value of derivative instruments increased by approximately $8.6 million - As of May 7, 2024, the fair value of the company's derivative instruments increased by approximately $8.6 million subsequent to March 31, 2024[406] Part II: Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The company manufactures specialty products and renewable fuels, with a Conversion Agreement for transition to New Calumet - The company manufactures, formulates, and markets a diversified slate of specialty branded products and renewable fuels[439] - A Conversion Agreement was entered into on February 9, 2024, to effectuate a corporate transition to New Calumet, with an amendment made on April 17, 2024[57][440] First Quarter 2024 Update Q1 2024 saw a net loss of $41.6 million and lower Adjusted EBITDA, with mixed segment performance - Net loss of $41.6 million in Q1 2024 versus net income of $18.6 million in Q1 2023[29] - Adjusted EBITDA of $21.6 million in Q1 2024 versus $77.3 million in Q1 2023[29] - Specialty Products and Solutions and Performance Brands segments continued to benefit from above mid-cycle margin environment and strong demand[59] - Montana/Renewables segment Adjusted EBITDA was a loss of $14.5 million in Q1 2024, unfavorably impacted by higher material costs, seasonally weak asphalt and gas markets, and higher operating expenses[62] - Specialty Products and Solutions segment Adjusted EBITDA was $41.8 million in Q1 2024 versus $76.0 million in Q1 2023, impacted by lower throughput volumes due to a planned turnaround[61][413] - Performance Brands segment Adjusted EBITDA was $13.4 million in Q1 2024 versus $16.4 million in Q1 2023, with Q1 2023 including a $5.0 million insurance claim benefit[445] Outlook and Trends Strong demand for renewable fuels, especially SAF, is expected, with specialty segments maintaining above mid-cycle margins - Strong demand for renewable fuel products, including SAF, is expected to continue due to corporate decarbonization targets, sustainability initiatives, and governmental mandates[442] - Montana Renewables facility is positioned as a key producer for SAF in North America[442] - Specialty Products and Solutions and Performance Brands segments are expected to maintain above mid-cycle margins for the remainder of the year, with healthy demand[59] Contingencies Contingencies are monitored, with no material adverse effects on liquidity or financial condition expected beyond accrued amounts - The company does not believe that any liabilities beyond the amounts already accrued, which may result from contingencies, will have a material adverse effect on liquidity, financial condition or results of operations[60] Liquidity Update Total liquidity decreased to $211.8 million, but the company expects sufficient liquidity for the next 12 months - Total liquidity decreased from $244.9 million at March 31, 2023, to $211.8 million at March 31, 2024[118] - Liquidity at March 31, 2024, comprised $23.9 million of unrestricted cash and $187.9 million of availability under credit facilities[63] - The company believes it has sufficient liquidity to meet financial commitments, debt service, contingencies, and anticipated capital expenditures for at least the next 12 months[63] Renewable Fuel Standard Update Q1 2024 saw a $64.5 million RINs gain, but RFS compliance costs remain significant with potential regulatory risks - The company recorded a gain of $64.5 million for RINs in Q1 2024, compared to a gain of $32.1 million in Q1 2023[415] - Expenses related to RFS compliance have the potential to remain a significant expense for the Specialty Products and Solutions and Montana/Renewables segments[64][254] - Legal or regulatory changes increasing RINs obligations or narrowing small refinery exemptions could materially increase RFS compliance costs and adversely affect results and liquidity[64][254] Unrestricted Subsidiaries Refer to Note 13 for detailed financial information on the company's unrestricted subsidiaries - Further information regarding certain financial information of unrestricted subsidiaries is available in Note 13[448] Key Performance Measures Management analyzes performance using segment Adjusted EBITDA, gross profit, and sales volumes for core operations and asset utilization - Key performance measures include segment Adjusted EBITDA, segment gross profit, and sales volumes[34][35][67][449] - Sales volumes are important for measuring effective asset utilization and improving profitability through fixed cost spreading and additional gross profit[418] - Segment Adjusted EBITDA is used to analyze trends and performance of core cash operations and ability to pay interest to noteholders, excluding non-core cash operating activities[37] Production and Sales Volume Trends | Metric | Three Months Ended March 31, 2024 (bpd) | Three Months Ended March 31, 2023 (bpd) | % Change | | :------------------------------------ | :-------------------------------------- | :-------------------------------------- | :------- | | Total sales volume | 83,602 | 76,856 | 8.8% | | Total feedstock runs | 71,548 | 71,559 | 0.0% | | Total facility production | 72,266 | 73,222 | (1.3)% | | Specialty Products and Solutions production | 51,688 | 54,466 | (5.1)% | | Montana/Renewables production | 18,995 | 16,825 | 12.9% | | Performance Brands production | 1,583 | 1,931 | (18.0)% | | Renewable fuels production | 8,243 | 5,030 | 63.9% | Results of Operations for the Three Months Ended March 31, 2024 and 2023 Q1 2024 sales decreased by 3.0%, gross profit fell by 18.7%, and a $16.9 million derivative loss reversed prior year gains Consolidated Results of Operations | Metric | Three Months Ended March 31, 2024 (Millions) | Three Months Ended March 31, 2023 (Millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Sales | $1,005.8 | $1,037.3 | | Cost of sales | $927.3 | $940.7 | | Gross profit | $78.5 | $96.6 | | Operating income | $36.3 | $43.0 | | Interest expense | $(60.8) | $(49.2) | | Gain (loss) on derivative instruments | $(16.9) | $25.5 | | Net income (loss) | $(41.6) | $18.6 | | Adjusted EBITDA | $21.6 | $77.3 | | Distributable Cash Flow | $(59.6) | $4.8 | - Total sales decreased by $31.5 million (3.0%) to $1,005.8 million in Q1 2024, primarily due to a lower commodity price environment in the Specialty Products and Solutions segment, partially offset by increased sales volumes[457][45] - Gross profit decreased by $18.1 million (18.7%) to $78.5 million in Q1 2024, mainly due to the regression of record high specialties and fuels margins in the prior year[77][78] - Montana/Renewables segment gross profit increased due to higher margins from renewable fuel products, despite higher operating costs[79] - General and administrative expenses decreased by $13.8 million (37.2%) to $23.3 million, primarily due to a $16.4 million decrease in equity-based compensation[107] - Interest expense increased by $11.6 million (23.6%) to $60.8 million, mainly due to interest on 2028 Notes and MRL Term Loan Credit Agreement[82] - A $16.9 million loss on derivative instruments was recorded in Q1 2024, compared to a $25.5 million gain in Q1 2023, primarily due to a realized loss on the embedded derivative from the termination of the Shreveport inventory financing arrangement[108] Non-GAAP Financial Measures Non-GAAP measures like EBITDA, Adjusted EBITDA, and Distributable Cash Flow assess core cash operations, not as GAAP alternatives - EBITDA, Adjusted EBITDA, and Distributable Cash Flow are non-GAAP measures used to assess financial performance, excluding transactions not related to core cash operating activities[40][70][422] - EBITDA is defined as net income (loss) plus interest expense, income taxes, and depreciation and amortization[71] - Adjusted EBITDA is EBITDA adjusted for various non-cash and non-recurring items, similar to 'Consolidated Cash Flow' in senior note indentures and 'Consolidated EBITDA' in the credit agreement[424][454] - Distributable Cash Flow is defined as Adjusted EBITDA less replacement and environmental capital expenditures, turnaround costs, cash interest expense, gain (loss) from unconsolidated affiliates, net of cash distributions and income tax expense (benefit)[41] - These non-GAAP measures have limitations and should not be considered alternatives to GAAP measures[72] Reconciliation of Net Income (Loss) to EBITDA, Adjusted EBITDA, and Distributable Cash Flow | Metric | Three Months Ended March 31, 2024 (Millions) | Three Months Ended March 31, 2023 (Millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Net income (loss) | $(41.6) | $18.6 | | Interest expense | $60.8 | $49.2 | | Depreciation and amortization | $36.0 | $29.5 | | Income tax expense | $0.2 | $0.5 | | EBITDA | $55.4 | $97.8 | | LCM / LIFO loss | $9.0 | $19.7 | | Unrealized (gain) loss on derivative instruments | $(35.7) | $(41.0) | | RINs mark-to-market gain | $(71.1) | $(46.1) | | Other non-recurring expenses | $60.8 | $29.5 | | Adjusted EBITDA | $21.6 | $77.3 | | Replacement and environmental capital expenditures | $(16.7) | $(17.2) | | Turnaround costs | $(5.5) | $(7.1) | | Cash interest expense | $(58.8) | $(47.7) | | Income tax expense | $(0.2) | $(0.5) | | Distributable Cash Flow | $(59.6) | $4.8 | Liquidity and Capital Resources Sufficient liquidity is expected for 12 months despite increased operating cash use; capital expenditures significantly decreased - The company believes it has sufficient liquid assets, cash flow from operations, borrowing capacity, and access to capital markets to meet financial commitments for at least the next 12 months[84] - Operating activities used $94.0 million cash in Q1 2024, compared to $26.7 million in Q1 2023, primarily due to decreased net unit margins[112] - Investing activities used $20.0 million cash in Q1 2024, a decrease from $130.4 million in Q1 2023, mainly due to lower capital expenditures for property, plant, and equipment[85] - Financing activities provided $130.7 million cash in Q1 2024, slightly down from $133.1 million in Q1 2023, driven by higher borrowings under revolving credit facilities offset by increased net payments for inventory financing[113] Capital Expenditures | Category | Three Months Ended March 31, 2024 (Millions) | Three Months Ended March 31, 2023 (Millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Capital improvement expenditures | $3.3 | $113.2 | | Replacement capital expenditures | $15.8 | $13.7 | | Environmental capital expenditures | $0.9 | $3.5 | | Turnaround capital expenditures | $5.5 | $7.1 | | Total | $25.5 | $137.5 | - Total capital expenditures are forecasted to be $110 million to $140 million in 2024, primarily for growth and sustainability projects[115] - Principal sources of short-term liquidity include $187.9 million availability under credit facilities, inventory financing agreements, and $23.9 million unrestricted cash[120] Part III: Quantitative and Qualitative Disclosures About Market Risk Commodity Price Risk The company mitigates commodity price risks (crude oil, refined products, natural gas, precious metals) using derivatives, not eliminating all risk - The company is exposed to price risks from fluctuations in crude oil, refined products, natural gas, and precious metals[124][145] - Strategies to reduce commodity price risk include physical forward contracts and financially settled derivative instruments (swaps, collars, options, futures)[145] - Risk management activities are monitored by a risk management committee and reviewed quarterly by the general partner's Board of Directors[147][172] Compliance Price Risk RINs price volatility poses market risk, with a $1.00 increase negatively impacting net income by $65.0 million annually - The company is exposed to market risks related to the volatility in the price of credits (RINs) needed to comply with governmental programs like the RFS[183] - A $1.00 increase in the price of RINs is expected to have a negative impact on Net income (loss) of approximately $65.0 million per year[129] - The company has not entered into any derivative instruments to manage RINs price risk[183] Interest Rate Risk Interest rate risk on variable debt is limited; a 100 basis point change impacts net income by approximately $3.3 million annually - The company's exposure to interest rate changes on fixed and variable rate debt is limited to the fair value of the debt[130] - A 100 basis point change in interest rates on variable rate debt as of March 31, 2024, would impact Net income (loss) by approximately $3.3 million per year[150] Outstanding Variable Rate Debt | Metric | March 31, 2024 (Millions) | December 31, 2023 (Millions) | | :------------------- | :-------------------------- | :--------------------------- | | Outstanding variable rate debt | $332.4 | $149.7 | Foreign Currency Risk Minimal foreign currency risk exists, with hedging costs exceeding benefits of further exposure reduction - The company has minimal exposure to foreign currency risk[151] - The cost of hedging foreign currency risk is viewed as exceeding the benefit of further reductions in exposure[151] Part IV: Controls and Procedures Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2024, ensuring timely information accumulation - The company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2024[152] - Disclosure controls are designed to provide reasonable assurance that required information is accumulated and communicated timely to management[152] Remediation of Previously Reported Material Weakness Material weakness in internal controls for redeemable noncontrolling interests was remediated as of March 31, 2024 - A material weakness in internal controls related to the subsequent accounting for and measurement of redeemable noncontrolling interests was previously identified[153] - This material weakness led to errors in the attribution of net losses to redeemable noncontrolling interest and partners, resulting in a restatement of prior financial statements[153] - The material weakness has been remediated as of March 31, 2024, through implementing new controls, increased rigor in financial reporting, and engaging third-party technical accounting expertise[174] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred in Q1 2024, beyond remediation efforts - No material changes in internal control over financial reporting occurred during Q1 2024, other than the remediation actions for the previously reported material weakness[154] Part II: Other Information Item 1. Legal Proceedings No pending legal proceedings beyond routine litigation; commitments and contingencies are referenced in Note 6 - The company is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business[155] - Information provided under Note 6 — 'Commitments and Contingencies' is incorporated by reference[155] Item 1A. Risk Factors No material changes to risk factors were reported from the 2023 Annual Report - No material changes in the risk factors discussed in Part I, Item 1A 'Risk Factors' in the 2023 Annual Report[138] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported - None[156] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - None[175] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Not applicable[176] Item 5. Other Information A trading plan for up to 82,000 common units was adopted by the Daniel J. Sajkowski 2011 Trust for future sales - The Daniel J. Sajkowski 2011 Trust adopted a trading plan (Rule 10b5-1(c)) for the potential sale of up to 82,000 common units between March 1, 2025, and July 31, 2025[201] Item 6. Exhibits Exhibits include Conversion agreements, partnership amendments, senior note indentures, financing agreements, and certifications - Exhibits include the Conversion Agreement and its First Amendment, amendments to the First Amended and Restated Agreement of Limited Partnership, and the Amended and Restated Limited Liability Company Agreement of Calumet GP, LLC[157][159][160][163][178][179][188][203] - Key debt-related exhibits include the Indenture for 2029 Secured Notes and the Fourth Amendment to the Third Amended and Restated Credit Agreement[164][166] - Inventory financing agreements, such as the Monetization Master Agreement, Financing Agreement, and Supply and Offtake Agreement with J. Aron & Company LLC, are also listed[166][204] - Sarbanes-Oxley Section 302 and Section 1350 certifications of Todd Borgmann and David Lunin are included[166] SIGNATURES The report was signed by David Lunin, EVP and CFO of Calumet GP, LLC, on May 10, 2024 - The report was signed by David Lunin, Executive Vice President and Chief Financial Officer of Calumet GP, LLC, on May 10, 2024[162][167]