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As Of Filer Filing For·On·As Docs:Size Issuer Agent 6/29/06 Calumet Specialty Prods Partn… LP 424B1 1:2.9M RR Donnelley |
Document/Exhibit Description Pages Size
1: 424B1 Calumet Specialty Products Partners, L.P. - HTML 2.17M
333-134993
| e424b1 |
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-134993
PROSPECTUS
3,300,000 Common Units
Calumet Specialty Products Partners, L.P.
Representing Limited Partner Interests
Calumet Specialty Products Partners, L.P. is offering 3,300,000
common units representing limited partner interests.
The common units are traded on the NASDAQ National Market under
the symbol “CLMT.” On June 28, 2006, the last
reported sale price of the common units on the NASDAQ National
Market was $32.94 per common unit.
See “Risk Factors” on page 15 to read about
factors you should consider before buying the common units.
These risks include the following:
•
We may not have sufficient cash from operations to pay our
minimum quarterly distribution following the establishment of
cash reserves and payment of fees and expenses, including
payments to our general partner.
•
Refining margins are volatile, and a reduction in our refining
margins will adversely affect the amount of cash we will have
available for distribution.
•
Our hedging activities may reduce our earnings, profitability
and cash flows.
•
Our asset reconfiguration and enhancement initiatives, including
the planned expansion project at our Shreveport refinery, may
not result in revenue or cash flow increases, may be subject to
cost overruns and are subject to regulatory, environmental,
political, legal and economic risks, which could adversely
affect our business, operating results, cash flows and financial
condition.
•
We depend on certain key crude oil gatherers for a significant
portion of our supply of crude oil.
•
Our general partner and its affiliates have conflicts of
interest and limited fiduciary duties, which may permit them to
favor their own interests to your detriment.
•
Unitholders have limited voting rights and are not entitled to
elect our general partner or its directors.
•
Even if unitholders are dissatisfied, they cannot initially
remove our general partner without its consent.
•
You may be required to pay taxes on income from us even if you
do not receive any cash distributions from us.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
| Per Common Unit | Total | |||||||
|
Initial price to public
|
$ | 32.94 | $ | 108,702,000 | ||||
|
Underwriting discount
|
$ | 1.40 | $ | 4,620,000 | ||||
|
Proceeds, before expenses to
Calumet Specialty Products Partners, L.P.
|
$ | 31.54 | $ | 104,082,000 | ||||
| Deutsche Bank Securities |
| Petrie Parkman & Co. |
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iii
iv
References in this prospectus to “Calumet,” “the
Partnership,” “we,” “our,”
“us” or like terms when used in the present tense,
prospectively or for historical periods since January 31,
2006, refer to Calumet Specialty Products Partners, L.P. and its
subsidiaries. References to “Calumet Predecessor,” or
to “we,” “our,” “us” or like terms
for historical periods prior to January 31, 2006, refer to
Calumet Lubricants Co., Limited Partnership and its
subsidiaries, which were contributed to us at the closing of our
initial public offering on January 31, 2006. The results of
operations for the quarter ended March 31, 2006 for Calumet
include the results of operations of Calumet Predecessor for the
period of January 1, 2006 through January 31, 2006.
References in this prospectus to “our general partner”
refer to Calumet GP, LLC.
| • | Princeton Refinery. Our Princeton refinery, with an aggregate crude oil throughput capacity of approximately 10,000 barrels per day (“bpd”) and located in northwest Louisiana, produces specialty lubricating oils, including process oils, base oils, transformer oils and refrigeration oils that are used in a variety of industrial and automotive applications. | |
| • | Cotton Valley Refinery. Our Cotton Valley refinery, with an aggregate crude oil throughput capacity of approximately 13,500 bpd and located in northwest Louisiana, produces specialty solvents that are used principally in the manufacture of paints, cleaners and automotive products. | |
| • | Shreveport Refinery. Our Shreveport refinery, with an aggregate current crude oil throughput capacity of approximately 42,000 bpd and located in northwest Louisiana, produces specialty lubricating oils and waxes, as well as fuel products such as gasoline, diesel fuel and jet fuel. In the second quarter of 2006, we began processing 5,000 bpd of sour crude oil utilizing existing permitted capacity at our Shreveport refinery. We plan to commence construction of an expansion project, scheduled for completion in the third quarter of 2007, to increase our Shreveport refinery’s aggregate crude oil throughput capacity to approximately 57,000 bpd. | |
| • | Distribution and Logistics Assets. We own and operate a terminal in Burnham, Illinois with a storage capacity of approximately 150,000 barrels that facilitates the distribution of our products in the Upper Midwest and East Coast regions of the United States and in Canada. In addition, we lease approximately 1,200 rail cars to receive crude oil or distribute our products throughout the United States and Canada. We also have approximately 4.5 million barrels of aggregate finished product storage capacity at our refineries. |
1
| • | Concentrate on stable cash flows. | |
| • | Develop and expand our customer relationships. | |
| • | Enhance profitability of our existing assets. | |
| • | Pursue strategic and complementary acquisitions. |
| • | We offer our customers a diverse range of specialty products. | |
| • | We have strong relationships with a broad customer base. | |
| • | Our refineries have advanced technology. | |
| • | We have an experienced management team. |
2
| • | The Heritage Group, a privately-owned general partnership that invests in a variety of industrial companies, the Fred M. Fehsenfeld, Jr. and F. William Grube families or trusts set up on their behalf, and certain of their affiliates will own 5,761,015 common units and 13,066,000 subordinated units, representing a 62.7% limited partner interest in us; | |
| • | Our general partner, Calumet GP, LLC, will continue to own a 2% general partner interest in us and all of our incentive distribution rights, which entitles our general partner to increasing percentages of the cash we distribute in excess of $0.495 per unit per quarter; and | |
| • | Our public unitholders will own 10,604,985 common units, representing a 35.3% limited partner interest in us. |
3
| Ownership of Calumet Specialty Products Partners, L.P. | |||||
|
Public Common Units
|
35.3% | ||||
|
Common Units owned by Affiliates of
our General Partner
|
19.2% | ||||
|
Subordinated Units owned by
Affiliates of our General Partner
|
43.5% | ||||
|
General Partner Interest
|
2.0% | ||||
|
Total
|
100% | ||||
4
5
| Common units offered | 3,300,000 common units. | |
| 3,795,000 common units, if the underwriters exercise their option to purchase additional units in full. | ||
| Units outstanding after this offering | 16,366,000 common units, representing a 54.5% limited partner interest in us, and 13,066,000 subordinated units, representing a 43.5% limited partner interest in us. | |
| 16,861,000 common units, representing a 55.2% limited partner interest, and 13,066,000 subordinated units, representing a 42.8% limited partner interest in us, if the underwriters exercise their option to purchase additional units in full. | ||
| Use of proceeds | We intend to use the estimated net proceeds of approximately $103.1 million from this offering, after deducting underwriting discounts, commissions and fees, and estimated offering expenses of approximately $1.0 million: | |
| • to repay all of our borrowings outstanding under our revolving credit facility, which were $14.8 million as of March 31, 2006 ($16.0 million as of June 23, 2006); | ||
| • to fund the construction and other start-up costs of the planned expansion project at our Shreveport refinery; and | ||
| • to the extent available, for general partnership purposes. | ||
| If we experience a substantial delay in commencing construction of the expansion project at our Shreveport refinery, we intend to use the estimated net proceeds of approximately $103.1 million from this offering: | ||
| • to repay all of our borrowings outstanding under our revolving credit facility; | ||
| • to fund capital expenditures; and | ||
| • to the extent available, for general partnership purposes. | ||
| Pending receipt of the air permit necessary to commence construction of the Shreveport expansion project, we plan to invest the portion of the net proceeds from this offering that we plan to use to fund future construction costs in highly liquid cash equivalents, as defined in our credit facilities. | ||
| If the underwriters exercise their option to purchase additional units, we will use the additional net proceeds for general partnership purposes. | ||
| Cash distributions | We paid a prorated quarterly cash distribution of $0.30 per unit for the first quarter of 2006, or $1.80 per unit on an annualized and un-prorated basis, on May 15, 2006 to unitholders of record as of May 2, 2006. This distribution was for the period from January 31, 2006, the date of the closing of our initial public offering, through the end of the first quarter. |
6
| Within 45 days after the end of each quarter, we distribute our available cash to unitholders of record on the applicable record date. | ||
| In general, we will pay any cash distributions we make each quarter in the following manner: | ||
| • first, 98% to the holders of common units, pro rata, and 2% to our general partner, until each common unit has received a minimum quarterly distribution of $0.45 plus any arrearages from prior quarters; | ||
| • second, 98% to the holders of subordinated units, pro rata, and 2% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $0.45; and | ||
| • third, 98% to all unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $0.495. | ||
| If cash distributions to our unitholders exceed $0.495 per common unit in any quarter, our general partner will receive increasing percentages, up to 50%, of the cash we distribute in excess of that amount. We refer to the amount of these distributions in excess of the 2% general partner interest as “incentive distributions.” Please read “How We Make Cash Distributions — Incentive Distribution Rights.” | ||
| We must distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner. We refer to this cash as “available cash,” and we define its meaning in our partnership agreement, in “How We Make Cash Distributions — Distributions of Available Cash — Definition of Available Cash” and in the glossary of terms attached as Appendix A. The amount of available cash may be greater than or less than the minimum quarterly distribution to be distributed on all units. | ||
| Subordination period | During the subordination period, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.45 per quarter, plus any arrearages from prior quarters, before any distributions may be made on the subordinated units. The subordination period will extend until the first day of any quarter beginning after December 31, 2010 that each of the following tests are met: | |
| (1) distributions of available cash from operating surplus on each of the outstanding common units, subordinated units and general partner units equaled or exceeded the minimum quarterly distributions on all such units for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date; | ||
| (2) the adjusted operating surplus generated during each of the three consecutive, non-overlapping four-quarter periods |
7
| immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units, subordinated units and general partner units during those periods on a fully diluted basis; and | ||
| (3) there are no arrearages in payment of minimum quarterly distributions on the common units. | ||
| When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and the common units will no longer be entitled to arrearages. | ||
| Issuance of additional units | In general, during the subordination period, we may issue up to 6,533,000 additional common units without obtaining unitholder approval. We can also issue an unlimited number of common units in connection with acquisitions and capital improvements that increase cash flow from operations per unit on an estimated pro forma basis. We can also issue additional common units if the proceeds are used to repay certain of our indebtedness. | |
| Until the time that our Shreveport refinery expansion project is put into commercial service, the common units to be issued in connection with this offering will be deemed to constitute a portion of the up to 6,533,000 common units we are permitted to issue during the subordination period without obtaining unitholder approval and will reduce the number of additional common units we may issue in the future without obtaining unitholder approval accordingly. However, we anticipate that our Shreveport refinery expansion project will increase cash flow from operations per unit upon its completion. If this occurs, the common units we issue in this offering that are used to pay for such expansion project will be added back to the number of additional common units we may issue in the future without unitholder approval. | ||
| Please read “Units Eligible for Future Sale” and “The Partnership Agreement — Issuance of Additional Securities.” | ||
| Limited voting rights | Our general partner manages and operates us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 662/3 % of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, the owners of our general partner and certain of their affiliates will own an aggregate of 64.0% of our common and subordinated units. This will give our general partner the practical ability to prevent its involuntary removal. Please read “The Partnership Agreement — Voting Rights.” |
8
| Limited call right | If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price not less than the then-current market price of the common units. | |
| Estimated ratio of taxable income to distributions | We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2008, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be 20% or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $1.80 per unit, we estimate that your average allocable federal taxable income per year will be no more than $0.36 per unit. Please read “Material Tax Consequences — Tax Consequences of Unit Ownership — Ratio of Taxable Income to Distributions.” | |
| Material tax consequences | For a discussion of other material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material Tax Consequences.” | |
| Trading | Our common units are traded on the NASDAQ National Market under the symbol “CLMT.” |
9
| • | this offering of common units, our general partner’s proportionate capital contribution and our expected application of the estimated proceeds, net of underwriting discounts and commissions and estimated offering expenses, therefrom; | |
| • | our initial public offering of common units, our application of the net proceeds therefrom and the formation transactions related to our partnership; and | |
| • | the refinancing by Calumet Predecessor of its long-term debt obligations pursuant to new credit facilities it entered into in December 2005. |
10
| Calumet | ||||||||||||||||||||||||||||||
| Calumet Predecessor | Predecessor | Calumet | Calumet Pro Forma | |||||||||||||||||||||||||||
| Three Months | ||||||||||||||||||||||||||||||
| Year Ended | Three Months Ended | Year Ended | Ended | |||||||||||||||||||||||||||
| December 31, | March 31, | December 31, | March 31, | |||||||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2005 | 2006 | 2005 | 2006 | ||||||||||||||||||||||||
| (In thousands, except per unit data) | ||||||||||||||||||||||||||||||
|
Summary of Operations
Data:
|
||||||||||||||||||||||||||||||
|
Sales
|
$ | 430,381 | $ | 539,616 | $ | 1,289,072 | $ | 229,549 | $ | 397,694 | $ | 1,289,072 | $ | 397,694 | ||||||||||||||||
|
Cost of sales
|
385,890 | 501,284 | 1,148,715 | 203,432 | 346,744 | 1,148,715 | 346,744 | |||||||||||||||||||||||
|
Gross profit
|
44,491 | 38,332 | 140,357 | 26,117 | 50,950 | 140,357 | 50,950 | |||||||||||||||||||||||
|
Operating costs and expenses:
|
||||||||||||||||||||||||||||||
|
Selling, general and administrative
|
9,432 | 13,133 | 22,126 | 3,392 | 4,929 | 22,126 | 4,929 | |||||||||||||||||||||||
|
Transportation
|
28,139 | 33,923 | 46,849 | 10,723 | 13,907 | 46,849 | 13,907 | |||||||||||||||||||||||
|
Taxes other than income
|
2,419 | 2,309 | 2,493 | 732 | 914 | 2,493 | 914 | |||||||||||||||||||||||
|
Other
|
905 | 839 | 871 | 157 | 115 | 871 | 115 | |||||||||||||||||||||||
|
Restructuring, decommissioning and
asset impairments(1)
|
6,694 | 317 | 2,333 | 368 | — | 2,333 | — | |||||||||||||||||||||||
|
Total operating income (loss)
|
(3,098 | ) | (12,189 | ) | 65,685 | 10,745 | 31,085 | 65,685 | 31,085 | |||||||||||||||||||||
|
Other income (expense):
|
||||||||||||||||||||||||||||||
|
Equity in income (loss) of
unconsolidated affiliates
|
867 | (427 | ) | — | — | — | — | — | ||||||||||||||||||||||
|
Interest expense
|
(9,493 | ) | (9,869 | ) | (22,961 | ) | (4,864 | ) | (3,976 | ) | (8,542 | ) | (2,011 | ) | ||||||||||||||||
|
Debt extinguishment costs
|
— | — | (6,882 | ) | — | (2,967 | ) | (6,882 | ) | (2,967 | ) | |||||||||||||||||||
|
Realized gain (loss) on derivative
instruments
|
(961 | ) | 39,160 | 2,830 | (6,651 | ) | (3,080 | ) | 2,830 | (3,080 | ) | |||||||||||||||||||
|
Unrealized gain (loss) on
derivative instruments
|
7,228 | (7,788 | ) | (27,586 | ) | 603 | (17,715 | ) | (27,586 | ) | (17,715 | ) | ||||||||||||||||||
|
Other
|
32 | 83 | 242 | 39 | 199 | 242 | 199 | |||||||||||||||||||||||
|
Total other income (expense)
|
(2,327 | ) | 21,159 | (54,357 | ) | (10,873 | ) | (27,539 | ) | (39,938 | ) | (25,574 | ) | |||||||||||||||||
|
Net income (loss) before income
taxes
|
(5,425 | ) | 8,970 | 11,328 | (128 | ) | 3,546 | 25,747 | 5,511 | |||||||||||||||||||||
|
Income tax expense
|
— | — | — | — | 14 | 90 | 14 | |||||||||||||||||||||||
|
Net income (loss)
|
$ | (5,425 | ) | $ | 8,970 | $ | 11,328 | $ | (128 | ) | $ | 3,532 | $ | 25,657 | $ | 5,497 | ||||||||||||||
|
Basic and diluted pro forma net
income per limited partner unit:
|
||||||||||||||||||||||||||||||
|
Common
|
$ | 0.30 | $ | 2.47 | $ | 0.45 | ||||||||||||||||||||||||
|
Subordinated
|
$ | (0.36 | ) | $ | (1.94 | ) | $ | (0.15 | ) | |||||||||||||||||||||
|
Weighted average units:
|
||||||||||||||||||||||||||||||
|
Common
|
12,950 | 16,366 | 16,366 | |||||||||||||||||||||||||||
|
Subordinated
|
13,066 | 13,066 | 13,066 | |||||||||||||||||||||||||||
|
Balance Sheet Data (at period
end):
|
||||||||||||||||||||||||||||||
|
Property, plant and equipment, net
|
$ | 89,938 | $ | 126,585 | $ | 127,846 | $ | 131,194 | $ | 127,674 | $ | 127,674 | ||||||||||||||||||
|
Total assets
|
216,941 | 318,206 | 399,717 | 327,961 | 349,459 | 440,008 | ||||||||||||||||||||||||
|
Accounts payable
|
32,263 | 58,027 | 44,759 | 28,053 | 52,216 | 52,216 | ||||||||||||||||||||||||
|
Long-term debt
|
146,853 | 214,069 | 267,985 | 251,376 | 64,626 | 49,875 | ||||||||||||||||||||||||
|
Partners’ capital
|
25,544 | 34,514 | 39,054 | 34,385 | 169,180 | 274,480 | ||||||||||||||||||||||||
|
Cash Flow Data:
|
||||||||||||||||||||||||||||||
|
Net cash flow provided by (used in):
|
||||||||||||||||||||||||||||||
|
Operating activities
|
$ | 7,048 | $ | (612 | ) | $ | (34,001 | ) | $ | (48,005 | ) | $ | 60,115 | |||||||||||||||||
|
Investing activities
|
(11,940 | ) | (42,930 | ) | (12,903 | ) | (6,933 | ) | (2,921 | ) | ||||||||||||||||||||
|
Financing activities
|
4,884 | 61,561 | 40,990 | 37,306 | (69,282 | ) | ||||||||||||||||||||||||
|
Other Financial Data:
|
||||||||||||||||||||||||||||||
|
EBITDA
|
$ | 10,837 | $ | 25,766 | $ | 51,557 | $ | 7,532 | $ | 13,162 | $ | 51,557 | $ | 13,162 | ||||||||||||||||
|
Adjusted EBITDA
|
6,110 | 34,711 | 85,821 | 8,718 | 26,110 | 85,821 | 26,110 | |||||||||||||||||||||||
|
Operating Data (bpd):
|
||||||||||||||||||||||||||||||
|
Total sales volume(2)
|
23,616 | 24,658 | 46,953 | 38,418 | 52,090 | |||||||||||||||||||||||||
|
Total feedstock runs(3)
|
25,007 | 26,205 | 50,213 | 42,059 | 52,370 | |||||||||||||||||||||||||
|
Total refinery production(4)
|
25,204 | 26,297 | 48,331 | 40,343 | 50,585 | |||||||||||||||||||||||||
| (1) | Incurred in connection with the decommissioning of the Rouseville, Pennsylvania facility, the termination of the Bareco joint venture and the closing of the Reno, Pennsylvania facility, none of which were contributed to us in connection with our initial public offering. |
| (2) | Total sales volume includes sales from the production of our refineries and sales of inventories. |
| (3) | Feedstock runs represents the barrels per day of crude oil and other feedstocks processed at our refineries. |
| (4) | Total refinery production represents the barrels per day of specialty products and fuel products yielded from processing crude oil and other refinery feedstocks at our refineries. The difference between total refinery production and total feedstock is primarily a result of the time lag between the input of feedstock and production of end products and volume loss. |
11
| • | the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; | |
| • | the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness; | |
| • | our operating performance and return on capital as compared to those of other companies in our industry, without regard to financing or capital structure; and | |
| • | the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities. |
12
| Calumet Predecessor 5,2 | Calumet | Calumet Pro Forma | |||||||||||||||||||||||||||
| Three M | onths | ||||||||||||||||||||||||||||
| End | ed | Three Months | |||||||||||||||||||||||||||
| Year Ended December 31, | March | 31, | Year Ended | Ended | |||||||||||||||||||||||||
| December 31, | March 31, | ||||||||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2005 | 2006 | 2005 | 2006 | |||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
|
Reconciliation of EBITDA and
Adjusted EBITDA to net income (loss):
|
|||||||||||||||||||||||||||||
|
Net income (loss)
|
$ | (5,425 | ) | $ | 8,970 | $ | 11,328 | $ | (128 | ) | $ | 3,532 | $ | 25,657 | $ | 5,497 | |||||||||||||
|
Add:
|
|||||||||||||||||||||||||||||
|
Interest expense and debt
extinguishment costs
|
9,493 | 9,869 | 29,843 | 4,864 | 6,943 | 15,424 | 4,978 | ||||||||||||||||||||||
|
Depreciation and amortization
|
6,769 | 6,927 | 10,386 | 2,796 | 2,673 | 10,386 | 2,673 | ||||||||||||||||||||||
|
Income tax expense
|
— | — | — | — | 14 | 90 | 14 | ||||||||||||||||||||||
|
EBITDA
|
$ | 10,837 | $ | 25,766 | $ | 51,557 | $ | 7,532 | $ | 13,162 | $ | 51,557 | $ | 13,162 | |||||||||||||||
|
Add:
|
|||||||||||||||||||||||||||||
|
Unrealized loss (gain) from
mark to market accounting for hedging activities
|
$ | (7,228 | ) | $ | 7,788 | $ | 27,586 | $ | (603 | ) | $ | 17,715 | $ | 27,586 | $ | 17,715 | |||||||||||||
|
Non-cash impact of restructuring,
decommissioning and asset impairments
|
2,250 | (1,276 | ) | 1,766 | 368 | — | 1,766 | — | |||||||||||||||||||||
|
Prepaid non-recurring expenses and
accrued non-recurring expenses, net of cash outlays
|
251 | 2,433 | 4,912 | 1,421 | (4,767 | ) | 4,912 | (4,767 | ) | ||||||||||||||||||||
|
Adjusted EBITDA
|
$ | 6,110 | $ | 34,711 | $ | 85,821 | $ | 8,718 | $ | 26,110 | $ | 85,821 | $ | 26,110 | |||||||||||||||
13
| Calumet Predecessor | Calumet | ||||||||||||||||||||
| Three Months | |||||||||||||||||||||
| Ended | |||||||||||||||||||||
| Year Ended December 31, | March 31, | ||||||||||||||||||||
| 2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||||||
| (In thousands) | |||||||||||||||||||||
|
Reconciliation of EBITDA and
Adjusted EBITDA to net cash provided (used) by operating
activities:
|
|||||||||||||||||||||
|
Net cash provided (used) by
operating activities
|
$ | 7,048 | $ | (612 | ) | $ | (34,001 | ) | $ | (48,005 | ) | $ | 60,115 | ||||||||
|
Add:
|
|||||||||||||||||||||
|
Interest expense and debt
extinguishment costs
|
9,493 | 9,869 | 29,843 | 4,864 | 6,943 | ||||||||||||||||
|
Income tax expense
|
— | — | — | — | 14 | ||||||||||||||||
|
Restructuring charge
|
(874 | ) | — | (1,693 | ) | — | — | ||||||||||||||
|
Provision for doubtful accounts
|
(12 | ) | (216 | ) | (294 | ) | (50 | ) | (127 | ) | |||||||||||
|
Equity in (loss) income of
unconsolidated affiliates
|
867 | (427 | ) | — | — | — | |||||||||||||||
|
Dividends received from
unconsolidated affiliates
|
(750 | ) | (3,470 | ) | — | — | — | ||||||||||||||
|
Debt extinguishment costs
|
— | — | (4,173 | ) | — | (2,967 | ) | ||||||||||||||
|
Accounts receivable
|
4,670 | 19,399 | 56,878 | 22,506 | (1,400 | ) | |||||||||||||||
|
Inventory
|
(15,547 | ) | 20,304 | 25,441 | 3,009 | (7,313 | ) | ||||||||||||||
|
Other current assets
|
563 | 11,596 | (569 | ) | 5,117 | (16,471 | ) | ||||||||||||||
|
Derivative activity
|
6,265 | (5,046 | ) | (31,101 | ) | (6,305 | ) | (18,694 | ) | ||||||||||||
|
Accounts payable
|
1,809 | (25,764 | ) | 13,268 | 29,974 | (7,457 | ) | ||||||||||||||
|
Accrued liabilities
|
(1,379 | ) | (1,203 | ) | (5,874 | ) | (2,551 | ) | 4,933 | ||||||||||||
|
Other, including changes in
noncurrent assets and liabilities
|
(1,316 | ) | 1,336 | 3,832 | (1,027 | ) | (4,414 | ) | |||||||||||||
|
EBITDA
|
$ | 10,837 | $ | 25,766 | $ | 51,557 | $ | 7,532 | $ | 13,162 | |||||||||||
|
Add:
|
|||||||||||||||||||||
|
Unrealized loss (gain) from
mark to market accounting for hedging activities
|
$ | (7,228 | ) | $ | 7,788 | $ | 27,586 | $ | (603 | ) | $ | 17,715 | |||||||||
|
Non-cash impact of restructuring,
decommissioning and asset impairments
|
2,250 | (1,276 | ) | 1,766 | 368 | — | |||||||||||||||
|
Prepaid non-recurring expenses and
accrued non-recurring expenses, net of cash outlays
|
251 | 2,433 | 4,912 | 1,421 | (4,767 | ) | |||||||||||||||
|
Adjusted EBITDA
|
$ | 6,110 | $ | 34,711 | $ | 85,821 | $ | 8,718 | $ | 26,110 | |||||||||||
14
15
RISK FACTORS
Limited partner interests are inherently different from
capital stock of a corporation, although many of the business
risks to which we are subject are similar to those that would be
faced by a corporation engaged in a similar business. You should
consider carefully the following risk factors together with all
of the other information included in this prospectus in
evaluating an investment in our common units.
The following risks could materially and adversely affect our
business, financial condition or results of operations. In that
case, we might not be able to pay the minimum quarterly
distribution on our common units, the trading price of our
common units could decline and you could lose all or part of
your investment.
Risks Related to Our Business
We may not have sufficient cash from operations to enable
us to pay the minimum quarterly distribution following the
establishment of cash reserves and payment of fees and expenses,
including payments to our general partner.
We may not have sufficient available cash from operations each
quarter to enable us to pay the minimum quarterly distribution.
Under the terms of our partnership agreement, we must pay
expenses, including payments to our general partner, and set
aside any cash reserve amounts before making a distribution to
our unitholders. The amount of cash we can distribute on our
units principally depends upon the amount of cash we generate
from our operations, which is primarily dependent upon our
producing and selling quantities of fuel and specialty products,
or refined products, at margins that are high enough to cover
our fixed and variable expenses. Crude oil costs, fuel and
specialty products prices and, accordingly, the cash we generate
from operations, will fluctuate from quarter to quarter based
on, among other things:
•
overall demand for specialty hydrocarbon products, fuels and
other refined products;
•
the level of foreign and domestic production of crude oil and
refined products;
•
our ability to produce fuel and specialty products that meet our
customers’ unique and precise specifications;
•
the marketing of alternative and competing products;
•
the extent of government regulation;
•
results of our hedging activities; and
•
overall economic and local market conditions.
In addition, the actual amount of cash we will have available
for distribution will depend on other factors, some of which are
beyond our control, including:
•
the level of capital expenditures we make, including those for
acquisitions, if any;
•
our debt service requirements;
•
fluctuations in our working capital needs;
•
our ability to borrow funds and access capital markets;
•
restrictions on distributions and on our ability to make working
capital borrowings for distributions contained in our credit
facilities; and
•
the amount of cash reserves established by our general partner
for the proper conduct of our business.
16
The amount of cash we have available for distribution to
unitholders depends primarily on our cash flow and not solely on
profitability.
You should be aware that the amount of cash we have available
for distribution depends primarily upon our cash flow, including
cash flow from financial reserves and working capital
borrowings, and not solely on profitability, which will be
affected by non-cash items. As a result, we may make cash
distributions during periods when we record losses and may not
make cash distributions during periods when we record net income.
Refining margins are volatile, and a reduction in our
refining margins will adversely affect the amount of cash we
will have available for distribution to our unitholders.
Our financial results are primarily affected by the
relationship, or margin, between our specialty products and fuel
prices and the prices for crude oil and other feedstocks. The
cost to acquire our feedstocks and the price at which we can
ultimately sell our refined products depend upon numerous
factors beyond our control. Historically, refining margins have
been volatile, and they are likely to continue to be volatile in
the future. A widely used benchmark in the fuel products
industry to measure market values and margins is the “3/2/1
crack spread,” which represents the approximate gross
margin resulting from processing one barrel of crude oil,
assuming that three barrels of a benchmark crude oil are
converted, or cracked, into two barrels of gasoline and one
barrel of heating oil. The 3/2/1 crack spread averaged
$3.04 per barrel between 1990 and 1999, $4.61 per
barrel between 2000 and 2004, $6.52 per barrel in the first
quarter of 2005, $9.10 per barrel in the second quarter of
2005, $17.07 per barrel in the third quarter of 2005,
$9.81 per barrel in the fourth quarter of 2005, and $8.68
in the first quarter of 2006. Our actual refinery margins vary
from the Gulf Coast 3/2/1 crack spread due to the actual crude
oil used and products produced, transportation costs, regional
differences, and the timing of the purchase of the feedstock and
sale of the refined products, but we use the Gulf Coast 3/2/1
crack spread as an indicator of the volatility and general
levels of refining margins. Because refining margins are
volatile, you should not assume that our current margins will be
sustained. If our refining margins fall, it will adversely
affect the amount of cash we will have available for
distribution to our unitholders. Please read “Industry
Overview — Fuel Products.”
The price at which we sell specialty products, fuel and other
refined products is strongly influenced by the commodity price
of crude oil. If crude oil prices increase, our operating
margins will fall unless we are able to pass along these price
increases to our customers. Increases in selling prices
typically lag the rising cost of crude oil for specialty
products. It is possible we may not be able to pass on all or
any portion of the increased crude oil costs to our customers.
In addition, we will not be able to completely eliminate our
commodity risk through our hedging activities.
Because of the volatility of crude oil and refined
products prices, our method of valuing our inventory may result
in decreases in net income.
The nature of our business requires us to maintain substantial
quantities of crude oil and refined product inventories. Because
crude oil and refined products are essentially commodities, we
have no control over the changing market value of these
inventories. Because our inventory is valued at the lower of
cost or market value, if the market value of our inventory were
to decline to an amount less than our cost, we would record a
write-down of inventory and a non-cash charge to cost of sales.
In a period of decreasing crude oil or refined product prices,
our inventory valuation methodology may result in decreases in
net income.
The price volatility of fuel and utility services may
result in decreases in our earnings, profitability and cash
flows.
The volatility in costs of fuel, principally natural gas, and
other utility services, principally electricity, used by our
refinery and other operations affect our net income and cash
flows. Fuel and
17
utility prices are affected by factors outside of our control,
such as supply and demand for fuel and utility services in both
local and regional markets. Natural gas prices have historically
been volatile. For example, daily prices as reported on the New
York Mercantile Exchange (“NYMEX”) ranged between
$4.57 and $8.75 per million British thermal units, or
MMBtu, in 2004, between $5.79 and $15.39 per MMBtu in 2005
and between $6.54 and $10.62 per MMBtu in the first quarter
of 2006. Typically, electricity prices fluctuate with natural
gas prices. Future increases in fuel and utility prices may have
a material adverse effect on our results of operations. Fuel and
utility costs constituted approximately 45.6% and 45.8% of our
total operating expenses included in cost of sales for the year
ended December 31, 2005 and the three months ended
March 31, 2006, respectively.
Our hedging activities may reduce our earnings,
profitability and cash flows.
We are exposed to fluctuations in the price of crude oil, fuel
products, natural gas and interest rates. We utilize derivative
financial instruments with the intent of reducing volatility in
our cash flows due to fluctuations in these prices or interest
rates. We are not able to enter into derivative instruments to
reduce the volatility of the sales prices of the specialty
hydrocarbon products we sell as there is no established
derivative market for such products.
Historically, we have not designated all of our derivative
instruments as hedges in accordance with the provisions of
Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities. According to SFAS 133, changes in
fair value of derivatives which have not been designated as
hedges are to be recorded in earnings as reflected in unrealized
gain (loss) on derivative instruments. For derivatives
designated as cash flow hedges, the change in fair value of
these derivatives is reflected in other comprehensive income.
For the years ended December 31, 2003, 2004 and 2005, these
unrealized gains (losses) were $7,228,000, $(7,788,000) and
$(27,586,000), respectively. For the three months ended
March 31, 2005 and 2006, these unrealized gains (losses)
were $603,000 and $(17,715,000), respectively. On April 1,
2006, we designated certain derivative contracts that hedge the
purchase of crude oil and sale of fuel products as cash flow
hedges to the extent they qualify for hedge accounting.
The extent of our commodity price exposure is related largely to
the effectiveness and scope of our hedging activities. For
example, the derivative instruments we utilize are based on
posted market prices, which may differ from the actual crude oil
prices, natural gas prices or crack spreads that we realize in
our operations. Furthermore, we have a policy to enter into
derivative transactions related to only a portion of the volume
of our expected production or fuel requirements and, as a
result, we will continue to have direct commodity price exposure
to the unhedged portion. Our actual future production or fuel
requirements may be significantly higher or lower than we
estimate for such period. If the actual amount is higher than we
estimate, we will have greater commodity price exposure than we
intended. If the actual amount is lower than the amount that is
subject to our derivative financial instruments, we might be
forced to satisfy all or a portion of our derivative
transactions without the benefit of the cash flow from our sale
or purchase of the underlying physical commodity, resulting in a
substantial diminution of our liquidity. As a result, our
hedging activities may not be as effective as we intend in
reducing the volatility of our cash flows and our cash
distributions to unitholders may be reduced. Please read
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Quantitative and
Qualitative Disclosures about Market Risk.”
Our asset reconfiguration and enhancement initiatives,
including the planned expansion project at our Shreveport
refinery, may not result in revenue or cash flow increases, may
be subject to significant cost overruns and are subject to
regulatory, environmental, political, legal and economic risks,
which could adversely affect our business, operating results,
cash flows and financial condition.
We plan to grow our business through the reconfiguration and
enhancement of our refinery assets. As a specific current
example, we plan to commence construction of an expansion
project at
18
our Shreveport refinery to increase throughput capacity and
crude oil processing flexibility. This construction project and
the construction of other additions or modifications to our
existing refineries involves numerous regulatory, environmental,
political, legal and economic uncertainties beyond our control,
which could cause delays in construction or require the
expenditure of significant amounts of capital, which we may
finance with additional indebtedness or by issuing additional
equity securities. As a result, these projects may not be
completed at the budgeted cost, on schedule or at all. In
particular, the Shreveport refinery expansion cannot commence
construction until we receive an air quality permit relating to
various air emissions following the project’s completion.
Although we currently expect to be able to obtain a state air
quality permit and commence construction in the fourth quarter
of 2006, if we are required to instead seek a federal PSD
permit, commencement and completion of the construction project
would be substantially delayed.
Regardless of the date on which construction commences, we
currently anticipate that our expansion project at the
Shreveport refinery will cost approximately $110 million,
but we may suffer significant delays to the expected completion
date or significant cost overruns as a result of a delay in the
receipt of the required air permit, shortages of workers or
materials, transportation constraints, adverse weather,
unforeseen difficulties or labor issues. Thus, construction to
expand our Shreveport refinery or construction of other
additions or modifications to our existing refineries may occur
over an extended period of time, and we may not receive any
material increases in revenues and cash flows until the projects
are completed, or at all. In addition, assuming the underwriters
exercise their option to purchase additional units in full,
until the Shreveport expansion project is put into commercial
service and increases our cash flow from operations on a per
unit basis, we will be able to issue only 2,738,000 additional
common units without obtaining unitholder approval, thereby
limiting our ability to raise additional capital through the
sale of common units.
If our general financial condition deteriorates, we may be
limited in our ability to obtain credit with counterparties and
issue letters of credit, which may affect our ability to enter
into hedging arrangements or to purchase crude oil.
We rely on our ability to obtain unsecured credit lines or issue
letters of credit to enter into hedging arrangements in an
effort to reduce our exposure to adverse fluctuations in the
prices of crude oil, natural gas, and fuel products. We also
rely on our ability to obtain unsecured credit lines or issue
letters of credit to support the purchase of crude oil
feedstocks for our refineries. If, due to our financial
condition or other reasons, we are limited in our ability or
unable to obtain unsecured credit lines or issue letters of
credit, we may be required to post substantial amounts of cash
collateral to our hedging counterparties or crude oil suppliers
in order to continue these activities, which would adversely
affect our liquidity and our ability to distribute cash to our
unitholders.
We depend on certain key crude oil gatherers for a
significant portion of our supply of crude oil, and the loss of
any of these key suppliers or a material decrease in the supply
of crude oil generally available to our refineries could
materially reduce our ability to make distributions to
unitholders.
We purchase crude oil from major oil companies as well as from
various gatherers and marketers in Texas and north Louisiana.
For the three months ended March 31, 2006, Plains All
American Pipeline, L.P. and Koch Supply and Trading, LP supplied
us with approximately 49.7% and 27.1%, respectively, of our
total crude oil supplies. Each of our refineries is dependent on
one or both of these suppliers and the loss of these suppliers
would adversely affect our financial results to the extent we
were unable to find another supplier of this substantial amount
and type of crude oil. We do not maintain long-term contracts
with most of our suppliers. Please read
“Business — Crude Oil and Feedstock Supply.”
To the extent that our suppliers reduce the volumes of crude oil
that they supply us as a result of declining production or
competition or otherwise, our revenues, net income and cash
available for distribution would decline unless we were able to
acquire comparable supplies of crude oil on
19
comparable terms from other suppliers, which may not be possible
in areas where the supplier that reduces its volumes is the
primary supplier in the area. A material decrease in crude oil
production from the fields that supply our refineries, as a
result of depressed commodity prices, lack of drilling activity,
natural production declines or otherwise, could result in a
decline in the volume of crude oil we refine. Fluctuations in
crude oil prices can greatly affect production rates and
investments by third parties in the development of new oil
reserves. Drilling activity generally decreases as crude oil
prices decrease. We have no control over the level of drilling
activity in the fields that supply our refineries, the amount of
reserves underlying the wells in these fields, the rate at which
production from a well will decline or the production decisions
of producers, which are affected by, among other things,
prevailing and projected energy prices, demand for hydrocarbons,
geological considerations, governmental regulation and the
availability and cost of capital.
We are dependent on certain third-party pipelines for
transportation of crude oil and refined products, and if these
pipelines become unavailable to us, our revenues and cash
available for distribution could decline.
Each of our refineries is interconnected to pipelines that
supply most of its crude oil and ship most of its refined fuel
products to customers, such as pipelines operated by
subsidiaries of TEPPCO Partners, L.P. and ExxonMobil
Corporation. Since we do not own or operate any of these
pipelines, their continuing operation is not within our control.
If any of these third-party pipelines become unavailable to
transport crude oil feedstock or our refined products because of
accidents, government regulation, terrorism or other events, our
revenues, net income and cash available for distribution could
decline.
Distributions to unitholders could be adversely affected
by a decrease in the demand for our specialty products.
Changes in our customers’ products or processes may enable
our customers to reduce consumption of the specialty products
that we produce or make our specialty products unnecessary.
Should a customer decide to use a different product due to
price, performance or other considerations, we may not be able
to supply a product that meets the customer’s new
requirements. In addition, the demand for our customers’
end products could decrease, which would reduce their demand for
our specialty products. Our specialty product customers are
primarily in the industrial goods, consumer goods and automotive
goods industries and we are therefore susceptible to changing
demand patterns and products in those industries. Consequently,
it is important that we develop and manufacture new products to
replace the sales of products that mature and decline in use. If
we are unable to manage successfully the maturation of our
existing specialty products and the introduction of new
specialty products, our revenues, net income and cash available
for distribution to unitholders could be reduced.
Distributions to unitholders could be adversely affected
by a decrease in demand for fuel products in the markets we
serve.
Any sustained decrease in demand for fuel products in the
markets we serve could result in a reduction in our cash flow,
reducing our ability to make distributions to unitholders.
Factors that could lead to a decrease in market demand include:
•
a recession or other adverse economic condition that results in
lower spending by consumers on gasoline, diesel, and travel;
•
higher fuel taxes or other governmental or regulatory actions
that increase, directly or indirectly, the cost of gasoline and
other fuel products;
•
an increase in fuel economy or the increased use of alternative
fuel sources;
20
•
an increase in the market price of gasoline and other fuel
products, which may reduce demand for gasoline and other fuel
products;
•
competitor actions; and
•
availability of raw materials.
We could be subject to damages based on claims brought
against us by our customers or lose customers as a result of the
failure of our products to meet certain quality
specifications.
Our specialty products provide precise performance attributes
for our customers’ products. If a product fails to perform
in a manner consistent with the detailed quality specifications
required by the customer, the customer could seek replacement of
the product or damages for costs incurred as a result of the
product failing to perform as expected. A successful claim or
series of claims against us could result in a loss of one or
more customers and reduce our ability to make distributions to
unitholders.
We are subject to compliance with stringent environmental
laws and regulations that may expose us to substantial costs and
liabilities.
Our crude oil and specialty hydrocarbon refining and terminal
operations are subject to stringent and complex federal, state
and local environmental laws and regulations governing the
discharge of materials into the environment or otherwise
relating to environmental protection. These laws and regulations
impose numerous obligations that are applicable to our
operations, including the acquisition of permits to conduct
regulated activities, the incurrence of significant capital
expenditures to limit or prevent releases of materials from our
refineries, terminal, and related facilities, and the incurrence
of substantial costs and liabilities for pollution resulting
both from our operations and from those of prior owners.
Numerous governmental authorities, such as the Environmental
Protection Agency (“EPA”) and state agencies, such as
the Louisiana Department of Environmental Quality
(“LDEQ”), have the power to enforce compliance with
these laws and regulations and the permits issued under them,
often requiring difficult and costly actions. Failure to comply
with environmental laws, regulations, permits and orders may
result in the assessment of administrative, civil, and criminal
penalties, the imposition of remedial obligations, and the
issuance of injunctions limiting or preventing some or all of
our operations.
We recently have entered into discussions on a voluntary basis
with the LDEQ regarding our participation in that agency’s
“Small Refinery and Single Site Refinery Initiative.”
We are only in the beginning stages of discussion with the LDEQ
and, consequently, while no significant compliance and
enforcement expenditures have been requested as a result of our
discussions, we anticipate that we will ultimately be required
to make emissions reductions or other efforts requiring capital
investments and increased operating expenditures that may be
material. Please read “Business — Environmental
Matters — Air.”
Our business subjects us to the inherent risk of incurring
significant environmental liabilities in the operation of our
refineries and related facilities.
There is inherent risk of incurring significant environmental
costs and liabilities in the operation of our refineries,
terminal, and related facilities due to our handling of
petroleum hydrocarbons and wastes, air emissions and water
discharges related to our operations, and historical operations
and waste disposal practices by prior owners. We currently own
or operate properties that for many years have been used for
industrial activities, including refining or terminal storage
operations. Petroleum hydrocarbons or wastes have been released
on or under the properties owned or operated by us. Joint and
several strict liability may be incurred in connection with such
releases of petroleum hydrocarbons and wastes on, under or from
our properties and facilities. Private parties, including the
owners of properties adjacent to our operations and facilities
where our petroleum hydrocarbons
21
or wastes are taken for reclamation or disposal, may also have
the right to pursue legal actions to enforce compliance as well
as to seek damages for non-compliance with environmental laws
and regulations or for personal injury or property damage. We
may not be able to recover some or any of these costs from
insurance or other sources of indemnity.
Increasingly stringent environmental laws and regulations,
unanticipated remediation obligations or emissions control
expenditures and claims for penalties or damages could result in
substantial costs and liabilities, and our ability to make
distributions to our unitholders could suffer as a result.
Neither the owners of our general partner nor their affiliates
have indemnified us for any environmental liabilities, including
those arising from non-compliance or pollution, that may be
discovered at, or arise from operations on, our assets they
contributed to us. As such, we can expect no economic assistance
from any of them in the event that we are required to make
expenditures to investigate or remediate any petroleum
hydrocarbons, wastes, or other materials. Please read
“Business — Environmental Matters.”
We are exposed to trade credit risk in the ordinary course
of our business activities.
We are exposed to risks of loss in the event of nonperformance
by our customers, suppliers and by counterparties of our forward
contracts, options and swap agreements. Some of our customers,
suppliers and counterparties may be highly leveraged and subject
to their own operating and regulatory risks. Even if our credit
review and analysis mechanisms work properly, we may experience
financial losses in our dealings with other parties. Any
increase in the nonpayment or nonperformance by any of these
parties could reduce our ability to make distributions to our
unitholders.
If we do not make acquisitions on economically acceptable
terms, our future growth will be limited.
Our ability to grow depends on our ability to make acquisitions
that result in an increase in the cash generated from operations
per unit. If we are unable to make these accretive acquisitions
either because we are: (1) unable to identify attractive
acquisition candidates or negotiate acceptable purchase
contracts with them, (2) unable to obtain financing for
these acquisitions on economically acceptable terms, or
(3) outbid by competitors, then our future growth and
ability to increase distributions will be limited. Furthermore,
any acquisition involves potential risks, including, among other
things:
•
performance from the acquired assets and businesses that is
below the forecasts we used in evaluating the acquisition;
•
a significant increase in our indebtedness and working capital
requirements;
•
an inability to timely and effectively integrate the operations
of recently acquired businesses or assets, particularly those in
new geographic areas or in new lines of business;
•
the incurrence of substantial unforeseen environmental and other
liabilities arising out of the acquired businesses or assets;
•
the diversion of management’s attention from other business
concerns; and
•
customer or key employee losses at the acquired businesses.
If we consummate any future acquisitions, our capitalization and
results of operations may change significantly, and you will not
have the opportunity to evaluate the economic, financial and
other relevant information that we will consider in determining
the application of our funds and other resources.
22
Our refineries face operating hazards, and the potential
limits on insurance coverage could expose us to potentially
significant liability costs.
Our refining activities are conducted at three refineries in
northwest Louisiana. These refineries are our principal
operating assets. Our operations are subject to significant
interruption, and our cash from operations could decline, if any
of our refineries experiences a major accident or fire, is
damaged by severe weather or other natural disaster, or
otherwise is forced to curtail its operations or shut down.
These hazards could result in substantial losses due to personal
injury and/or loss of life, severe damage to and destruction of
property and equipment and pollution or other environmental
damage and may result in curtailment or suspension of our
related operations.
We are not fully insured against all risks incident to our
business. Furthermore, we may be unable to maintain or obtain
insurance of the type and amount we desire at reasonable rates.
As a result of market conditions, premiums and deductibles for
certain of our insurance policies have increased and could
escalate further. In some instances, certain insurance could
become unavailable or available only for reduced amounts of
coverage. Our business interruption insurance will not apply
unless a business interruption exceeds 90 days. We are not
insured for environmental accidents. If we were to incur a
significant liability for which we were not fully insured, it
could diminish our ability to make distributions to unitholders.
Downtime for maintenance at our refineries will reduce our
revenues and cash available for distribution.
Our refineries consist of many processing units, a number of
which have been in operation for a long time. One or more of the
units may require additional unscheduled down time for
unanticipated maintenance or repairs that are more frequent than
our scheduled turnaround for each unit every one to five years.
Scheduled and unscheduled maintenance reduce our revenues during
the period of time that our units are not operating.
We are subject to strict regulations at many of our
facilities regarding employee safety, and failure to comply with
these regulations could reduce our ability to make distributions
to our unitholders.
The workplaces associated with the refineries we operate are
subject to the requirements of the federal Occupational Safety
and Health Act (“OSHA”) and comparable state statutes
that regulate the protection of the health and safety of
workers. In addition, the OSHA hazard communication standard
requires that we maintain information about hazardous materials
used or produced in our operations and that we provide this
information to employees, state and local government
authorities, and local residents. Failure to comply with OSHA
requirements, including general industry standards, record
keeping requirements and monitoring of occupational exposure to
regulated substances, could reduce our ability to make
distributions to our unitholders if we are subjected to fines or
significant compliance costs.
We face substantial competition from other refining
companies.
The refining industry is highly competitive. Our competitors
include large, integrated, major or independent oil companies
that, because of their more diverse operations, larger
refineries and stronger capitalization, may be better positioned
than we are to withstand volatile industry conditions, including
shortages or excesses of crude oil or refined products or
intense price competition at the wholesale level. If we are
unable to compete effectively, we may lose existing customers or
fail to acquire new customers. For example, if a competitor
attempts to increase market share by reducing prices, our
operating results and cash available for distribution to our
unitholders could be reduced.
23
Our debt levels may limit our flexibility in obtaining
additional financing and in pursuing other business
opportunities.
After giving effect to this offering, we estimate that our total
debt as of the close of this offering will be approximately
$49.8 million, consisting of borrowings under our term loan
facility. Additionally, we have a $50.0 million letter of
credit facility to support crack spread hedging. Following this
offering, we estimate we will continue to have the ability to
incur additional debt, including the capacity to borrow up to
approximately $122.6 million under our senior secured
revolving credit facility, subject to borrowing base limitations
in the credit agreement. Our level of indebtedness could have
important consequences to us, including the following:
•
our ability to obtain additional financing, if necessary, for
working capital, capital expenditures, acquisitions or other
purposes may be impaired or such financing may not be available
on favorable terms;
•
covenants contained in our existing and future credit and debt
arrangements will require us to meet financial tests that may
affect our flexibility in planning for and reacting to changes
in our business, including possible acquisition opportunities;
•
we will need a substantial portion of our cash flow to make
principal and interest payments on our indebtedness, reducing
the funds that would otherwise be available for operations,
future business opportunities and distributions to
unitholders; and
•
our debt level will make us more vulnerable than our competitors
with less debt to competitive pressures or a downturn in our
business or the economy generally.
Our ability to service our indebtedness will depend upon, among
other things, our future financial and operating performance,
which will be affected by prevailing economic conditions and
financial, business, regulatory and other factors, some of which
are beyond our control. If our operating results are not
sufficient to service our current or future indebtedness, we
will be forced to take actions such as reducing distributions,
reducing or delaying our business activities, acquisitions,
investments and/or capital expenditures, selling assets,
restructuring or refinancing our indebtedness, or seeking
additional equity capital or bankruptcy protection. We may not
be able to effect any of these remedies on satisfactory terms,
or at all.
Our credit agreements contain operating and financial
restrictions that may restrict our business and financing
activities.
The operating and financial restrictions and covenants in our
credit agreements and any future financing agreements could
restrict our ability to finance future operations or capital
needs or to engage, expand or pursue our business activities.
For example, our credit agreements restrict our ability to:
•
incur indebtedness;
•
grant liens;
•
make certain acquisitions and investments;
•
make capital expenditures above specified amounts;
•
redeem or prepay other debt or make other restricted payments;
•
enter into transactions with affiliates;
•
enter into a merger, consolidation or sale of assets; and
•
cease our crack spread hedging program.
Our ability to comply with the covenants and restrictions
contained in our credit agreements may be affected by events
beyond our control. If market or other economic conditions
deteriorate,
24
our ability to comply with these covenants may be impaired. If
we violate any of the restrictions, covenants, ratios or tests
in our credit agreements, a significant portion of our
indebtedness may become immediately due and payable, our ability
to make distributions may be inhibited and our lenders’
commitment to make further loans to us may terminate. We might
not have, or be able to obtain, sufficient funds to make these
accelerated payments. In addition, our obligations under our
credit agreements are secured by substantially all of our
assets, and if we are unable to repay our indebtedness under our
credit agreements, the lenders could seek to foreclose on our
assets.
An increase in interest rates will cause our debt service
obligations to increase.
Borrowings under our revolving credit facility bear interest at
a floating rate (8.00% as of June 23, 2006). Borrowings
under our term loan facility bear interest at a floating rate
(8.78% as of June 23, 2006). The rates are subject to
adjustment based on fluctuations in the London Interbank Offered
Rate (“LIBOR”) and prime rate. An increase in the
interest rates associated with our floating-rate debt would
increase our debt service costs and affect our results of
operations and cash flow available for distribution to our
unitholders. In addition, an increase in our interest rates
could adversely affect our future ability to obtain financing or
materially increase the cost of any additional financing.
Our business and operations could be adversely affected by
terrorist attacks.
Since the September 11th terrorist attacks, the
U.S. government has issued public warnings that indicate
that energy assets might be specific targets of terrorist
organizations. The continued threat of terrorism and the impact
of military and other actions will likely lead to increased
volatility in prices for natural gas and oil and could affect
the markets for our products. These developments have subjected
our operations to increased risk and, depending on their
ultimate magnitude, could have a material adverse affect on our
business. We do not carry any terrorism risk insurance.
Due to our lack of asset and geographic diversification,
adverse developments in our operating areas would reduce our
ability to make distributions to our unitholders.
We rely exclusively on sales generated from products processed
from the refineries we own. Furthermore, almost all of our
assets and operations are located in northwest Louisiana. Due to
our lack of diversification in asset type and location, an
adverse development in these businesses or areas, including
adverse developments due to catastrophic events or weather,
decreased supply of crude oil feedstocks and/or decreased demand
for refined petroleum products, would have a significantly
greater impact on our financial condition and results of
operations than if we maintained more diverse assets and in
diverse locations.
We depend on key personnel for the success of our business
and the loss of those persons could adversely affect our
business and our ability to make distributions to our
unitholders.
The loss of the services of any member of senior management or
key employee could have an adverse effect on our business and
reduce our ability to make distributions to our unitholders. We
may not be able to locate or employ on acceptable terms
qualified replacements for senior management or other key
employees if their services were no longer available. Except
with respect to Mr. Grube, neither we, our general partner
nor any affiliate thereof has entered into an employment
agreement with any member of our senior management team or other
key personnel. Furthermore, we do not maintain any key man
insurance.
We depend on unionized labor for the operation of our
refineries. Any work stoppages or labor disturbances at these
facilities could disrupt our business.
Substantially all of our operating personnel at our Princeton,
Cotton Valley and Shreveport refineries are employed under
collective bargaining agreements that expire in 2008, 2007 and
2007,
25
respectively. Please read “Business —
Employees.” Any work stoppages or other labor disturbances
at these facilities could have an adverse effect on our business
and reduce our ability to make distributions to our unitholders.
In addition, employees who are not currently represented by
labor unions may seek union representation in the future, and
any renegotiation of current collective bargaining agreements
may result in terms that are less favorable to us.
The operating results for our fuel products segment and
the selling price of asphalt we produce and sell can be seasonal
and are generally lower in the first and fourth quarters of the
year.
The operating results for the fuel products segment and the
selling prices of asphalt products we produce can be seasonal.
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 road construction. Demand for
gasoline 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. 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 as a result of this
seasonality.
Risks Inherent in an Investment in Us
Following this offering, the Fred M. Fehsenfeld, Jr.
and F. William Grube families or trusts set up on their
behalf, The Heritage Group and certain of their affiliates will
own a 62.7% limited partner interest in us and will continue to
own and control our general partner, which has sole
responsibility for conducting our business and managing our
operations. Our general partner and its affiliates have
conflicts of interest and limited fiduciary duties, which may
permit them to favor their own interests to your
detriment.
Following the offering, The Heritage Group, the Fred M.
Fehsenfeld, Jr. and F. William Grube families (or trusts
set up on their behalf), and certain of their affiliates will
own a 62.7% limited partner interest in us. In addition, The
Heritage Group and the Fred M. Fehsenfeld, Jr. and F.
William Grube families (or trusts set up on their behalf) will
continue to own our general partner. Conflicts of interest may
arise between our general partner and its affiliates, on the one
hand, and us and our unitholders, on the other hand. As a result
of these conflicts, the general partner may favor its own
interests and the interests of its affiliates over the interests
of our unitholders. These conflicts include, among others, the
following situations:
•
our general partner is allowed to take into account the
interests of parties other than us, such as its affiliates, in
resolving conflicts of interest, which has the effect of
limiting its fiduciary duty to our unitholders;
•
our general partner has limited its liability and reduced its
fiduciary duties under our partnership agreement and has also
restricted the remedies available to our unitholders for actions
that, without the limitations, might constitute breaches of
fiduciary duty. As a result of purchasing common units,
unitholders consent to some actions and conflicts of interest
that might otherwise constitute a breach of fiduciary or other
duties under applicable state law;
•
our general partner determines the amount and timing of asset
purchases and sales, borrowings, issuance of additional
partnership securities, and reserves, each of which can affect
the amount of cash that is distributed to unitholders;
•
our general partner determines which costs incurred by it and
its affiliates are reimbursable by us;
•
our general partner determines the amount and timing of any
capital expenditures and whether a capital expenditure is a
maintenance capital expenditure, which reduces operating
surplus, or a capital expenditure for acquisitions or capital
improvements, which does not.
26
This determination can affect the amount of cash that is
distributed to our unitholders and the ability of the
subordinated units to convert to common units;
•
our general partner has the flexibility to cause us to enter
into a broad variety of derivative transactions covering
different time periods, the net cash receipts from which will
increase operating surplus and adjusted operating surplus, with
the result that our general partner may be able to shift the
recognition of operating surplus and adjusted operating surplus
between periods to increase the distributions it and its
affiliates receive on their subordinated units and incentive
distribution rights or to accelerate the expiration of the
subordination period; and
•
in some instances, our general partner may cause us to borrow
funds in order to permit the payment of cash distributions, even
if the purpose or effect of the borrowing is to make a
distribution on the subordinated units, to make incentive
distributions or to accelerate the expiration of the
subordination period.
Please read “Conflicts of Interest and Fiduciary
Duties.”
The Heritage Group and certain of its affiliates may
engage in limited competition with us.
Pursuant to the omnibus agreement, The Heritage Group and its
controlled affiliates have agreed not to engage in, whether by
acquisition or otherwise, the business of refining or marketing
specialty lubricating oils, solvents and wax products as well as
gasoline, diesel and jet fuel products in the continental United
States (“restricted business”) for so long as it
controls us. This restriction does not apply to certain assets
and businesses which are more fully described under
“Certain Relationships and Related Party
Transactions — Omnibus Agreement.”
Although Mr. Grube is prohibited from competing with us
pursuant to the terms of the employment agreement we have
entered into with him, the owners of our general partner, other
than The Heritage Group, are not prohibited from competing with
us.
Our partnership agreement limits our general
partner’s fiduciary duties to our unitholders and restricts
the remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of
fiduciary duty.
Our partnership agreement contains provisions that reduce the
standards to which our general partner would otherwise be held
by state fiduciary duty law. For example, our partnership
agreement:
•
permits our general partner to make a number of decisions in its
individual capacity, as opposed to in its capacity as our
general partner. This entitles our general partner to consider
only the interests and factors that it desires, and it has no
duty or obligation to give any consideration to any interest of,
or factors affecting, us, our affiliates or any limited partner.
Examples include the exercise of its limited call right, its
voting rights with respect to the units it owns, its
registration rights and its determination whether or not to
consent to any merger or consolidation of our partnership or
amendment to our partnership agreement;
•
provides that our general partner will not have any liability to
us or our unitholders for decisions made in its capacity as a
general partner so long as it acted in good faith, meaning it
believed the decision was in the best interests of our
partnership;
•
generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the conflicts committee
of the board of directors of our general partner and not
involving a vote of unitholders must be on terms no less
favorable to us than those generally being provided to or
available from unrelated third parties or be “fair and
reasonable” to us. In determining whether a transaction or
resolution is “fair and reasonable,” our general
27
partner may consider the totality of the relationships between
the parties involved, including other transactions that may be
particularly advantageous or beneficial to us; and
•
provides that our general partner and its officers and directors
will not be liable for monetary damages to us or our limited
partners for any acts or omissions unless there has been a final
and non-appealable judgment entered by a court of competent
jurisdiction determining that the general partner or those other
persons acted in bad faith or engaged in fraud or willful
misconduct or, in the case of a criminal matter, acted with
knowledge that such person’s conduct was criminal.
In order to become a limited partner of our partnership, a
common unitholder is required to agree to be bound by the
provisions in the partnership agreement, including the
provisions discussed above. Please read “Conflicts of
Interest and Fiduciary Duties — Fiduciary Duties.”
Unitholders have limited voting rights and are not
entitled to elect our general partner or its directors.
Unlike the holders of common stock in a corporation, unitholders
have only limited voting rights on matters affecting our
business and, therefore, limited ability to influence
management’s decisions regarding our business. Unitholders
did not elect our general partner or its board of directors, and
will have no right to elect our general partner or its board of
directors on an annual or other continuing basis. The board of
directors of our general partner is chosen by the members of our
general partner. Furthermore, if the unitholders were
dissatisfied with the performance of our general partner, they
will have little ability to remove our general partner. As a
result of these limitations, the price at which the common units
will trade could be diminished because of the absence or
reduction of a takeover premium in the trading price.
Even if unitholders are dissatisfied, they cannot remove
our general partner without its consent.
The unitholders are unable initially to remove the general
partner without its consent because the general partner and its
affiliates own sufficient units to be able to prevent its
removal. The vote of the holders of at least
662/3
% of all outstanding units voting together as a single
class is required to remove the general partner. Following the
closing of this offering, the owners of our general partner and
certain of their affiliates will own 64.0% of our common and
subordinated units. Also, if our general partner is removed
without cause during the subordination period and units held by
our general partner and its affiliates are not voted in favor of
that removal, all remaining subordinated units will
automatically convert into common units and any existing
arrearages on the common units will be extinguished. A removal
of the general partner under these circumstances would adversely
affect the common units by prematurely eliminating their
distribution and liquidation preference over the subordinated
units, which would otherwise have continued until we had met
certain distribution and performance tests.
Cause is narrowly defined in our partnership agreement to mean
that a court of competent jurisdiction has entered a final,
non-appealable judgment finding our general partner liable for
actual fraud or willful misconduct in its capacity as our
general partner. Cause does not include most cases of charges of
poor management of the business, so the removal of our general
partner during the subordination period because of the
unitholders’ dissatisfaction with our general
partner’s performance in managing our partnership will most
likely result in the termination of the subordination period.
28
Our partnership agreement restricts the voting rights of
those unitholders owning 20% or more of our common units.
Unitholders’ voting rights are further restricted by the
partnership agreement provision providing that any units held by
a person that owns 20% or more of any class of units then
outstanding, other than our general partner, its affiliates,
their transferees, and persons who acquired such units with the
prior approval of the board of directors of our general partner,
cannot vote on any matter. Our partnership agreement also
contains provisions limiting the ability of unitholders to call
meetings or to acquire information about our operations, as well
as other provisions limiting the unitholders’ ability to
influence the manner or direction of management.
Control of our general partner may be transferred to a
third party without unitholder consent.
Our general partner may transfer its general partner interest to
a third party in a merger or in a sale of all or substantially
all of its assets without the consent of the unitholders.
Furthermore, our partnership agreement does not restrict the
ability of the members of our general partner from transferring
their respective membership interests in our general partner to
a third party. The new members of our general partner would then
be in a position to replace the board of directors and officers
of our general partner with their own choices and thereby
control the decisions taken by the board of directors.
We do not have our own officers and employees and rely
solely on the officers and employees of our general partner and
its affiliates to manage our business and affairs.
We do not have our own officers and employees and rely solely on
the officers and employees of our general partner and its
affiliates to manage our business and affairs. We can provide no
assurance that our general partner will continue to provide us
the officers and employees that are necessary for the conduct of
our business nor that such provision will be on terms that are
acceptable to us. If our general partner fails to provide us
with adequate personnel, our operations could be adversely
impacted and our cash available for distribution to unitholders
could be reduced.
We may issue additional common units without your
approval, which would dilute your existing ownership
interests.
During the subordination period, our general partner, without
the approval of our unitholders, may also cause us to issue up
to 6,533,000 additional common units. Our general partner may
also cause us to issue an unlimited number of additional common
units or other equity securities of equal rank with the common
units, without unitholder approval, in a number of circumstances
set forth under “The Partnership Agreement —
Issuance of Additional Securities.”
The issuance of additional common units or other equity
securities of equal or senior rank to the common units will have
the following effects:
•
our unitholders’ proportionate ownership interest in us may
decrease;
•
the amount of cash available for distribution on each unit may
decrease;
•
because a lower percentage of total outstanding units will be
subordinated units, the risk that a shortfall in the payment of
the minimum quarterly distribution will be borne by our common
unitholders will increase;
•
the relative voting strength of each previously outstanding unit
may be diminished;
•
the market price of the common units may decline; and
•
the ratio of taxable income to distributions may increase.
29
After the end of the subordination period, we may issue an
unlimited number of limited partner interests of any type
without the approval of our unitholders. Our partnership
agreement does not give our unitholders the right to approve our
issuance of equity securities ranking junior to the common units
at any time. In addition, our partnership agreement does not
prohibit the issuance by our subsidiaries of equity securities,
which may effectively rank senior to the common units.
Our general partner’s determination of the level of
cash reserves may reduce the amount of available cash for
distribution to you.
Our partnership agreement requires our general partner to deduct
from operating surplus cash reserves that it establishes are
necessary to fund our future operating expenditures. In
addition, our partnership agreement also permits our general
partner to reduce available cash by establishing cash reserves
for the proper conduct of our business, to comply with
applicable law or agreements to which we are a party, or to
provide funds for future distributions to partners. These
reserves will affect the amount of cash available for
distribution to you.
Cost reimbursements due to our general partner and its
affiliates will reduce cash available for distribution to
you.
Prior to making any distribution on the common units, we will
reimburse our general partner and its affiliates for all
expenses they incur on our behalf. Any such reimbursement will
be determined by our general partner and will reduce the cash
available for distribution to unitholders. These expenses will
include all costs incurred by our general partner and its
affiliates in managing and operating us. Please read
“Certain Relationships and Related Party Transactions”
and “Conflicts of Interests and Fiduciary
Duties — Conflicts of Interest.”
Our general partner has a limited call right that may
require you to sell your units at an undesirable time or
price.
If at any time our general partner and its affiliates own more
than 80% of the issued and outstanding common units, our general
partner will have the right, but not the obligation, which right
it may assign to any of its affiliates or to us, to acquire all,
but not less than all, of the common units held by unaffiliated
persons at a price not less than their then-current market
price. As a result, you may be required to sell your common
units to our general partner, its affiliates or us at an
undesirable time or price and may not receive any return on your
investment. You may also incur a tax liability upon a sale of
your common units. At the completion of this offering, our
general partner and its affiliates will own approximately 35.2%
of the common units. At the end of the subordination period,
assuming no additional issuances of common units, our general
partner and its affiliates will own approximately 64.0% of the
common units. For additional information about this right,
please read “The Partnership Agreement — Limited
Call Right.”
Your liability may not be limited if a court finds that
unitholder action constitutes control of our business.
A general partner of a partnership generally has unlimited
liability for the obligations of the partnership, except for
those contractual obligations of the partnership that are
expressly made without recourse to the general partner. Our
partnership is organized under Delaware law and we conduct
business in a number of other states. The limitations on the
liability of holders of limited partner interests for the
obligations of a limited partnership have not been clearly
established in some of the other states in which we do business.
You could be liable for any and all of our obligations as if you
were a general partner if:
•
a court or government agency determined that we were conducting
business in a state but had not complied with that particular
state’s partnership statute; or
30
•
your right to act with other unitholders to remove or replace
the general partner, to approve some amendments to our
partnership agreement or to take other actions under our
partnership agreement constitute “control” of our
business.
For a discussion of the implications of the limitations of
liability on a unitholder, please read “The Partnership
Agreement — Limited Liability.”
Unitholders may have liability to repay distributions that
were wrongfully distributed to them.
Under certain circumstances, unitholders may have to repay
amounts wrongfully returned or distributed to them. Under
Section 17-607 of
the Delaware Revised Uniform Limited Partnership Act, which we
call the Delaware Act, we may not make a distribution to you if
the distribution would cause our liabilities to exceed the fair
value of our assets. Delaware law provides that for a period of
three years from the date of the impermissible distribution,
limited partners who received the distribution and who knew at
the time of the distribution that it violated Delaware law will
be liable to the limited partnership for the distribution
amount. Purchasers of units who become limited partners are
liable for the obligations of the transferring limited partner
to make contributions to the partnership that are known to the
purchaser of the units at the time it became a limited partner
and for unknown obligations if the liabilities could be
determined from the partnership agreement. Liabilities to
partners on account of their partnership interest and
liabilities that are non-recourse to the partnership are not
counted for purposes of determining whether a distribution is
permitted.
Our common units have a limited trading history and a
limited trading volume compared to other units representing
limited partner interests.
Our common units are traded publicly on the NASDAQ National
Market under the symbol “CLMT.” However, our common
units have a limited trading history and daily trading volumes
for our common units are, and may continue to be, relatively
small compared to many other units representing limited partner
interests quoted on the NASDAQ. This offering may not increase
the trading volume for our common units, and the price of our
common units may, therefore, be volatile.
The market price of our common units may also be influenced by
many factors, some of which are beyond our control, including:
•
our quarterly distributions;
•
our quarterly or annual earnings or those of other companies in
our industry;
•
changes in commodity prices or refining margins;
•
loss of a large customer;
•
announcements by us or our competitors of significant contracts
or acquisitions;
•
changes in accounting standards, policies, guidance,
interpretations or principles;
•
general economic conditions;
•
the failure of securities analysts to cover our common units
after this offering or changes in financial estimates by
analysts;
•
future sales of our common units; and
•
the other factors described in these “Risk Factors.”
Tax Risks to Common Unitholders
In addition to reading the following risk factors, you should
read “Material Tax Consequences” for a more complete
discussion of the expected material federal income tax
consequences of owning and disposing of common units.
31
Our tax treatment depends on our status as a partnership
for federal income tax purposes, as well as our not being
subject to a material amount of entity-level taxation by
individual states. If the Internal Revenue Service, or IRS, were
to treat us as a corporation or we become subject to a material
amount of entity-level taxation for state tax purposes, it would
substantially reduce the amount of cash available for
distribution to you.
The anticipated after-tax economic benefit of an investment in
our common units depends largely on our being treated as a
partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on
this or any other tax matter affecting us.
If we were treated as a corporation for federal income tax
purposes, we would pay federal income tax on our taxable income
at the corporate tax rate, which is currently a maximum of 35%
and would likely pay state income tax at varying rates.
Distributions to you would generally be taxed again as corporate
distributions, and no income, gains, losses or deductions would
flow through to you. Because a tax would be imposed upon us as a
corporation, our cash available for distribution to you would be
substantially reduced. Therefore, treatment of us as a
corporation would result in a material reduction in the
anticipated cash flow and after-tax return to the unitholders,
likely causing a substantial reduction in the value of our
common units.
Current law may change so as to cause us to be treated as a
corporation for federal income tax purposes or otherwise subject
us to entity-level taxation. In addition, because of widespread
state budget deficits and other reasons, several states are
evaluating ways to subject partnerships to entity-level taxation
through the imposition of state income, franchise and other
forms of taxation. For example, we will be subject to a new
entity level tax on the portion of our income that is generated
in Texas beginning in our tax year ending in 2007. Specifically,
the Texas margin tax will be imposed at a maximum effective rate
of 0.7% of our gross income apportioned to Texas. Imposition of
such a tax on us by Texas, or any other state, will reduce the
cash available for distribution to you.
Our partnership agreement provides that if a law is enacted or
existing law is modified or interpreted in a manner that
subjects us to taxation as a corporation or otherwise subjects
us to entity-level taxation for federal, state or local income
tax purposes, the minimum quarterly distribution amount and the
target distribution levels will be adjusted to reflect the
impact of that law on us.
If the IRS contests the federal income tax positions we
take, the market for our common units may be adversely impacted,
and the cost of any IRS contest will reduce our cash available
for distribution to you.
We have not requested a ruling from the IRS with respect to our
treatment as a partnership for federal income tax purposes or
any other matter affecting us. The IRS may adopt positions that
differ from the conclusions of our counsel expressed in this
prospectus or from the positions we take. It may be necessary to
resort to administrative or court proceedings to sustain some or
all of our counsel’s conclusions or the positions we take.
A court may not agree with some or all of our counsel’s
conclusions or positions we take. Any contest with the IRS may
materially and adversely impact the market for our common units
and the price at which they trade. In addition, our costs of any
contest with the IRS will be borne indirectly by our unitholders
and our general partner because the costs will reduce our cash
available for distribution.
You may be required to pay taxes on your share of our
income even if you do not receive any cash distributions from
us.
Because our unitholders will be treated as partners to whom we
will allocate taxable income which could be different in amount
than the cash we distribute, you will be required to pay any
federal income taxes and, in some cases, state and local income
taxes on your share of our taxable income even if you receive no
cash distributions from us. You may not receive cash
distributions
32
from us equal to your share of our taxable income or even equal
to the actual tax liability that results from that income.
Tax gain or loss on disposition of our common units could
be more or less than expected.
If you sell your common units, you will recognize a gain or loss
equal to the difference between the amount realized and your tax
basis in those common units. Prior distributions to you in
excess of the total net taxable income you were allocated for a
common unit, which decreased your tax basis in that common unit,
will, in effect, become taxable income to you if the common unit
is sold at a price greater than your tax basis in that common
unit, even if the price you receive is less than your original
cost. A substantial portion of the amount realized, whether or
not representing gain, may be ordinary income. In addition, if
you sell your units, you may incur a tax liability in excess of
the amount of cash you receive from the sale.
Tax-exempt entities and foreign persons face unique tax
issues from owning our common units that may result in adverse
tax consequences to them.
Investment in common units by tax-exempt entities, such as
individual retirement accounts (“IRAs”), other
retirement plans, and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to organizations that are exempt from federal
income tax, including individual retirement accounts and other
retirement plans, will be unrelated business taxable income and
will be taxable to them. Distributions to
non-U.S. persons
will be reduced by withholding taxes at the highest applicable
effective tax rate, and
non-U.S. persons
will be required to file United States federal tax returns and
pay tax on their share of our taxable income. If you are a
tax-exempt entity or a foreign person, you should consult your
tax advisor before investing in our common units.
We will treat each purchaser of our common units as having
the same tax benefits without regard to the actual common units
purchased. The IRS may challenge this treatment, which could
adversely affect the value of the common units.
Because we cannot match transferors and transferees of common
units and because of other reasons, we have adopted depreciation
and amortization positions that may not conform to all aspects
of existing Treasury Regulations. A successful IRS challenge to
those positions could adversely affect the amount of tax
benefits available to you. It also could affect the timing of
these tax benefits or the amount of gain from your sale of
common units and could have a negative impact on the value of
our common units or result in audit adjustments to your tax
returns. For a further discussion of the effect of the
depreciation and amortization positions we have adopted, please
read “Material Tax Consequences — Uniformity of
Units.”
We have a subsidiary that is treated as a corporation for
federal income tax purposes and subject to corporate-level
income taxes.
We conduct all or a portion of our operations in which we market
finished petroleum products to certain end-users through a
subsidiary that is organized as a corporation. We may elect to
conduct additional operations through this corporate subsidiary
in the future. This corporate subsidiary is subject to
corporate-level tax, which reduces the cash available for
distribution to us and, in turn, to you. If the IRS were to
successfully assert that this corporation has more tax liability
than we anticipate or legislation was enacted that increased the
corporate tax rate, our cash available for distribution to you
would be further reduced.
33
The sale or exchange of 50% or more of our capital and
profits interests during any twelve-month period will result in
the termination of our partnership for federal income tax
purposes.
We will be considered to have terminated for federal income tax
purposes if there is a sale or exchange of 50% or more of the
total interests in our capital and profits within a twelve-month
period. Our termination would, among other things, result in the
closing of our taxable year for all unitholders and could result
in a deferral of depreciation deductions allowable in computing
our taxable income. If this occurs, you will be allocated an
increased amount of federal taxable income for the year in which
we are considered to be terminated as a percentage of the cash
distributed to you with respect to that period. Please read
“Material Tax Consequences — Tax Consequences of
Unit Ownership — Ratio of Taxable Income to
Distributions.”
You will likely be subject to state and local taxes and
return filing requirements in states where you do not live as a
result of investing in our common units.
In addition to federal income taxes, you will likely be subject
to other taxes, including foreign, state and local taxes,
unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions
in which we conduct business or own property, even if you do not
live in any of those jurisdictions. You will likely be required
to file foreign, state and local income tax returns and pay
state and local income taxes in some or all of these various
jurisdictions. Further, you may be subject to penalties for
failure to comply with those requirements. We own assets and
conduct business in Arkansas, California, Connecticut, Florida,
Georgia, Indiana, Illinois, Kentucky, Louisiana, Massachusetts,
Mississippi, Missouri, New Jersey, New York, Ohio, South
Carolina, Pennsylvania, Texas, Utah and Virginia. Each of these
states, other than Texas and Florida, currently imposes a
personal income tax as well as an income tax on corporations and
other entities. As we make acquisitions or expand our business,
we may own assets or conduct business in additional states that
impose a personal income tax. It is your responsibility to file
all United States federal, foreign, state and local tax returns.
Our counsel has not rendered an opinion on the state or local
tax consequences of an investment in our common units.
34
USE OF PROCEEDS
We expect to receive net proceeds of approximately
$103.1 million from the sale of 3,300,000 common units
offered by this prospectus after deducting underwriting
discounts and commissions and estimated offering expenses of
approximately $1.0 million.
We intend to use all of the estimated net proceeds from this
offering:
•
to repay all of our borrowings outstanding under our revolving
credit facility, which were $14.8 million as of
March 31, 2006 ($16.0 million as of June 23, 2006);
•
to fund the construction and other
start-up costs of the
planned expansion project at our Shreveport refinery; and
•
to the extent available, for general partnership purposes.
If we experience a substantial delay in commencing construction
of the expansion project at our Shreveport refinery, we intend
to use the estimated net proceeds of approximately
$103.1 million from this offering:
•
to repay all of our borrowings outstanding under our revolving
credit facility;
•
to fund capital expenditures; and
•
to the extent available, for general partnership purposes.
Pending receipt of the air permit necessary to commence
construction of the Shreveport expansion project, we plan to
invest the portion of the net proceeds from this offering that
we plan to use to fund future construction costs in highly
liquid cash equivalents, as defined in our credit facilities.
Please read “Management’s Discussion and Analysis of
Financial Condition and Results of Operation —
Liquidity and Capital Resources — Capital
Expenditures” for additional discussion of the expansion
project at our Shreveport refinery.
If the underwriters exercise their option to purchase additional
common units, we will use the additional net proceeds for
general partnership purposes.
We entered into a $225.0 million revolving credit facility
in December 2005 and simultaneously drew down a revolving loan
thereunder, the proceeds of which (along with simultaneous
borrowings under our term loan facility) were used to repay all
of our then outstanding indebtedness. Borrowings under our
revolving credit facility bear interest at a variable rate based
upon LIBOR or the Bank of America, N.A.’s prime rate, at
our option. As of June 23, 2006, we had $16.0 million
of outstanding indebtedness under our revolving credit facility,
which matures in 2010, at an interest rate of 8.0%.
CAPITALIZATION
The following table shows:
•
our historical cash and capitalization as of March 31,
2006; and
•
on a pro forma basis to reflect the sale of common units in this
offering, our general partner’s proportionate capital
contribution and the expected application of the estimated net
proceeds therefrom.
We derived this table from, and it should be read in conjunction
with and is qualified in its entirety by reference to, the
historical and pro forma consolidated financial statements and
the accompanying notes included elsewhere in this prospectus.
You should also read this table in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
| As of | |||||||||||
| March 31, 2006 | |||||||||||
| Historical | Pro Forma | ||||||||||
| (In thousands) | |||||||||||
|
Cash
|
$ | 85 | $ | 90,634 | |||||||
|
Long term debt, including current
portion:
|
|||||||||||
|
Revolving credit loan
|
14,751 | — | |||||||||
|
Term loan
|
49,875 | 49,875 | |||||||||
|
Total debt
|
64,626 | 49,875 | |||||||||
|
Partners’ capital:
|
|||||||||||
|
Common unitholders
|
147,442 | 250,524 | |||||||||
|
Subordinated unitholders
|
20,273 | 20,273 | |||||||||
|
General partner interest
|
966 | 3,184 | |||||||||
|
Accumulated other comprehensive
income
|
499 | 499 | |||||||||
|
Total partners’ capital
|
169,180 | 274,480 | |||||||||
|
Total capitalization
|
233,806 | 324,355 | |||||||||
35
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
Our common units are quoted and traded on the NASDAQ National
Market under the symbol “CLMT.” Our common units began
trading on January 26, 2006 at an initial public offering
price of $21.50 per common unit. The following table shows
the low and high sales prices per common unit, as reported by
the NASDAQ National Market, for the periods indicated.
Distributions are shown in the quarter for which they were paid.
For the first quarter of 2006, an identical cash distribution
was paid on all outstanding common and subordinated units.
| Cash Distribution | |||||||||||||
| Low | High | Per Unit | |||||||||||
|
2006:
|
|||||||||||||
|
First quarter(1)
|
$ | 21.70 | $ | 27.95 | $ | 0.30 | (2) | ||||||
|
Second quarter(3)
|
27.11 | 36.68 | — | (4) | |||||||||
| (1) | January 26, 2006, the day our common units began trading on the NASDAQ National Market, through March 31, 2006. |
| (2) | Reflects the pro rata portion of the $0.45 quarterly distribution per unit paid, representing the period from the January 31, 2006 closing of our initial public offering through March 31, 2006. |
| (3) | Through June 28, 2006. |
| (4) | The cash distribution for this period has not been declared or paid. |
36
37
HOW WE MAKE CASH DISTRIBUTIONS
Distributions of Available Cash
General. Within 45 days after the end of each
quarter, we will distribute our available cash to unitholders of
record on the applicable record date.
Definition of Available Cash. Available cash
generally means, for any quarter, all cash on hand at the end of
the quarter:
•
less the amount of cash reserves established by our general
partner to:
•
provide for the proper conduct of our business;
•
comply with applicable law, any of our debt instruments or other
agreements; or
•
provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters.
•
plus all cash on hand on the date of determination of available
cash for the quarter resulting from working capital borrowings
made after the end of the quarter for which the determination is
being made. Working capital borrowings are generally borrowings
that will be made under our revolving credit facility and in all
cases are used solely for working capital purposes or to pay
distributions to partners.
Intent to Distribute the Minimum Quarterly
Distribution. We will distribute to the holders of
common units and subordinated units on a quarterly basis at
least the minimum quarterly distribution of $0.45 per unit,
or $1.80 per year, to the extent we have sufficient cash
from our operations after establishment of cash reserves and
payment of fees and expenses, including payments to our general
partner. However, there is no guarantee that we will pay the
minimum quarterly distribution on the units in any quarter. Even
if our cash distribution policy is not modified or revoked, the
amount of distributions paid under our policy and the decision
to make any distribution is determined by our general partner,
taking into consideration the terms of our partnership
agreement. We are prohibited from making any distributions to
unitholders if it would cause an event of default, or an event
of default is existing, under our credit agreements. Please read
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources — Debt and Credit Facilities”
for a discussion of the restrictions to be included in our
credit agreement that may restrict our ability to make
distributions.
General Partner Interest and Incentive Distribution
Rights. As of the date of this offering, our general
partner is entitled to 2% of all quarterly distributions since
inception that we make prior to our liquidation. This general
partner interest is represented by 600,653 general partner
units. Our general partner has the right, but not the
obligation, to contribute a proportionate amount of capital to
us to maintain its current general partner interest. The general
partner’s initial 2% interest in these distributions may be
reduced if we issue additional units in the future and our
general partner does not contribute a proportionate amount of
capital to us to maintain its 2% general partner interest. Our
general partner also currently holds incentive distribution
rights that entitle it to receive increasing percentages, up to
a maximum of 50%, of the cash we distribute from operating
surplus (as defined below) in excess of $0.45 per unit. The
maximum distribution of 50% includes distributions paid to our
general partner on its 2% general partner interest, and assumes
that our general partner maintains its general partner interest
at 2%. The maximum distribution of 50% does not include any
distributions that our general partner may receive on units that
it owns. Please read “— Incentive Distribution
Rights” for additional information.
38
Operating Surplus and Capital Surplus
General. All cash distributed to unitholders is
characterized as either “operating surplus” or
“capital surplus.” Our partnership agreement requires
that we distribute available cash from operating surplus
differently than available cash from capital surplus.
Operating Surplus. Operating surplus generally
consists of:
•
our cash balance on the closing date of this offering; plus
•
$10.0 million (as described below); plus
•
all of our cash receipts after the closing of this offering,
excluding cash from (1) borrowings that are not working
capital borrowings, (2) sales of equity and debt securities
and (3) sales or other dispositions of assets outside the
ordinary course of business; plus
•
working capital borrowings made after the end of a quarter but
before the date of determination of operating surplus for the
quarter; less
•
all of our operating expenditures after the closing of this
offering (including the repayment of working capital borrowings,
but not the repayment of other borrowings) and maintenance
capital expenditures; less
•
the amount of cash reserves established by our general partner
for future operating expenditures.
Please read “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Liquidity and Capital Resources.”
Maintenance capital expenditures represent capital expenditures
made to replace partially or fully depreciated assets, to
maintain the existing operating capacity of our assets and to
extend their useful lives, or other capital expenditures that
are incurred in maintaining existing system volumes and related
cash flows. Expansion capital expenditures represent capital
expenditures made to expand the existing operating capacity of
our assets or to expand the operating capacity or revenues of
existing or new assets, whether through construction or
acquisition. Costs for repairs and minor renewals to maintain
facilities in operating condition and that do not extend the
useful life of existing assets are treated as operations and
maintenance expenses as we incur them. Our partnership agreement
provides that our general partner determines how to allocate a
capital expenditure for the acquisition or expansion of our
assets between maintenance capital expenditures and expansion
capital expenditures.
Capital Surplus. Capital surplus consists of:
•
borrowings other than working capital borrowings;
•
sales of our equity and debt securities; and
•
sales or other dispositions of assets for cash, other than
inventory, accounts receivable and other current assets sold in
the ordinary course of business or as part of normal retirement
or replacement of assets.
Characterization of Cash Distributions. We treat
all available cash distributed as coming from operating surplus
until the sum of all available cash distributed since we began
operations equals the operating surplus as of the most recent
date of determination of available cash. We treat any amount
distributed in excess of operating surplus, regardless of its
source, as capital surplus. As reflected above, operating
surplus includes $10.0 million. This amount does not
reflect actual cash on hand that is available for distribution
to our unitholders. Rather, it is a provision that will enable
us, if we choose, to distribute as operating surplus up to this
amount of cash we receive in the future from non-operating
sources, such as asset sales, issuances of securities and
borrowings, that would
39
otherwise be distributed as capital surplus. We do not
anticipate that we will make any distributions from capital
surplus.
Subordination Period
General. Our partnership agreement provides that,
during the subordination period (which we define below and in
Appendix A), the common units have the right to receive
distributions of available cash from operating surplus in an
amount equal to the minimum quarterly distribution of
$0.45 per quarter, plus any arrearages in the payment of
the minimum quarterly distribution on the common units from
prior quarters, before any distributions of available cash from
operating surplus may be made on the subordinated units. These
units are deemed “subordinated” because for a period
of time, referred to as the subordination period, the
subordinated units will not be entitled to receive any
distributions until the common units have received the minimum
quarterly distribution plus any arrearages from prior quarters.
Furthermore, no arrearages will be paid on the subordinated
units. The practical effect of the existence of the subordinated
units is to increase the likelihood that during the
subordination period there will be available cash to be
distributed on the common units. All of the outstanding
subordinated units are owned by affiliates of our general
partner. Please read “Security Ownership of Certain
Beneficial Owners and Management.”
Subordination Period. The subordination period
will extend until the first day of any quarter beginning after
December 31, 2010 that each of the following tests are met:
•
distributions of available cash from operating surplus on each
of the outstanding common units, subordinated units and general
partner units equaled or exceeded the minimum quarterly
distributions on such common units, subordinated units and
general partner units for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that
date;
•
the “adjusted operating surplus” (as defined below)
generated during each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date equaled or
exceeded the sum of the minimum quarterly distributions on all
of the outstanding common units, subordinated units and general
partner units during those periods on a fully diluted
basis; and
•
there are no arrearages in payment of minimum quarterly
distributions on the common units.
Expiration of the Subordination Period. When the
subordination period expires, each outstanding subordinated unit
will convert into one common unit and will then participate pro
rata with the other common units in distributions of available
cash. In addition, if the unitholders remove our general partner
other than for cause and units held by the general partner and
its affiliates are not voted in favor of such removal:
•
the subordination period will end and each subordinated unit
will immediately convert into one common unit;
•
any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
•
the general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests.
Adjusted Operating Surplus. Adjusted operating
surplus is intended to reflect the cash generated from
operations during a particular period and therefore excludes net
increases in working capital borrowings and net drawdowns of
reserves of cash generated in prior periods. Adjusted operating
surplus consists of:
•
operating surplus generated with respect to that period; less
•
any net increase in working capital borrowings with respect to
that period; less
40
•
any net decrease in cash reserves for operating expenditures
with respect to that period not relating to an operating
expenditure made with respect to that period; plus
•
any net decrease in working capital borrowings with respect to
that period; plus
•
any net increase in cash reserves for operating expenditures
with respect to that period required by any debt instrument for
the repayment of principal, interest or premium.
Distributions of Available Cash from Operating Surplus During
the Subordination Period
We will make distributions of available cash from operating
surplus for any quarter during the subordination period in the
following manner:
•
first, 98% to the common unitholders, pro rata, and 2% to the
general partner, until we distribute for each outstanding common
unit an amount equal to the minimum quarterly distribution for
that quarter;
•
second, 98% to the common unitholders, pro rata, and 2% to the
general partner, until we distribute for each outstanding common
unit an amount equal to any arrearages in payment of the minimum
quarterly distribution on the common units for any prior
quarters during the subordination period;
•
third, 98% to the subordinated unitholders, pro rata, and 2% to
the general partner, until we distribute for each subordinated
unit an amount equal to the minimum quarterly distribution for
that quarter; and
•
thereafter, in the manner described in
“— Incentive Distribution Rights” below.
The preceding discussion is based on the assumptions that our
general partner maintains its 2% general partner interest and
that we do not issue additional classes of equity securities.
Distributions of Available Cash from Operating Surplus After
the Subordination Period
We will make distributions of available cash from operating
surplus for any quarter after the subordination period in the
following manner:
•
first, 98% to all unitholders, pro rata, and 2% to the general
partner, until we distribute for each outstanding unit an amount
equal to the minimum quarterly distribution for that
quarter; and
•
thereafter, in the manner described in
“— Incentive Distribution Rights” below.
The preceding discussion is based on the assumptions that our
general partner maintains its 2% general partner interest and
that we do not issue additional classes of equity securities.
Incentive Distribution Rights
Incentive distribution rights represent the right to receive an
increasing percentage of quarterly distributions of available
cash from operating surplus after the minimum quarterly
distribution and the target distribution levels have been
achieved. Our general partner currently holds the incentive
distribution rights, but may transfer these rights separately
from its general partner interest, subject to restrictions in
the partnership agreement.
If for any quarter:
•
we have distributed available cash from operating surplus to the
common and subordinated unitholders in an amount equal to the
minimum quarterly distribution; and
•
we have distributed available cash from operating surplus on
outstanding common units in an amount necessary to eliminate any
cumulative arrearages in payment of the minimum quarterly
distribution;
then, we will distribute any additional available cash from
operating surplus for that quarter among the unitholders and the
general partner in the following manner:
•
first, 98% to all unitholders, pro rata, and 2% to the general
partner, until each unitholder receives a total of
$0.495 per unit for that quarter (the “first target
distribution”);
•
second, 85% to all unitholders, pro rata, and 15% to the general
partner, until each unitholder receives a total of
$0.563 per unit for that quarter (the “second target
distribution”);
•
third, 75% to all unitholders, pro rata, and 25% to the general
partner, until each unitholder receives a total of
$0.675 per unit for that quarter (the “third target
distribution”); and
•
thereafter, 50% to all unitholders, pro rata, and 50% to the
general partner.
In each case, the amount of the target distribution set forth
above is exclusive of any distributions to common unitholders to
eliminate any cumulative arrearages in payment of the minimum
quarterly distribution. The preceding discussion is based on the
assumptions that our general partner maintains its 2% general
partner interest and that we do not issue additional classes of
equity securities.
Percentage Allocations of Available Cash from Operating
Surplus
The following table illustrates the percentage allocations of
the additional available cash from operating surplus between the
unitholders and our general partner up to the various target
distribution levels. The amounts set forth under “Marginal
Percentage Interest in Distributions” are the percentage
interests of our general partner and the unitholders in any
available cash from operating surplus we distribute up to and
including the corresponding amount in the column “Total
Quarterly Distribution,” until available cash from
operating surplus we distribute reaches the next target
distribution level, if any. The percentage interests shown for
the unitholders and the general partner for the minimum
quarterly distribution are also applicable to quarterly
distribution amounts that are less than the minimum quarterly
distribution. The percentage interests set forth below for our
general partner include its 2% general partner interest and
assume our general partner has contributed any additional
capital to maintain its 2% general partner interest and has not
transferred its incentive distribution rights.
| Marginal Percentage | ||||||||||
| Interest in | ||||||||||
| Total Quarterly | Distributions | |||||||||
| Distribution | ||||||||||
| General | ||||||||||
| Target Amount | Unitholders | Partner | ||||||||
|
Minimum Quarterly Distribution
|
$0.45 | 98% | 2% | |||||||
|
First Target Distribution
|
up to $0.495 | 98% | 2% | |||||||
|
Second Target Distribution
|
above $0.495 up to $0.563 | 85% | 15% | |||||||
|
Third Target Distribution
|
above $0.563 up to $0.675 | 75% | 25% | |||||||
|
Thereafter
|
above $0.675 | 50% | 50% | |||||||
| • | first, 98% to all unitholders, pro rata, and 2% to the general partner, until we distribute for each common unit that was issued in this offering, an amount of available cash from capital surplus equal to the initial public offering price; |
41
42
•
second, 98% to the common unitholders, pro rata, and 2% to the
general partner, until we distribute for each common unit, an
amount of available cash from capital surplus equal to any
unpaid arrearages in payment of the minimum quarterly
distribution on the common units; and
•
thereafter, we will make all distributions of available cash
from capital surplus as if they were from operating surplus.
Effect of a Distribution from Capital Surplus. Our
partnership agreement treats a distribution of capital surplus
as the repayment of the initial unit price from the initial
public offering, which is a return of capital. The initial
public offering price less any distributions of capital surplus
per unit is referred to as the “unrecovered initial unit
price.” Each time a distribution of capital surplus is
made, the minimum quarterly distribution and the target
distribution levels will be reduced in the same proportion as
the corresponding reduction in the unrecovered initial unit
price. Because distributions of capital surplus will reduce the
minimum quarterly distribution, after any of these distributions
are made, it may be easier for the general partner to receive
incentive distributions and for the subordinated units to
convert into common units. However, any distribution of capital
surplus before the unrecovered initial unit price is reduced to
zero cannot be applied to the payment of the minimum quarterly
distribution or any arrearages.
Once we distribute capital surplus on a unit issued in this
offering in an amount equal to the initial unit price, our
partnership agreement specifies that the minimum quarterly
distribution and the target distribution levels will be reduced
to zero. Our partnership agreement specifies that we then make
all future distributions from operating surplus, with 50% being
paid to the holders of units and 50% to the general partner. The
percentage interests shown for our general partner include its
2% general partner interest and assume the general partner has
not transferred the incentive distribution rights.
Adjustment to the Minimum Quarterly Distribution and Target
Distribution Levels
In addition to adjusting the minimum quarterly distribution and
target distribution levels to reflect a distribution of capital
surplus, if we combine our units into fewer units or subdivide
our units into a greater number of units, our partnership
agreement specifies that the following items will be
proportionately adjusted:
•
the minimum quarterly distribution;
•
target distribution levels;
•
the unrecovered initial unit price;
•
the number of common units issuable during the subordination
period without a unitholder vote; and
•
the number of common units into which a subordinated unit is
convertible.
For example, if a two-for-one split of the common units should
occur, the minimum quarterly distribution, the target
distribution levels and the unrecovered initial unit price would
each be reduced to 50% of its initial level, the number of
common units issuable during the subordination period without
unitholder vote would double and each subordinated unit would be
convertible into two common units. Our partnership agreement
provides that we not make any adjustment by reason of the
issuance of additional units for cash or property.
In addition, if legislation is enacted or if existing law is
modified or interpreted by a governmental taxing authority, so
that we become taxable as a corporation or otherwise subject to
taxation as an entity for federal, state or local income tax
purposes, our partnership agreement specifies that the minimum
quarterly distribution and the target distribution levels for
each quarter will be reduced by multiplying each distribution
level by a fraction, the numerator of which is available
43
cash for that quarter and the denominator of which is the sum of
available cash for that quarter plus the general partner’s
estimate of our aggregate liability for the quarter for such
income taxes payable by reason of such legislation or
interpretation. To the extent that the actual tax liability
differs from the estimated tax liability for any quarter, the
difference will be accounted for in subsequent quarters.
Distributions of Cash Upon Liquidation
General. If we dissolve in accordance with the
partnership agreement, we will sell or otherwise dispose of our
assets in a process called liquidation. We will first apply the
proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and the
general partner, in accordance with their capital account
balances, as adjusted to reflect any gain or loss upon the sale
or other disposition of our assets in liquidation.
The allocations of gain and loss upon liquidation are intended,
to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding
subordinated units upon our liquidation, to the extent required
to permit common unitholders to receive their unrecovered
initial unit price plus the minimum quarterly distribution for
the quarter during which liquidation occurs plus any unpaid
arrearages in payment of the minimum quarterly distribution on
the common units. However, there may not be sufficient gain upon
our liquidation to enable the holders of common units to fully
recover all of these amounts, even though there may be cash
available for distribution to the holders of subordinated units.
Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive
distribution rights of the general partner.
Manner of Adjustments for Gain. The manner of the
adjustment for gain is set forth in the partnership agreement.
If our liquidation occurs before the end of the subordination
period, we will allocate any gain to the partners in the
following manner:
•
first, to the general partner and the holders of units who have
negative balances in their capital accounts to the extent of and
in proportion to those negative balances;
•
second, 98% to the common unitholders, pro rata, and 2% to the
general partner, until the capital account for each common unit
is equal to the sum of: (1) the unrecovered initial unit
price; (2) the amount of the minimum quarterly distribution
for the quarter during which our liquidation occurs; and
(3) any unpaid arrearages in payment of the minimum
quarterly distribution;
•
third, 98% to the subordinated unitholders, pro rata, and 2% to
the general partner until the capital account for each
subordinated unit is equal to the sum of: (1) the
unrecovered initial unit price; and (2) the amount of the
minimum quarterly distribution for the quarter during which our
liquidation occurs;
•
fourth, 98% to all unitholders, pro rata, and 2% to the general
partner, until we allocate under this paragraph an amount per
unit equal to: (1) the sum of the excess of the first
target distribution per unit over the minimum quarterly
distribution per unit for each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the minimum
quarterly distribution per unit that we distributed 98% to the
unitholders, pro rata, and 2% to the general partner, for each
quarter of our existence;
•
fifth, 85% to all unitholders, pro rata, and 15% to the general
partner, until we allocate under this paragraph an amount per
unit equal to: (1) the sum of the excess of the second
target distribution per unit over the first target distribution
per unit for each quarter of our existence; less (2) the
cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the first target
distribution per unit that we distributed 85% to the
unitholders, pro rata, and 15% to the general partner for each
quarter of our existence;
44
•
sixth, 75% to all unitholders, pro rata, and 25% to the general
partner, until we allocate under this paragraph an amount per
unit equal to: (1) the sum of the excess of the third
target distribution per unit over the second target distribution
per unit for each quarter of our existence; less (2) the
cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the second target
distribution per unit that we distributed 75% to the
unitholders, pro rata, and 25% to the general partner for each
quarter of our existence; and
•
thereafter, 50% to all unitholders, pro rata, and 50% to the
general partner.
The percentage interests set forth above for our general partner
include its 2% general partner interest and assume the general
partner has not transferred the incentive distribution rights.
If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that clause (3) of the second
bullet point above and all of the third bullet point above will
no longer be applicable.
Manner of Adjustments for Losses. If our
liquidation occurs before the end of the subordination period,
we will generally allocate any loss to the general partner and
the unitholders in the following manner:
•
first, 98% to holders of subordinated units in proportion to the
positive balances in their capital accounts and 2% to the
general partner, until the capital accounts of the subordinated
unitholders have been reduced to zero;
•
second, 98% to the holders of common units in proportion to the
positive balances in their capital accounts and 2% to the
general partner, until the capital accounts of the common
unitholders have been reduced to zero; and
•
thereafter, 100% to the general partner.
If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that all of the first bullet point
above will no longer be applicable.
Adjustments to Capital Accounts. Our partnership
agreement requires that we make adjustments to capital accounts
upon the issuance of additional units. In this regard, our
partnership agreement specifies that we allocate any unrealized
and, for tax purposes, unrecognized gain or loss resulting from
the adjustments to the unitholders and the general partner in
the same manner as we allocate gain or loss upon liquidation. In
the event that we make positive adjustments to the capital
accounts upon the issuance of additional units, our partnership
agreement requires that we allocate any later negative
adjustments to the capital accounts resulting from the issuance
of additional units or upon our liquidation in a manner which
results, to the extent possible, in the general partner’s
capital account balances equaling the amount which they would
have been if no earlier positive adjustments to the capital
accounts had been made.
45
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING
DATA
The following table shows selected historical financial and
operating data of Calumet Lubricants, Co., Limited Partnership
(“Calumet Predecessor”) and pro forma financial data
of Calumet Specialty Products Partners, L.P.
(“Calumet”) for the periods and as of the dates
indicated. The selected historical financial data as of
December 31, 2001, 2002, 2003, 2004 and 2005 and
March 31, 2005 and for the years ended December 31,
2001, 2002, 2003, 2004 and 2005 and for the three months ended
March 31, 2005, are derived from the consolidated financial
statements of Calumet Predecessor. This summary financial data
as of and for the three months ended March 31, 2006 are
derived from the consolidated financial statements of Calumet.
The results of operations for the three months ended
March 31, 2006 for Calumet include the results of
operations of Calumet Predecessor for the period of
January 1, 2006 through January 31, 2006. The selected
pro forma financial data as of March 31, 2006 and for the
year ended December 31, 2005 and the three months ended
March 31, 2006 are derived from the unaudited pro forma
financial statements of Calumet. The pro forma adjustments have
been prepared as if the transactions listed below had taken
place on March 31, 2006, in the case of the pro forma
balance sheet, or as of January 1, 2005, in the case of the
pro forma statement of operations for the three months ended
March 31, 2006 and for the year ended December 31,
2005. The pro forma financial data give pro forma effect to:
•
this offering of common units, our general partner’s
proportionate capital contribution and our expected application
of the estimated proceeds, net of underwriting discounts and
commissions and estimated offering expenses therefrom;
•
our initial public offering of common units, our application of
the net proceeds therefrom and the formation transactions
related to our partnership; and
•
the refinancing by Calumet Predecessor of its long-term debt
obligations pursuant to new credit facilities it entered into in
December 2005.
None of the assets or liabilities of Calumet Predecessor’s
Rouseville wax processing facility, Reno wax packaging facility
and Bareco wax marketing joint venture, which are included in
the historical financial statements, were contributed to us in
connection with the closing of our initial public offering on
January 31, 2006.
The following table includes the non-GAAP financial measures
EBITDA and Adjusted EBITDA. For a reconciliation of EBITDA and
Adjusted EBITDA to net income and cash flow from operating
activities, our most directly comparable financial performance
and liquidity measures calculated in accordance with GAAP,
please read “— Non-GAAP Financial Measures.”
We derived the information in the following table from, and that
information should be read together with and is qualified in its
entirety by reference to, the historical and pro forma combined
financial statements and the accompanying notes included
elsewhere in this prospectus. The table should be read together
with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
| Calumet Predecessor | Calumet | Calumet Pro Forma | ||||||||||||||||||||||||||||||||||||
| Three | ||||||||||||||||||||||||||||||||||||||
| Three Months | Months | |||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | Ended March 31, | Year Ended | Ended | |||||||||||||||||||||||||||||||||||
| December 31, | March 31, | |||||||||||||||||||||||||||||||||||||
| 2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | 2005 | 2006 | ||||||||||||||||||||||||||||||
| (In thousands, except per unit data) | ||||||||||||||||||||||||||||||||||||||
|
Summary of Operations
Data:
|
||||||||||||||||||||||||||||||||||||||
|
Sales
|
$ | 306,760 | $ | 316,350 | $ | 430,381 | $ | 539,616 | $ | 1,289,072 | $ | 229,549 | $ | 397,694 | $ | 1,289,072 | $ | 397,694 | ||||||||||||||||||||
|
Cost of sales
|
272,523 | 268,911 | 385,890 | 501,284 | 1,148,715 | 203,432 | 346,744 | 1,148,715 | 346,744 | |||||||||||||||||||||||||||||
|
Gross profit
|
34,237 | 47,439 | 44,491 | 38,332 | 140,357 | 26,117 | 50,950 | 140,357 | 50,950 | |||||||||||||||||||||||||||||
|
Operating costs and expenses:
|
||||||||||||||||||||||||||||||||||||||
|
Selling, general and administrative
|
7,844 | 9,066 | 9,432 | 13,133 | 22,126 | 3,392 | 4,929 | 22,126 | 4,929 | |||||||||||||||||||||||||||||
|
Transportation
|
24,096 | 25,449 | 28,139 | 33,923 | 46,849 | 10,723 | 13,907 | 46,849 | 13,907 | |||||||||||||||||||||||||||||
|
Taxes other than income
|
1,400 | 2,404 | 2,419 | 2,309 | 2,493 | 732 | 914 | 2,493 | 914 | |||||||||||||||||||||||||||||
|
Other
|
1,038 | 1,392 | 905 | 839 | 871 | 157 | 115 | 871 | 115 | |||||||||||||||||||||||||||||
|
Restructuring, decommissioning and
asset impairments(1)
|
9,015 | — | 6,694 | 317 | 2,333 | 368 | — | 2,333 | — | |||||||||||||||||||||||||||||
|
Total operating income (loss)
|
(9,156 | ) | 9,128 | (3,098 | ) | (12,189 | ) | 65,685 | 10,745 | 31,085 | 65,685 | 31,085 | ||||||||||||||||||||||||||
|
Other income (expense):
|
||||||||||||||||||||||||||||||||||||||
|
Equity in income (loss) of
unconsolidated affiliates
|
1,636 | 2,442 | 867 | (427 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||
|
Interest expense
|
(6,235 | ) | (7,435 | ) | (9,493 | ) | (9,869 | ) | (22,961 | ) | (4,864 | ) | (3,976 | ) | (8,542 | ) | (2,011 | ) | ||||||||||||||||||||
|
Debt extinguishment costs
|
— | — | — | — | (6,882 | ) | — | (2,967 | ) | (6,882 | ) | (2,967 | ) | |||||||||||||||||||||||||
|
Realized gain (loss) on derivative
instruments
|
— | 1,058 | (961 | ) | 39,160 | 2,830 | (6,651 | ) | (3,080 | ) | 2,830 | (3,080 | ) | |||||||||||||||||||||||||
|
Unrealized gain (loss) on
derivative instruments
|
— | — | 7,228 | (7,788 | ) | (27,586 | ) | 603 | (17,715 | ) | (27,586 | ) | (17,715 | ) | ||||||||||||||||||||||||
|
Other
|
471 | 88 | 32 | 83 | 242 | 39 | 199 | 242 | 199 | |||||||||||||||||||||||||||||
|
Total other income (expense)
|
(4,128 | ) | (3,847 | ) | (2,327 | ) | 21,159 | (54,357 | ) | (10,873 | ) | (27,539 | ) | (39,938 | ) | (25,574 | ) | |||||||||||||||||||||
|
Net income (loss) before income
taxes
|
(13,284 | ) | 5,281 | (5,425 | ) | 8,970 | 11,328 | (128 | ) | 3,546 | 25,747 | 5,511 | ||||||||||||||||||||||||||
|
Pro forma income tax expense
|
— | — | — | — | — | — | 14 | 90 | 14 | |||||||||||||||||||||||||||||
|
Net income (loss)
|
$ | (13,284 | ) | $ | 5,281 | $ | (5,425 | ) | $ | 8,970 | $ | 11,328 | $ | (128 | ) | $ | 3,532 | $ | 25,657 | $ | 5,497 | |||||||||||||||||
|
Basic and diluted pro forma net
income per limited partner unit:
|
||||||||||||||||||||||||||||||||||||||
|
Common
|
$ | 0.30 | $ | 2.47 | $ | 0.45 | ||||||||||||||||||||||||||||||||
|
Subordinated
|
$ | (0.36 | ) | $ | (1.94 | ) | $ | (0.15 | ) | |||||||||||||||||||||||||||||
|
Weighted average units:
|
||||||||||||||||||||||||||||||||||||||
|
Common
|
12,950 | 16,366 | 16,366 | |||||||||||||||||||||||||||||||||||
|
Subordinated
|
13,066 | 13,066 | 13,066 | |||||||||||||||||||||||||||||||||||
|
Balance Sheet Data (at period
end):
|
||||||||||||||||||||||||||||||||||||||
|
Property, plant and equipment, net
|
$ | 76,316 | $ | 85,995 | $ | 89,938 | $ | 126,585 | $ | 127,846 | $ | 131,194 | $ | 127,674 | $ | 127,674 | ||||||||||||||||||||||
|
Total assets
|
192,118 | 217,915 | 216,941 | 318,206 | 399,717 | 327,961 | 349,459 | 440,008 | ||||||||||||||||||||||||||||||
|
Accounts payable
|
24,485 | 34,072 | 32,263 | 58,027 | 44,759 | 28,053 | 52,216 | 52,216 | ||||||||||||||||||||||||||||||
|
Long-term debt
|
127,759 | 141,968 | 146,853 | 214,069 | 267,985 | 251,376 | 64,626 | 49,875 | ||||||||||||||||||||||||||||||
|
Partners’ capital
|
17,362 | 30,968 | 25,544 | 34,514 | 39,054 | 34,385 | 169,180 | 274,480 | ||||||||||||||||||||||||||||||
|
Cash Flow Data:
|
||||||||||||||||||||||||||||||||||||||
|
Net cash flow provided by (used in):
|
||||||||||||||||||||||||||||||||||||||
|
Operating activities
|
$ | (13,774 | ) | $ | (4,326 | ) | $ | 7,048 | $ | (612 | ) | $ | (34,001 | ) | $ | (48,005 | ) | $ | 60,115 | |||||||||||||||||||
|
Investing activities
|
(31,059 | ) | (9,924 | ) | (11,940 | ) | (42,930 | ) | (12,903 | ) | (6,933 | ) | (2,921 | ) | ||||||||||||||||||||||||
|
Financing activities
|
44,872 | 14,209 | 4,884 | 61,561 | 40,990 | 37,306 | (69,282 | ) | ||||||||||||||||||||||||||||||
46
| Calumet Predecessor | Calumet | Calumet Pro Forma | |||||||||||||||||||||||||||||||||||
| Three | |||||||||||||||||||||||||||||||||||||
| Three Months | Months | ||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | Ended March 31, | Year Ended | Ended | ||||||||||||||||||||||||||||||||||
| December 31, | March 31, | ||||||||||||||||||||||||||||||||||||
| 2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | 2005 | 2006 | |||||||||||||||||||||||||||||
| (In thousands, except per unit data) | |||||||||||||||||||||||||||||||||||||
|
Other Financial Data:
|
|||||||||||||||||||||||||||||||||||||
|
EBITDA
|
$ | 18,592 | $ | 10,837 | $ | 25,766 | $ | 51,557 | $ | 7,532 | $ | 13,162 | $ | 51,557 | $ | 13,162 | |||||||||||||||||||||
|
Adjusted EBITDA
|
16,277 | 6,110 | 34,711 | 85,821 | 8,718 | 26,110 | 85,821 | 26,110 | |||||||||||||||||||||||||||||
|
Operating Data (bpd):
|
|||||||||||||||||||||||||||||||||||||
|
Total sales volume(2)
|
19,021 | 19,110 | 23,616 | 24,658 | 46,953 | 38,418 | 52,090 | ||||||||||||||||||||||||||||||
|
Total feedstock runs(3)
|
18,941 | 21,665 | 25,007 | 26,205 | 50,213 | 42,059 | 52,370 | ||||||||||||||||||||||||||||||
|
Total refinery production(4)
|
18,991 | 21,587 | 25,204 | 26,297 | 48,331 | 40,343 | 50,585 | ||||||||||||||||||||||||||||||
| (1) | Incurred in connection with the decommissioning of the Rouseville, Pennsylvania facility, the termination of the Bareco joint venture and the closing of the Reno, Pennsylvania facility, none of which were contributed to us in connection with our initial public offering. |
| (2) | Total sales volume includes sales from the production of our refineries and sales of inventories. |
| (3) | Feedstock runs represents the barrels per day of crude oil and other feedstocks processed at our refineries. |
| (4) | Total refinery production represents the barrels per day of specialty products and fuel products yielded from processing crude oil and other refinery feedstocks at our refineries. The difference between total refining production and total feedstock production is primarily a result of the time lag between the input of feedstock and production of end products and volume loss. |
| • | the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; | |
| • | the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness; | |
| • | our operating performance and return on capital as compared to those of other companies in our industry, without regard to financing or capital structure; and | |
| • | the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities. |
47
thereunder. We are required to maintain a consolidated leverage
ratio of consolidated debt to Adjusted EBITDA, after giving
effect to any proposed distributions, of no greater than 3.75 to
1 in order to make distributions to our unitholders.
EBITDA and Adjusted EBITDA should not be considered alternatives
to net income, operating income, cash flows from operating
activities or any other measure of financial performance
presented in accordance with GAAP. Our EBITDA and Adjusted
EBITDA may not be comparable to similarly titled measures of
another company because all companies may not calculate EBITDA
and Adjusted EBITDA in the same manner. The following table
presents a reconciliation of EBITDA and Adjusted EBITDA to net
income and cash flow from operating activities, our most
directly comparable GAAP financial performance and liquidity
measures, for each of the periods indicated:
| Calumet Predecessor | Calumet | Calumet Pro Forma | |||||||||||||||||||||||||||||||
| Three | |||||||||||||||||||||||||||||||||
| Three Months | Months | ||||||||||||||||||||||||||||||||
| Year Ended December 31, | Ended March 31, | Year Ended | Ended | ||||||||||||||||||||||||||||||
| December 31, | March 31, | ||||||||||||||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | 2005 | 2006 | ||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||
|
Reconciliation of EBITDA and
Adjusted EBITDA to net income (loss):
|
|||||||||||||||||||||||||||||||||
|
Net income (loss)
|
$ | 5,281 | $ | (5,425 | ) | $ | 8,970 | $ | 11,328 | $ | (128 | ) | $ | 3,532 | $ | 25,657 | $ | 5,497 | |||||||||||||||
|
Add:
|
|||||||||||||||||||||||||||||||||
|
Interest expense and debt
extinguishment costs
|
7,435 | 9,493 | 9,869 | 29,843 | 4,864 | 6,943 | 15,424 | 4,978 | |||||||||||||||||||||||||
|
Depreciation and amortization
|
5,876 | 6,769 | 6,927 | 10,386 | 2,796 | 2,673 | 10,386 | 2,673 | |||||||||||||||||||||||||
|
Income tax expense
|
— | — | — | — | — | 14 | 90 | 14 | |||||||||||||||||||||||||
|
EBITDA
|
$ | 18,592 | $ | 10,837 | $ | 25,766 | $ | 51,557 | $ | 7,532 | $ | 13,162 | $ | 51,557 | $ | 13,162 | |||||||||||||||||
|
Add:
|
|||||||||||||||||||||||||||||||||
|
Unrealized loss (gain) from
mark to market accounting for hedging activities
|
$ | — | $ | (7,228 | ) | $ | 7,788 | $ | 27,586 | $ | (603 | ) | $ | 17,715 | $ | 27,586 | $ | 17,715 | |||||||||||||||
|
Non-cash impact of restructuring,
decommissioning and asset impairments
|
— | 2,250 | (1,276 | ) | 1,766 | 368 | — | 1,766 | — | ||||||||||||||||||||||||
|
Prepaid non-recurring expenses and
accrued non-recurring expenses, net of cash outlays
|
(2,315 | ) | 251 | 2,433 | 4,912 | 1,421 | (4,767 | ) | 4,912 | (4,767 | ) | ||||||||||||||||||||||
|
Adjusted EBITDA
|
$ | 16,277 | $ | 6,110 | $ | 34,711 | $ | 85,821 | $ | 8,718 | $ | 26,110 | $ | 85,821 | $ | 26,110 | |||||||||||||||||
48
| Calumet Predecessor | Calumet | ||||||||||||||||||||||||
| Three Months | |||||||||||||||||||||||||
| Ended | |||||||||||||||||||||||||
| Year Ended December 31, | March 31, | ||||||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||
|
Reconciliation of EBITDA and
Adjusted EBITDA to net cash provided (used) by operating
activities:
|
|||||||||||||||||||||||||
|
Net cash provided (used) by
operating activities
|
$ | (4,326 | ) | $ | 7,048 | $ | (612 | ) | $ | (34,011 | ) | $ | (48,055 | ) | $ | 60,115 | |||||||||
|
Add:
|
|||||||||||||||||||||||||
|
Interest expense and debt
extinguishment costs
|
7,435 | 9,493 | 9,869 | 29,843 | 4,864 | 6,943 | |||||||||||||||||||
|
Income tax expense
|
— | — | — | — | — | 14 | |||||||||||||||||||
|
Restructuring charge
|
— | (874 | ) | — | (1,693 | ) | — | — | |||||||||||||||||
|
Provision for doubtful accounts
|
(16 | ) | (12 | ) | (216 | ) | (294 | ) | (50 | ) | (127 | ) | |||||||||||||
|
Equity in (loss) income of
unconsolidated affiliates
|
2,442 | 867 | (427 | ) | — | — | — | ||||||||||||||||||
|
Dividends received from
unconsolidated affiliates
|
(2,925 | ) | (750 | ) | (3,470 | ) | — | — | — | ||||||||||||||||
|
Debt extinguishment costs
|
— | — | — | (4,173 | ) | — | (2,967 | ) | |||||||||||||||||
|
Accounts receivable
|
1,025 | 4,670 | 19,399 | 56,878 | 22,506 | (1,400 | ) | ||||||||||||||||||
|
Inventory
|
16,984 | (15,547 | ) | 20,304 | 25,441 | 3,009 | (7,313 | ) | |||||||||||||||||
|
Other current assets
|
(1,295 | ) | 563 | 11,596 | (569 | ) | 5,117 | (16,471 | ) | ||||||||||||||||
|
Derivative activity
|
3,682 | 6,265 | (5,046 | ) | (31,101 | ) | (6,305 | ) | (18,694 | ) | |||||||||||||||
|
Accounts payable
|
(9,587 | ) | 1,809 | (25,764 | ) | 13,268 | 29,974 | (7,457 | ) | ||||||||||||||||
|
Accrued liabilities
|
2,622 | (1,379 | ) | (1,203 | ) | (5,874 | ) | (2,551 | ) | 4,933 | |||||||||||||||
|
Other, including changes in
noncurrent assets and liabilities
|
2,551 | (1,316 | ) | 1,336 | 3,832 | (1,027 | ) | (4,414 | ) | ||||||||||||||||
|
EBITDA
|
$ | 18,592 | $ | 10,837 | $ | 25,766 | $ | 51,557 | $ | 7,532 | $ | 13,162 | |||||||||||||
|
Add:
|
|||||||||||||||||||||||||
|
Unrealized loss (gain) from
mark to market accounting for hedging activities
|
$ | — | $ | (7,228 | ) | $ | 7,788 | $ | 27,586 | $ | (603 | ) | $ | 17,715 | |||||||||||
|
Non-cash impact of restructuring,
decommissioning and asset impairments
|
— | 2,250 | (1,276 | ) | 1,766 | 368 | — | ||||||||||||||||||
|
Prepaid non-recurring expenses and
accrued non-recurring expenses, net of cash outlays
|
(2,315 | ) | 251 | 2,433 | 4,912 | 1,421 | (4,767 | ) | |||||||||||||||||
|
Adjusted EBITDA
|
$ | 16,277 | $ | 6,110 | $ | 34,711 | $ | 85,821 | $ | 8,718 | $ | 26,110 | |||||||||||||
49
50
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The historical consolidated financial statements included in
this prospectus reflect all of the assets, liabilities, and
results of operations of Calumet Specialty Products Partners,
L.P. (“Calumet”) when used in the present tense,
prospectively or for historical periods since January 31,
2006 and Calumet Lubricants Co., Limited Partnership
(“Calumet Predecessor”) for historical periods prior
to January 31, 2006 where applicable. These historical
consolidated financial statements include the results of
operations of the Rouseville and Reno facilities, which have
been closed, and the Bareco joint venture, which was terminated
as described below. The following discussion analyzes the
financial condition and results of operations of Calumet
Predecessor for the years ended December 31, 2003, 2004,
2005, and for the three months ended March 31, 2005. The
financial condition and results of operation for the three
months ended March 31, 2006 are of Calumet and include the
results of operations of Calumet Predecessor for the period from
January 1, 2006 to January 31, 2006. You should read
the following discussion of the financial condition and results
of operations for Calumet Predecessor in conjunction with the
historical consolidated financial statements and notes of
Calumet Predecessor and historical consolidated financial
statements and notes and the pro forma financial statements for
Calumet included elsewhere in this prospectus. The statements in
this discussion regarding industry outlook, our expectations
regarding our future performance, liquidity and capital
resources and other non-historical statements in this discussion
are forward-looking statements. These forward-looking statements
are subject to numerous risks and uncertainties, including, but
not limited to, the risks and uncertainties described in the
“Risk Factors” and “Forward-Looking
Statements” sections of this prospectus. Our actual results
may differ materially from those contained in or implied by any
forward-looking statements.
Overview
We are a leading independent producer of high-quality, specialty
hydrocarbon products in North America. Our business is organized
into two segments: specialty products and fuel products. In our
specialty products segment, we process crude oil into a wide
variety of customized lubricating oils, solvents and waxes. Our
specialty products are sold to domestic and international
customers who purchase them primarily as raw material components
for basic industrial, consumer and automotive goods. In our fuel
products segment, we process crude oil into a variety of fuel
and fuel-related products including unleaded gasoline, diesel
fuel and jet fuel. Our specialty products segment results
include fuel, asphalt, and other by-products produced in
connection with our production of specialty products. Our fuel
products segment results includes asphalt and other by-products
produced in connection with the production of fuel products at
the Shreveport refinery. For the year ended December 31,
2005 and the three months ended March 31, 2006,
approximately 52.2% and 72.7%, respectively, of our gross profit
was generated from our specialty products segment and
approximately 47.8% and 27.3%, respectively, of our gross profit
was generated from our fuel products segment.
On January 31, 2006, we completed our initial public
offering of our common units and received aggregate net proceeds
(including pursuant to the underwriters’ full exercise of
their option to purchase additional units) of approximately
$144.4 million. The net proceeds were used to:
(1) repay indebtedness and accrued interest under our first
lien term loan facility in the amount of approximately
$125.7 million, (2) repay indebtedness under our
secured revolving credit facility in the amount of approximately
$13.1 million and (3) pay transaction fees and
expenses in the amount of approximately $5.6 million.
Subsequent to the acquisition of the Shreveport refinery,
Calumet Predecessor undertook to streamline its wax processing
and marketing operations by decommissioning its Rouseville
facility, closing its Reno facility and terminating its Bareco
joint venture. None of the assets or liabilities of Calumet
Predecessor’s Rouseville facility, Reno facility or Bareco
joint venture were contributed to Calumet in connection with the
initial public offering on January 31, 2006. Calumet
Predecessor
51
began decommissioning the Rouseville facility in 2003 and
completed the decommissioning in 2005. This resulted in
restructuring costs of $6.7 million in 2003 and
$0.3 million in 2004 and $2.3 million in 2005. In
2005, Calumet Predecessor closed the Reno facility for a
restructuring cost of $1.7 million. In 2003, Calumet
Predecessor terminated its Bareco joint venture. The results of
operations of Bareco are reflected in equity in (loss) income of
unconsolidated affiliates in the consolidated statements of
operations. The combined net book value of the Reno and
Rouseville operations as of December 31, 2005 was
$0.4 million.
Our fuel products segment began operations in 2004, as we
substantially completed the approximately $39.7 million
reconfiguration of the Shreveport refinery to add motor fuels
production, including gasoline, diesel and jet fuel, to its
existing specialty products slate as well as to increase overall
feedstock throughput. The project was fully completed in
February 2005. The reconfiguration was undertaken to capitalize
on strong fuels refining margins, or crack spreads, relative to
historical levels, to utilize idled assets, and to enhance the
profitability of the Shreveport refinery’s specialty
products segment by increasing overall refinery throughput.
Since completion of the reconfiguration of the Shreveport
refinery, crack spreads have increased, which has further
improved the profitability of the fuel products segment. We plan
to commence construction of an expansion project at our
Shreveport refinery to increase throughput capacity and
feedstock flexibility. Please read “Liquidity and Capital
Resources — Capital Expenditures”.
Our sales and net income are principally affected by the price
of crude oil, demand for specialty and fuel products, prevailing
crack spreads for fuel products, the price of natural gas used
as fuel in our operations and our results from derivative
instrument activities.
Our primary raw material is crude oil and our primary outputs
are specialty petroleum and fuel products. The prices of crude
oil, specialty and fuel products are subject to fluctuations in
response to changes in supply, demand, market uncertainties and
a variety of additional factors beyond our control. We monitor
these risks and enter into financial derivatives designed to
mitigate the impact of commodity price fluctuations on our
business. The primary purpose of our commodity risk management
activities is to economically hedge our cash flow exposure to
commodity price risk so that we can meet our cash distribution,
debt service and capital expenditure requirements despite
fluctuations in crude oil and fuel product prices. We enter into
derivative contracts for future periods in quantities which do
not exceed our projected purchases of crude oil and fuels
production. Please read “— Quantitative and
Qualitative Disclosures about Market Risk — Commodity
Price Risk.”
Our management uses several financial and operational
measurements to analyze our performance. These measurements
include the following:
•
Sales volumes;
•
Production yields; and
•
Specialty products and fuel products gross profit.
Sales volumes. We view the volumes of specialty
and fuel products sold as an important measure of our ability to
effectively utilize our refining assets. Our ability to meet the
demands of our customers is driven by the volumes of crude oil
and feedstocks that we run at our refineries. Higher volumes
improve profitability both through the spreading of fixed costs
over greater volumes and the additional gross margin achieved on
the incremental volumes.
Production yields. We seek the optimal product mix
for each barrel of crude oil we refine in order to maximize our
gross profits and minimize lower margin by-products which we
refer to as production yield.
Specialty products and fuel products gross profit.
Specialty products and fuel products gross profit are an
important measure of our ability to maximize the profitability
of our specialty products and fuel products segments. We define
specialty products and fuel products gross profit as sales less
the cost of crude oil and other feedstocks and other
production-related expenses, the
most significant portion of which include labor, fuel,
utilities, contract services, maintenance and processing
materials. We use specialty products and fuel products 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 in selling prices
typically lags behind the rising costs of crude oil feedstocks
for specialty products. Other than plant fuel,
production-related expenses generally remain stable across broad
ranges of throughput volumes, but can fluctuate depending on the
maintenance and turnaround activities performed during a
specific period. Maintenance expense includes accruals for
turnarounds and other maintenance expenses.
In addition to the foregoing measures, we also monitor our
general and administrative expenditures, substantially all of
which are incurred through our general partner, Calumet GP, LLC.
Results of Operations
The following table sets forth information about our combined
refinery operations. Refining production volume differs from
sales volume due to changes in inventory.
| Calumet | |||||||||||||||||||||||
| Calumet Predecessor | Predecessor | Calumet | |||||||||||||||||||||
| Year Ended | Three Months Ended | ||||||||||||||||||||||
| December 31, | March 31, | ||||||||||||||||||||||
| 2003- | 2004 | 2005 | 2005 | 2006 | |||||||||||||||||||
|
Total sales volume (bpd)(1)
|
23,616 | 24,658 | 46,953 | 38,418 | 52,090 | ||||||||||||||||||
|
Total feedstock runs (bpd)(2)
|
25,007 | 26,205 | 50,213 | 42,059 | 52,370 | ||||||||||||||||||
|
Refinery production (bpd)(3):
|
|||||||||||||||||||||||
|
Specialty products:
|
|||||||||||||||||||||||
|
Lubricating oils
|
8,290 | 9,437 | 11,556 | 10,095 | 11,695 | ||||||||||||||||||
|
Solvents
|
4,623 | 4,973 | 4,422 | 3,422 | 4,346 | ||||||||||||||||||
|
Waxes
|
699 | 1,010 | 1,020 | 886 | 1,144 | ||||||||||||||||||
|
Asphalt and other by-products
|
5,159 | 5,992 | 6,313 | 5,490 | 5,561 | ||||||||||||||||||
|
Fuels
|
6,433 | 3,931 | 2,354 | 2,395 | 2,508 | ||||||||||||||||||
|
Total
|
25,204 | 25,343 | 25,665 | 22,288 | 25,254 | ||||||||||||||||||
|
Fuel products:
|
|||||||||||||||||||||||
|
Gasoline
|
— | 3 | 8,278 | 6,401 | 10,002 | ||||||||||||||||||
|
Diesel fuel
|
— | 583 | 8,891 | 7,792 | 7,724 | ||||||||||||||||||
|
Jet fuel
|
— | 342 | 5,080 | 3,772 | 7,308 | ||||||||||||||||||
|
Asphalt and other by-products
|
— | 26 | 417 | 90 | 297 | ||||||||||||||||||
|
Total
|
— | 954 | 22,666 | 18,055 | 25,331 | ||||||||||||||||||
|
Total refinery production
|
25,204 | 26,297 | 48,331 | 40,343 | 50,585 | ||||||||||||||||||
| (1) | Total sales volume includes sales from the production of our refineries and sales of inventories. |
| (2) | Feedstock runs represents the barrels per day of crude oil and other feedstocks processed at our refineries. |
| (3) | Total refinery production represents the barrels per day of specialty products and fuel products yielded from processing crude oil and other refinery feedstocks at our refineries. The difference between total refinery production and total feedstock runs is primarily a result of the time lag between the input of feedstock and production of end products and volume loss. |
52
The following table sets forth information about the sales of
our principal products.
| Calumet | ||||||||||||||||||||||
| Calumet Predecessor | Predecessor | Calumet | ||||||||||||||||||||
| Year Ended | Three Months Ended | |||||||||||||||||||||
| December 31, | March 31, | |||||||||||||||||||||
| 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||
|
Specialty products:
|
||||||||||||||||||||||
|
Lubricating oils
|
$ | 205.9 | $ | 251.9 | $ | 394.4 | $ | 79.0 | $ | 132.9 | ||||||||||||
|
Solvents
|
87.6 | 114.7 | 145.0 | 27.5 | 52.4 | |||||||||||||||||
|
Waxes
|
32.3 | 39.5 | 43.6 | 8.5 | 15.5 | |||||||||||||||||
|
Fuels
|
83.5 | 72.7 | 44.0 | 11.7 | 11.8 | |||||||||||||||||
|
Asphalt and other by-products
|
21.1 | 51.2 | 76.3 | 15.1 | 17.1 | |||||||||||||||||
|
Total
|
430.4 | 530.0 | 703.3 | 141.8 | 229.7 | |||||||||||||||||
|
Fuel products:
|
||||||||||||||||||||||
|
Gasoline
|
— | — | 223.6 | 27.9 | 71.9 | |||||||||||||||||
|
Diesel fuel
|
— | 3.3 | 230.9 | 40.7 | 56.0 | |||||||||||||||||
|
Jet fuel
|
— | — | 121.3 | 15.3 | 38.9 | |||||||||||||||||
|
Asphalt and other by-products
|
— | 6.3 | 10.0 | 3.8 | 1.2 | |||||||||||||||||
|
Total
|
— | 9.6 | 585.8 | 87.7 | 168.0 | |||||||||||||||||
|
Consolidated sales
|
$ | 430.4 | $ | 539.6 | $ | 1,289.1 | $ | 229.5 | $ | 397.7 | ||||||||||||
53
The following table reflects our consolidated results of
operations.
| Calumet | |||||||||||||||||||||
| Predecessor | Calumet | ||||||||||||||||||||
| Calumet Predecessor | |||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||
| Year Ended December 31, | March 31, | ||||||||||||||||||||
| 2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||||||
| (In millions) | |||||||||||||||||||||
|
Sales
|
$ | 430.4 | $ | 539.6 | $ | 1,289.1 | $ | 229.5 | $ | 397.7 | |||||||||||
|
Cost of sales
|
385.9 | 501.3 | 1,148.7 | 203.4 | 346.7 | ||||||||||||||||
|
Gross profit
|
44.5 | 38.3 | 140.4 | 26.1 | 51.0 | ||||||||||||||||
|
Operating costs and expenses:
|
|||||||||||||||||||||
|
Selling, general and administrative
|
9.4 | 13.1 | 22.1 | 3.4 | 4.9 | ||||||||||||||||
|
Transportation
|
28.2 | 34.0 | 46.9 | 10.7 | 13.9 | ||||||||||||||||
|
Taxes other than income taxes
|
2.4 | 2.3 | 2.5 | 0.7 | 1.0 | ||||||||||||||||
|
Other
|
0.9 | 0.8 | 0.9 | 0.2 | 0.1 | ||||||||||||||||
|
Restructuring, decommissioning and
asset impairments
|
6.7 | 0.3 | 2.3 | 0.4 | — | ||||||||||||||||
|
Operating income (loss)
|
(3.1 | ) | (12.2 | ) | 65.7 | 10.7 | 31.1 | ||||||||||||||
|
Other income (expense):
|
|||||||||||||||||||||
|
Equity in (loss) income of
unconsolidated affiliates
|
0.9 | (0.4 | ) | — | — | — | |||||||||||||||
|
Interest expense
|
(9.5 | ) | (9.9 | ) | (23.0 | ) | (4.8 | ) | (4.0 | ) | |||||||||||
|
Debt extinguishment costs
|
— | — | (6.9 | ) | — | (3.0 | ) | ||||||||||||||
|
Realized gain (loss) on derivative
instruments
|
(1.0 | ) | 39.2 | 2.8 | (6.6 | ) | (3.1 | ) | |||||||||||||
|
Unrealized gain (loss) on
derivative instruments
|
7.3 | (7.8 | ) | (27.6 | ) | 0.6 | (17.7 | ) | |||||||||||||
|
Other
|
— | 0.1 | 0.3 | — | 0.2 | ||||||||||||||||
|
Total other income (expense)
|
(2.3 | ) | 21.2 | (54.4 | ) | (10.8 | ) | (27.6 | ) | ||||||||||||
|
Net income (loss)
|
$ | (5.4 | ) | $ | 9.0 | $ | 11.3 | $ | (0.1 | ) | $ | 3.5 | |||||||||
54
Three Months Ended March 31, 2006 Compared to Three
Months Ended March 31, 2005
Sales. Sales increased $168.1 million, or
73.3%, to $397.7 million in the three months ended
March 31, 2006 from $229.5 million in the three months
ended March 31, 2005. Sales for each of our principal
product categories in these periods were as follows:
| Calumet | ||||||||||||||
| Predecessor | Calumet | |||||||||||||
| Three Months Ended | ||||||||||||||
| March 31, | ||||||||||||||
| 2005 | 2006 | % Change | ||||||||||||
| (Dollars in millions) | ||||||||||||||
|
Sales by segment:
|
||||||||||||||
|
Specialty products:
|
||||||||||||||
|
Lubricating oils
|
$ | 79.0 | $ | 132.9 | 68.2 | % | ||||||||
|
Solvents
|
27.5 | 52.4 | 90.2 | |||||||||||
|
Waxes
|
8.5 | 15.5 | 81.5 | |||||||||||
|
Fuels(1)
|
11.7 | 11.8 | 0.8 | |||||||||||
|
Asphalt and by-products(2)
|
15.1 | 17.1 | 13.9 | |||||||||||
|
Total specialty products
|
$ | 141.8 | $ | 229.7 | 61.9 | % | ||||||||
|
Total specialty products volume (in
barrels)
|
2,033,000 | 2,414,000 | 18.8 | % | ||||||||||
|
Fuel products:
|
||||||||||||||
|
Gasoline
|
$ | 27.9 | $ | 71.9 | 157.7 | % | ||||||||
|
Diesel
|
40.7 | 56.0 | 37.3 | |||||||||||
|
Jet fuel
|
15.3 | 38.9 | 154.5 | |||||||||||
|
Asphalt and by-products(3)
|
3.8 | 1.2 | (67.6 | ) | ||||||||||
|
Total fuel products
|
$ | 87.7 | $ | 168.0 | 91.5 | % | ||||||||
|
Total fuel products sales volumes
(in barrels)
|
1,425,000 | 2,274,000 | 59.6 | % | ||||||||||
|
Total sales
|
$ | 229.5 | $ | 397.7 | 73.3 | % | ||||||||
|
Total sales volumes (in barrels)
|
3,458,000 | 4,688,000 | 35.6 | % | ||||||||||
| (1) | Represents fuels produced in connection with the production of specialty products at the Princeton and Cotton Valley refineries. |
| (2) | Represents asphalt and other by-products produced in connection with the production of specialty products at the Princeton, Cotton Valley and Shreveport refineries. |
| (3) | Represents asphalt and other by-products produced in connection with the production of fuels at the Shreveport refinery. |
55
partially offset by decreased sales of fuels and asphalt and
by-products that are produced by the specialty products segment.
Average selling prices per barrel for lubricating oils,
solvents, fuels and asphalt and by-product prices increased at
rates comparable to or in excess of the overall 25.1% increase
in the cost of crude oil per barrel during the period, whereas
waxes increased by only 22.0% due to market conditions.
Fuel products segment sales for 2006 increased
$80.3 million, or 91.5% for the three months ended
March 31, 2006, primarily due to increased volume of 59.6%
attributable to the increased production of our fuels operations
at the Shreveport refinery in the first quarter of 2005. This
increase was due to increased combined sales volume for gasoline
and jet fuel of 0.8 million barrels, or $48.3 million,
with diesel fuel sales volume remaining relatively constant. In
addition, fuel product segment sales increased due to a 20.1%
increase in average sales prices per barrel for fuel products
consistent with the 25.6% increase in the cost of crude oil per
barrel.
Gross Profit. Gross profit increased
$24.8 million, or 95.1%, to $51.0 million for the
three months ended March 31, 2006 from $26.1 million
for the three months ended March 31, 2005. Gross profit for
our specialty and fuel products segments were as follows:
| Calumet | ||||||||||||||
| Predecessor | Calumet | |||||||||||||
| Three Months Ended | ||||||||||||||
| March 31, | ||||||||||||||
| 2005 | 2006 | % Change | ||||||||||||
| (Dollars in millions) | ||||||||||||||
|
Gross profit by segment:
|
||||||||||||||
|
Specialty products
|
$ | 17.7 | $ | 37.1 | 109.6 | % | ||||||||
|
Percentage of sales
|
12.5 | % | 16.2 | % | ||||||||||
|
Fuel products
|
$ | 8.4 | $ | 13.9 | 65.5 | % | ||||||||
|
Percentage of sales
|
9.5 | % | 8.3 | % | ||||||||||
|
Total gross profit
|
$ | 26.1 | $ | 51.0 | 95.1 | % | ||||||||
|
Percentage of sales
|
11.4 | % | 12.8 | % | ||||||||||
56
57
Restructuring, decommissioning and asset
impairments. Restructuring, decommissioning and asset
impairment expenses were $0.4 million in the three months
ended March 31, 2005, and we incurred no such expenses in
2006. The charges recorded in 2005 related to asset impairment
of the Reno wax packaging assets. No assets impairments occurred
the first quarter of 2006.
Interest expense. Interest expense decreased
$0.9 million, or 18.3%, to $4.0 million in the three
months ended March 31, 2006 from $4.9 million in the
three months ended March 31, 2005. This decrease was
primarily due to our debt refinancing in December 2005 and the
repayment of debt with the proceeds of our initial public
offering, which occurred on January 31, 2006.
Debt extinguishment costs. Debt extinguishment
costs increased to $3.0 million for the three months ended
March 31, 2006 compared to no debt extinguishment costs for
the three months ended March 31, 2005, as a result of the
repayment of borrowings under our term loan using a portion of
the net proceeds from our initial public offering, which
occurred on January 31, 2006.
Realized loss on derivative instruments. Realized
loss on derivative instruments decreased $3.6 million, or
53.7%, to a $3.1 million loss in the three months ended
March 31, 2006 from a $6.7 million loss in the three
months ended March 31, 2005. This decrease primarily was
the result of a new mix of crude and fuel product margin collar
and swap contracts which have experienced less decline in value
than the contracts that settled in the first quarter of 2005.
Unrealized (loss) gain on derivative instruments.
Unrealized loss on derivative instruments increased
$18.3 million to a $17.7 million loss in the three
months ended March 31, 2006 from a $0.6 million
unrealized gain for the three months ended March 31, 2005.
This unrealized loss is a non-cash item that results from
valuing at fair value our derivative instruments used to hedge
our fuel products margins in future periods. The increase
compared to the same period in the prior year is primarily due
to the decline in fair value of these instruments as the market
prices for fuel products have increased. Our objective in
hedging our fuel products margins is to ensure stability of cash
flows in future periods. We believe that this hedging program is
helping us achieve this objective.
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Sales. Sales increased $749.5 million, or
138.9%, to $1,289.1 million in the year ended
December 31, 2005 from $539.6 million in the year
ended December 31, 2004. Sales for each of our principal
product categories in these periods were as follows:
| Calumet Predecessor | ||||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2004 | 2005 | % Change | ||||||||||||
| (Dollars in millions) | ||||||||||||||
|
Sales by segment:
|
||||||||||||||
|
Specialty products:
|
||||||||||||||
|
Lubricating oils
|
$ | 251.9 | $ | 394.4 | 56.6 | % | ||||||||
|
Solvents
|
114.7 | 145.0 | 26.4 | |||||||||||
|
Waxes
|
39.5 | 43.6 | 10.4 | |||||||||||
|
Fuels(1)
|
72.7 | 44.0 | (39.5 | ) | ||||||||||
|
Asphalt and by-products(2)
|
51.2 | 76.3 | 48.8 | |||||||||||
|
Total specialty products
|
$ | 530.0 | $ | 703.3 | 32.7 | % | ||||||||
|
Total specialty products volume (in
barrels)
|
8,807,000 | 8,900,000 | 1.1 | % | ||||||||||
|
Fuel products:
|
||||||||||||||
|
Gasoline
|
$ | — | $ | 223.6 | — | |||||||||
|
Diesel
|
3.3 | 230.9 | 6,885.7 | % | ||||||||||
|
Jet fuel
|
— | 121.3 | — | |||||||||||
|
Asphalt and by-products(3)
|
6.3 | 10.0 | 59.0 | |||||||||||
|
Total fuel products
|
$ | 9.6 | $ | 585.8 | 5,998.2 | % | ||||||||
|
Total fuel products sales volumes
(in barrels)
|
193,000 | 8,238,000 | 4,168.4 | % | ||||||||||
|
Total sales
|
$ | 539.6 | $ | 1,289.1 | 138.9 | % | ||||||||
|
Total sales volumes (in barrels)
|
9,000,000 | 17,138,000 | 90.4 | % | ||||||||||
| (1) | Represents fuels produced in connection with the production of specialty products at the Princeton and Cotton Valley refineries. |
| (2) | Represents asphalt and other by-products produced in connection with the production of specialty products at the Princeton, Cotton Valley and Shreveport refineries. |
| (3) | Represents asphalt and other by-products produced in connection with the production of fuels at the Shreveport refinery. |
58
Fuel products segment sales for 2005 increased
$576.2 million which is attributable to the reconfiguration
of the Shreveport refinery, which was fully completed by
February 2005, and the
start-up of our fuel
products segment in the fourth quarter of 2004.
Gross Profit. Gross profit increased
$102.0 million, or 266.2%, to $140.4 million for the
year ended December 31, 2005 from $38.3 million for
year ended December 31, 2004. Gross profit for our
specialty and fuel products segments were as follows:
| Calumet | ||||||||||||||
| Predecessor | ||||||||||||||
| Year Ended | ||||||||||||||
| December 31, | ||||||||||||||
| 2004 | 2005 | % Change | ||||||||||||
| (Dollars in millions) | ||||||||||||||
|
Gross profit by segment:
|
||||||||||||||
|
Specialty products
|
$ | 40.6 | $ | 73.3 | 80.5 | % | ||||||||
|
Percentage of sales
|
7.7 | % | 10.4 | % | ||||||||||
|
Fuel products
|
$ | (2.3 | ) | $ | 67.1 | — | ||||||||
|
Percentage of sales
|
(24.1 | )% | 11.5 | % | ||||||||||
|
Total gross profit
|
$ | 38.3 | $ | 140.4 | 266.2 | % | ||||||||
|
Percentage of sales
|
7.1 | % | 10.9 | % | ||||||||||
59
On December 9, 2005, we repaid our existing facilities with
the proceeds of borrowings under our current credit agreements.
This resulted in debt extinguishment costs of $6.9 million
being recorded in the fourth quarter.
Gain (loss) on derivative instruments. Gains
(loss) on derivative instruments decreased $56.1 million,
to a $24.8 million loss in the year ended December 31,
2005 from a $31.4 million gain in the year ended
December 31, 2004. This decrease primarily was the result
of marking to fair value a new mix of fuel product margin collar
and swap contracts which experienced significant declines in
value due to increased crack spreads as of December 31,
2005.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Sales. Sales increased $109.2 million, or
25.4%, to $539.6 million in the year ended
December 31, 2004 from $430.4 million in the year
ended December 31, 2003. Sales for each of our principal
product categories in these periods were as follows:
| Calumet Predecessor | ||||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2003 | 2004 | % Change | ||||||||||||
| (Dollars in millions) | ||||||||||||||
|
Sales by segment:
|
||||||||||||||
|
Specialty products:
|
||||||||||||||
|
Lubricating oils
|
$ | 205.9 | $ | 251.9 | 22.3 | % | ||||||||
|
Solvents
|
87.6 | 114.7 | 30.9 | |||||||||||
|
Waxes
|
32.3 | 39.5 | 22.3 | |||||||||||
|
Fuels(1)
|
83.5 | 72.7 | (13.0 | ) | ||||||||||
|
Asphalt and by-products(2)
|
21.1 | 51.2 | 142.7 | |||||||||||
|
Total specialty products
|
$ | 430.4 | $ | 530.0 | 23.1 | % | ||||||||
|
Total specialty products volumes
(in barrels)
|
8,620,000 | 8,807,000 | 2.2 | % | ||||||||||
|
Fuel products:
|
||||||||||||||
|
Gasoline
|
$ | — | $ | — | — | |||||||||
|
Diesel
|
— | 3.3 | — | |||||||||||
|
Jet fuel
|
— | — | — | |||||||||||
|
Asphalt and by-products(3)
|
— | 6.3 | — | |||||||||||
|
Total fuel products
|
$ | — | $ | 9.6 | — | |||||||||
|
Total fuel products volumes (in
barrels)
|
— | 193,000 | — | |||||||||||
|
Total sales
|
$ | 430.4 | $ | 539.6 | 25.4 | % | ||||||||
|
Total sales volumes (in barrels)
|
8,620,000 | 9,000,000 | 4.4 | % | ||||||||||
| (1) | Represents fuels produced in connection with the production of specialty products at the Princeton and Cotton Valley refineries. |
| (2) | Represents asphalt and other by-products produced in connection with the production of specialty products at the Princeton and Cotton Valley refineries. |
| (3) | Represents asphalt and other by-products produced in connection with the production of fuels at the Shreveport refinery. |
60
2.2% increase in volumes sold, from approximately
8.6 million barrels in 2003 to 8.8 million barrels in
2004. Sales price increases were driven by an average 32.5%
increase in the cost of crude oil per barrel over the same
period. Increases in prices for waxes lagged our average
increase in price per barrel of product sold compared to the
increase in prices for lubricating oils, solvents and fuels. In
2004 as compared to 2003, sales volumes of fuels decreased and
sales volumes of asphalt and by-products increased due to a
different mix of feedstock.
Gross Profit. Gross profit decreased
$6.2 million, or 13.8%, to $38.3 million for the year
ended December 31, 2004 from $44.5 million for the
year ended December 31, 2003. Gross profit for our
specialty and fuel products segments were as follows:
| Calumet Predecessor | ||||||||||||||
| Year Ended | ||||||||||||||
| December 31, | ||||||||||||||
| 2003 | 2004 | % Change | ||||||||||||
| (Dollars in millions) | ||||||||||||||
|
Gross profit by segment:
|
||||||||||||||
|
Specialty products
|
$ | 44.5 | $ | 40.6 | (8.6 | )% | ||||||||
|
Percentage of sales
|
10.3 | % | 7.7 | % | ||||||||||
|
Fuel products
|
— | (2.3 | ) | — | ||||||||||
|
Percentage of sales
|
— | (24.1 | )% | |||||||||||
|
Total gross profit
|
$ | 44.5 | $ | 38.3 | (13.8 | )% | ||||||||
|
Percentage of sales
|
10.3 | % | 7.1 | % | ||||||||||
61
Gain (loss) on derivative instruments. Gains on
derivative instruments increased $25.1 million, or 400.6%,
to $31.4 million in the year ended December 31, 2004
from $6.3 million in the year ended December 31, 2003.
This increase was the result of marking to fair value gains due
to the rising price of crude oil in relation to the contractual
strike prices on our derivative instruments and our new mix of
fuel product margin collar and swap contracts during 2004.
Liquidity and Capital Resources
Our principal historical sources of cash have included the
issuance of private debt, bank borrowings, and cash flow from
operations. Principal historical uses of cash have included
capital expenditures, growth in working capital and debt
service. We expect that our principal uses of cash in the future
will be to finance working capital, capital expenditures,
distributions and debt service.
Cash Flows
We believe that we have sufficient liquid assets, cash flow from
operations and borrowing capacity to meet our financial
commitments, debt service obligations, contingencies and
anticipated capital expenditures. However, we are subject to
business and operational risks that could materially adversely
affect our cash flows. A material decrease in our cash flows
would likely produce a corollary materially adverse effect on
our borrowing capacity.
The following table summarizes our primary sources and uses of
cash in the periods presented (in millions):
| Calumet | ||||||||||||||||||||
| Calumet Predecessor | Predecessor | Calumet | ||||||||||||||||||
| Year Ended | Three Months Ended | |||||||||||||||||||
| December 31, | March 31, | |||||||||||||||||||
| 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
|
Net cash provided by (used in)
operating activities
|
$ | 7.0 | $ | (0.6 | ) | $ | (34.0 | ) | $ | (48.0 | ) | $ | 60.1 | |||||||
|
Net cash used in investing
activities
|
(11.9 | ) | (42.9 | ) | (12.9 | ) | (6.9 | ) | (2.9 | ) | ||||||||||
|
Net cash provided by (used in)
financing activities
|
$ | 4.9 | $ | 61.6 | $ | 41.0 | $ | 37.3 | $ | (69.3 | ) | |||||||||
62
63
Operating activities used $0.6 million of cash for the year
ended December 31, 2004 compared to generating
$7.0 million of cash for the year ended December 31,
2003. This decrease is primarily due to increased levels of
accounts receivable and inventory which more than offset
increases in net income and accounts payable. This net increase
in accounts payable was driven primarily by capital expenditures
related to the Shreveport reconfiguration incurred but not paid
at the end of 2004 and the rising cost of crude oil.
Investing Activities. Cash used in investing
activities decreased to $2.9 million during the three
months ended March 31, 2006 as compared to
$6.9 million during the three months ended March 31,
2005. This decrease is primarily due to the $5.1 million of
additions to property, plant and equipment related to the
reconfiguration at our Shreveport refinery incurred during 2005,
with no comparable expenditures in 2006.
Cash used in investing activities decreased to
$12.9 million during the year ended December 31, 2005
as compared to $42.9 million during the year ended
December 31, 2004. This decrease is primarily due to the
$36.0 million of additions to property, plant and equipment
related to the reconfiguration at our Shreveport refinery
incurred during 2004, with no comparable expenditures in 2005,
offset by an upgrade to the capacity and enhancement of product
mix at our Cotton Valley refinery in 2005.
Cash used in investing activities increased to
$42.9 million for the year ended December 31, 2004
compared to $11.9 million for the year ended
December 31, 2003. This increase is primarily due to
$36.0 million of additions to property, plant and equipment
related to the reconfiguration at our Shreveport refinery
incurred during 2004.
Financing Activities. Financing activities used
cash of $69.3 million for the three months ended
March 31, 2006 compared to providing $37.3 million for
the three months ended March 31, 2005. This decrease is
primarily due to the use of cash from operations to pay down
debt and borrowings in the three months ended March 31,
2005 to finance the growth in working capital related to the
increased production of fuel products operations at Shreveport.
Financing activities provided cash of $41.0 million for the
year ended December 31, 2005 compared to $61.6 million
for the year ended December 31, 2004. This decrease is
primarily due to distributions to our partners of
$7.3 million and increased borrowings in 2005 to finance
the growth in working capital related to the startup of fuel
products operations at Shreveport.
Cash provided by financing activities increased to
$61.6 million for the year ended December 31, 2004
compared to $4.9 million for the year ended
December 31, 2003. This increase is primarily due to the
third party borrowings of $49.8 million and additional
borrowings from a limited partner obtained to finance the
reconfiguration at our Shreveport refinery.
Cash Distributions to Unitholders
We paid a quarterly distribution of $0.30 per unit
($8.0 million) to common and subordinated unitholders and
our general partner on May 15, 2006. The $0.30 per
unit distribution reflected the pro rata portion of the $0.45
quarterly distribution per unit for the period from
January 31, 2006, the date of the closing of our initial
public offering, through March 31, 2006. We intend to
continue making minimum quarterly distributions of
$0.45 per unit to all common and subordinated unitholders
throughout 2006 to the extent we have sufficient cash from
operations after establishment of cash reserves.
Capital Expenditures
Our capital requirements consist of capital improvement
expenditures, replacement capital expenditures and environmental
expenditures. Capital improvement expenditures include
expenditures to acquire assets to grow our business and to
expand existing facilities, such as projects that increase
operating capacity. Replacement capital expenditures replace
worn out or obsolete
equipment or parts. Environmental expenditures include property
additions to meet or exceed environmental and operating
regulations. We expense all maintenance costs with major
maintenance and repairs (facility turnarounds) accrued in
advance over the period between turnarounds.
The following table sets forth our capital improvement
expenditures, replacement capital expenditures and environmental
expenditures in each of the periods shown.
| Calumet | |||||||||||||||||||||
| Calumet Predecessor | Predecessor | Calumet | |||||||||||||||||||
| Year Ended | Three Months Ended | ||||||||||||||||||||
| December 31, | March 31, | ||||||||||||||||||||
| 2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||||||
| (In millions) | |||||||||||||||||||||
|
Capital improvement expenditures
|
$ | 7.5 | $ | 39.0 | $ | 8.8 | $ | 5.9 | $ | 1.7 | |||||||||||
|
Replacement capital expenditures
|
4.3 | 2.6 | 3.5 | 1.0 | 0.6 | ||||||||||||||||
|
Environmental expenditures
|
0.4 | 1.4 | 0.7 | — | 0.7 | ||||||||||||||||
|
Total
|
$ | 12.2 | $ | 43.0 | $ | 13.0 | $ | 6.9 | $ | 3.0 | |||||||||||
| Shreveport Refinery Expansion Project |
64
65
Subject to normal contingencies and receipt of necessary permits
that would enable us to commence construction in the fourth
quarter of 2006, we anticipate incurring approximately
$60 million in capital expenditures related to the
expansion project during 2006 and approximately $50 million
related to the expansion project in 2007. Please read “Risk
Factors — Our asset reconfiguration and
enhancement initiatives, including the planned expansion project
at our Shreveport refinery, may not result in revenue or cash
flow increases, may be subject to significant cost overruns and
are subject to regulatory, environmental, political, legal and
economic risks, which could adversely affect our business,
operating results, cash flows and financial condition.”
Debt and Credit Facilities
On December 9, 2005, we repaid all of our existing
indebtedness under our prior credit facilities and entered into
new credit agreements with syndicates of financial institutions
for credit facilities that consist of:
•
a $225.0 million senior secured revolving credit
facility; and
•
a $225.0 million senior secured first lien credit facility
consisting of a $175.0 million term loan facility and a
$50.0 million letter of credit facility to support crack
spread hedging.
At March 31, 2006 we had borrowings of $49.9 million
under our term loan and $14.8 million under our revolving
credit facility. Our letters of credit outstanding as of
March 31, 2006 were $40.0 million under the revolving
credit facility and $50.0 million under the
$50.0 million letter of credit facility.
At December 31, 2005 we had borrowings of
$175.0 million under our term loan facility and
$93.0 million under our revolving credit facility. Our
letters of credit outstanding as of December 31, 2005 were
$37.7 million under the revolving credit facility and
$11.0 million under the $50 million letter of credit
facility to support crack spread hedging.
The secured revolving credit facility currently bears interest
at Bank of America, N.A.’s prime rate or LIBOR plus
150 basis points (which basis point margin may fluctuate),
has a first priority lien on our cash, accounts receivable and
inventory and a second priority lien on our fixed assets and
matures in December 2010. On March 31, 2006, we had
availability on our revolving credit facility of
$130.5 million, based upon its $185.2 million
borrowing base, $40.0 million in outstanding letters of
credit, and borrowings of $14.8 million. As of
June 23, 2006, we had availability on our revolving credit
facility of $122.1 million, based upon its $204.3 borrowing
base, $66.2 million in outstanding letters of credit, and
borrowings of $16.0 million.
The term loan facility was fully drawn at the time of the
refinancing. The term loan facility bears interest at a rate of
LIBOR plus 350 basis points and the letter of credit
facility to support crack spread hedging bears interest at a
rate of 3.5%. Each facility has a first priority lien on our
fixed assets and a second priority lien on our cash, accounts
receivable and inventory and matures in December 2012. Under the
terms of our term loan facility, we applied a portion of the net
proceeds we received from our initial public offering, including
and the underwriters’ option to purchase additional units,
to repay the term loan facility, and are required to make
mandatory repayments of approximately $0.1 million at the
end of each fiscal quarter, beginning with the fiscal quarter
ended March 31, 2006 and ending with the fiscal quarter
ending December 31, 2011. At the end of each fiscal quarter
in 2012 we are required to make mandatory repayments of
approximately $11.8 million per quarter, with the remainder
of the principal due at maturity. On April 24, 2006, the
Company entered into an interest rate swap agreement with a
counterparty to fix the LIBOR component of the interest rate on
a portion of outstanding borrowings under its term loan
facility. The notional amount of the interest rate swap
agreement is 85% of the outstanding term loan balance over its
remaining term, with LIBOR fixed at 5.44%. Borrowings under the
term loan facility bear interest at LIBOR plus 3.50%.
66
On June 19 and 22, 2006, we completed the amendments to our
revolving and term loan credit facilities, respectively, to
increase the amount of permitted capital expenditures we may
make in order to accommodate our Shreveport refinery expansion
project and to increase the level of permitted annual capital
expenditures beginning in 2007.
Our letter of credit facility to support crack spread hedging is
secured by a first priority lien on our fixed assets. As long as
this first priority lien is in effect, we will have no
obligation to post additional cash, letters of credit or other
collateral to supplement this $50.0 million letter of
credit to secure our crack spread hedges at any time, even if
our counterparty’s exposure to our credit increases over
the term of the hedge as a result of higher commodity prices.
The credit facilities permit us to make distributions to our
unitholders as long as we are not in default or would not be in
default following the distribution. Under the credit facilities,
we are obligated to comply with certain financial covenants
requiring us to maintain a Consolidated Leverage Ratio of no
more than 3.75 to 1 (as of the end of each fiscal quarter
and after giving effect to a proposed distribution) and
available liquidity of at least $30.0 million (after giving
effect to a proposed distribution). The Consolidated Leverage
Ratio is defined under our credit agreements to mean the ratio
of our consolidated debt (as defined in the credit agreements)
as of the last day of any fiscal quarter to our Adjusted EBITDA
(as defined below) for the four fiscal quarter period ending on
such date. Available liquidity is a measure used under our
credit agreements to mean the sum of the cash and borrowing
capacity under our revolving credit facility that we have as of
a given date. Adjusted EBITDA means Consolidated EBITDA as
defined in our credit facilities to mean, for any period:
(1) net income plus (2)(a) interest expense;
(b) taxes; (c) depreciation and amortization;
(d) unrealized losses from mark to market accounting for
hedging activities; (e) unrealized items decreasing net
income (including the non-cash impact of restructuring,
decommissioning and asset impairments in the periods presented);
and (f) other non-recurring expenses reducing net income
which do not represent a cash item for such period; minus
(3)(a) tax credits; (b) unrealized items increasing
net income (including the non-cash impact of restructuring,
decommissioning and asset impairments in the periods presented);
(c) unrealized gains from mark to market accounting for
hedging activities; and (d) other non-recurring expenses
and unrealized items that reduced net income for a prior period,
but represent a cash item in the current period.
In addition, at any time that our borrowing capacity under our
revolving credit facility falls below $25.0 million, we
must maintain a Fixed Charge Coverage Ratio of at least 1
to 1 (as of the end of each fiscal quarter). The Fixed
Charge Coverage Ratio is defined under our credit agreements to
mean the ratio of (a) Adjusted EBITDA minus Consolidated
Capital Expenditures minus Consolidated Cash Taxes, to
(b) Fixed Charges (as each such term is defined in our
credit agreements). We anticipate that we will continue to be in
compliance with the financial covenants contained in our credit
facilities and will, therefore, be able to make distributions to
our unitholders.
In addition, our credit agreements contain various covenants
that limit, among other things, our ability to: incur
indebtedness; grant liens; make certain acquisitions and
investments; make capital expenditures above specified amounts;
redeem or prepay other debt or make other restricted payments
such as dividends to unitholders; enter into transactions with
affiliates; enter into a merger, consolidation or sale of
assets; and cease our refining margin hedging program (our
lenders have required us to obtain and maintain derivative
contracts for refining margins in our fuels segment for a
rolling two-year period for at least 40%, and no more than 80%,
of our anticipated fuels production).
If an event of default exists under our credit agreements, the
lenders will be able to accelerate the maturity of the credit
facilities and exercise other rights and remedies. An event of
default is defined as nonpayment of principal interest, fees or
other amounts; failure of any representation or warranty to be
true and correct when made or confirmed; failure to perform or
observe covenants in the credit agreement or other loan
documents, subject to certain grace periods; payment defaults in
respect of other indebtedness; cross-defaults in other
indebtedness if the effect of such default is to cause the
acceleration of such indebtedness under any material agreement
if such default could
have a material adverse effect on us; bankruptcy or insolvency
events; monetary judgment defaults; the accrual of liability
with respect to any pension or multiemployer plan in excess of
$5.0 million asserted invalidity of the loan documentation;
a change of control in us; the loss of collateral; the inability
to conduct any material part of our business; and certain
criminal matters.
Contractual Obligations and Commercial Commitments
A summary of our total contractual cash obligations as of
March 31, 2006, is as follows:
| Payments Due by Period (in thousands) | |||||||||||||||||||||
| Less | |||||||||||||||||||||
| Than | 1-3 | 3-5 | More Than | ||||||||||||||||||
| Total | 1 Year | Years | Years | 5 Years | |||||||||||||||||
|
Long-term debt obligations
|
$ | 64,626 | $ | 500 | $ | 1,000 | $ | 15,751 | $ | 47,375 | |||||||||||
|
Operating lease obligations(1)
|
33,766 | 7,813 | 10,502 | 7,088 | 8,363 | ||||||||||||||||
|
Letters of credit(2)
|
40,045 | 40,045 | — | — | — | ||||||||||||||||
|
Crack spread hedging letter of
credit(3)
|
50,000 | — | — | — | 50,000 | ||||||||||||||||
|
Purchase commitments(4)
|
784,641 | 396,974 | 354,597 | 33,070 | — | ||||||||||||||||
|
Employment agreement(5)
|
1,609 | 333 | 666 | 610 | — | ||||||||||||||||
|
Total obligations
|
$ | 974,687 | $ | 445,665 | $ | 366,765 | $ | 56,519 | $ | 105,738 | |||||||||||
| (1) | We have various operating leases for the use of land, storage tanks, pressure stations, railcars, equipment, precious metals and office facilities that extend through August 2015. |
| (2) | Standby letters of credit supporting crude oil purchases and hedging activities. |
| (3) | Standby letters of credit supporting hedging activities. |
| (4) | Purchase commitments consist of obligations to purchase fixed volumes of crude oil from various suppliers based on current market prices at the time of delivery. |
| (5) | Annual compensation under the employment agreement of F. William Grube, President and Chief Executive Officer. |
| Revenue Recognition |
67
68
customer has made a fixed commitment to purchase the product for
a fixed or determinable sales price, collection is reasonably
assured under our normal billing and credit terms, and ownership
and all risks of loss have been transferred to the buyer, which
is upon shipment to the customer.
Turnaround
Periodic major maintenance and repairs (turnaround costs)
applicable to refining facilities are accounted for using the
accrue-in-advance
method. Accruals are based upon management’s estimate of
the nature and extent of maintenance and repair necessary for
each facility. Actual expenditures could vary significantly from
management’s estimates as the scope of a turnaround may
significantly change once the actual maintenance has commenced.
Inventory
The cost of inventories is determined using the
last-in, first-out
(LIFO) method. Costs include material, labor and
manufacturing overhead costs. We review our inventory balances
quarterly for excess inventory levels or obsolete products and
write down, if necessary, the inventory to net realizable value.
The replacement cost of our inventory, based on current market
values, would have been $47.8 million and
$53.2 million higher at December 31, 2005 and
March 31, 2006, respectively.
Derivatives
We utilize derivative instruments to minimize our price risk and
volatility of cash flows associated with the purchase of crude
oil and natural gas, the sale of fuel products and interest
expense. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which was amended in June
2000 by SFAS No. 138 and in May 2003 by
SFAS No. 149 (collectively referred to as
“SFAS 133”), we recognize all derivative
transactions as either assets or liabilities at fair value on
the balance sheet. To the extent designated as an effective cash
flow hedge of an exposure to future changes in the value of a
purchase or sale transaction, the change in fair value of the
derivative is deferred in other comprehensive income. For cash
flow hedges of the purchase of natural gas and crude oil, the
realized gain or loss on the derivative instrument is recorded
to cost of goods sold in the statement of operations upon
completed purchase of crude oil or natural gas. The realized
gain or loss upon the settlement of a cash flow hedge of the
sale of diesel fuel or gasoline is recorded to sales in the
statement of operations when the sale occurs. For derivative
instruments not designated as cash flow hedges and the portion
of any cash flow hedge that is determined to be ineffective, the
change in fair value of the asset or liability for the period is
recorded to unrealized gain or loss on derivative instruments in
the statement of operations. Upon the settlement of a derivative
not designated as a cash flow hedge, the gain or loss for the
gain or loss at settlement is recorded to realized gain or loss
on derivative instruments in the statement of operations.
At March 31, 2006, certain derivatives hedging natural gas
and crude oil purchases for our specialty products segment were
designated as cash flow hedges. During 2003, 2004 and through
November 30, 2005, none of our outstanding derivative
transactions were designated as hedges. At March 31, 2006,
$0.5 million was recorded in other comprehensive income
related to these natural gas and crude derivative contracts with
$0.1 million to be recognized in the statement of
operations during the remainder of 2006 and $0.4 million in
2007.
At March 31, 2006, we had not designated our derivative
contracts hedging refining margins as cash flow hedges. The
company utilizes third party valuations, published market data
and option valuation models to determine the fair value of these
derivatives. The change in fair value of these derivatives is
recorded in unrealized gain or loss on derivative instruments in
the statement of operations. On April 1, 2006, we
designated certain derivative contracts that hedge the purchase
of crude oil and sale of fuel products as cash flow hedges to
the extent they qualify for hedge accounting.
69
In April 2006, we entered into a derivative contract to minimize
a portion of our exposure to rising interest rates. We have
designated this contract as a cash flow hedge.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
(SFAS) No. 151, Inventory Costs — an
amendment of Accounting Research Bulletin
(ARB) No. 43, Chapter 4. The Statement clarifies
that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials should be recognized as
current-period expenses regardless of how abnormal the
circumstances. In addition, this Statement requires that the
allocation of fixed overheads to the costs of conversion be
based upon normal production capacity levels. The Statement is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not anticipate that
this Statement will have a material effect on our financial
position, results of operations or cash flows.
On December 16, 2004, the FASB issued Statement
No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock
Based Compensation. Statement 123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and
amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to
the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative.
Statement 123(R) is effective for fiscal years beginning
after July 1, 2005. We expect to adopt
Statement 123(R) using the “modified prospective”
method in which compensation cost is recognized beginning with
the effective date based on the requirements of
Statement 123(R) for all share-based payments granted after
the effective date and based on the requirements of
Statement 123 for all awards granted to employees prior to
the effective date of Statement 123(R) that remain unvested
on the effective date. There was no impact of adoption of
Statement 123(R) as we had not granted share-based payments
as of the date of adoption.
In 2005, the FASB Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement Obligations
was issued. We were required to adopt this interpretation as
of December 31, 2005. We have conditional asset retirement
obligations related to our Cotton Valley, Shreveport and
Princeton refineries related to asbestos. We believe that there
is an indeterminate settlement date for these obligations so
that a fair value cannot be reasonably estimated. Therefore, we
did not record any liability for asset retirement obligations
related to these refineries upon adoption of FIN 47.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to market risk from fluctuations in interest
rates. As of December 31, 2005 and March 31, 2006, we
had approximately $268.0 million and $64.6 million of
variable rate debt, respectively. Holding other variables
constant (such as debt levels) a one hundred basis point change
in interest rates on our variable rate debt as of March 31,
2006 would be expected to have an impact on net income and cash
flows for 2006 of approximately $0.6 million.
Commodity Price Risk
Both our profitability and our cash flows are affected by
volatility in prevailing crude oil and natural gas prices and
crack spreads (the difference between crude oil prices and
refined product sale prices). The primary purpose of our
commodity risk management activities is to hedge our exposure to
price risks associated with the cost of crude oil and natural
gas and sales prices of our fuel and specialty products.
70
Crude Oil Price Volatility
We are exposed to significant fluctuations in the price of crude
oil, our principal raw material. Given the historical volatility
of crude oil prices, this exposure can significantly impact
product costs and gross profit. Holding all other variables
constant, and excluding the impact of our current hedges, we
expect a $1.00 change in the per barrel price of crude oil would
change our specialty product segment cost of sales by
$9.7 million and our fuel product segment cost of sales by
$9.1 million on an annual basis based on our results for
the three months ended March 31, 2006.
Crude Oil Hedging Policy
Because we typically do not set prices for our specialty
products in advance of our crude oil purchases, we can take into
account the cost of crude oil in setting prices. We further
manage our exposure to fluctuations in crude oil prices in our
specialty products segment through the use of derivative
instruments. Our policy is generally to enter into crude oil
contracts for three to six months forward and for 50% to 70% of
our anticipated crude oil purchases related to our specialty
products production.
Natural Gas Price Volatility
Since natural gas purchases comprise a significant component of
our cost of sales, changes in the price of natural gas also
significantly affect our profitability and our cash flows.
Holding all other cost and revenue variables constant, and
excluding the impact of our current hedges, we expect a
$0.50 change per MMBtu (one million British Thermal Units)
in the price of natural gas would change our cost of sales by
$2.4 million on an annual basis based on our results for
the three months ended March 31, 2006.
Natural Gas Hedging Policy
In order to manage our exposure to natural gas prices, we enter
into derivative contracts. Our policy is generally to enter into
natural gas swap contracts during the summer months for
approximately 50% of our anticipated natural gas requirements
for the upcoming fall and winter months.
Crack Spread Volatility
Our profitability and cash flows are also significantly impacted
by the crack spreads we experience. Crack spreads represent the
difference between the prices we are able to realize for our
fuel products and the cost of the crude oil we must purchase to
produce those products. Holding other variables constant, and
excluding the impact of our current hedges, we expect a
$0.50 change in the Gulf Coast 2/1/1 crack spread per
barrel would change our annual fuel products segment gross
profit by $4.5 million based on our results for the three
months ended March 31, 2006.
Crack Spread Hedging Policy
In order to manage our exposure to crack spreads, we enter into
fuels product margin swap and collar contracts. We began to
implement this policy in October 2004. Our policy is to enter
into derivative contracts to hedge our refining margins for a
period no greater than five years and for no more than 75% of
anticipated fuels production. We believe this policy lessens the
volatility of our cash flows. In addition, in connection with
our credit facilities, our lenders require us to obtain and
maintain derivative contracts to hedge our refining margins for
a rolling two-year period for at least 40%, and no more than
80%, of our anticipated fuels production.
The historical impact of fair value fluctuations in our
derivative instruments has been reflected in the
realized/unrealized gain (loss) on derivative instruments line
items in our consolidated statements of operations. As a result,
gain (loss) on derivative transactions recognized in our
71
historical financial statements may not be consistent with
future periods. Effective April 1, 2006, we restructured
and designated certain of our derivative contracts for our fuel
products segment as cash flow hedges of future crude oil
purchases or fuel product sales, to the extent they qualify for
hedge accounting.
The unrealized gain or loss on derivatives at a given point in
time is not necessarily indicative of the results realized when
such contracts mature. Please read Note 3
“Derivatives” in our unaudited consolidated financial
statements and Note 7 “Derivatives” in our
consolidated financial statements for a discussion of the
accounting treatment for the various types of derivative
transactions, and a further discussion of our derivatives policy.
Existing Derivative Instruments
The following tables provide information about our derivative
instruments as of March 31, 2006:
2006 Derivative Transactions
| Crude Oil Put/Call Spread | Lower Put | Upper Put | Call Floor | Call Ceiling | ||||||||||||||||
| Contracts Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | ($/Bbl) | ($/Bbl) | |||||||||||||||
|
April 2006
|
240,000 | $ | 45.85 | $ | 55.58 | $ | 65.58 | $ | 75.58 | |||||||||||
|
May 2006
|
248,000 | 52.60 | 62.60 | 72.60 | 82.60 | |||||||||||||||
|
June 2006
|
240,000 | 51.06 | 61.06 | 71.06 | 81.06 | |||||||||||||||
|
Totals
|
728,000 | |||||||||||||||||||
|
Average price
|
$ | 49.87 | $ | 59.78 | $ | 69.78 | $ | 79.78 | ||||||||||||
| Crack Spread Swap Contracts Expiration Dates | Barrels | ($/Bbl) | |||||||
|
Second Quarter 2006
|
1,039,000 | 8.94 | |||||||
|
Third Quarter 2006
|
1,043,000 | 8.61 | |||||||
|
Fourth Quarter 2006
|
1,043,000 | 8.25 | |||||||
|
Annual Totals
|
3,125,000 | ||||||||
|
Average Price
|
$ | 8.60 | |||||||
| Put | Call | ||||||||||||
| Option | Option | ||||||||||||
| Strike | Strike | ||||||||||||
| Price | Price | ||||||||||||
| Crack Spread Collar Contracts Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | ||||||||||
|
Second Quarter 2006
|
680,000 | $ | 7.82 | $ | 10.15 | ||||||||
|
Third Quarter 2006
|
685,000 | 7.59 | 9.59 | ||||||||||
|
Fourth Quarter 2006
|
685,000 | 6.30 | 8.30 | ||||||||||
|
Totals
|
2,050,000 | ||||||||||||
|
Average price
|
$ | 7.24 | $ | 9.35 | |||||||||
| Natural Gas Swap Contracts Expiration Dates | MMBtu | $/MMBtu | |||||||
|
Third Quarter 2006
|
200,000 | $ | 8.52 | ||||||
|
Fourth Quarter 2006
|
300,000 | 8.52 | |||||||
|
Annual Totals
|
500,000 | ||||||||
|
Average Price
|
$ | 8.52 | |||||||
| Crack Spread Swap Contracts Expiration Dates | Barrels | ($/Bbl) | |||||||
|
First Quarter 2007
|
1,620,000 | $ | 12.43 | ||||||
|
Second Quarter 2007
|
1,637,000 | 12.41 | |||||||
|
Third Quarter 2007
|
1,650,000 | 12.45 | |||||||
|
Fourth Quarter 2007
|
1,650,000 | 12.45 | |||||||
|
Annual Totals
|
6,557,000 | ||||||||
|
Average Price
|
$ | 12.43 | |||||||
72
| Natural Gas Swap Contracts Expiration Dates | MMbtu | $/MMbtu | |||||||
|
First Quarter 2007
|
300,000 | $ | 8.52 | ||||||
|
Annual Totals
|
300,000 | ||||||||
|
Average Price
|
$ | 8.52 | |||||||
| Crack Spread Swap Contracts Expiration Dates | Barrels | ($/Bbl) | ||||||
|
Calendar Year 2008
|
5,124,000 | $ | 11.49 | |||||
|
Calendar Year 2009
|
4,745,000 | 10.94 | ||||||
|
Calendar Year 2010
|
1,825,000 | 10.46 | ||||||
|
Annual Totals
|
11,694,000 | |||||||
|
Average Price
|
$ | 11.11 | ||||||
| Crack Spread Swap Contracts Expiration Dates | Barrels | ($/Bbl) | ||||||
|
First Quarter 2007
|
90,000 | $ | 16.55 | |||||
|
Second Quarter 2007
|
91,000 | 16.55 | ||||||
|
Third Quarter 2007
|
92,000 | 16.55 | ||||||
|
Fourth Quarter 2007
|
92,000 | 16.55 | ||||||
|
Calendar Year 2010
|
2,190,000 | 11.76 | ||||||
|
Annual Totals
|
2,550,000 | |||||||
|
Average Price
|
$ | 12.44 | ||||||
| Natural Gas Swap Contracts Expiration Dates | MMbtu | $/MMbtu | ||||||
|
Second Quarter 2006
|
200,000 | $ | 6.30 | |||||
|
Third Quarter 2006
|
400,000 | 8.83 | ||||||
|
Fourth Quarter 2006
|
300,000 | 9.21 | ||||||
|
First Quarter 2007
|
300,000 | 9.21 | ||||||
|
Annual Totals
|
1,200,000 | |||||||
|
Average Price
|
$ | 8.32 | ||||||
| Crude Oil Put/Call Spread | Lower Put | Upper Put | Call Floor | Call Ceiling | ||||||||||||||||
| Contracts Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | ($/Bbl) | ($/Bbl) | |||||||||||||||
|
July 2006
|
248,000 | $ | 57.60 | $ | 67.60 | $ | 77.60 | $ | 87.60 | |||||||||||
|
August 2006
|
248,000 | 57.76 | 67.76 | 77.76 | 87.76 | |||||||||||||||
|
September 2006
|
180,000 | 57.75 | 67.75 | 77.75 | 87.75 | |||||||||||||||
|
Totals
|
676,000 | |||||||||||||||||||
|
Average Price
|
$ | 57.70 | $ | 67.70 | $ | 77.70 | $ | 87.70 | ||||||||||||
73
74
INDUSTRY OVERVIEW
Specialty Products
Specialty product manufacturing companies, such as us, use
complex technologies and processes, such as chemical processing,
treating and blending, to produce a wide variety of
high-quality, customized hydrocarbon products, including
lubricating oils, solvents and waxes from base crude oil
feedstocks.
Specialty product manufacturing is customer focused and
characterized by precise, high-quality product specifications.
Each manufacturer has a unique processing configuration as a
result of the product markets it serves and the feedstock
available to it. The nature and complexity of specialty product
manufacturing typically provide for higher product margins than
commodity fuels refining, a high barrier to entry for new
competitors and economic benefits from manufacturing and
marketing a diverse scope of products.
Petroleum Base Stocks. Specialty products are
primarily produced from base crude oil feedstocks or “base
stocks.” There are two primary types of base stocks:
paraffinic and naphthenic, each having different characteristics
and producing different specialty products.
Paraffinic base stocks are typically heavier fractions of
hydrocarbons and are used to formulate most automotive,
industrial and consumer lubricants, including engine oils,
transmission fluids and gear oils, waxes, petrolatums, finished
candle blends, and agricultural spray oils, as well as solvents
for the manufacturing of paints, inks, coatings, adhesives,
cosmetics, and fragrances.
Naphthenic base stocks are typically lighter fractions of
hydrocarbons and are used to formulate low temperature hydraulic
oils, refrigeration oils, rubber process oils and metal working
oils.
Specialty Products. Specialty products produced
from base stocks include lubricating oils, solvents and waxes.
Lubricating oils can be compounded or finished with additives to
provide the characteristics required by the manufacturers of
motor oils, industrial greases, lubricants, and cutting oils.
Solvents are manufactured from the further distillation of
paraffinic and naphthenic base stocks. Solvents can also be
produced or blended to meet very specific requirements. The most
common solvents include mineral spirits, xylene, toluene,
hexane, heptane and naphthas. Solvents have a wide variety of
industrial applications, including the manufacture of paints,
inks, coatings, cleaning products, adhesives and petrochemicals.
Waxes are derived from the processing of paraffinic base stocks
and are divided into three categories: paraffin,
microcrystalline and petrolatum waxes. These three categories of
waxes differ in their crystal structure, color and melting
points, each of which are important characteristics in the
manufacturing of final end products. Waxes have a wide array of
primary and secondary uses, including adhesive manufacture,
barrier coatings, batteries, bottle cap liner, cable filling,
candlemaking, caulking compound, chewing gum base, corrosion
inhibitor, corrugated products, cosmetics, fabric waterproofing,
firelogs, food wrappers, fruit coatings, ink manufacture, metal
coatings and pharmaceuticals.
Market Demand and Growth Potential. Specialty
products can typically be categorized into the major sectors
they serve, which are the:
•
Industrial sector;
•
Consumer sector; and
•
Automotive sector.
Demand for specialty products in the industrial sector, which
utilizes specialty products such as hydraulic and compressor
oils, process oils, waxes, metalworking fluids and solvents, is
generally tied to demand for durable and nondurable manufactured
goods and services. Demand for specialty
75
products in the consumer sector, which uses specialty products
such as candle blends, chewing gum base, fire logs, cosmetics
and fragrances is also generally tied to demand for consumer
goods. Demand for specialty products in the automotive sector,
which utilizes specialty products such as engine oils,
transmission fluids and gear oils, is tied directly to demand in
the automotive industry.
Because specialty products typically represent a strictly
formulated essential element of a higher priced end-product,
consumers of specialty products are concerned primarily with
product quality and are less sensitive to price than most
consumers of commodity products. Therefore, as compared to other
commercial industries, specialty product manufacturing generally
exhibits the characteristics of a niche industry: lower volumes,
consistent, high-quality product specifications, higher margins
and limited competition relative to most commodity products.
Fuel Products
Oil refining is the process of taking hydrocarbon molecules
present in crude oil and separating and converting them into
marketable finished petroleum products, including fuel products
such as gasoline, diesel fuel and jet fuel. Refining is
primarily a margin-based business where the majority of
feedstocks, including crude oil, and finished petroleum products
are commodities. Refiners create value by selling finished
petroleum products at prices higher than the cost to acquire and
convert crude oil into finished petroleum products. The current
U.S. refining industry is characterized by limited
available capacity, high utilization rates, strong demand for
products and reliance on imported products. A new refinery has
not been built in the United States since 1976, and there are
approximately 150 oil refineries operating in the United
States.
Widely used benchmarks in the fuel products industry to measure
market values and margins are West Texas Intermediate crude oil,
a reference to the quality of crude oil, and the 3/2/1 crack
spread. West Texas Intermediate is a light sweet crude oil and
the West Texas Intermediate benchmark is used in both the spot
and futures markets. The 3/2/1 crack spread refers to the margin
that would accrue from the simultaneous purchase of West Texas
Intermediate crude oil and the sale of finished petroleum
products, in each case at the then prevailing market price. The
3/2/1 crack spread assumes three barrels of West Texas
Intermediate crude oil will produce two barrels of
U.S. Gulf Coast 87 Octane Conventional gasoline and
one barrel of U.S. Gulf Coast No. 2 Heating Oil.
Average 3/2/1 crack spreads vary from region to region
depending on the supply and demand balances of crude oils and
refined products. Actual refinery margins vary from the 3/2/1
crack spread due to the actual crude oil used and products
produced, transportation costs, regional differences and the
timing of the purchase of the feedstock and sale of the refined
petroleum products.
The fundamental drivers of profitability in the refining
industry have improved since the late 1990s, which has resulted
in a general widening between the prices for finished petroleum
products and the costs of crude oil. For a historical
perspective demonstrating the improved margins, the 3/2/1 crack
spread averaged $3.04 per barrel between 1990 and 1999,
$4.61 per barrel between 2000 and 2004, $6.52 per
barrel in the first quarter of 2005, $9.10 per barrel in
the second quarter of 2005, $17.07 per barrel in the third
quarter of 2005, $9.81 per barrel in the fourth quarter of
2005, and $8.68 per barrel in the first quarter of 2006.
The Energy Information Administration, or EIA, projects demand
for petroleum products to outpace capacity growth and to grow at
an average of 1.5% per year over the next two decades.
The Refining Process. Refineries are designed to
process specific crude oils into selected products. The
different process units inside a refinery generally perform one
of three functions:
•
separate the different types of hydrocarbons present in crude
oil;
•
convert the separated hydrocarbons into more desirable or
higher-value products, such as fuels; or
•
chemically treat the products by removing unwanted elements and
compounds, like sulfur, nitrogen and metals.
76
The many steps in the refining process are designed to maximize
the value of the main feedstock, crude oil.
The first refinery units at the inlet of the plant to process
crude oil are typically the atmospheric and vacuum distillation
towers. Crude oil is separated through the distillation process
and recovered as hydrocarbon fractions. The hydrocarbon
components that have the lowest boiling points, including
gasoline and liquefied petroleum gas, vaporize and exit the top
of the atmospheric distillation tower. The hydrocarbon
components with medium boiling points, such as jet fuel,
kerosene, home heating oil and diesel fuel, are drawn from the
middle of the atmospheric distillation tower. The hydrocarbon
components with the highest boiling points are recovered from
the bottom of the atmospheric distillation tower and then
separated in the vacuum distillation tower. The various
fractionated hydrocarbon components are then pumped to the next
appropriate unit in the refinery for further processing into
higher-value products.
Major fuel products include:
•
Unleaded Gasoline: One of the most significant refinery
products, both in terms of volume and value, is unleaded
gasoline. Various gasoline blendstocks are blended to achieve
specifications for regular and premium grades in both summer and
winter gasoline formulations. Additives are often used to
enhance performance and provide protection against oxidation and
rust formation.
•
Distillate Fuels: Distillates are primarily diesel fuels
and domestic heating oils.
•
Kerosene: Kerosene is a refined middle-distillate
petroleum product that is used for jet fuel, cooking, space
heating, lighting, solvents and for blending into diesel fuel.
•
Liquefied Petroleum Gas: Liquefied petroleum gases,
consisting primarily of propane and butane, are produced for use
as a fuel and a feedstock in the manufacture of petrochemicals,
such as ethylene and propylene.
•
Residual Fuels: Many marine vessels, power plants,
commercial buildings and industrial facilities use residual
fuels or combinations of residual and distillate fuels for
heating and processing. Asphalts are also made from residual
fuels and are used primarily for roads and roofing materials.
Economics of Fuel Products Refining. Fuel Products
refining is primarily a margin-based business where both the
feedstocks and refined finished products are commodities.
Because some of the operating expenses are relatively fixed, the
refiner’s goal is to maximize the yields of high-value
products and to minimize feedstock costs. Feedstock costs depend
on the specific type of crude oil and other inputs to the
refinery. Product value and yields are a function of the
operating equipment at a specific refinery and the
characteristics of the feedstocks.
Because refineries produce many other products that are not
reflected in the crack spread, gross profit tends to be specific
to the refinery. Crack spreads can be used as an indicator for
gross profit, but actual gross profit may vary significantly
from the crack spread.
Major operating costs include energy costs, employee wages and
routine maintenance and repair. Employee labor and repairs and
maintenance are relatively fixed costs that generally increase
proportional to inflation. By far, the largest component of
variable cost is energy, or fuel gas, and the most reliable
price indicator for energy costs is the cost of natural gas.
The refinery industry is subject to many regulatory and
environmental constraints. Please read
“Business — Environmental Matters.”
77
BUSINESS
Overview
We are a leading independent producer of high-quality, specialty
hydrocarbon products in North America. Our business is organized
into two segments: specialty products and fuel products. In our
specialty products segment, we process crude oil into a wide
variety of customized lubricating oils, solvents and waxes. Our
specialty products are sold to domestic and international
customers who purchase them primarily as raw material components
for basic industrial, consumer and automotive goods. In our fuel
products segment, we process crude oil into a variety of fuel
and fuel-related products including unleaded gasoline, diesel
fuel and jet fuel. In connection with our production of
specialty products and fuel products, we also produce asphalt
and a limited number of other by-products. For the year ended
December 31, 2005 and the three months ended March 31,
2006, approximately 52.2% and 72.7%, respectively, of our gross
profit was generated from our specialty products segment and
approximately 47.8% and 27.3%, respectively, of our gross profit
was generated from our fuel products segment.
Our operating assets consist of our:
•
Princeton Refinery. Our Princeton refinery, located in
northwest Louisiana and acquired in 1990, produces specialty
lubricating oils, including process oils, base oils, transformer
oils and refrigeration oils that are used in a variety of
industrial and automotive applications. The Princeton refinery
has aggregate crude oil throughput capacity of approximately
10,000 bpd and average daily crude oil throughput of
7,672 bpd for the three months ended March 31, 2006.
•
Cotton Valley Refinery. Our Cotton Valley refinery,
located in northwest Louisiana and acquired in 1995, produces
specialty solvents that are used principally in the manufacture
of paints, cleaners and automotive products. The Cotton Valley
refinery has aggregate crude oil throughput capacity of
approximately 13,500 bpd and average daily crude oil
throughput of 6,883 bpd for the three months ended
March 31, 2006.
•
Shreveport Refinery. Our Shreveport refinery, located in
northwest Louisiana and acquired in 2001, produces specialty
lubricating oils and waxes, as well as fuel products such as
gasoline, diesel fuel and jet fuel. The Shreveport refinery has
aggregate current crude oil throughput capacity of approximately
42,000 bpd and average daily crude oil throughput of
37,815 bpd for the three months ended March 31, 2006.
•
Distribution and Logistics Assets. We own and operate a
terminal in Burnham, Illinois with a storage capacity of
approximately 150,000 barrels that facilitates the
distribution of product in the Upper Midwest and East Coast
regions of the United States and in Canada. In addition, we
lease approximately 1,200 rail cars to receive crude oil or
distribute our products throughout the United States and Canada.
We also have approximately 4.5 million barrels of aggregate
finished product storage capacity at our refineries.
78
Following each of our refinery acquisitions, we commenced and
completed reconfiguration and expansion projects that allowed us
to more efficiently produce existing products, increase
utilization and improve our ability to produce additional higher
margin specialized products to satisfy our customers’
demands. For example, when we acquired the Princeton refinery,
we expanded the number of products produced at the refinery from
approximately 65 products to approximately
175 products and increased capacity by expanding production
from the facility’s hydrotreater and redesigning the
product mix. In addition, when we acquired the Cotton Valley
refinery, we expanded the number of products produced at the
refinery from approximately 10 products to approximately
80 products by constructing a hydrotreater at the facility
and redesigning the product mix. We increased the capabilities
at our Shreveport refinery by expanding the wax production
capacity and recommissioning certain of its previously idled
fuels production units to take advantage of improved fuels
margins and increase overall refinery utilization.
The following table contains the primary products we produce as
well as some of their end-uses:
| Representative End-Users and | |||||
| Product | End-Uses | Brand Names | |||
|
Lubricating
Oils
|
|||||
|
Process Oils and Base Oils
|
Defoamers; Adhesives; Rubber Processing; Extenders; Heat Transfer Fluids; Metalworking Fluids; Inks; Drilling Fluids; Plant/Grain Dedusters; Transformer Oils; Refrigeration Oils; White Oil Feedstocks | Goodyear; Cooper Tire; Michelin; Bridgestone Firestone; Bostik Findley; HB Fuller; National Starch; ExxonMobil; Penreco; Sonneborn; Fuchs | |||
|
Bright Stocks
|
Gear Lubricants; Rubber Processing | ExxonMobil; Shell Oil; Lubricating Specialties Co. | |||
|
Agricultural Spray Oils
|
Pesticides for Fruit-Bearing Trees | Fleetwing; Helena Chemical | |||
|
Blended Lubricating Oils
|
Automotive Transmission Fluids; Motor Oils; Hydraulic Oils | Tulco Oil; Hubert Glass; Premier Lubricants | |||
|
Waxes
|
|||||
|
Petrolatum
|
Cosmetics; Pharmaceuticals; Animal Feed Supplements | Smap; Avatar; ADM | |||
|
Waxes
|
Chewing Gum Base; Candles; Firelogs; Board Coatings; Adhesives; PVC Additives | Candle-lite; Duraflame; Wrigley’s Gum; Blyth; For Every Body; Global Wax; HB Fuller; Forbo Adhesives; Rose Art Industries; National Starch; Baker Petrolite | |||
|
Solvents
|
|||||
|
Petroleum Spirits
|
Camp Fuel | Coleman; Wal-Mart | |||
|
Light Mineral Spirits
|
Charcoal Lighter Fluid | Family Dollar; Duraflame | |||
|
Heart Cut Kerosene
|
Automotive Aftermarket; Pesticides | Turtle Wax; WD-40; Spectracide; Hot Shot Bug Killer; Deep 6; Shell Oil Products US | |||
|
Iso-Hexane
|
Adhesives | Liquid Nails; Wilson Art; OSI Brands | |||
|
Heptane
|
Automotive Aftermarket | Starting Fluid | |||
|
Heavy Mineral Spirits
|
Paints and Coatings | Sherwin Williams; Behr; Duckback Products | |||
|
Fuel Products
|
|||||
|
Ultra-Low Sulfur Gasoline
|
Motor Fuel | Murphy Oil; BP | |||
|
Ultra-Low Sulfur Diesel
|
Motor Fuel | Murphy Oil; BP | |||
|
Jet Fuel
|
Aviation Fuel | Barksdale Air Force Base; Truman Arnold | |||
|
Asphalt and Other
By-Products
|
|||||
|
Asphalt
|
Road Paving; Roofing | Certainteed; Davison Petroleum Products | |||
|
Vacuum Residual
|
Asphalt Blending; Fuel Oil | Davison Petroleum Products | |||
|
Mixed Butanes
|
Petrochemical Feedstock; Gasoline Blendstock | Shell Trading US | |||
79
80
Business Strategies
Our management team is dedicated to increasing the amount of
cash available for distribution on each limited partner unit by
executing the following strategies:
•
Concentrate on stable cash flows. We intend to continue
to focus on businesses and assets that generate stable cash
flows. Approximately 72.7% of our gross profit for the three
months ended March 31, 2006 was generated by the sale of
specialty products, a segment of our business which is
characterized by stable customer relationships due to their
requirements for highly specialized products. Historically, we
have been able to reduce our exposure to crude oil price
fluctuations in this segment through our ability to pass on
incremental feedstock costs to our specialty products customers
and through our crude oil hedging programs. In our fuel products
business, we seek to mitigate our exposure to fuel margin
volatility by maintaining a long-term crack spread hedging
program. We believe the diversity of our products, our broad
customer base and our hedging activities will contribute to the
stability of our cash flows.
•
Develop and expand our customer relationships. Due to the
specialized nature of, and the long lead-time associated with,
the development and production of many of our products, our
customers have an incentive to continue their relationships with
us. We believe that larger competitors do not work with
customers as we do from product design to delivery for small
volume products like ours. We intend to continue to assist our
existing customers in expanding their product offerings as well
as marketing specialty product formulations to new customers. By
striving to maintain our long-term relationships with our
existing customers and to add new customers, we seek to limit
our dependence on a small number of customers.
•
Enhance profitability of our existing assets. We will
continue to evaluate opportunities to expand our existing asset
base to increase our throughput and cash flow. Following each of
our asset acquisitions, we have undertaken projects designed to
increase the profitability of our acquired assets. We intend to
further increase the profitability of our existing asset base
through various measures which include changing the product mix
of our processing units, debottlenecking and expanding units as
necessary to increase throughput, restarting idle assets and
reducing costs by improving operations. For example, at the
Shreveport refinery we recently recommissioned certain of its
previously idled fuels production units, refurbished existing
fuels production units, converted existing units to improve
gasoline blending profitability and expanded capacity to
increase lubricating oil and fuels production. Also, we plan to
commence construction of an expansion project at our Shreveport
refinery, scheduled for completion in the third quarter of 2007,
to increase its aggregate crude oil throughput capacity to
approximately 57,000 bpd. For a discussion of this project,
please read “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Liquidity and Capital Resources — Capital
Expenditures.”
•
Pursue strategic and complementary acquisitions. Since
1990, our management team has demonstrated the ability to
identify opportunities to acquire refineries whose operations we
can enhance and whose profitability we can improve. In the
future, we intend to continue to make strategic acquisitions of
refineries that offer the opportunity for operational
efficiencies and the potential for increased utilization and
expansion. In addition, we may pursue selected acquisitions in
new geographic or product areas to the extent we perceive
similar opportunities.
81
Competitive Strengths
We believe that we are well positioned to execute our business
strategies successfully based on the following competitive
strengths:
•
We offer our customers a diverse range of specialty
products. We offer a wide range of over 250 specialty
products. We believe that our ability to provide our customers
with a more diverse selection of products than our competitors
generally gives us an advantage in competing for new business.
We believe that we are the only specialty product manufacturer
that produces all four of naphthenic lubricating oils,
paraffinic lubricating oils, waxes and solvents. A contributing
factor to our ability to produce numerous specialty products is
our ability to ship products between our refineries for product
upgrading in order to meet customer specifications.
•
We have strong relationships with a broad customer base.
We have long-term relationships with many of our customers, and
we believe that we will continue to benefit from these
relationships. Our customer base includes over
1,000 companies and we are continually seeking new
customers. From 1996 to March 31, 2006, we added an average
of approximately 80 new specialty products customers per
year, and for the three months ended March 31, 2006, we
added 30 new specialty products customers. No single
customer accounts for more than 10% of our specialty products
revenues.
•
Our refineries have advanced technology. Our refineries
are equipped with advanced, flexible technology that allows us
to produce high-grade specialty products and to produce gasoline
and diesel products that comply with new fuel regulations. Our
current gasoline production satisfies the 2006 low sulfur
gasoline standard set by the EPA, and our Shreveport and Cotton
Valley refineries, as currently configured, have the processing
capability to satisfy the 2006 ultra low sulfur diesel standard.
Unlike larger refineries, which lack some of the equipment
necessary to achieve the narrow distillation ranges associated
with the production of specialty products, our operations are
capable of producing a wide range of products tailored to our
customers’ needs. We have also upgraded the operations of
many of our assets through our investment in advanced,
computerized refinery process controls.
•
We have an experienced management team. Our management
has a proven track record of enhancing value through the
acquisition, exploitation and integration of refining assets and
the development and marketing of specialty products. Our senior
management team, the majority of whom have been working together
since 1990, has an average of over 20 years of industry
experience. Our team’s extensive experience and contacts
within the refining industry provide a strong foundation and
focus for managing and enhancing our operations, for accessing
strategic acquisition opportunities and for constructing and
enhancing the profitability of new assets.
Our Operating Assets
General
We own and operate all of the active refining assets in
northwest Louisiana, which consist of: the Princeton refinery,
the Cotton Valley refinery and the Shreveport refinery. We also
own and operate a terminal in Burnham, Illinois.
The following table sets forth information about our combined
refinery operations. Refining production volume differs from
sales volumes due to changes in inventory.
| Calumet Predecessor | Calumet | ||||||||||||||||||
| Years Ended | Three Months | ||||||||||||||||||
| December 31, | Ended | ||||||||||||||||||
| March 31, | |||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
|
Total sales volume (bpd)(1)
|
23,616 | 24,658 | 46,953 | 52,090 | |||||||||||||||
|
Feedstock runs (bpd)(2)
|
25,007 | 26,205 | 50,213 | 52,370 | |||||||||||||||
|
Refinery production (bpd)(3)
|
|||||||||||||||||||
|
Specialty products:
|
|||||||||||||||||||
|
Lubricating oils
|
8,290 | 9,437 | 11,556 | 11,695 | |||||||||||||||
|
Solvents
|
4,623 | 4,973 | 4,422 | 4,346 | |||||||||||||||
|
Waxes
|
699 | 1,010 | 1,020 | 1,144 | |||||||||||||||
|
Asphalt and other by-products
|
5,159 | 5,992 | 6,313 | 5,561 | |||||||||||||||
|
Fuels
|
6,433 | 3,931 | 2,354 | 2,508 | |||||||||||||||
|
Total
|
25,204 | 25,343 | 25,665 | 25,254 | |||||||||||||||
|
Fuel products:
|
|||||||||||||||||||
|
Gasoline
|
— | 3 | 8,278 | 10,002 | |||||||||||||||
|
Diesel fuel
|
— | 583 | 8,891 | 7,724 | |||||||||||||||
|
Jet fuel
|
— | 342 | 5,080 | 7,308 | |||||||||||||||
|
Asphalt and other by-products
|
— | 26 | 417 | 297 | |||||||||||||||
|
Total
|
— | 954 | 22,666 | 25,331 | |||||||||||||||
|
Total refinery production
|
25,204 | 26,297 | 48,331 | 50,585 | |||||||||||||||
| (1) | Total sales volume includes sales from the production of our refineries and sales of inventories. |
| (2) | Feedstock runs represents the barrels per day of crude oil and other feedstocks processed at our refineries. |
| (3) | Total refinery production represents the barrels per day of specialty products and fuel products yielded from processing crude oil and other refinery feedstocks at our refineries. The difference between total refinery production and total feedstock runs is primarily a result of the time lag between the input of feedstock and production of end products and volume loss. |
82
Set forth below is information regarding sales contributed by
our principal products.
| Calumet Predecessor | Calumet | |||||||||||||||||
| Years Ended | Three Months | |||||||||||||||||
| December 31, | Ended | |||||||||||||||||
| March 31, | ||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | |||||||||||||||
| (In millions) | ||||||||||||||||||
|
Sales of specialty products:
|
||||||||||||||||||
|
Lubricating oils
|
$ | 205.9 | $ | 251.9 | $ | 394.4 | $ | 132.9 | ||||||||||
|
Solvents
|
87.6 | 114.7 | 145.0 | 52.4 | ||||||||||||||
|
Waxes
|
32.3 | 39.5 | 43.6 | 15.5 | ||||||||||||||
|
Fuels
|
83.5 | 72.7 | 44.0 | 11.8 | ||||||||||||||
|
Asphalt and other by-products
|
21.1 | 51.2 | 76.3 | 17.1 | ||||||||||||||
|
Total
|
$ | 430.4 | $ | 530.0 | $ | 703.3 | $ | 229.7 | ||||||||||
|
Sales of fuel products:
|
||||||||||||||||||
|
Gasoline
|
— | — | 223.6 | 71.9 | ||||||||||||||
|
Diesel fuel
|
— | 3.3 | 230.9 | 56.0 | ||||||||||||||
|
Jet fuel
|
— | — | 121.3 | 38.9 | ||||||||||||||
|
Asphalt and other by-products
|
— | 6.3 | 10.0 | 1.2 | ||||||||||||||
|
Total
|
— | 9.6 | 585.8 | 168.0 | ||||||||||||||
|
Consolidated sales
|
$ | 430.4 | $ | 539.6 | $ | 1,289.1 | $ | 397.7 | ||||||||||
| Princeton Refinery |
83
extend its useful life. The following table sets forth
historical information about production at our Princeton
refinery.
| Calumet Predecessor | Calumet | |||||||||||||||||
| Years Ended | Three Months | |||||||||||||||||
| December 31, | Ended | |||||||||||||||||
| March 31, | ||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | |||||||||||||||
|
Crude oil throughput capacity (bpd)
|
10,000 | 10,000 | 10,000 | 10,000 | ||||||||||||||
|
Feedstock runs (bpd)(1)(2)
|
7,548 | 8,170 | 8,067 | 7,672 | ||||||||||||||
|
Refinery production (bpd):
|
||||||||||||||||||
|
Lubricating oils
|
5,141 | 5,404 | 5,463 | 4,865 | ||||||||||||||
|
Fuels
|
1,104 | 1,070 | 1,163 | 1,125 | ||||||||||||||
|
Asphalt and other by-products
|
1,246 | 1,428 | 1,356 | 1,413 | ||||||||||||||
|
Total(1)
|
7,491 | 7,902 | 7,982 | 7,403 | ||||||||||||||
| (1) | The difference between total refinery production and total feedstock runs is primarily a result of the time lag between the input of feedstock and production of end products and volume loss. |
| (2) | Feedstock runs represent the barrels per day of crude oil and other feedstocks processed at the refinery. |
| Cotton Valley Refinery |
84
refinery’s fractionation train to improve product quality,
enhance flexibility and lower utility costs. The following table
sets forth historical information about production at our Cotton
Valley refinery.
| Calumet Predecessor | Calumet | |||||||||||||||||
| Years Ended | Three Months | |||||||||||||||||
| December 31, | Ended | |||||||||||||||||
| March 31, | ||||||||||||||||||
| 2003 | 2004 | 2005(1) | 2006 | |||||||||||||||
|
Crude oil throughput capacity (bpd)
|
13,500 | 13,500 | 13,500 | 13,500 | ||||||||||||||
|
Feedstock runs (bpd)(2)
|
9,370 | 9,093 | 7,145 | 6,883 | ||||||||||||||
|
Refinery production (bpd):
|
||||||||||||||||||
|
Solvents
|
4,623 | 4,973 | 4,422 | 4,346 | ||||||||||||||
|
By-products
|
2,866 | 2,330 | 1,473 | 1,182 | ||||||||||||||
|
Fuels
|
1,882 | 1,790 | 1,191 | 1,383 | ||||||||||||||
|
Total
|
9,371 | 9,093 | 7,086 | 6,911 | ||||||||||||||
| (1) | The refinery was temporarily shut down in February 2005 for an expansion project. |
| (2) | Feedstock runs represent the barrels per day of crude oil and other feedstocks processed at the refinery. |
| Shreveport Refinery |
85
specified environmental liabilities. Since the acquisition,
Pennzoil-Quaker State Company has been acquired by Shell Oil
Company, who is now the indemnitor.
The following table sets forth historical information about
production at our Shreveport refinery.
| Calumet Predecessor | ||||||||||||||||||
| Calumet | ||||||||||||||||||
| Three Months | ||||||||||||||||||
| Years Ended December 31, | Ended | |||||||||||||||||
| March 31, | ||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | |||||||||||||||
|
Crude oil throughput capacity (bpd)
|
10,000 | 10,000 | 42,000 | 42,000 | ||||||||||||||
|
Feedstock runs (bpd)(1)(2)
|
8,089 | 8,956 | 35,342 | 37,815 | ||||||||||||||
|
Refinery production (bpd):
|
||||||||||||||||||
|
Fuels
|
3,448 | 1,595 | 22,666 | 25,033 | ||||||||||||||
|
Lubricating oils
|
3,149 | 4,047 | 6,093 | 6,830 | ||||||||||||||
|
Waxes
|
699 | 1,010 | 1,020 | 1,144 | ||||||||||||||
|
Asphalt and other by-products
|
1,047 | 2,325 | 3,483 | 3,264 | ||||||||||||||
|
Total(1)
|
8,343 | 8,977 | 33,262 | 36,271 | ||||||||||||||
| (1) | The difference between total refinery production and total feedstock runs is primarily a result of the time lag between the input of feedstock and production of end products and volume loss. |
| (2) | Feedstock runs represent the barrels per day of crude oil and other feedstocks processed at the refinery. |
86
87
River, to major feedstock and petroleum products logistics
networks on the Mississippi River and Gulf Coast inland waterway
system. The Shreveport refinery also ships its finished products
throughout the country through both truck and rail car service.
Burnham Terminal and Other Logistics Assets
We own and operate a terminal in Burnham, Illinois. The Burnham
terminal receives specialty products exclusively from each of
our refineries on a daily basis via railcar and distributes them
by truck to our customers in the Upper Midwest and East Coast
regions of the United States and in Canada.
The terminal includes a tank farm with 67 tanks with aggregate
lubricating oil, solvent and specialty product storage capacity
of approximately 150,000 barrels as well as blending
equipment. The Burnham terminal is complementary to our
refineries and plays a key role in moving our products to the
end-user market by providing the following services:
•
distribution;
•
blending to achieve specified products; and
•
storage and inventory management.
We also lease a fleet of approximately 1,200 railcars from
various lessors. This fleet enables us to receive crude oil and
distribute various specialty products to and from each of our
refineries throughout the United States and Canada.
Crude Oil and Feedstock Supply
We purchase both domestic and foreign crude oil from major oil
companies as well as domestic crude oil from various gatherers
and marketers in Texas and north Louisiana. The Shreveport
refinery can also receive crude oil through the ExxonMobil
pipeline system originating in St. James, Louisiana, which
provides the refinery with access to domestic crude oils or
foreign crude oils through the LOOP or other terminal locations.
For the three months ended March 31, 2006, we purchased
approximately 37.5% of our crude oil supply from a subsidiary of
Plains All American under a term contract that expires in 2008.
During that period, we purchased approximately 35.4% of our
crude oil supply through evergreen crude oil supply contracts,
which are typically terminable on 30 days’ notice by
either party, and the remaining 27.1% of our crude oil supply on
the spot market. We also purchase foreign crude oil when its
spot market price is attractive relative to the price of crude
oil from domestic sources. Due to the location of our
refineries, we believe that adequate supplies of crude oil will
continue to be available to us.
Our cost to acquire feedstocks, and the price for which we
ultimately can sell refined products, depend on a number of
factors beyond our control, including regional and global supply
of and demand for crude oil and other feedstocks and specialty
and fuel products. These in turn are dependent upon, among other
things, the availability of imports, the production levels of
domestic and foreign suppliers, U.S. relationships with
foreign governments, political affairs and the extent of
governmental regulation. We have historically been able to pass
on the costs associated with increased feedstock prices to our
specialty products customers although the increase in selling
prices typically lags the rising cost of crude oil for specialty
products. We use a hedging program to manage a portion of the
price risk. Please read “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Quantitative and Qualitative Disclosures
About Market Risk — Commodity Price Risk” for a
discussion of our crude oil hedging program.
88
Markets and Customers
We produce a full line of specialty products, including premium
lubricating oils, solvents and waxes. Our customers purchase
these products primarily as raw material components for basic
industrial, consumer and automotive goods. We also produce a
variety of fuel products.
We have a strong marketing department with an average industry
tenure of over 15 years. Our salespeople regularly visit
customers and our sales department works closely with the
laboratories at the refineries and our technical department to
help create specialized blends that will work optimally for our
customers.
Markets
Specialty Products. The specialty products market
represents a small portion of the overall petroleum refining
industry in the United States. Of the nearly 150 refineries
currently in operation in the United States, a small number of
the refineries are considered specialty products producers and
only a few compete with us in terms of the number of products
produced.
Our specialty products are utilized in applications across a
broad range of industries, including in:
•
industrial goods such as metal working fluids, belts, hoses,
sealing systems, batteries, hot melt adhesives, pressure
sensitive tapes, electrical transformers and refrigeration
compressors;
•
consumer goods such as candles, petroleum jelly, creams, tonics,
lotions, coating on paper cups, chewing gum base, automotive
aftermarket car-care products (fuel injection cleaners, tire
shines and polishes), lamp oils, charcoal lighter fluids,
camping fuel and various aerosol products; and
•
automotive goods such as motor oils, greases, transmission fluid
and tires.
Although our refineries are all located in northwest Louisiana,
we have the capability to ship our specialty products worldwide.
We ship via railcars, trucks or barges in the United States and
Canada. Approximately 36% of our product is shipped in our fleet
of approximately 1,200 leased railcars, approximately 55% of our
product is shipped in trucks owned and operated by several
different third-party carriers, and the remaining 9% is shipped
by pipeline or barges. We have the capability to ship large
quantities via barge if necessary. For shipments outside of
North America, which account for less than 10% of our business,
we can ship railcars to several ports where the product can be
loaded on a ship for delivery to a customer.
Fuel Products. We also produce a variety of fuel
and fuel-related products, primarily at our Shreveport refinery.
Fuel products produced at the Shreveport refinery can be sold
locally or through the TEPPCO pipeline. Local sales are made in
the TEPPCO terminal in Bossier City, Louisiana, which is
approximately 15 miles from the Shreveport refinery. Any
excess volumes are sold to marketers further up the pipeline.
We currently sell approximately 6,300 bpd of gasoline into
the Louisiana, Texas and Arkansas markets, and we sell our
excess volumes to marketers further up the TEPPCO pipeline.
Should the appropriate market conditions arise, we have the
capability to redirect and sell additional volumes into the
Louisiana, Texas and Arkansas markets rather than transport them
to the Midwest. Similar market conditions exist for our diesel
production. We sell the majority of our diesel fuel locally, but
we occasionally sell volumes to upstream marketers during times
of high diesel production or for competitive reasons.
The Shreveport refinery’s gasoline production meets low
sulfur standards set by the EPA. Our Shreveport refinery also
has the ability to produce low emission diesel fuel for sale in
Texas. We currently sell an average of 1,000 bpd into this
market at a slight premium over our diesel fuel sales.
The Shreveport refinery also has the capacity to produce about
7,000 bpd of commercial jet fuel that can be marketed to
Barksdale Air Force Base in Bossier City, Louisiana or other
military facility locations, sold as Jet-A locally or via the
TEPPCO pipeline, or transferred to the Cotton Valley refinery to
be further processed and sold as solvents. Jet fuel volumes
change as the margin between diesel fuel and jet fuel change. We
have a contract with the federal government for approximately
4,500 bpd of jet fuel. This contract is effective until
April 2007 and is bid annually.
Additionally, we produce a number of fuel-related products
including fluid catalytic cracking (“FCC”) feedstock,
asphalt, vacuum residuals and mixed butanes.
Vacuum residuals are blended together or processed further to
make specialty asphalt products. Volumes of vacuum residuals
which we cannot process are sold locally into the fuel oil
market or sold via rail car to other producers. FCC feedstock is
sold to other refiners as a feedstock for their FCC units.
Butanes are primarily available in the summer months and are
primarily sold to local marketers. We can also blend butane into
current refinery production of gasoline.
Customers
Specialty Products. We have a diverse customer
base for our specialty products, with approximately 1,000 active
accounts. Most of our customers are long-term customers who use
our products in specialty applications which require six months
to two years to gain approval for use in their formulations. No
single customer accounted for more than 10% of our total
specialty product segment revenues in 2005 or for the first
three months of 2006.
The table below sets forth some of our representative specialty
products customers, the products that they purchase from us and
the end-uses of the products:
| Customer | Products | End-Uses | ||
|
ExxonMobil
|
Base oils and process oils | Internal use product demands | ||
|
National Starch & Chemical
|
Process oils | Hot melt adhesives | ||
|
HB Fuller
|
Process oils and waxes | Hot melt adhesives | ||
|
Candle-Lite
|
Waxes and candle wax blends | Candles | ||
|
Goodyear
|
Process oils | Masterbatch rubber for tires | ||
|
Cooper Tire
|
Process oils | Extruded sealing systems | ||
|
Fuchs
|
Base oils | Metalworking fluids | ||
|
Shell Chemical
|
Solvents | Finished product supply | ||
|
Shell Oil Products US
|
Solvents | Automotive aftermarket products | ||
|
ABB
|
Transformer oils | Power transformers | ||
|
ITW (Wilson Art)
|
Solvents | Contact flooring adhesives | ||
|
Brenntag
|
Solvents and oils | Distributor | ||
|
Chemcentral
|
Solvents and oils | Distributor | ||
|
Baker Petrolite
|
Microcrystalline waxes | Wax and polymer marketing | ||
89
Louisiana and east Texas. We also have the option to ship our
fuel products to the Midwest through the TEPPCO pipeline, should
the need arise.
The table below sets forth some of our representative fuel
products customers and the products that they purchase from us:
| Customer | Products | End-Uses | ||
|
Murphy Oil
|
Gasoline; diesel | Motor fuel; road use diesel fuel; off-road use diesel fuel | ||
|
BP
|
Gasoline; diesel | Motor fuel; road use diesel fuel; off-road use diesel fuel | ||
|
Truman Arnold
|
Jet fuel | Aviation fuel | ||
|
Defense Finance and Accounting
|
Jet fuel | Aviation fuel | ||
90
91
Fuel Products. Our competitors in producing fuel
products in the local markets in which we operate include Delek
Refining, Ltd. and Lion Oil Company.
Our ability to compete effectively depends on our responsiveness
to customer needs and our ability to maintain competitive prices
and product offerings. We believe that our flexibility and
customer responsiveness differentiate us from many of our larger
competitors. However, it is possible that new or existing
competitors could enter the markets in which we operate, which
could negatively affect our financial performance.
Environmental Matters
We operate crude oil and specialty hydrocarbon refining and
terminal operations, which are subject to stringent and complex
federal, state, and local laws and regulations governing the
discharge of materials into the environment or otherwise
relating to environmental protection. These laws and regulations
can impair our operations that affect the environment in many
ways, such as requiring the acquisition of permits to conduct
regulated activities; restricting the manner in which we can
release materials into the environment; requiring remedial
activities or capital expenditures to mitigate pollution from
former or current operations; and imposing substantial
liabilities on us for pollution resulting from our operations.
Certain environmental laws impose joint and several, strict
liability for costs required to remediate and restore sites
where petroleum hydrocarbons, wastes, or other materials have
been released or disposed.
Failure to comply with environmental laws and regulations may
result in the triggering of administrative, civil and criminal
measures, including the assessment of monetary penalties, the
imposition of remedial obligations, and the issuance of
injunctions limiting or prohibiting some or all of our
operations. On occasion, we receive notices of violation,
enforcement and other complaints from regulatory agencies
alleging non-compliance with applicable environmental laws and
regulations. In particular, the Louisiana Department of
Environmental Quality (“LDEQ”) has proposed penalties
and supplemental projects totaling approximately
$0.2 million for the following alleged violations:
(i) a May 2001 notification received by our Cotton Valley
refinery from the LDEQ regarding several alleged violations of
various air emission regulations, as identified in the course of
our Leak Detection and Repair program, and also for failure to
submit various reports related to the facility’s air
emissions; (ii) a December 2002 notification received by
our Cotton Valley refinery from the LDEQ regarding alleged
violations for excess emissions, as identified in the
LDEQ’s file review of the Cotton Valley refinery; and
(iii) a December 2004 notification received by our Cotton
Valley refinery from the LDEQ regarding alleged violations for
the construction of a multi-tower pad and associated pump pads
without a permit issued by the agency. We have been in
settlement negotiations with the LDEQ to resolve these matters,
as well as a number of similar matters at our Princeton
refinery, for which no penalty has yet been proposed. Currently,
we expect that the approximately $0.2 million in proposed
penalties and supplemental projects for the three alleged
violations at our Cotton Valley refinery, and the penalties, if
any, that may arise out of the alleged violations at our
Princeton refinery, will be rolled into an agreement that we
anticipate executing with the LDEQ in connection with the
agency’s “Small Refinery and Single Site Refinery
Initiative” described below.
The clear trend in environmental regulation is to place more
restrictions and limitations on activities that may affect the
environment, and thus, any changes in environmental laws and
regulations that result in more stringent and costly waste
handling, storage, transport, disposal, or remediation
requirements could have a material adverse effect on our
operations and financial position. Moreover, accidental spills
or releases are associated with our operations, and we cannot
assure you that we will not incur substantial costs and
liabilities as a result of such spills or releases, including
those relating to claims for damage to property and persons. In
the event of future increases in costs, we may be unable to pass
on those increases to our customers. While we believe that we
are in substantial compliance with existing environmental laws
and regulations and that continued compliance with these
requirements will not have a material adverse effect on us,
there can be no assurance that our environmental compliance
expenditures will not become material in the future.
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Air
Our operations are subject to the federal Clean Air Act, as
amended, and comparable state and local laws. The Clean Air Act
Amendments of 1990 require most industrial operations in the
U.S. to incur capital expenditures to meet the air emission
control standards that are developed and implemented by the EPA
and state environmental agencies. Under the Clean Air Act,
facilities that emit volatile organic compounds or nitrogen
oxides face increasingly stringent regulations, including
requirements to install various levels of control technology on
sources of pollutants. In addition, the petroleum refining
sector has come under stringent new EPA regulations, imposing
maximum achievable control technology (“MACT”) on
refinery equipment emitting certain listed hazardous air
pollutants. Some of our facilities have been included within the
categories of sources regulated by MACT rules. In addition, air
permits are required for our refining and terminal operations
that result in the emission of regulated air contaminants. These
permits incorporate stringent control technology requirements
and are subject to extensive review and periodic renewal. Aside
from the alleged air violations for which we are currently
discussing settlement with the LDEQ, we believe that we are in
substantial compliance with the Clean Air Act and similar state
and local laws.
The Clean Air Act authorizes the EPA to require modifications in
the formulation of the refined transportation fuel products we
manufacture in order to limit the emissions associated with the
fuel product’s final use. For example, in December 1999,
the EPA promulgated regulations limiting the sulfur content
allowed in gasoline. These regulations required the phase-in of
gasoline sulfur standards beginning in 2004, with special
provisions for small refiners and for refiners serving those
Western states exhibiting lesser air quality problems.
Similarly, the EPA promulgated regulations that will limit the
sulfur content of highway diesel fuel beginning in 2006 from its
current level of 500 parts per million (“ppm”) to
15 ppm. Our Shreveport refinery has implemented the sulfur
standard with respect to gasoline in its production and thus
currently satisfies the sulfur standard for gasoline. Our
Shreveport refinery already has the capability to satisfy the
sulfur standard for diesel fuel and we produce diesel fuel
meeting this sulfur standard.
We recently have entered into discussions on a voluntary basis
with the LDEQ regarding our participation in that agency’s
“Small Refinery and Single Site Refinery Initiative.”
This state initiative is patterned after the EPA’s
“National Petroleum Refinery Initiative,” which is a
coordinated, integrated compliance and enforcement strategy to
address federal Clean Air Act compliance issues at the
nation’s largest petroleum refineries. We expect that the
LDEQ’s primary focus under the state initiative will be on
four compliance and enforcement concerns: (i) Prevention of
Significant Deterioration/ New Source Review; (ii) New
Source Performance Standards for fuel gas combustion devices,
including flares, heaters and boilers; (iii) Leak Detection
and Repair requirements; and (iv) Benzene Waste Operations
National Emission Standards for Hazardous Air Pollutants. We are
only in the beginning stages of discussion with the LDEQ and,
consequently, while no significant compliance and enforcement
expenditures have been requested as a result of our discussions,
we anticipate that we will ultimately enter into an agreement
with the LDEQ to expend approximately $1.75 to
$2.95 million in capital expenditures over a three to five
year period to accomplish emissions reductions at our Princeton,
Cotton Valley and Shreveport refineries. We can provide no
assurance that capital expenditures or other liabilities
ultimately arising out of these discussions will not be material.
We are required to obtain an air quality permit relating to
various air emissions in order to commence construction of the
Shreveport expansion project. Based on our internal analysis, we
expect that we can obtain a state air quality permit in October
2006 and complete the project in the third quarter of 2007.
However, if we are required to seek a federal PSD permit, the
issuance of which would likely take substantially longer than
the issuance of a state air quality permit, we expect the
project would be substantially delayed.
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Hazardous Substances and Wastes
The Comprehensive Environmental Response, Compensation and
Liability Act, as amended (“CERCLA”), also known as
the “Superfund” law, and comparable state laws impose
liability without regard to fault or the legality of the
original conduct, on certain classes of persons who are
considered to be responsible for the release of a hazardous
substance into the environment. Such classes of persons include
the current and past owners and operators of sites where a
hazardous substance was released, and companies that disposed or
arranged for disposal of hazardous substances at offsite
locations, such as landfills. Under CERCLA, these
“responsible persons” may be subject to joint and
several, strict liability for the costs of cleaning up the
hazardous substances that have been released into the
environment, for damages to natural resources, and for the costs
of certain health studies. It is not uncommon for neighboring
landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of
hazardous substances into the environment. In the course of our
operations, we generate wastes or handle substances that may be
regulated as hazardous substances, and we could become subject
to liability under CERCLA and comparable state laws.
We also may incur liability under the Resource Conservation and
Recovery Act (“RCRA”), and comparable state laws,
which impose requirements related to the handling, storage,
treatment, and disposal of solid and hazardous wastes. In the
course of our operations, we generate petroleum product wastes
and ordinary industrial wastes, such as paint wastes, waste
solvents, and waste oils, that may be regulated as hazardous
wastes. In addition, our operations also generate solid wastes,
which are regulated under RCRA and state law. We believe that we
are in substantial compliance with the existing requirements of
RCRA and similar state and local laws, and the cost involved in
complying with these requirements is not material.
We currently own or operate, and have in the past owned or
operated, properties that for many years have been used for
refining and terminal activities. These properties have in the
past been operated by third parties whose treatment and disposal
or release of petroleum hydrocarbons and wastes was not under
our control. Although we used operating and disposal practices
that were standard in the industry at the time, petroleum
hydrocarbons or wastes have been released on or under the
properties owned or operated by us. These properties and the
materials disposed or released on them may be subject to CERCLA,
RCRA and analogous state laws. Under such laws, we could be
required to remove or remediate previously disposed wastes or
property contamination, or to perform remedial activities to
prevent future contamination.
Voluntary remediation of subsurface contamination is in process
at each of our refinery sites. The remedial projects are being
overseen by the appropriate state agencies. Based on current
investigative and remedial activities, we believe that the
groundwater contamination at these refineries can be controlled
or remedied without having a material adverse effect on our
financial condition. However, such costs are often unpredictable
and, therefore, there can be no assurance that the future costs
will not become material.
We are indemnified by Shell Oil Company, as successor to
Pennzoil-Quaker State Company and Atlas Processing Company, for
specified environmental liabilities arising from the operations
of the Shreveport refinery prior to our acquisition of the
facility. The indemnity is unlimited in amount and duration, but
requires us to contribute up to $1.0 million of the first
$5.0 million of indemnified costs for certain of the
specified environmental liabilities.
Water
The Federal Water Pollution Control Act of 1972, as amended,
also known as the Clean Water Act, and analogous state laws
impose restrictions and stringent controls on the discharge of
pollutants, including oil, into federal and state waters. Such
discharges are prohibited, except in accord with the terms of a
permit issued by the EPA or the appropriate state agencies. Any
unpermitted release of pollutants, including crude or
hydrocarbon specialty oils as well as refined products, could
result in penalties, as well as significant remedial
obligations. Spill prevention,
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control, and countermeasure requirements of federal laws require
appropriate containment berms and similar structures to help
prevent the contamination of navigable waters in the event of a
petroleum hydrocarbon tank spill, rupture, or leak. We believe
that we are in substantial compliance with the requirements of
the Clean Water Act.
The primary federal law for oil spill liability is the Oil
Pollution Act of 1990, as amended (“OPA”), which
addresses three principal areas of oil pollution —
prevention, containment, and cleanup. OPA applies to vessels,
offshore facilities, and onshore facilities, including
refineries, terminals, and associated facilities that may affect
waters of the U.S. Under OPA, responsible parties,
including owners and operators of onshore facilities, may be
subject to oil cleanup costs and natural resource damages as
well as a variety of public and private damages from oil spills.
We believe that we are in substantial compliance with OPA and
similar state laws.
Health and Safety
We are subject to various laws and regulations relating to
occupational health and safety including OSHA, and comparable
state laws. These laws and the implementing regulations strictly
govern the protection of the health and safety of employees. In
addition, OSHA’s hazard communication standard requires
that information be maintained about hazardous materials used or
produced in our operations and that this information be provided
to employees, state and local government authorities and
citizens. We maintain safety, training, and maintenance programs
as part of our ongoing efforts to ensure compliance with
applicable laws and regulations. Our compliance with applicable
health and safety laws and regulations has required and
continues to require substantial expenditures. We believe that
our operations are in substantial compliance with OSHA and
similar state laws.
Insurance
Our operations are subject to normal hazards of operations,
including fire, explosion and weather-related perils. We
maintain insurance policies with insurers in amounts and with
coverage and deductibles that we, with the advice of our
insurance advisors and brokers, believe are reasonable and
prudent. In connection with our new credit facilities and this
offering, we have obtained business interruption insurance for
each of our refineries. We cannot, however, assure you that this
insurance will be adequate to protect us from all material
expenses related to potential future claims for personal and
property damage or that these levels of insurance will be
available in the future at economical prices. We are not fully
insured against certain risks because such risks are not fully
insurable, coverage is unavailable, or premium costs, in our
judgment, do not justify such expenditures.
Title to Properties
We own the 208-acre
site of the Princeton refinery in Princeton, Louisiana, the
77-acre site of the
Cotton Valley refinery in Cotton Valley, Louisiana and the
240-acre site of the
Shreveport refinery in Shreveport, Louisiana. In addition, we
own the 11-acre site of
the Burnham terminal in Burnham, Illinois. Our properties secure
our credit facilities.
Office Facilities
In addition to our refineries and terminal discussed above, we
occupy approximately 19,267 square feet of space at our
executive offices in Indianapolis, Indiana under a lease
expiring in September 2011. We have an additional
4,232 square feet of office space in Indianapolis under a
lease expiring in July 2006. While we may require additional
office space as our business expands, we believe that our
existing facilities are adequate to meet our needs for the
immediate future and that additional facilities will be
available on commercially reasonable terms as needed.
Employees
To carry out our operations, our general partner or its
affiliates employ approximately 350 people who provide
direct support to our operations. Of these employees,
approximately 190 are covered by
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collective bargaining agreements. Employees at our Princeton
refinery and Cotton Valley refinery are covered by separate
collective bargaining agreements with the International Union of
Operating Engineers, having expiration dates of October 31,
2008 and March 31, 2007, respectively. Employees at our
Shreveport refinery are covered by a collective bargaining
agreement with the Paper, Allied-Industrial, Chemical and Energy
Workers International Union which expires as of April 30,
2007. None of the employees at the Burnham terminal are covered
by collective bargaining agreements. Our general partner
considers its employee relations to be good, with no history of
work stoppages.
Legal Proceedings
We are not a party to any material litigation. Our operations
are subject to a variety of risks and disputes normally incident
to our business. As a result, we may, at any given time, be a
defendant in various legal proceedings and litigation arising in
the ordinary course of business.
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MANAGEMENT
Management of Calumet Specialty Products Partners, L.P.
Our general partner, Calumet GP, LLC, manages our operations and
activities. Unitholders will not be entitled to elect the
directors of our general partner or directly or indirectly
participate in our management or operations. Our general partner
owes a fiduciary duty to our unitholders. However, our
partnership agreement also contains various provisions modifying
and restricting the fiduciary duties that might otherwise be
owed by our general partner to our unitholders. Please read
“Conflicts of Interest and Fiduciary Duties —
Fiduciary Duties”. Our general partner will be liable, as
general partner, for all of our debts (to the extent not paid
from our assets), except for indebtedness or other obligations
that are made expressly nonrecourse to it. Whenever possible,
our general partner intends to incur indebtedness or other
obligations that are nonrecourse to it.
The directors of our general partner oversee our operations. The
owners of our general have appointed seven members to its board
of directors. The directors of our general partner will be
generally elected by a majority vote of the owners of our
general partner. However, as long as our chief executive officer
and president, F. William Grube, or trusts established for the
benefit of his family members, continue to own at least 30% of
the membership interests in our general partner, Mr. Grube
(or in certain specified instances, his designee or transferee)
will have the right to serve as a director of our general
partner. The NASDAQ National Market does not require a limited
partnership like us to have a majority of independent directors
on the board of directors of our general partner or to establish
a compensation committee or a nominating/governance committee.
Two members of the board of directors of our general partner
serve on a conflicts committee to review specific matters that
the board believes may involve conflicts of interest. The
conflicts committee will determine if the resolution of the
conflict of interest is fair and reasonable to us. The members
of the conflicts committee may not be officers or employees of
our general partner or directors, officers, or employees of its
affiliates, and must meet the independence and experience
standards established by the NASDAQ National Market and the
Securities Exchange Act of 1934, as amended (“Exchange
Act”), to serve on an audit committee of a board of
directors, and certain other requirements. Any matters approved
by the conflicts committee will be conclusively deemed to be
fair and reasonable to us, approved by all of our partners, and
not a breach by our general partner of any duties it may owe us
or our unitholders. The two independent board members who serve
on the conflicts committee are Messrs. James Carter and
Robert Funk.
In addition, the board of directors of our general partner has
an audit committee comprised of three directors who meet the
independence and experience standards established by the NASDAQ
National Market and the Exchange Act. The audit committee
assists the board of directors in its oversight of the integrity
of our financial statements and our compliance with legal and
regulatory requirements and corporate policies and controls. The
audit committee has the sole authority to retain and terminate
our independent registered public accounting firm, approve all
auditing services and related fees and the terms thereof, and
pre-approve any non-audit services to be rendered by our
independent registered public accounting firm. The audit
committee is also responsible for confirming the independence
and objectivity of our independent registered public accounting
firm. Our independent registered public accounting firm is given
unrestricted access to the audit committee. The three
independent board members who serve on the audit committee are
Messrs. James Carter, Robert Funk and Michael Smith.
The board of directors of our general partner also has a
compensation committee, which will, among other things, oversee
the compensation plans described below. The NASDAQ National
Market does not require a limited partnership like us to have a
compensation committee comprised entirely of independent
directors. Accordingly, the two board members who serve on the
compensation committee are Messrs. Fred M.
Fehsenfeld, Jr. and F. William Grube.
The officers of our general partner manage the
day-to-day affairs of
our business.
Directors and Executive Officers
The following table shows information regarding the current
directors, director nominees and executive officers of Calumet
GP, LLC. Directors are elected for one-year terms.
| Name | Age | Position with Calumet GP, LLC | ||||
|
Fred M.
Fehsenfeld, Jr.
|
55 | Chairman of the Board | ||||
|
F. William Grube
|
58 | Chief Executive Officer, President and Director | ||||
|
Allan A. Moyes, III
|
59 | Executive Vice President | ||||
|
R. Patrick Murray, II
|
35 | Vice President and Chief Financial Officer | ||||
|
Robert M. Mills
|
53 | Vice President — Crude Oil Supply | ||||
|
Jeffrey D. Smith
|
43 | Vice President — Planning and Economics | ||||
|
William A. Anderson
|
38 | Vice President — Sales and Marketing | ||||
|
James S. Carter
|
58 | Director | ||||
|
William S. Fehsenfeld
|
55 | Director | ||||
|
Robert E. Funk
|
61 | Director | ||||
|
Nicholas J. Rutigliano
|
58 | Director | ||||
|
Michael L. Smith
|
57 | Director | ||||
97
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Mr. Smith joined our predecessor in 1994 and served in
various capacities prior to becoming vice president.
Mr. Smith received his B.S. in Geology from Louisiana Tech
University.
William A. Anderson is the vice
president — sales and marketing of our general
partner. Mr. Anderson has served as the vice
president — sales and marketing of our predecessor
since 2000 and served in various other capacities for our
predecessor from 1993 to 2000. Mr. Anderson received his
B.A. in Communications from DePauw University.
James S. Carter has served as a member of the
board of directors of our general partner since January 26,
2006. Mr. Carter served as U.S. regional director of
ExxonMobil Fuels Company, the fuels subsidiary of Exxon Mobil
Corporation, from 1999 until his retirement in 2003.
Mr. Carter received his M.B.A. in Finance and Accounting
from Tulane University.
William S. Fehsenfeld has served as a member of
the board of directors of our general partner since
January 26, 2006. Mr. Fehsenfeld has served as vice
president and secretary of Schuler Books, Inc., the independent
bookstore company he founded with his wife, since 1982. He has
also served as a trustee of The Heritage Group from 2003 to the
present. Mr. Fehsenfeld received his B.G.S. from the
University of Michigan and his M.B.A. from Grand Valley State
University. He is also a first cousin of the chairman of the
board of directors of our general partner, Mr. Fred M.
Fehsenfeld, Jr.
Robert E. Funk has served as a member of the board
of directors of our general partner since January 26, 2006.
Mr. Funk served as vice president-corporate planning and
economics of Citgo Petroleum Corporation, a refiner and marketer
of transportation fuels, lubricants, petrochemicals, refined
waxes, asphalt and other industrial products, from 1997 until
his retirement in December 2004. Mr. Funk previously served
Citgo or its predecessor, Cities Services Company, as general
manager-facilities planning from 1988 to 1997, general
manager-lubricants operations from 1983 to 1988 and
manager-refinery east, Lake Charles refinery from 1982 to 1983.
Mr. Funk received his B.S. in Chemical Engineering from the
University of Kansas.
Nicholas J. Rutigliano has served as a member of
the board of directors of our general partner since
January 26, 2006. Mr. Rutigliano has served as
President of Tobias Insurance Group, Inc., a commercial
insurance brokerage business he founded, since 1973. He has also
served as a trustee of The Heritage Group from 1980 to the
present. Mr. Rutigiliano received his B.S. in Business from
the University of Evansville. He is also the
brother-in-law of the
chairman of the board of directors of our general partner,
Mr. Fred M. Fehsenfeld, Jr.
Michael L. Smith has served as a member of the
board of directors of our general partner since January 26,
2006. Mr. Smith serves as the “audit committee
financial expert” on the audit committee of the board of
directors of our general partner. Mr. Smith served as
executive vice president and chief financial officer of
Wellpoint Inc. (f/k/a Anthem Inc.), a publicly traded health
benefits company, from 1999 until his retirement in January
2005. Mr. Smith previously served as senior vice president
of Anthem and chief financial officer of Anthem Blue Cross and
Blue Shield’s Midwest and Connecticut operations from 1998
to 1999. From 1996 to 1998, he was chief operating officer and
chief financial officer of American Health Network, a former
Anthem subsidiary. Mr. Smith is a member of the board of
directors of First Indiana Corporation and its principal
subsidiary, First Indiana Bank, Kite Realty Group Trust, Vectren
Corporation, InterMune Inc. and Emergency Medical Services
Corporation. He also serves as on the Board of Trustees of
DePauw University. Mr. Smith received his B.A. in Economics
from DePauw University.
Reimbursement of Expenses of Our General Partner
Our general partner will not receive any management fee or other
compensation for its management of our partnership. Our general
partner and its affiliates will, however, be reimbursed for all
expenses incurred on our behalf. These expenses include the cost
of employee, officer and director compensation benefits properly
allocable to us and all other expenses necessary or
99
appropriate to the conduct of our business and allocable to us.
The partnership agreement provides that our general partner will
determine the expenses that are allocable to us. There is no
limit on the amount of expenses for which our general partner
and its affiliates may be reimbursed.
Executive Compensation
Our general partner was formed in September 2005 and began
reporting separately from Calumet Predecessor with the
conclusion of our initial public offering on January 31,
2006. Accordingly, our general partner did not accrue any
obligations with respect to management incentive or retirement
benefits for its directors and officers for the 2005 fiscal
year. The compensation of the executive officers of our general
partner is set by the compensation committee of our general
partner’s board of directors. The officers and employees of
our general partner may participate in employee benefit plans
and arrangements sponsored by us, our general partner or its
affiliates, including plans that may be established in the
future.
On December 30, 2005, our predecessor approved
discretionary cash bonuses totaling $5.0 million to be paid
to certain of its executive officers and key members of its
management based on our predecessor’s financial
performance. These cash bonuses were paid by our predecessor
prior to the completion of our initial public offering.
Compensation of Directors
Officers or employees of our general partner who also serve as
directors do not receive additional compensation for their
service as a director of our general partner. Each director who
is not an officer or employee of our general partner receives
compensation for attending meetings of the board of directors,
as well as committee meetings. The primary fees paid to
non-employee directors are as follows:
•
Annual fee of $30,000;
•
The annual award of restricted units in the amount of $40,000
with a four-year vesting period;
•
Annual fee of $8,000 to the audit committee chairperson;
•
Annual fee of $4,000 to each audit committee member; and
•
Annual fee of $5,000 to all other committee chairpersons.
In addition, each non-employee director will be reimbursed for
his out-of-pocket
expenses in connection with attending meetings of the board of
directors or committees. Each director will be fully indemnified
by us for his actions associated with being a director to the
fullest extent permitted under Delaware law.
Long-Term Incentive Plan
General. Our general partner adopted a Long-Term
Incentive Plan (the “Plan”) on January 24, 2006
for its employees, consultants and directors and its affiliates
who perform services for us. The Plan provides for the grant of
restricted units, phantom units, unit options and substitute
awards and, with respect to unit options and phantom units, the
grant of distribution equivalent rights (“DERs”).
Subject to adjustment for certain events, an aggregate of
783,960 common units may be delivered pursuant to awards under
the Plan. Units withheld to satisfy our general partner’s
tax withholding obligations are available for delivery pursuant
to other awards. If the Plan is implemented, the Plan will be
administered by the compensation committee of our general
partner’s board of directors.
Restricted Units and Phantom Units. A restricted
unit is a common unit that is subject to forfeiture. Upon
vesting, the grantee receives a common unit that is not subject
to forfeiture. A phantom unit is a notional unit that entitles
the grantee to receive a common unit upon the vesting of
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the phantom unit or, in the discretion of the compensation
committee, cash equal to the fair market value of a common unit.
The compensation committee may make grants of restricted units
and phantom units under the Plan to eligible individuals
containing such terms, consistent with the Plan, as the
compensation committee may determine, including the period over
which restricted units and phantom units granted will vest. The
committee may, in its discretion, base vesting on the
grantee’s completion of a period of service or upon the
achievement of specified financial objectives or other criteria.
In addition, the restricted and phantom units will vest
automatically upon a change of control (as defined in the Plan)
of us or our general partner, subject to any contrary provisions
in the award agreement.
If a grantee’s employment, consulting or membership on the
board terminates for any reason, the grantee’s restricted
units and phantom units will be automatically forfeited unless,
and to the extent, the grant agreement or the compensation
committee provides otherwise. Common units to be delivered with
respect to these awards may be common units acquired by our
general partner in the open market, common units already owned
by our general partner, common units acquired by our general
partner directly from us or any other person, or any combination
of the foregoing. Our general partner will be entitled to
reimbursement by us for the cost incurred in acquiring common
units. If we issue new common units with respect to these
awards, the total number of common units outstanding will
increase.
Distributions made by us on restricted units may, in the
compensation committee’s discretion, be subject to the same
vesting requirements as the restricted units. The compensation
committee, in its discretion, may also grant tandem DERs with
respect to phantom units on such terms as it deems appropriate.
DERs are rights that entitle the grantee to receive, with
respect to a phantom unit, cash equal to the cash distributions
made by us on a common unit.
We intend for the restricted units and phantom units granted
under the Plan to serve as a means of incentive compensation for
performance and not primarily as an opportunity to participate
in the equity appreciation of the common units. Therefore,
participants will not pay any consideration for the common units
they receive with respect to these types of awards, and neither
we nor our general partner will receive remuneration for the
units delivered with respect to these awards.
Unit Options. The Plan also permits the grant of
options covering common units. Unit options may be granted to
such eligible individuals and with such terms as the
compensation committee may determine, consistent with the Plan;
however, a unit option must have an exercise price equal to the
fair market value of a common unit on the date of grant.
Upon exercise of a unit option, our general partner will acquire
common units in the open market at a price equal to the
prevailing price on the principal national securities exchange
upon which the common units are then traded, or directly from us
or any other person, or use common units already owned by the
general partner, or any combination of the foregoing. Our
general partner will be entitled to reimbursement by us for the
difference between the cost incurred by our general partner in
acquiring the common units and the proceeds received by our
general partner from an optionee at the time of exercise. Thus,
we will bear the cost of the unit options. If we issue new
common units upon exercise of the unit options, the total number
of common units outstanding will increase, and our general
partner will remit the proceeds it received from the optionee
upon exercise of the unit option to us. The unit option plan has
been designed to furnish additional compensation to employees,
consultants and directors and to align their economic interests
with those of common unitholders.
On October 22, 2004, the American Jobs Creation Act of 2004
(H.R. 4520) (the “AJCA”) was signed into law by the
President. The AJCA added new Section 409A to the Internal
Revenue Code (“Section 409A”) which significantly
alters the rules relating to the taxation of deferred
compensation. Section 409A broadly applies to deferred
compensation and potentially results in additional tax to
participants. The Department of Treasury and IRS have issued
guidance and proposed regulations under Section 409A,
however further guidance is anticipated. Based on current
guidance, the award
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of options to employees, consultants and directors of certain of
our affiliates may be very limited in order to meet the
requirements of Section 409A. However, we expect that we
will be able to structure awards under the plan in a manner that
complies with Section 409A. Because we expect additional
guidance to be issued under Section 409A, we may be
required to alter certain provisions of the plan and future
awards.
Substitution Awards. The compensation committee,
in its discretion, may grant substitute or replacement awards to
eligible individuals who, in connection with an acquisition made
by us, our general partner or an affiliate, have forfeited an
equity-based award in their former employer. A substitute award
that is an option may have an exercise price less than the value
of a common unit on the date of grant of the award.
Termination of Long-Term Incentive Plan. Our
general partner’s board of directors, in its discretion,
may terminate the Plan at any time with respect to the common
units for which a grant has not theretofore been made. The Plan
will automatically terminate on the earlier of the
10th anniversary of the date it was initially approved by
our unitholders or when common units are no longer available for
delivery pursuant to awards under the Plan. Our general
partner’s board of directors will also have the right to
alter or amend the Plan or any part of it from time to time and
the compensation committee may amend any award; provided,
however, that no change in any outstanding award may be made
that would materially impair the rights of the participant
without the consent of the affected participant. Subject to
unitholder approval, if required by the rules of the principal
national securities exchange upon which the common units are
traded, the board of directors of our general partner may
increase the number of common units that may be delivered with
respect to awards under the Plan.
Employment Agreement
Upon the consummation of our initial public offering on
January 31, 2006, F. William Grube entered into an
employment agreement with our general partner. Pursuant to the
employment agreement, Mr. Grube serves as President and
Chief Executive Officer of our general partner as well as a
member of the board of directors of our general partner. The
employment agreement provides that Mr. Grube will have
powers and duties and responsibilities that are customary to
this position and that are assigned to him by the board of
directors of our general partner in connection with his general
management and supervision of the operations of our general
partner.
The employment agreement has an initial term of five years, with
automatic annual extensions beginning on the third anniversary
of its effective date. The agreement provides for an annual base
salary of approximately $333,000, subject to annual adjustment
by the compensation committee of the board of directors of our
general partner, as well as the right to participate in our Long
Term Incentive Plan and other bonus plans. Mr. Grube will
generally be entitled to receive a payout or distribution of at
least 150% of the amount of any cash, equity or other payout or
distribution that may be made to any other executive officer
under the terms of these plans. The employment agreement also
contains non-competition provisions.
Mr. Grube’s employment agreement may be terminated at
any time by either party with proper notice. If
Mr. Grube’s employment is terminated without cause, as
defined in the agreement, or by Mr. Grube for good reason,
as defined in the agreement, then our general partner will be
required to pay Mr. Grube a lump sum equal to three times
his current base salary as well as a lump sum cash payment for
amounts accrued under our various incentive and benefit plans.
In addition, all equity based awards will vest in full in the
event of such a termination.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of our
units that will be owned upon the consummation of this
offering by:
•
each person known by us to beneficially own 5% or more of the
outstanding units;
•
each director of our general partner;
•
each named executive officer of our general partner; and
•
all directors and executive officers of our general partner as a
group.
The amounts and percentages of units beneficially owned are
reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a “beneficial
owner” of a security if that person has or shares
“voting power,” which includes the power to vote or to
direct the voting of such security, or “investment
power,” which includes the power to dispose of or to direct
the disposition of such security. A person is also deemed to be
a beneficial owner of any securities of which that person has a
right to acquire beneficial ownership within 60 days. Under
these rules, more than one person may be deemed a beneficial
owner of the same securities and a person may be deemed a
beneficial owner of securities as to which he has no economic
interest.
Except as indicated by footnote, the persons named in the table
below have sole voting and investment power with respect to all
units shown as beneficially owned by them, subject to community
property laws where applicable. The address for the beneficial
owners listed below, other than The Heritage Group and Kayne
Anderson Capital Advisors, L.P., is 2780 Waterfront Pkwy
E. Drive, Suite 200, Indianapolis, Indiana 46214. The
address for The Heritage Group is 5400 W. 86th St.,
Indianapolis, Indiana
46268-0123. The address
for Kayne Anderson Capital Advisors, L.P. is 1800 Avenue of the
Stars, 2nd Floor, Los Angeles, California 90067.
| Percentage of | ||||||||||||||||||||
| Common | Percentage of | Subordinated | Subordinated | Percentage of | ||||||||||||||||
| Units to be | Common Units to | Units to be | Units to be | Total Units to be | ||||||||||||||||
| Beneficially | be Beneficially | Beneficially | Beneficially | Beneficially | ||||||||||||||||
| Name of Beneficial Owner | Owned | Owned | Owned | Owned | Owned | |||||||||||||||
|
The Heritage Group(1)
|
3,499,277 | 21.38 | % | 7,936,370 | 60.74% | 38.85 | % | |||||||||||||
|
Calumet, Incorporated(2)
|
591,886 | 3.62 | % | 1,342,401 | 10.27% | 6.57 | % | |||||||||||||
|
Kayne Anderson Capital Advisors,
L.P.(3)
|
907,701 | 5.55 | % | — | —% | 3.08 | % | |||||||||||||
|
Janet K. Grube(2)(4)
|
1,180,089 | 7.21 | % | 2,676,183 | 20.48% | 13.10 | % | |||||||||||||
|
F. William Grube(2)(4)
|
88,783 | 0.54 | % | 201,360 | 1.54% | 0.99 | % | |||||||||||||
|
Fred M. Fehsenfeld, Jr.(1)(2)
|
173,424 | 1.06 | % | 393,323 | 3.01% | 1.93 | % | |||||||||||||
|
Allan A. Moyes, III
|
14,000 | * | — | —% | * | |||||||||||||||
|
R. Patrick Murray, II
|
6,000 | * | — | —% | * | |||||||||||||||
|
Robert M. Mills
|
11,400 | * | — | —% | * | |||||||||||||||
|
William A. Anderson
|
6,000 | * | — | —% | * | |||||||||||||||
|
Jeffrey D. Smith
|
5,000 | * | — | —% | * | |||||||||||||||
|
James S. Carter
|
4,000 | * | — | —% | * | |||||||||||||||
|
William S. Fehsenfeld(1)(5)
|
12,000 | * | — | —% | * | |||||||||||||||
|
Robert E. Funk
|
5,000 | * | — | —% | * | |||||||||||||||
|
Nicholas J. Rutigliano(1)(6)
|
25,000 | * | — | —% | * | |||||||||||||||
|
Michael L. Smith
|
5,000 | * | — | —% | * | |||||||||||||||
|
All directors and executive
officers as a group (12 persons)
|
355,607 | 2.17 | % | 594,683 | 4.55% | 3.19 | % | |||||||||||||
| * | = less than 1 percent |
| (1) | Thirty grantor trusts indirectly own all of the outstanding general partner interests in The Heritage Group, an Indiana general partnership. The direct or indirect beneficiaries of the grantor trusts are members of the Fred M. Fehsenfeld, Jr. family. Each of the grantor trusts has five trustees, Fred M. Fehsenfeld, Jr., James |
102
103
C. Fehsenfeld, Nicholas J.
Rutigliano, William S. Fehsenfeld and Nancy A. Smith, each of
whom exercises equivalent voting rights with respect to each
such trust. Each of Fred M. Fehsenfeld, Jr., Nicholas J.
Rutigliano and William S. Fehsenfeld, who will serve as
directors of our general partner, disclaims beneficial ownership
of all of the common and subordinated units owned by The
Heritage Group, and none of these units are shown as being
beneficially owned by such directors in the table above.
(2)
F. William Grube is a
director of and owns 15% of the common shares of Calumet,
Incorporated, an Indiana corporation. Accordingly, 88,783 of the
common units and 201,360 of the subordinated units owned by
Calumet, Incorporated are also shown as being beneficially owned
by F. William Grube in the table above. Janet K. Grube, the
spouse of F. William Grube, has no voting or investment
power over these units, and none of these units are shown as
being beneficially owned by Janet K. Grube in the table above.
The remaining 85% of the common shares of Calumet, Incorporated
are indirectly owned 45.8% by The Heritage Group and 5.1% by
Fred M. Fehsenfeld, Jr. personally. Fred M.
Fehsenfeld, Jr. is also a director of Calumet,
Incorporated. Accordingly, 230,244 of the common units and
522,194 of the subordinated units owned by Calumet, Incorporated
are also shown as being beneficially owned by The Heritage Group
in the table above, and 25,451 of the common units and 57,723 of
the subordinated units owned by Calumet, Incorporated are also
shown as being beneficially owned by Fred M.
Fehsenfeld, Jr. in the table above. Each of F. William
Grube, The Heritage Group and Fred M. Fehsenfeld, Jr.
disclaims beneficial ownership of all of the common and
subordinated units owned by Calumet, Incorporated in excess of
their respective pecuniary interests in such units.
(3)
As noted in the Schedule 13G
filed with the SEC on April 11, 2006.
(4)
Includes common and subordinated
units that are owned by two grantor retained annuity trusts for
which Janet K. Grube, the spouse of F. William Grube, serves as
sole trustee. Janet K. Grube and her two children are the
beneficiaries of such trusts. Also includes common and
subordinated units owned by Janet K. Grube personally.
F. William Grube has no voting or investment power over
these units and disclaims beneficial ownership of all such
units, and none of these units are shown as being beneficially
owned by F. William Grube in the table above.
(5)
Includes common units that are
owned by the spouse of Nicholas J. Rutigliano for which he
disclaims beneficial ownership.
(6)
Includes common units that are
owned by the spouse of William S. Fehsenfeld for which he
disclaims beneficial ownership.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Owners of our general partner and their affiliates own 5,761,015
common units and 13,066,000 subordinated units representing an
aggregate 62.7% limited partner interest in us. In addition, our
general partner owns a 2% general partner interest in us and the
incentive distribution rights.
Distributions and Payments to Our General Partner and its
Affiliates
The following table summarizes the distributions and payments to
be made by us to our general partner and its affiliates in
connection with the formation, ongoing operation and any
liquidation of Calumet Specialty Products Partners, L.P. These
distributions and payments were determined by and among
affiliated entities and, consequently, are not the result of
arm’s-length negotiations.
Formation Stage
The consideration received by our general partner and its
affiliates for the contribution of the assets and liabilities to
us
• 5,761,015 common units;
• 13,066,000 subordinated units;
• 2% general partner interest; and
• the incentive distribution rights.
Operational Stage
Distributions of available cash to our general partner and its
affiliates
Generally, we will make cash distributions of 98% to the
unitholders pro rata, including the affiliates of our general
partner, as the holders of an aggregate 5,761,015 common units
and 13,066,000 subordinated units, and 2% to our general partner.
In addition, if distributions exceed the minimum quarterly
distribution and other higher target distribution levels, our
general partner will be entitled to increasing percentages of
the distributions, up to 50% of the distributions above the
highest target level.
Assuming we have sufficient available cash to pay the full
minimum quarterly distribution on all of our outstanding units
for four quarters, our general partner would receive an annual
distribution of approximately $1.1 million on its 2%
general partner interest and the affiliates of our general
partner would receive $33.9 million on their common and
subordinated units.
Payments to our general partner and its affiliates
We will reimburse our general partner and its affiliates for all
expenses incurred on our behalf.
Withdrawal or removal of our general partner
If our general partner withdraws or is removed, its general
partner interest and its incentive distribution rights will
either be sold to the new general partner for cash or converted
into common units, in each case for an amount equal to the fair
105
market value of those interests. Please read “The
Partnership Agreement — Withdrawal or Removal of the
General Partner.”
Liquidation Stage
Liquidation
Upon our liquidation, the partners, including our general
partner, will be entitled to receive liquidating distributions
according to their respective capital account balances.
Omnibus Agreement
We entered into an omnibus agreement, dated the closing date of
our initial public offering, with The Heritage Group and certain
of its affiliates pursuant to which The Heritage Group and its
controlled affiliates agreed not to engage in, whether by
acquisition or otherwise, the business of refining or marketing
specialty lubricating oils, solvents and wax products as well as
gasoline, diesel and jet fuel products in the continental United
States (“restricted business”) for so long as The
Heritage Group controls us. This restriction will not apply to:
•
any business owned or operated by The Heritage Group or any of
its affiliates at the closing of the offering;
•
the refining and marketing of asphalt and asphalt-related
products and related product development activities;
•
the refining and marketing of other products that do not produce
“qualifying income” as defined in the Internal Revenue
Code;
•
the purchase and ownership of up to 9.9% of any class of
securities of any entity engaged in any restricted business;
•
any restricted business acquired or constructed that The
Heritage Group or any of its affiliates acquires or constructs
that has a fair market value or construction cost, as
applicable, of less than $5.0 million;
•
any restricted business acquired or constructed that has a fair
market value or construction cost, as applicable, of
$5.0 million or more if we have been offered the
opportunity to purchase it for fair market value or construction
cost and we decline to do so with the concurrence of the
conflicts committee of the board of directors of our general
partner; and
•
any business conducted by The Heritage Group with the approval
of the conflicts committee of the board of directors of our
general partner.
Administrative and Other Services
The Heritage Group provides us with certain management and
administrative services for which it receives an annual fee. The
Heritage Group also provides us with strategic and financial
advisory services from time to time. Payments for these services
were approximately $0.6 million for each of the years ended
December 31, 2003, 2004, and 2005, and $0.2 million
for the three months ended March 31, 2006.
We participate in a self-insurance program for medical benefits
with The Heritage Group and certain of its affiliates. In
connection with this program, contributions are made to a
voluntary employees’ benefit association (VEBA) trust.
Contributions made by us to the VEBA totaled approximately
$3.2 million, $2.8 million and $3.2 million for
the years ended December 31, 2003, 2004 and 2005,
respectively, and $0.8 million for the three months ended
March 31, 2006.
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We participate in a self-insurance program for workers’
compensation with The Heritage Group and certain of its
affiliates. In connection with this program, contributions are
made to The Heritage Group. Contributions made by us to The
Heritage Group totaled approximately $0.2 million,
$0.3 million and $0.3 million, respectively for the
years ended December 31, 2003, 2004, and 2005,
respectively, and $0.1 million for the three months ended
March 31, 2006.
We participate in a self-insurance program for general liability
with The Heritage Group and certain of its affiliates. In
connection with this program, contributions are made to The
Heritage Group. Contributions made by us to The Heritage Group
totaled approximately $0.4 million, $0.3 million and
$0.6 million for the years ended December 31, 2003,
2004, and 2005, respectively, and $0.1 million for the
three months ended March 31, 2006.
In the near term, we anticipate we will continue to participate
in these plans.
Indemnification of Directors and Officers
Under our limited partnership agreement and subject to specified
limitations, we will indemnify to the fullest extent permitted
by Delaware law, from and against all losses, claims, damages or
similar events any director or officer, or while serving as a
director or officer, any person who is or was serving as a tax
matters member or as a director, officer, tax matters member,
employee, partner, manager, fiduciary or trustee of our
partnership or any of our affiliates. Additionally, we will
indemnify to the fullest extent permitted by law, from and
against all losses, claims, damages or similar events any person
who is or was an employee (other than an officer) or agent of
our partnership.
Credit Facility with and Guarantees by The Heritage Group
The Heritage Group was previously a lender to us under a term
loan. The credit agreement provided for up to $180 million
in long-term borrowings which bore interest at various rates and
was to have matured on June 30, 2007. In addition, as of
September 30, 2005, we had $11.4 million in
outstanding notes issued to certain owners of our general
partner. The notes bore interest at the prime rate. In
connection with our refinancing in December 2005, all
outstanding borrowings under the existing credit agreement and
the principal and interest on the notes were repaid, the credit
agreement was terminated and the notes cancelled. In addition,
we were a limited guarantor of a bank credit facility of The
Heritage Group, one of its affiliates and an owner of our
general partner. This guaranty was terminated in connection with
our refinancing.
Sales to Bareco Joint Venture
During 2003 and 2004, we had sales to our Bareco joint venture
of $29.0 million and $9,000, respectively. Bareco marketed
wax products produced by us. The Bareco joint venture was
dissolved in 2004.
Transactions with Director
Nicholas J. Rutigliano, a director of our general partner,
founded and is the president of Tobias Insurance Group, Inc., a
commercial insurance brokerage business, that has historically
placed a portion of our insurance underwriting requirements. The
total premiums paid by us through Mr. Rutigliano’s
firm were approximately $0.6 million, $0.6 million,
and $0.8 million for the years ended December 31,
2003, 2004, and 2005, respectively, and $0.8 million for
the three months ended March 31, 2006. It is anticipated
that Mr. Rutigliano’s firm will continue to provide
these services to us following completion of the offering on
substantially similar terms. We believe these premiums are
comparable to the premiums we would pay for such insurance from
a non-affiliated third party.
107
Crude Oil Purchases
We have historically purchased a small percentage of our crude
oil supplies from Legacy Resources Co., L.P., an exploration and
production company owned in part by The Heritage Group and our
president and chief executive officer, F. William Grube.
The total purchases made by us from Legacy Resources were
approximately $0.6 million, $0.8 million and
$1.1 million for the years ended December 31, 2003,
2004, and 2005, respectively, and $0.3 million for the
three months ended March 31, 2006. It is anticipated that
we may continue to purchase crude oil from Legacy Resources
following completion of the offering at applicable market rates.
We believe that the prices we pay Legacy Resources for crude oil
are comparable to the prices we pay for crude oil from
non-affiliated third parties.
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CONFLICTS OF INTEREST AND FIDUCIARY DUTIES
Conflicts of Interest
Conflicts of interest exist and may arise in the future as a
result of the relationships between our general partner and its
affiliates (including the Fred M. Fehsenfeld, Jr. and F.
William Grube families, The Heritage Group and their affiliates)
on the one hand, and our partnership and our unaffiliated
limited partners, on the other hand. The directors and officers
of our general partner have fiduciary duties to manage our
general partner in a manner beneficial to its owners. At the
same time, our general partner has a fiduciary duty to manage
our partnership in a manner beneficial to our unitholders and us.
Whenever a conflict arises between our general partner or its
affiliates, on the one hand, and us or any other partner, on the
other hand, our general partner will resolve that conflict. Our
partnership agreement contains provisions that modify and limit
our general partner’s fiduciary duties to the unitholders.
Our partnership agreement also restricts the remedies available
to unitholders for actions taken that, without those
limitations, might constitute breaches of fiduciary duty.
Our general partner will not be in breach of its obligations
under our partnership agreement or its duties to us or our
unitholders if the resolution of the conflict is:
•
approved by the conflicts committee of the board of directors of
our general partner, although our general partner is not
obligated to seek such approval;
•
approved by the vote of a majority of the outstanding common
units, excluding any common units owned by our general partner
or any of its affiliates;
•
on terms no less favorable to us than those generally being
provided to or available from unrelated third parties; or
•
fair and reasonable to us, taking into account the totality of
the relationships among the parties involved, including other
transactions that may be particularly favorable or advantageous
to us.
Our general partner may, but is not required to, seek the
approval of such resolution from the conflicts committee of its
board of directors. If our general partner does not seek
approval from the conflicts committee and its board of directors
determines that the resolution or course of action taken with
respect to the conflict of interest satisfies either of the
standards set forth in the third and fourth bullet points above,
then it will be presumed that, in making its decision, the board
of directors acted in good faith, and in any proceeding brought
by or on behalf of any limited partner or the partnership, the
person bringing or prosecuting such proceeding will have the
burden of overcoming such presumption. Unless the resolution of
a conflict is specifically provided for in our partnership
agreement, our general partner or the conflicts committee may
consider any factors it determines in good faith to consider
when resolving a conflict. When our partnership agreement
provides that someone act in good faith, it requires that person
to reasonably believe he is acting in the best interests of the
partnership, unless the context otherwise requires.
Conflicts of interest could arise in the situations described
below, among others.
Our general partner is allowed to take into account the
interests of parties other than us, such as the Fred M.
Fehsenfeld, Jr. or F. William Grube families, The Heritage
Group or their affiliates, in resolving conflicts of
interest.
Our partnership agreement contains provisions that reduce the
standards to which our general partner would otherwise be held
by state fiduciary duty law. For example, our partnership
agreement permits our general partner to make a number of
decisions in its individual capacity, as opposed to in its
capacity as our general partner. This entitles our general
partner to consider only the interests and factors that it
desires, and it has no duty or obligation to give any
consideration to any interest of, or factors affecting, us, our
affiliates or any limited partner. Examples include the exercise
of its
109
limited call right, its voting rights with respect to the units
it owns, its registration rights and its determination whether
or not to consent to any merger or consolidation of the
partnership or amendment to our partnership agreement.
We do not have any officers or employees and will rely
solely on officers and employees of our general partner and its
affiliates.
We will not have any officers or employees and will rely solely
on officers of our general partner and employees of our general
partner and its affiliates. Affiliates of our general partner
will conduct businesses and activities of their own in which we
will have no economic interest. If these separate activities are
significantly greater than our activities, there could be
material competition for the time and effort of the officers and
employees who provide services to our general partner and its
affiliates.
Our general partner has limited its liability and reduced
its fiduciary duties, and has also restricted the remedies
available to our unitholders for actions that, without the
limitations, might constitute breaches of fiduciary duty.
In addition to the provisions described above, our partnership
agreement contains provisions that restrict the remedies
available to our unitholders for actions that might otherwise
constitute breaches of fiduciary duty. For example, our
partnership agreement:
•
provides that the general partner shall not have any liability
to us or our unitholders for decisions made in its capacity as a
general partner so long as it acted in good faith, meaning it
believed that the decision was in the best interests of our
partnership;
•
generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the conflicts committee
of the board of directors of our general partner and not
involving a vote of unitholders must be on terms no less
favorable to us than those generally being provided to or
available from unrelated third parties or be “fair and
reasonable” to us, as determined by the general partner in
good faith. In determining whether a transaction or resolution
is “fair and reasonable,” our general partner may
consider the totality of the relationships between the parties
involved, including other transactions that may be particularly
advantageous or beneficial to us; and
•
provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners or assignees for any acts or omissions unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that our general partner or
those other persons acted in bad faith or engaged in fraud or
willful misconduct or, in the case of a criminal matter, acted
with knowledge that such person’s conduct was unlawful.
Our general partner determines the amount and timing of
asset purchases and sales, capital expenditures, borrowings,
issuances of additional partnership securities and reserves,
each of which can affect the amount of cash available for
distribution to our unitholders.
The amount of cash that is available for distribution to
unitholders is affected by decisions of our general partner
regarding such matters as:
•
amount and timing of asset purchases and sales;
•
cash expenditures;
•
borrowings;
•
the issuance of additional units; and
•
the creation, reduction or increase of reserves in any quarter.
110
In addition, borrowings by us and our affiliates do not
constitute a breach of any duty owed by the general partner to
our unitholders, including borrowings that have the purpose or
effect of:
•
enabling our general partner or its affiliates to receive
distributions on any subordinated units held by them or the
incentive distribution rights; or
•
hastening the expiration of the subordination period.
For example, in the event we have not generated sufficient cash
from our operations to pay the minimum quarterly distribution on
our common units and our subordinated units, our partnership
agreement permits us to borrow funds, which would enable us to
make this distribution on all outstanding units. Please read
“How We Make Cash Distributions — Subordination
Period.”
Our partnership agreement provides that we and our subsidiaries
may borrow funds from our general partner and its affiliates.
Our general partner and its affiliates may not borrow funds from
us, our operating company, or its operating subsidiaries.
In addition, our general partner may use an amount, initially
equal to $10.0 million, which would not otherwise
constitute operating surplus, in order to permit the payment of
cash distributions on the subordinated units or incentive
distribution rights. Please read “Our
Partnership — Cash Distributions.”
Our general partner has the flexibility to cause us to
enter into a broad variety of derivative transactions.
Our general partner has the flexibility to cause us to enter
into a broad variety of derivative transactions covering
different time periods, the net cash receipts from which will
increase operating surplus and adjusted operating surplus, with
the result that our general partner may be able to shift the
recognition of operating surplus and adjusted operating surplus
among periods to increase the distributions it and its
affiliates receive on their subordinated units and incentive
distribution rights or to accelerate the expiration of the
subordination period.
Our general partner determines which costs incurred by our
general partner are reimbursable by us.
We will reimburse our general partner and its affiliates for
costs incurred in managing and operating us, including costs
incurred in rendering corporate staff and support services to
us. Our partnership agreement provides that our general partner
will determine the expenses that are allocable to us in good
faith. Please read “Certain Relationships and Related Party
Transactions.”
Contracts between us, on the one hand, and our general
partner and its affiliates, on the other, will not be the result
of arm’s-length transactions.
Our partnership agreement allows our general partner to
determine, in good faith, any amounts to pay itself or its
affiliates for any services rendered to us. Our general partner
may also enter into additional contractual arrangements with any
of its affiliates on our behalf. Neither our partnership
agreement nor any of the other agreements, contracts, and
arrangements between us, on the one hand, and our general
partner and its affiliates, on the other hand, are or will be
the result of arm’s-length negotiations.
Our general partner will determine, in good faith, the terms of
any of these transactions entered into after the sale of the
common units offered in this offering.
Our general partner and its affiliates will have no obligation
to permit us to use any facilities or assets of our general
partner and its affiliates, except as may be provided in
contracts entered into specifically dealing with that use. There
is no obligation of our general partner and its affiliates to
enter into any contracts of this kind.
111
Our general partner’s affiliates may compete with
us.
Our partnership agreement provides that our general partner will
be restricted from engaging in any business activities other
than those incidental to its ownership of interests in us.
Except as provided in our partnership agreement and the omnibus
agreement, affiliates of our general partner are not prohibited
from engaging in other businesses or activities, including those
that might be in direct competition with us. Please read
“Certain Relationships and Related Party
Transactions — Omnibus Agreement.”
Our general partner intends to limit its liability
regarding our obligations.
Our general partner intends to limit its liability under
contractual arrangements so that the other party has recourse
only to our assets, and not against our general partner or its
assets. Our partnership agreement provides that any action taken
by our general partner to limit its liability or our liability
is not a breach of our general partner’s fiduciary duties,
even if we could have obtained more favorable terms without the
limitation on liability.
Common units are subject to our general partner’s
limited call right.
Our general partner may exercise its right to call and purchase
common units as provided in our partnership agreement or assign
this right to one of its affiliates or to us. Our general
partner is not bound by fiduciary duty restrictions in
determining whether to exercise this right. As a result, a
common unitholder may have his common units purchased from him
at an undesirable time or price. Please read “The
Partnership Agreement — Limited Call Right.”
Common unitholders will have no right to enforce
obligations of our general partner and its affiliates under
agreements with us.
Any agreements between us on the one hand, and our general
partner and its affiliates, on the other, will not grant to the
unitholders, separate and apart from us, the right to enforce
the obligations of our general partner and its affiliates in our
favor.
Our general partner decides whether to retain separate
counsel, accountants, or others to perform services for
us.
The attorneys, independent accountants and others who have
performed services for us regarding the offering have been
retained by our general partner. Attorneys, independent
accountants and others who will perform services for us are
selected by our general partner or the conflicts committee of
the board of directors of our general partner and may perform
services for our general partner and its affiliates. We may
retain separate counsel for ourselves or the holders of common
units in the event of a conflict of interest between our general
partner and its affiliates, on the one hand, and us or the
holders of common units, on the other, depending on the nature
of the conflict. We do not intend to do so in most cases.
Fiduciary Duties
Our general partner is accountable to us and our unitholders as
a fiduciary. Fiduciary duties owed to unitholders by our general
partner are prescribed by law and our partnership agreement. The
Delaware Act provides that Delaware limited partnerships may, in
their partnership agreements, modify, restrict or expand the
fiduciary duties otherwise owed by a general partner to limited
partners and the partnership.
Our partnership agreement contains various provisions modifying
and restricting the fiduciary duties that might otherwise be
owed by our general partner. We have adopted these restrictions
to allow our general partner or its affiliates to engage in
transactions with us that would otherwise be prohibited by state
law fiduciary duty standards and to take into account the
interests of other parties
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in addition to our interests when resolving conflicts of
interest. We believe this is appropriate and necessary because
our general partner’s board of directors will have
fiduciary duties to manage our general partner in a manner
beneficial to its owners, as well as to our unitholders. Without
these modifications, our general partner’s ability to make
decisions involving conflicts of interest would be restricted.
The modifications to the fiduciary standards enable our general
partner to take into consideration all parties involved in the
proposed action, so long as the resolution is fair and
reasonable to us. These modifications also enable our general
partner to attract and retain experienced and capable directors.
These modifications are detrimental to the common unitholders
because they restrict the remedies available to unitholders for
actions that, without those limitations, might constitute
breaches of fiduciary duty, as described below, and permit our
general partner to take into account the interests of third
parties in addition to our interests when resolving conflicts of
interest. The following is a summary of the material
restrictions of the fiduciary duties owed by our general partner
to the limited partners:
State law fiduciary duty standards
Fiduciary duties are generally considered to include an
obligation to act in good faith and with due care and loyalty.
The duty of care, in the absence of a provision in a partnership
agreement providing otherwise, would generally require a general
partner to act for the partnership in the same manner as a
prudent person would act on his own behalf. The duty of loyalty,
in the absence of a provision in a partnership agreement
providing otherwise, would generally prohibit a general partner
of a Delaware limited partnership from taking any action or
engaging in any transaction where a conflict of interest is
present.
Partnership agreement modified standards
Our partnership agreement contains provisions that waive or
consent to conduct by our general partner and its affiliates
that might otherwise raise issues about compliance with
fiduciary duties or applicable law. For example, our partnership
agreement provides that when our general partner is acting in
its capacity as our general partner, as opposed to in its
individual capacity, it must act in “good faith” and
will not be subject to any other standard under applicable law.
In addition, when our general partner is acting in its
individual capacity, as opposed to in its capacity as our
general partner, it may act without any fiduciary obligation to
us or the unitholders whatsoever. These standards reduce the
obligations to which our general partner would otherwise be held.
Our partnership agreement generally provides that affiliated
transactions and resolutions of conflicts of interest not
involving a vote of unitholders and that are not approved by the
conflicts committee of the board of directors of our general
partner must be:
• on terms no less favorable to us than those
generally being provided to or available from unrelated third
parties; or
• “fair and reasonable” to us, taking into
account the totality of the relationships between the parties
involved (including other transactions that may be particularly
favorable or advantageous to us).
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If our general partner does not seek approval from the conflicts
committee of its board of directors and its board of directors
determines that the resolution or course of action taken with
respect to the conflict of interest satisfies either of the
standards set forth in the bullet points above, then it will be
presumed that, in making its decision, the board of directors,
which may include board members affected by the conflict of
interest, acted in good faith and in any proceeding brought by
or on behalf of any limited partner or the partnership, the
person bringing or prosecuting such proceeding will have the
burden of overcoming such presumption. These standards reduce
the obligations to which our general partner would otherwise be
held.
Rights and remedies of unitholders
The Delaware Act generally provides that a limited partner may
institute legal action on behalf of the partnership to recover
damages from a third party where a general partner has refused
to institute the action or where an effort to cause a general
partner to do so is not likely to succeed. In addition, the
statutory or case law of some jurisdictions may permit a limited
partner to institute legal action on behalf of himself and all
other similarly situated limited partners to recover damages
from a general partner for violations of its fiduciary duties to
the limited partners.
In addition to the other more specific provisions limiting the
obligations of our general partner, our partnership agreement
further provides that our general partner and its officers and
directors will not be liable for monetary damages to us, our
limited partners or assignees for errors of judgment or for any
acts or omissions unless there has been a final and
non-appealable judgment by a court of competent jurisdiction
determining that our general partner or its officers and
directors acted in bad faith or engaged in fraud, willful
misconduct or, in the case of a criminal matter, acted with
knowledge that such person’s conduct was unlawful.
Each common unitholder automatically agrees to be bound by the
provisions in our partnership agreement, including the
provisions discussed above. This is in accordance with the
policy of the Delaware Act favoring the principle of freedom of
contract and the enforceability of partnership agreements. The
failure of a limited partner or transferee to sign a partnership
agreement does not render the partnership agreement
unenforceable against that person.
Under our partnership agreement, we must indemnify our general
partner and its officers, directors, managers and certain other
specified persons, to the fullest extent permitted by law,
against liabilities, costs and expenses incurred by our general
partner or these other persons. We must provide this
indemnification unless there has been a final and non-appealable
judgment by a court of competent jurisdiction determining that
these persons acted in bad faith or engaged in fraud or willful
misconduct. We must also provide this indemnification for
criminal proceedings unless our general partner or these other
persons acted with knowledge that their conduct was unlawful.
Thus, our general partner could be indemnified for its negligent
or grossly negligent acts if it meets the requirements set forth
above. To the extent these provisions purport to include
indemnification for liabilities arising under the Securities Act
of 1933, as amended (“Securities Act”), in the opinion
of the SEC such indemnification is contrary to public policy
and, therefore, unenforceable. Please read “The Partnership
Agreement — Indemnification.”
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DESCRIPTION OF THE COMMON UNITS
The Units
The common units and the subordinated units are separate classes
of limited partner interests in us. The holders of units are
entitled to participate in partnership distributions and
exercise the rights or privileges available to limited partners
under our partnership agreement. For a description of the
relative rights and preferences of holders of common units and
subordinated units in and to partnership distributions, please
read this section and “How We Make Cash
Distributions.” For a description of the rights and
privileges of limited partners under our partnership agreement,
including voting rights, please read “The Partnership
Agreement.”
Transfer Agent and Registrar
Duties. Mellon Investor Services, LLC serves as
registrar and transfer agent for the common units. We pay all
fees charged by the transfer agent for transfers of common
units, except the following that must be paid by unitholders:
•
surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges;
•
special charges for services requested by a common
unitholder; and
•
other similar fees or charges.
There is no charge to unitholders for disbursements of our cash
distributions. We will indemnify the transfer agent, its agents
and each of their stockholders, directors, officers and
employees against all claims and losses that may arise out of
acts performed or omitted for its activities in that capacity,
except for any liability due to any gross negligence or
intentional misconduct of the indemnified person or entity.
Resignation or Removal. The transfer agent may
resign by notice to us, or be removed by us. The resignation or
removal of the transfer agent will become effective upon our
appointment of a successor transfer agent and registrar and its
acceptance of the appointment. If no successor has been
appointed and accepted the appointment within 30 days after
notice of the resignation or removal, our general partner may
act as the transfer agent and registrar until a successor is
appointed.
Transfer of Common Units
By transfer of common units in accordance with our partnership
agreement, each transferee of common units shall be admitted as
a limited partner with respect to the common units transferred
when such transfer and admission is reflected in our books and
records. Each transferee:
•
represents that the transferee has the capacity, power and
authority to become bound by our partnership agreement;
•
automatically agrees to be bound by the terms and conditions of,
and is deemed to have executed, our partnership
agreement; and
•
gives the consents and approvals contained in our partnership
agreement, such as the approval of all transactions and
agreements that we are entering into in connection with our
formation and this offering.
A transferee will become a substituted limited partner of our
partnership for the transferred common units automatically upon
the recording of the transfer on our books and records. Our
general partner will cause any transfers to be recorded on our
books and records no less frequently than quarterly.
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We may, at our discretion, treat the nominee holder of a common
unit as the absolute owner. In that case, the beneficial
holders’ rights are limited solely to those that it has
against the nominee holder as a result of any agreement between
the beneficial owner and the nominee holder.
Common units are securities and are transferable according to
the laws governing transfers of securities. In addition to other
rights acquired upon transfer, the transferor gives the
transferee the right to become a substituted limited partner in
our partnership for the transferred common units.
Until a common unit has been transferred on our books, we and
the transfer agent may treat the record holder of the unit as
the absolute owner for all purposes, except as otherwise
required by law or stock exchange regulations.
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THE PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our
partnership agreement. We will provide prospective investors
with a copy of this agreement upon request at no charge.
We summarize the following provisions of our partnership
agreement elsewhere in this prospectus:
•
with regard to distributions of available cash, please read
“How We Make Cash Distributions”;
•
with regard to the fiduciary duties of our general partner,
please read “Conflicts of Interest and Fiduciary
Duties”;
•
with regard to the transfer of common units, please read
“Description of the Common Units — Transfer of
Common Units”; and
•
with regard to allocations of taxable income and taxable loss,
please read “Material Tax Consequences.”
Organization and Duration
We were organized on September 27, 2005 and have a
perpetual existence.
Purpose
Our purpose under the partnership agreement is limited to any
business activities that are approved by our general partner and
that lawfully may be conducted by a limited partnership
organized under Delaware law; provided, that our general partner
shall not cause us to engage, directly or indirectly, in any
business activity that the general partner determines would
cause us to be treated as an association taxable as a
corporation or otherwise taxable as an entity for federal income
tax purposes.
Although our general partner has the ability to cause us, our
operating company or its subsidiaries to engage in activities
other than the refining and marketing of fuel products and
specialty hydrocarbon products, our general partner has no
current plans to do so and may decline to do so free of any
fiduciary duty or obligation whatsoever to us or the limited
partners, including any duty to act in good faith or in the best
interests of us or the limited partners. Our general partner is
authorized in general to perform all acts it determines to be
necessary or appropriate to carry out our purposes and to
conduct our business.
Each limited partner, and each person who acquires a unit from a
unitholder, by accepting the common unit, automatically grants
to our general partner and, if appointed, a liquidator, a power
of attorney to, among other things, execute and file documents
required for our qualification, continuance or dissolution. The
power of attorney also grants our general partner the authority
to amend, and to make consents and waivers, under our
partnership agreement.
Capital Contributions
Unitholders are not obligated to make additional capital
contributions, except as described below under
“— Limited Liability.”
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Voting Rights
The following is a summary of the unitholder vote required for
the matters specified below. Various matters requiring the
approval of a “unit majority” require:
•
during the subordination period, the approval of a majority of
the common units, excluding those common units held by our
general partner and its affiliates, and a majority of the
subordinated units, voting as separate classes; and
•
after the subordination period, the approval of a majority of
the common units.
In voting their common and subordinated units, our general
partner and its affiliates will have no fiduciary duty or
obligation whatsoever to us or the limited partners, including
any duty to act in good faith or in the best interests of us and
our limited partners. For any action that is to be approved at a
meeting of unitholders, the holders of a majority of the
outstanding units of the class or classes for which a meeting
has been called represented in person or by proxy will
constitute a quorum unless any action by the unitholders
requires approval by holders of a greater percentage of the
units, in which case the quorum will be the greater percentage.
Please read “— Meetings; Voting.”
Issuance of additional units of equal rank with the common units
during the subordination period
Unit majority, with exceptions described under
“— Issuance of Additional Securities.”
Issuance of units senior to the common units during the
subordination period
Unit majority.
Issuance of units junior to the common units during the
subordination period
No approval right.
Issuance of additional units after the subordination period
No approval right.
Amendment of our partnership agreement
Certain amendments may be made by the general partner without
the approval of the unitholders. Other amendments generally
require the approval of a unit majority. Please read
“— Amendment of the Partnership Agreement.”
Merger of our partnership or the sale of all or substantially
all of our assets
Unit majority in certain circumstances. Please read
“— Merger, Sale or Other Disposition of
Assets.”
Dissolution of our partnership
Unit majority. Please read “— Termination and
Dissolution.”
Continuation of the business of our partnership upon dissolution
Unit majority. Please read “— Termination and
Dissolution.”
Withdrawal of our general partner
Under most circumstances, the approval of a majority of the
common units, excluding common units held by our general partner
and its affiliates, is required for the withdrawal of our
general partner prior to December 31, 2015 in a manner that
would cause a dissolution of our partnership. Please read
“— Withdrawal or Removal of the General
Partner.”
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Removal of our general partner
Not less than
662/3
% of the outstanding units, including units held by our
general partner and its affiliates. Please read
“— Withdrawal or Removal of the General
Partner.”
Transfer of the general partner interest
Our general partner may transfer all, but not less than all, of
its general partner interest in us without a vote of our
unitholders to an affiliate or another person in connection with
its merger or consolidation with or into, or sale of all or
substantially all of its assets to, such person. The approval of
a majority of the common units, excluding common units held by
our general partner and its affiliates, is required in other
circumstances for a transfer of the general partner interest to
a third party prior to December 31, 2015. Please read
“— Transfer of General Partner Interest.”
Transfer of incentive distribution rights
Except for transfers to an affiliate or another person as part
of our general partner’s merger or consolidation, sale of
all or substantially all of its assets or the sale of all of the
ownership interests in such holder, the approval of a majority
of the common units, excluding common units held by the general
partner and its affiliates, is required in most circumstances
for a transfer of the incentive distribution rights to a third
party prior to December 31, 2015. Please read
“— Transfer of Incentive Distribution
Rights.”
Transfer of ownership interests in our general partner
No approval required at any time. Please read
“— Transfer of Ownership Interests in Our General
Partner.”
Limited Liability
Assuming that a limited partner does not participate in the
control of our business within the meaning of the Delaware Act
and that he otherwise acts in conformity with the provisions of
the partnership agreement, his liability under the Delaware Act
will be limited, subject to possible exceptions, to the amount
of capital he is obligated to contribute to us for his common
units plus his share of any undistributed profits and assets. If
it were determined, however, that the right, or exercise of the
right, by the limited partners as a group:
•
to remove or replace our general partner;
•
to approve some amendments to our partnership agreement; or
•
to take other action under our partnership agreement;
constituted “participation in the control” of our
business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for our obligations
under the laws of Delaware, to the same extent as our general
partner. This liability would extend to persons who transact
business with us who reasonably believe that the limited partner
is a general partner. Neither our partnership agreement nor the
Delaware Act specifically provides for legal recourse against
the general partner if a limited partner were to lose limited
liability through any fault of the general partner. While this
does not mean that a limited partner could not seek legal
recourse, we know of no precedent for this type of a claim in
Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if, after the distribution, all
liabilities of the limited partnership, other than liabilities
to partners on account of
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their partnership interests and liabilities for which the
recourse of creditors is limited to specific property of the
partnership, would exceed the fair value of the assets of the
limited partnership. For the purpose of determining the fair
value of the assets of a limited partnership, the Delaware Act
provides that the fair value of property subject to liability
for which recourse of creditors is limited shall be included in
the assets of the limited partnership only to the extent that
the fair value of that property exceeds the nonrecourse
liability. The Delaware Act provides that a limited partner who
receives a distribution and knew at the time of the distribution
that the distribution was in violation of the Delaware Act shall
be liable to the limited partnership for the amount of the
distribution for three years. Under the Delaware Act, a
substituted limited partner of a limited partnership is liable
for the obligations of his assignor to make contributions to the
partnership, except that such person is not obligated for
liabilities unknown to him at the time he became a limited
partner and that could not be ascertained from the partnership
agreement.
Our subsidiaries conduct business in 20 states. Maintenance
of our limited liability as a member of our operating company
may require compliance with legal requirements in the
jurisdictions in which our operating company conducts business,
including qualifying our subsidiaries to do business there.
Limitations on the liability of limited partners for the
obligations of a limited partner have not been clearly
established in many jurisdictions. If, by virtue of our
membership interest in our operating company or otherwise, it
were determined that we were conducting business in any state
without compliance with the applicable limited partnership or
limited liability company statute, or that the right or exercise
of the right by the limited partners as a group to remove or
replace the general partner, to approve some amendments to our
partnership agreement, or to take other action under the
partnership agreement constituted “participation in the
control” of our business for purposes of the statutes of
any relevant jurisdiction, then the limited partners could be
held personally liable for our obligations under the law of that
jurisdiction to the same extent as our general partner under the
circumstances. We will operate in a manner that our general
partner considers reasonable and necessary or appropriate to
preserve the limited liability of the limited partners.
Issuance of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities for the
consideration and on the terms and conditions determined by our
general partner without the approval of the unitholders. During
the subordination period, however, except as we discuss in the
following paragraph, we may not issue equity securities ranking
senior to the common units or an aggregate of more than
6,533,000 additional common units or units on a parity with the
common units, in each case, without the approval of the holders
of a unit majority.
During the subordination period or thereafter, we may issue an
unlimited number of common units without the approval of the
unitholders as follows:
•
upon exercise of the underwriters’ option to purchase
additional units;
•
upon conversion of the subordinated units;
•
under employee benefits plans;
•
upon conversion of the general partner interest and incentive
distribution rights as a result of a withdrawal or removal of
our general partner;
•
upon conversion of units of equal rank with the common units
into common units or other parity units under certain
circumstances;
•
in the event of a combination or subdivision of common units;
•
in connection with an acquisition or an expansion capital
improvement that increases cash flow from operations per unit on
an estimated pro forma basis;
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•
if the proceeds of the issuance are used to repay indebtedness,
the cost of which to service is greater than the distribution
obligations associated with the units issued in connection with
its retirement; or
•
in connection with the redemption of common units or other
equity interests of equal rank with the common units from the
net proceeds of an issuance of common units or parity units, but
only if the redemption price equals the net proceeds per unit,
before expenses, to us.
Until the time that our Shreveport refinery expansion project is
put into commercial service, the common units to be issued in
connection with this offering will be deemed to constitute a
portion of the up to 6,533,000 common units we are permitted to
issue during the subordination period without obtaining
unitholder approval and will reduce the number of additional
common units we may issue in the future without obtaining
unitholder approval accordingly. However, we anticipate that our
Shreveport refinery expansion project will increase cash flow
from operations per unit upon its completion. If this occurs,
the common units we issue in this offering that are used to pay
for such expansion project will be added back to the number of
additional common units we may issue in the future without
unitholder approval.
It is possible that we will fund acquisitions through the
issuance of additional common units, subordinated units or other
partnership securities. Holders of any additional common units
we issue will be entitled to share equally with the
then-existing holders of common units in our distributions of
available cash. In addition, the issuance of additional common
units or other partnership securities may dilute the value of
the interests of the then-existing holders of common units in
our net assets.
In accordance with Delaware law and the provisions of our
partnership agreement, we may also issue additional partnership
securities that, as determined by our general partner, may have
special voting rights to which the common units are not
entitled. In addition, our partnership agreement does not
prohibit the issuance by our subsidiaries of equity securities,
which may effectively rank senior to the common units.
Upon issuance of additional partnership securities, our general
partner will be entitled, but not required, to make additional
capital contributions to the extent necessary to maintain its 2%
general partner interest in us. The general partner’s 2%
interest in us will be reduced if we issue additional units in
the future and our general partner does not contribute a
proportionate amount of capital to us to maintain its 2% general
partner interest. Moreover, our general partner will have the
right, which it may from time to time assign in whole or in part
to any of its affiliates, to purchase common units, subordinated
units or other partnership securities whenever, and on the same
terms that, we issue those securities to persons other than our
general partner and its affiliates, to the extent necessary to
maintain the percentage interest of the general partner and its
affiliates, including such interest represented by common units
and subordinated units, that existed immediately prior to each
issuance. Otherwise, under our partnership agreement, the
holders of common units will not have preemptive rights to
acquire additional common units or other partnership securities.
Amendment of the Partnership Agreement
General. Amendments to our partnership agreement
may be proposed only by or with the consent of our general
partner. However, our general partner will have no duty or
obligation to propose any amendment and may decline to do so
free of any fiduciary duty or obligation whatsoever to us or the
limited partners, including any duty to act in good faith or in
the best interests of us or the limited partners. In order to
adopt a proposed amendment, other than the amendments discussed
below, our general partner is required to seek written approval
of the holders of the number of units required to approve the
amendment or call a meeting of the limited partners to consider
and vote upon the proposed amendment. Except as described below,
an amendment must be approved by a unit majority.
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Prohibited Amendments. No amendment may be made
that would:
•
enlarge the obligations of any limited partner without its
consent, unless approved by at least a majority of the type or
class of limited partner interests so affected; or
•
enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable by us to our general partner
or any of its affiliates without the consent of our general
partner, which consent may be given or withheld at its option.
The provision of our partnership agreement preventing the
amendments having the effects described in any of the clauses
above can be amended upon the approval of the holders of at
least 90% of the outstanding units voting together as a single
class (including units owned by our general partner and its
affiliates). Upon completion of the offering, our general
partner and its affiliates will own approximately 64.0% of the
outstanding units.
No Unitholder Approval. Our general partner may
generally make amendments to our partnership agreement without
the approval of any limited partner or assignee to reflect:
•
a change in our name, the location of our principal place of our
business, our registered agent or our registered office;
•
the admission, substitution, withdrawal or removal of partners
in accordance with our partnership agreement;
•
a change that our general partner determines to be necessary or
appropriate to qualify or continue our qualification as a
limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or
to ensure that neither we nor the operating company nor any of
its subsidiaries will be treated as an association taxable as a
corporation or otherwise taxed as an entity for federal income
tax purposes;
•
an amendment that is necessary, in the opinion of our counsel,
to prevent us or our general partner or its directors, officers,
agents or trustees from in any manner being subjected to the
provisions of the Investment Company Act of 1940, the Investment
Advisors Act of 1940, or “plan asset” regulations
adopted under the Employee Retirement Income Security Act of
1974, or ERISA, whether or not substantially similar to plan
asset regulations currently applied or proposed;
•
an amendment that our general partner determines to be necessary
or appropriate for the authorization of additional partnership
securities or rights to acquire partnership securities;
•
any amendment expressly permitted in our partnership agreement
to be made by our general partner acting alone;
•
an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of our
partnership agreement;
•
any amendment that our general partner determines to be
necessary or appropriate for the formation by us of, or our
investment in, any corporation, partnership or other entity, as
otherwise permitted by our partnership agreement;
•
a change in our fiscal year or taxable year and related changes;
•
mergers with or conveyances to another limited liability entity
that is newly formed and has no assets, liabilities or
operations at the time of the merger or conveyance other than
those it receives by way of the merger or conveyance; or
•
any other amendments substantially similar to any of the matters
described in the bullet points above.
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In addition, our general partner may make amendments to our
partnership agreement without the approval of any limited
partner or assignee in connection with a merger or consolidation
approved in connection with our partnership agreement, or if our
general partner determines that those amendments:
•
do not adversely affect the limited partners (or any particular
class of limited partners) in any material respect;
•
are necessary or appropriate to satisfy any requirements,
conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute;
•
are necessary or appropriate to facilitate the trading of
limited partner interests or to comply with any rule,
regulation, guideline or requirement of any securities exchange
on which the limited partner interests are or will be listed for
trading;
•
are necessary or appropriate for any action taken by our general
partner relating to splits or combinations of units under the
provisions of our partnership agreement; or
•
are required to effect the intent expressed in this prospectus
or the intent of the provisions of our partnership agreement or
are otherwise contemplated by our partnership agreement.
Opinion of Counsel and Unitholder Approval. Our
general partner will not be required to obtain an opinion of
counsel that an amendment will not result in a loss of limited
liability to the limited partners or result in our being treated
as an entity for federal income tax purposes in connection with
any of the amendments described under “— No
Unitholder Approval.” No other amendments to our
partnership agreement will become effective without the approval
of holders of at least 90% of the outstanding units voting as a
single class unless we first obtain an opinion of counsel to the
effect that the amendment will not affect the limited liability
under applicable law of any of our limited partners.
In addition to the above restrictions, any amendment that would
have a material adverse effect on the rights or preferences of
any type or class of outstanding units in relation to other
classes of units will require the approval of at least a
majority of the type or class of units so affected. Any
amendment that reduces the voting percentage required to take
any action is required to be approved by the affirmative vote of
limited partners whose aggregate outstanding units constitute
not less than the voting requirement sought to be reduced.
Merger, Sale or Other Disposition of Assets
A merger or consolidation of us requires the prior consent of
our general partner. However, our general partner will have no
duty or obligation to consent to any merger or consolidation and
may decline to do so free of any fiduciary duty or obligation
whatsoever to us or the limited partners, including any duty to
act in good faith or in the best interest of us or the limited
partners.
In addition, our partnership agreement generally prohibits our
general partner without the prior approval of the holders of a
unit majority, from causing us to, among other things, sell,
exchange or otherwise dispose of all or substantially all of our
assets in a single transaction or a series of related
transactions, including by way of merger, consolidation or other
combination, or approving on our behalf the sale, exchange or
other disposition of all or substantially all of the assets of
our subsidiaries. Our general partner may, however, mortgage,
pledge, hypothecate or grant a security interest in all or
substantially all of our assets without that approval. Our
general partner may also sell all or substantially all of our
assets under a foreclosure or other realization upon those
encumbrances without that approval. Finally, our general partner
may consummate any merger without the prior approval of our
unitholders if we are the surviving entity in the transaction,
the transaction would not result in a material amendment to our
partnership agreement, each of our
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units will be an identical unit of our partnership following the
transaction, and the units to be issued do not exceed 20% of our
outstanding units immediately prior to the transaction.
If the conditions specified in our partnership agreement are
satisfied, our general partner may convert us or any of our
subsidiaries into a new limited liability entity or merge us or
any of our subsidiaries into, or convey all of our assets to, a
newly formed entity if the sole purpose of that merger or
conveyance is to effect a mere change in our legal form into
another limited liability entity. The unitholders are not
entitled to dissenters’ rights of appraisal under our
partnership agreement or applicable Delaware law in the event of
a conversion, merger or consolidation, a sale of substantially
all of our assets or any other transaction or event.
Termination and Dissolution
We will continue as a limited partnership until terminated under
our partnership agreement. We will dissolve upon:
•
the election of our general partner to dissolve us, if approved
by the holders of units representing a unit majority;
•
there being no limited partners, unless we are continued without
dissolution in accordance with applicable Delaware law;
•
the entry of a decree of judicial dissolution of our
partnership; or
•
the withdrawal or removal of our general partner or any other
event that results in its ceasing to be our general partner
other than by reason of a transfer of its general partner
interest in accordance with our partnership agreement or
withdrawal or removal following approval and admission of a
successor.
Upon a dissolution under the last clause above, the holders of a
unit majority may also elect, within specific time limitations,
to continue our business on the same terms and conditions
described in our partnership agreement by appointing as a
successor general partner an entity approved by the holders of
units representing a unit majority, subject to our receipt of an
opinion of counsel to the effect that:
•
the action would not result in the loss of limited liability of
any limited partner; and
•
neither our partnership, our operating company nor any of our
other subsidiaries would be treated as an association taxable as
a corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of that right to continue.
Liquidation and Distribution of Proceeds
Upon our dissolution, unless our business is continued as
described above, the liquidator authorized to wind up our
affairs will, acting with all of the powers of our general
partner that are necessary or appropriate to liquidate our
assets and apply the proceeds of the liquidation as provided in
“How We Make Cash Distributions — Cash
Distributions — Distributions of Cash upon
Liquidation.” The liquidator may defer liquidation or
distribution of our assets for a reasonable period of time or
distribute assets to partners in kind if it determines that a
sale would be impractical or would cause undue loss to our
partners.
Withdrawal or Removal of the General Partner
Except as described below, our general partner has agreed not to
withdraw voluntarily as our general partner prior to
December 31, 2015 without obtaining the approval of the
holders of at least a majority of the outstanding common units,
excluding common units held by the general partner and its
affiliates, and furnishing an opinion of counsel regarding
limited liability and tax matters. On or after December 31,
2015, our general partner may withdraw as general partner
without first obtaining
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approval of any unitholder by giving 90 days’ written
notice, and that withdrawal will not constitute a violation of
our partnership agreement. Notwithstanding the information
above, our general partner may withdraw without unitholder
approval upon 90 days’ notice to the limited partners
if at least 50% of the outstanding common units are held or
controlled by one person and its affiliates other than the
general partner and its affiliates. In addition, the partnership
agreement permits our general partner in some instances to sell
or otherwise transfer all of its general partner interest in us
without the approval of the unitholders. Please read
“— Transfer of General Partner Interest” and
“— Transfer of Incentive Distribution
Rights.”
Upon withdrawal of our general partner under any circumstances,
other than as a result of a transfer by our general partner of
all or a part of its general partner interest in us, the holders
of a unit majority, voting as separate classes, may select a
successor to that withdrawing general partner. If a successor is
not elected, or is elected but an opinion of counsel regarding
limited liability and tax matters cannot be obtained, we will be
dissolved, wound up and liquidated, unless within a specified
period after that withdrawal, the holders of a unit majority
agree in writing to continue our business and to appoint a
successor general partner. Please read
“— Termination and Dissolution.”
Our general partner may not be removed unless that removal is
approved by the vote of the holders of not less than
662/3%
of the outstanding units, voting together as a single class,
including units held by our general partner and its affiliates,
and we receive an opinion of counsel regarding limited liability
and tax matters. Any removal of our general partner is also
subject to the approval of a successor general partner by the
vote of the holders of a majority of the outstanding common
units and subordinated units, voting as separate classes. The
ownership of more than
331/3
% of the outstanding units by our general partner and its
affiliates would give them the practical ability to prevent our
general partner’s removal. At the closing of this offering,
our general partner and its affiliates will own an aggregate of
64.0% of the outstanding units.
Our partnership agreement also provides that if our general
partner is removed as our general partner under circumstances
where cause does not exist and units held by the general partner
and its affiliates are not voted in favor of that removal:
•
the subordination period will end, and all outstanding
subordinated units will immediately convert into common units on
a one-for-one basis;
•
any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
•
our general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests
based on the fair market value of those interests at that time.
In the event of removal of a general partner under circumstances
where cause exists or withdrawal of a general partner where that
withdrawal violates our partnership agreement, a successor
general partner will have the option to purchase the general
partner interest and incentive distribution rights of the
departing general partner for a cash payment equal to the fair
market value of those interests. Under all other circumstances
where a general partner withdraws or is removed by the limited
partners, the departing general partner will have the option to
require the successor general partner to purchase the general
partner interest of the departing general partner and its
incentive distribution rights for fair market value. In each
case, this fair market value will be determined by agreement
between the departing general partner and the successor general
partner. If no agreement is reached, an independent investment
banking firm or other independent expert selected by the
departing general partner and the successor general partner will
determine the fair market value. Or, if the departing general
partner and the successor general partner cannot agree upon an
expert, then an expert chosen by agreement of the experts
selected by each of them will determine the fair market value.
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If the option described above is not exercised by either the
departing general partner or the successor general partner, the
departing general partner’s general partner interest and
its incentive distribution rights will automatically convert
into common units equal to the fair market value of those
interests as determined by an investment banking firm or other
independent expert selected in the manner described in the
preceding paragraph.
In addition, we will be required to reimburse the departing
general partner for all amounts due the departing general
partner, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred for the
termination of any employees employed by the departing general
partner or its affiliates for our benefit.
Transfer of General Partner Interest
Except for transfer by our general partner of all, but not less
than all, of its general partner interest in our partnership to:
•
an affiliate of our general partner (other than an
individual); or
•
another entity as part of the merger or consolidation of our
general partner with or into another entity or the transfer by
our general partner of all or substantially all of its assets to
another entity,
our general partner may not transfer all or any part of its
general partner interest in our partnership to another person
prior to December 31, 2015 without the approval of the
holders of at least a majority of the outstanding common units,
excluding common units held by our general partner and its
affiliates. As a condition of this transfer, the transferee must
assume, among other things, the rights and duties of our general
partner, agree to be bound by the provisions of our partnership
agreement, and furnish an opinion of counsel regarding limited
liability and tax matters. On or after December 31, 2015,
our general partner interest will be freely transferable.
Our general partner and its affiliates may, at any time,
transfer units to one or more persons, without unitholder
approval, except that they may not transfer subordinated units
to us.
Transfer of Ownership Interests in Our General
Partner
At any time, the members of our general partner may sell or
transfer all or part of their membership interests in our
general partner to an affiliate or third party without the
approval of our unitholders.
Transfer of Incentive Distribution Rights
Our general partner or its affiliates or a subsequent holder may
transfer its incentive distribution rights to an affiliate of
the holder (other than an individual) or another entity as part
of the merger or consolidation of such holder with or into
another entity, the sale of all of the ownership interest of the
holder or the sale of all or substantially all of its assets to,
that entity without the prior approval of the unitholders. Prior
to December 31, 2015, other transfers of incentive
distribution rights will require the affirmative vote of holders
of a majority of the outstanding common units, excluding common
units held by our general partner and its affiliates. On or
after December 31, 2015, the incentive distribution rights
will be freely transferable.
Change of Management Provisions
Our partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to
remove Calumet GP, LLC as our general partner or otherwise
change our management. If any person or group other than our
general partner and its affiliates acquires beneficial ownership
of 20% or more of any class of units, that person or group loses
voting rights on all of its units. This loss of voting rights
does not apply to any person or group that
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acquires the units from our general partner or its affiliates
and any transferees of that person or group approved by our
general partner or to any person or group who acquires the units
with the prior approval of the board of directors of our general
partner.
Our partnership agreement also provides that if our general
partner is removed under circumstances where cause does not
exist and units held by our general partner and its affiliates
are not voted in favor of that removal:
•
the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a one-for-one basis;
•
any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
•
our general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests.
Limited Call Right
If at any time our general partner and its affiliates own more
than 80% of the then-issued and outstanding limited partner
interests of any class, our general partner will have the right,
but not the obligation, which right may be assigned in whole or
in part to any of its affiliates or to us, to acquire all, but
not less than all, of the remaining partnership securities of
the class held by unaffiliated persons as of a record date to be
selected by our general partner, on at least 10 but not more
than 60 days notice. The purchase price in the event of
this purchase is the greater of:
•
the highest cash price paid by either of our general partner or
any of its affiliates for any partnership securities of the
class purchased within the 90 days preceding the date on
which our general partner first mails notice of its election to
purchase those partnership securities; and
•
the current market price as of the date three days before the
date the notice is mailed.
As a result of our general partner’s right to purchase
outstanding partnership securities, a holder of partnership
securities may have his partnership securities purchased at an
undesirable time or price. The tax consequences to a unitholder
of the exercise of this call right are the same as a sale by
that unitholder of his common units in the market. Please read
“Material Tax Consequences — Disposition of
Common Units.”
Meetings; Voting
Except as described below regarding a person or group owning 20%
or more of any class of units then outstanding, unitholders who
are record holders of units on the record date will be entitled
to notice of, and to vote at, meetings of our limited partners
and to act upon matters for which approvals may be solicited.
Our general partner does not anticipate that any meeting of
unitholders will be called in the foreseeable future. Any action
that is required or permitted to be taken by the unitholders may
be taken either at a meeting of the unitholders or without a
meeting if consents in writing describing the action so taken
are signed by holders of the number of units necessary to
authorize or take that action at a meeting. Meetings of the
unitholders may be called by our general partner or by
unitholders owning at least 20% of the outstanding units of the
class for which a meeting is proposed. Unitholders may vote
either in person or by proxy at meetings. The holders of a
majority of the outstanding units of the class or classes for
which a meeting has been called represented in person or by
proxy will constitute a quorum unless any action by the
unitholders requires approval by holders of a greater percentage
of the units, in which case the quorum will be the greater
percentage.
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Each record holder of a unit has a vote according to his
percentage interest in us, although additional limited partner
interests having special voting rights could be issued. Please
read “— Issuance of Additional Securities.”
However, if at any time any person or group, other than our
general partner and its affiliates, or a direct or subsequently
approved transferee of our general partner or its affiliates,
acquires, in the aggregate, beneficial ownership of 20% or more
of any class of units then outstanding, that person or group
will lose voting rights on all of its units and the units may
not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of unitholders,
calculating required votes, determining the presence of a quorum
or for other similar purposes. Common units held in nominee or
street name account will be voted by the broker or other nominee
in accordance with the instruction of the beneficial owner
unless the arrangement between the beneficial owner and his
nominee provides otherwise. Except as our partnership agreement
otherwise provides, subordinated units will vote together with
common units as a single class.
Any notice, demand, request, report or proxy material required
or permitted to be given or made to record holders of common
units under our partnership agreement will be delivered to the
record holder by us or by the transfer agent.
Status as Limited Partner
Except as described under “— Limited
Liability,” the common units will be fully paid, and
unitholders will not be required to make additional
contributions. By transfer of common units in accordance with
our partnership agreement, each transferee of common units shall
be admitted as a limited partner with respect to the common
units transferred when such transfer and admission is reflected
in our books and records.
Non-Citizen Transferees
If we are or become subject to federal, state or local laws or
regulations that, in the reasonable determination of our general
partner, create a substantial risk of cancellation or forfeiture
of any property that we have an interest in because of the
nationality, citizenship or other related status of any limited
partner, we may redeem the units held by the limited partner at
their current market price. In order to avoid any cancellation
or forfeiture, our general partner may require each limited
partner to furnish information about his nationality,
citizenship or related status. If a limited partner fails to
furnish information about his nationality, citizenship or other
related status within 30 days after a request for the
information or our general partner determines after receipt of
the information that the limited partner is not an eligible
citizen, the limited partner may be treated as a non-citizen
transferee. A non-citizen transferee, is entitled to an interest
equivalent to that of a limited partner for the right to share
in allocations and distributions from us, including liquidating
distributions. A non-citizen transferee does not have the right
to vote his units and may not receive distributions in kind upon
our liquidation.
Indemnification
Under our partnership agreement, in most circumstances, we will
indemnify the following persons, to the fullest extent permitted
by law, from and against all losses, claims, damages or similar
events:
•
our general partner;
•
any departing general partner;
•
any person who is or was an affiliate of a general partner or
any departing general partner;
•
any person who is or was a director, officer, member, partner,
fiduciary or trustee of any entity set forth in the preceding
three bullet points;
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•
any person who is or was serving as director, officer, member,
partner, fiduciary or trustee of another person at the request
of our general partner or any departing general partner or any
of their affiliates (other than persons acting on a
fee-for-services basis); and
•
any person designated by our general partner.
Any indemnification under these provisions will only be out of
our assets. Unless it otherwise agrees, our general partner will
not be personally liable for, or have any obligation to
contribute or loan funds or assets to us to enable us to
effectuate, indemnification. We may purchase insurance against
liabilities asserted against and expenses incurred by persons
for our activities, regardless of whether we would have the
power to indemnify the person against liabilities under our
partnership agreement.
Reimbursement of Expenses
Our partnership agreement requires us to reimburse our general
partner for all direct and indirect expenses it incurs or
payments it makes on our behalf and all other expenses allocable
to us or otherwise incurred by our general partner in connection
with operating our business. These expenses include salary,
bonus, incentive compensation and other amounts paid to persons
who perform services for us or on our behalf and expenses
allocated to our general partner by its affiliates. The general
partner is entitled to determine in good faith the expenses that
are allocable to us.
Books and Reports
Our general partner is required to keep appropriate books of our
business at our principal offices. The books will be maintained
for both tax and financial reporting purposes on an accrual
basis. For tax and fiscal reporting purposes, our fiscal year is
the calendar year.
We will furnish or make available to record holders of common
units, within 120 days after the close of each fiscal year,
an annual report containing our audited financial statements and
a report on those financial statements by our independent public
accountants. Except for our fourth quarter, we will also furnish
or make available summary financial information within
90 days after the close of each quarter.
We will furnish each record holder of a unit with information
reasonably required for tax reporting purposes within
90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of partners can be
avoided. Our ability to furnish this summary information to
unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will
receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax
returns, regardless of whether he supplies us with information.
Right to Inspect Our Books and Records
Our partnership agreement provides that a limited partner can,
for a purpose reasonably related to his interest as a limited
partner, upon reasonable demand stating the purpose of such
demand and at his own expense, have furnished to him:
•
a current list of the name and last known address of each
partner;
•
a copy of our tax returns;
•
information as to the amount of cash, and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on
which each partner became a partner;
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•
copies of our partnership agreement, our certificate of limited
partnership, related amendments and powers of attorney under
which they have been executed;
•
information regarding the status of our business and financial
condition; and
•
any other information regarding our affairs as is just and
reasonable.
Our general partner may, and intends to, keep confidential from
the limited partners trade secrets or other information the
disclosure of which our general partner believes in good faith
is not in our best interests or that we are required by law or
by agreements with third parties to keep confidential.
Registration Rights
Under our partnership agreement, we have agreed to register for
resale under the Securities Act and applicable state securities
laws any common units, subordinated units or other partnership
securities proposed to be sold by our general partner or any of
its affiliates or their transferees if an exemption from the
registration requirements is not available. We have also agreed
to include on any registration statement we file any partnership
securities proposed to be sold by our general partner or its
affiliates or their transferees. These registration rights
continue for two years following any withdrawal or removal of
Calumet GP, LLC as our general partner. In connection with any
registration of this kind, we will indemnify each unitholder
participating in the registration and its officers, directors
and controlling persons from and against any liabilities under
the Securities Act or any state securities laws arising from the
registration statement or prospectus. We are obligated to pay
all expenses incidental to the registration, excluding
underwriting discounts and commissions. Please read “Units
Eligible for Future Sale.”
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered hereby, owners of our
general partner and certain of their affiliates will hold an
aggregate of 5,761,015 common units and 13,066,000 subordinated
units. All of the subordinated units will convert into common
units at the end of the subordination period and some may
convert earlier. The sale of these units could have an adverse
impact on the price of the common units or on any trading market
that may develop.
The common units sold in the offering will generally be freely
transferable without restriction or further registration under
the Securities Act, except that any common units owned by an
affiliate of ours may not be resold publicly except in
compliance with the registration requirements of the Securities
Act or under an exemption under Rule 144 or otherwise.
Rule 144 permits securities acquired by an affiliate of the
issuer to be sold into the market in an amount that does not
exceed, during any three-month period, the greater of:
•
1% of the total number of the securities outstanding; or
•
the average weekly reported trading volume of the common units
for the four calendar weeks prior to the sale.
Sales under Rule 144 are also subject to specific manner of
sale provisions, holding period requirements, notice
requirements and the availability of current public information
about us. A person who is not deemed to have been an affiliate
of ours at any time during the three months preceding a sale,
and who has beneficially owned his common units for at least two
years, would be entitled to sell common units under
Rule 144 without regard to the public information
requirements, volume limitations, manner of sale provisions and
notice requirements of Rule 144.
The partnership agreement does not restrict our ability to issue
any partnership securities at any time. Any issuance of
additional common units or other equity securities would result
in a corresponding decrease in the proportionate ownership
interest in us represented by, and could adversely affect the
cash distributions to and market price of, common units then
outstanding. Please read “The Partnership
Agreement — Issuance of Additional Securities.”
Under our partnership agreement, our general partner and its
affiliates and their transferees have the right to cause us to
register under the Securities Act and state securities laws the
offer and sale of any common units, subordinated units or other
partnership securities that they hold. Subject to the terms and
conditions of our partnership agreement, these registration
rights allow our general partner and its affiliates or their
assignees holding any units or other partnership securities to
require registration of any of these units or other partnership
securities and to include them in a registration by us of other
units, including units offered by us or by any unitholder.
Calumet GP, LLC will continue to have these registration rights
for two years following its withdrawal or removal as our general
partner. In connection with any registration of this kind, we
will indemnify each unitholder participating in the registration
and its officers, directors and controlling persons from and
against any liabilities under the Securities Act or any state
securities laws arising from the registration statement or
prospectus. We will bear all costs and expenses incidental to
any registration, excluding any underwriting discounts and
commissions. Except as described below, our general partner and
its affiliates may sell their units or other partnership
interests in private transactions at any time, subject to
compliance with applicable laws.
We, Fred M. Fehsenfeld, Jr. and certain related trusts, F.
William Grube and certain related trusts, The Heritage Group,
our general partner and the directors and executive officers of
our general partner, have agreed not to sell any common units
they beneficially own for a period of 90 days from the date
of this prospectus. For a description of these
lock-up provisions,
please read “Underwriting.”
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MATERIAL TAX CONSEQUENCES
This section is a discussion of the material tax considerations
that may be relevant to prospective unitholders who are
individual citizens or residents of the United States and,
unless otherwise noted in the following discussion, is the
opinion of Vinson & Elkins L.L.P., counsel to our
general partner and us, as to all material tax matters and all
legal conclusions insofar as it relates to matters of United
States federal income tax law and legal conclusions with respect
to those matters. This section is based upon current provisions
of the Internal Revenue Code, existing and proposed regulations
and current administrative rulings and court decisions, all of
which are subject to change. Later changes in these authorities
may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise
requires, references in this section to “us” or
“we” are references to Calumet Specialty Products
Partners, L.P. and our operating company.
The following discussion does not comment on all federal income
tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or
residents of the United States and has only limited application
to corporations, estates, trusts, nonresident aliens or other
unitholders subject to specialized tax treatment, such as
tax-exempt institutions, foreign persons, individual retirement
accounts (“IRAs”), real estate investment trusts
(“REITs”) or mutual funds. Accordingly, we urge each
prospective unitholder to consult, and depend on, his own tax
advisor in analyzing the federal, state, local and foreign tax
consequences particular to him of the ownership or disposition
of common units.
All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless
otherwise noted, are the opinion of Vinson & Elkins
L.L.P. and are, to the extent noted herein, based on the
accuracy of the representations made by us.
No ruling has been or will be requested from the IRS regarding
any matter affecting us or prospective unitholders. Instead, we
will rely on opinions of Vinson & Elkins L.L.P. Unlike
a ruling, an opinion of counsel represents only that
counsel’s best legal judgment and does not bind the IRS or
the courts. Accordingly, the opinions and statements made here
may not be sustained by a court if contested by the IRS. Any
contest of this sort with the IRS may materially and adversely
impact the market for the common units and the prices at which
common units trade. In addition, the costs of any contest with
the IRS, principally legal, accounting and related fees, will
result in a reduction in cash available for distribution to our
unitholders and our general partner and thus will be borne
indirectly by our unitholders and our general partner.
Furthermore, the tax treatment of us, or of an investment in us,
may be significantly modified by future legislative or
administrative changes or court decisions. Any modifications may
or may not be retroactively applied.
For the reasons described below, Vinson & Elkins L.L.P.
has not rendered an opinion with respect to the following
specific federal income tax issues: (1) the treatment of a
unitholder whose common units are loaned to a short seller to
cover a short sale of common units (please read
“— Tax Consequences of Unit Ownership —
Treatment of Short Sales”); (2) whether our monthly
convention for allocating taxable income and losses is permitted
by existing Treasury Regulations (please read
“— Disposition of Common Units —
Allocations Between Transferors and Transferees”); and
(3) whether our method for depreciating Section 743
adjustments is sustainable in certain cases (please read
“— Tax Consequences of Unit Ownership —
Section 754 Election”).
Partnership Status
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner of a partnership is
required to take into account his share of items of income,
gain, loss and deduction of the partnership in computing his
federal income tax liability, regardless of whether cash
distributions are made to him by the partnership. Distributions
by a partnership to a partner are generally not taxable unless
the amount of cash distributed is in excess of the
partner’s adjusted basis in his partnership interest.
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Section 7704 of the Internal Revenue Code provides that
publicly traded partnerships will, as a general rule, be taxed
as corporations. However, an exception, referred to as the
“Qualifying Income Exception,” exists with respect to
publicly traded partnerships of which 90% or more of the gross
income for every taxable year consists of “qualifying
income.” Qualifying income includes income and gains
derived from the refining, transportation, storage and marketing
of crude oil, natural gas and products thereof. Other types of
qualifying income include interest (other than from a financial
business), dividends, gains from the sale of real property and
gains from the sale or other disposition of capital assets held
for the production of income that otherwise constitutes
qualifying income. We estimate that less than 4% of our current
gross income is not qualifying income; however, this estimate
could change from time to time. Based upon and subject to this
estimate, the factual representations made by us and our general
partner and a review of the applicable legal authorities,
Vinson & Elkins L.L.P. is of the opinion that at least
90% of our current gross income constitutes qualifying income.
No ruling has been or will be sought from the IRS and the IRS
has made no determination as to our status for federal income
tax purposes or whether our operations generate “qualifying
income” under Section 7704 of the Internal Revenue
Code. Instead, we will rely on the opinion of Vinson &
Elkins L.L.P. that, based upon the Internal Revenue Code, its
regulations, published revenue rulings and court decisions and
the representations described below, we will be classified as a
partnership and our operating company will be disregarded as an
entity separate from us for federal income tax purposes.
In rendering its opinion, Vinson & Elkins L.L.P. has
relied on factual representations made by us and our general
partner. The representations made by us and our general partner
upon which Vinson & Elkins L.L.P. has relied are:
(a)
Neither we nor the operating company will elect to be treated as
a corporation; and
(b)
For each taxable year, more than 90% of our gross income will be
income that Vinson & Elkins L.L.P. has opined or will
opine is “qualifying income” within the meaning of
Section 7704(d) of the Internal Revenue Code.
If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery, we will be
treated as if we had transferred all of our assets, subject to
liabilities, to a newly formed corporation, on the first day of
the year in which we fail to meet the Qualifying Income
Exception, in return for stock in that corporation, and then
distributed that stock to the unitholders in liquidation of
their interests in us. This contribution and liquidation should
be tax-free to unitholders and us so long as we, at that time,
do not have liabilities in excess of the tax basis of our
assets. Thereafter, we would be treated as a corporation for
federal income tax purposes.
If we were taxable as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception
or otherwise, our items of income, gain, loss and deduction
would be reflected only on our tax return rather than being
passed through to the unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution
made to a unitholder would be treated as either taxable dividend
income, to the extent of our current or accumulated earnings and
profits, or, in the absence of earnings and profits, a
nontaxable return of capital, to the extent of the
unitholder’s tax basis in his common units, or taxable
capital gain, after the unitholder’s tax basis in his
common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a
unitholder’s cash flow and after-tax return and thus would
likely result in a substantial reduction of the value of the
units.
The discussion below is based on Vinson & Elkins
L.L.P.’s opinion that we will be classified as a
partnership for federal income tax purposes.
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Limited Partner Status
Unitholders who have become limited partners of Calumet
Specialty Products Partners, L.P. will be treated as partners of
Calumet Specialty Products Partners, L.P. for federal income tax
purposes. Also, unitholders whose common units are held in
street name or by a nominee and who have the right to direct the
nominee in the exercise of all substantive rights attendant to
the ownership of their common units will be treated as partners
of Calumet Specialty Products Partners, L.P. for federal income
tax purposes.
A beneficial owner of common units whose units have been
transferred to a short seller to complete a short sale would
appear to lose his status as a partner with respect to those
units for federal income tax purposes. Please read
“— Tax Consequences of Unit Ownership —
Treatment of Short Sales.”
Income, gain, deductions or losses would not appear to be
reportable by a unitholder who is not a partner for federal
income tax purposes, and any cash distributions received by a
unitholder who is not a partner for federal income tax purposes
would therefore appear to be fully taxable as ordinary income.
These holders are urged to consult their own tax advisors with
respect to their tax consequences of holding common units in
Calumet Specialty Products Partners, L.P.
The references to “unitholders” in the discussion that
follows are to persons who are treated as partners in Calumet
Specialty Products Partners, L.P. for federal income tax
purposes.
Tax Consequences of Unit Ownership
Flow-Through of Taxable Income. We will not pay
any federal income tax. Instead, each unitholder will be
required to report on his income tax return his share of our
income, gains, losses and deductions without regard to whether
corresponding cash distributions are received by him.
Consequently, we may allocate income to a unitholder even if he
has not received a cash distribution. Each unitholder will be
required to include in income his allocable share of our income,
gains, losses and deductions for our taxable year ending with or
within his taxable year. Our taxable year ends on
December 31.
Treatment of Distributions. Distributions by us to
a unitholder generally will not be taxable to the unitholder for
federal income tax purposes, except to the extent the amount of
any such cash distribution exceeds his tax basis in his common
units immediately before the distribution. Our cash
distributions in excess of a unitholder’s tax basis
generally will be considered to be gain from the sale or
exchange of the common units, taxable in accordance with the
rules described under “— Disposition of Common
Units.” Any reduction in a unitholder’s share of our
liabilities for which no partner, including the general partner,
bears the economic risk of loss, known as “nonrecourse
liabilities,” will be treated as a distribution of cash to
that unitholder. To the extent our distributions cause a
unitholder’s “at risk” amount to be less than
zero at the end of any taxable year, he must recapture any
losses deducted in previous years. Please read
“— Limitations on Deductibility of Losses.”
A decrease in a unitholder’s percentage interest in us
because of our issuance of additional common units will decrease
his share of our nonrecourse liabilities, and thus will result
in a corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income
to a unitholder, regardless of his tax basis in his common
units, if the distribution reduces the unitholder’s share
of our “unrealized receivables,” including
depreciation recapture, and/or substantially appreciated
“inventory items,” both as defined in the Internal
Revenue Code, and collectively, “Section 751
Assets.” To that extent, he will be treated as having been
distributed his proportionate share of the Section 751
Assets and having exchanged those assets with us in return for
the non-pro rata portion of the actual distribution made to him.
This latter deemed exchange will generally result in the
unitholder’s realization of ordinary income, which will
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equal the excess of (1) the non-pro rata portion of that
distribution over (2) the unitholder’s tax basis for
the share of Section 751 Assets deemed relinquished in the
exchange.
Ratio of Taxable Income to Distributions. We
estimate that a purchaser of common units in this offering who
owns those common units from the date of closing of this
offering through the record date for distributions for the
period ending December 31, 2008, will be allocated, on a
cumulative basis, an amount of federal taxable income for that
period that will be 20% or less of the cash distributed with
respect to that period. We anticipate that after the taxable
year ending December 31, 2008, the ratio of allocable
taxable income to cash distributions to the unitholders will
increase. These estimates are based upon the assumption that
gross income from operations will approximate the amount
required to make the minimum quarterly distribution on all units
and other assumptions with respect to capital expenditures
(including the prospective 2007 placed in service date of the
Shreveport refinery expansion), cash flow, net working capital
and anticipated cash distributions. These estimates and
assumptions are subject to, among other things, numerous
business, economic, regulatory, competitive and political
uncertainties beyond our control. Further, the estimates are
based on current tax law and tax reporting positions that we
will adopt and with which the IRS could disagree. Accordingly,
we cannot assure you that these estimates will prove to be
correct. The actual percentage of distributions that will
constitute taxable income could be higher or lower than our
estimate above, and any differences could be material and could
materially affect the value of the common units. For example,
the ratio of allocable taxable income to cash distributions to a
purchaser of common units in this offering will be greater, and
perhaps substantially greater, than our estimate with respect to
the period described above if:
•
the Shreveport refinery expansion is not placed into service in
2007,
•
gross income from operations exceeds the amount required to make
the minimum quarterly distribution on all units, yet we only
distribute the minimum quarterly distribution on all
units, or
•
we make a future offering of common units and use the proceeds
of the offering in a manner that does not produce substantial
additional deductions during the period described above, such as
to repay indebtedness outstanding at the time of this offering
or to acquire property that is not eligible for depreciation or
amortization for federal income tax purposes or that is
depreciable or amortizable at a rate significantly slower than
the rate applicable to our assets at the time of this offering.
Basis of Common Units. A unitholder’s initial
tax basis for his common units will be the amount he paid for
the common units plus his share of our nonrecourse liabilities.
That basis will be increased by his share of our income and by
any increases in his share of our nonrecourse liabilities. That
basis will be decreased, but not below zero, by distributions
from us, by the unitholder’s share of our losses, by any
decreases in his share of our nonrecourse liabilities and by his
share of our expenditures that are not deductible in computing
taxable income and are not required to be capitalized. A
unitholder will have no share of our debt that is recourse to
our general partner, but will have a share, generally based on
his share of profits, of our nonrecourse liabilities. Please
read “— Disposition of Common Units —
Recognition of Gain or Loss.”
Limitations on Deductibility of Losses. The
deduction by a unitholder of his share of our losses will be
limited to the tax basis in his units and, in the case of an
individual unitholder or a corporate unitholder, if more than
50% of the value of the corporate unitholder’s stock is
owned directly or indirectly by five or fewer individuals or
some tax-exempt organizations, to the amount for which the
unitholder is considered to be “at risk” with respect
to our activities, if that is less than his tax basis. A
unitholder must recapture losses deducted in previous years to
the extent that distributions cause his at risk amount to be
less than zero at the end of any taxable year. Losses disallowed
to a unitholder or recaptured as a result of these limitations
will carry forward and will be allowable to the extent that his
tax basis or at risk amount, whichever is the limiting factor,
is subsequently increased. Upon the taxable disposition of a
unit, any gain recognized by a unitholder
135
can be offset by losses that were previously suspended by the at
risk limitation but may not be offset by losses suspended by the
basis limitation. Any excess loss above that gain previously
suspended by the at risk or basis limitations is no longer
utilizable.
In general, a unitholder will be at risk to the extent of the
tax basis of his units, excluding any portion of that basis
attributable to his share of our nonrecourse liabilities,
reduced by any amount of money he borrows to acquire or hold his
units, if the lender of those borrowed funds owns an interest in
us, is related to the unitholder or can look only to the units
for repayment. A unitholder’s at risk amount will increase
or decrease as the tax basis of the unitholder’s units
increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of
our nonrecourse liabilities.
The passive loss limitations generally provide that individuals,
estates, trusts and some closely-held corporations and personal
service corporations can deduct losses from passive activities,
which are generally corporate or partnership activities in which
the taxpayer does not materially participate, only to the extent
of the taxpayer’s income from those passive activities. The
passive loss limitations are applied separately with respect to
each publicly traded partnership. Consequently, any passive
losses we generate will only be available to offset our passive
income generated in the future and will not be available to
offset income from other passive activities or investments,
including our investments or investments in other publicly
traded partnerships, or salary or active business income.
Passive losses that are not deductible because they exceed a
unitholder’s share of income we generate may be deducted in
full when he disposes of his entire investment in us in a fully
taxable transaction with an unrelated party. The passive
activity loss rules are applied after other applicable
limitations on deductions, including the at risk rules and the
basis limitation.
A unitholder’s share of our net income may be offset by any
of our suspended passive losses, but it may not be offset by any
other current or carryover losses from other passive activities,
including those attributable to other publicly traded
partnerships.
Limitations on Interest Deductions. The
deductibility of a non-corporate taxpayer’s
“investment interest expense” is generally limited to
the amount of that taxpayer’s “net investment
income.” Investment interest expense includes:
•
interest on indebtedness properly allocable to property held for
investment;
•
our interest expense attributed to portfolio income; and
•
the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
The computation of a unitholder’s investment interest
expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a unit.
Net investment income includes gross income from property held
for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than
interest, directly connected with the production of investment
income, but generally does not include gains attributable to the
disposition of property held for investment. The IRS has
indicated that net passive income earned by a publicly traded
partnership will be treated as investment income to its
unitholders. In addition, the unitholder’s share of our
portfolio income will be treated as investment income.
Entity-Level Collections. If we are required
or elect under applicable law to pay any federal, state, local
or foreign income tax on behalf of any unitholder or our general
partner or any former unitholder, we are authorized to pay those
taxes from our funds. That payment, if made, will be treated as
a distribution of cash to the unitholder on whose behalf the
payment was made. If the payment is made on behalf of a person
whose identity cannot be determined, we are authorized to treat
the payment as a distribution to all current unitholders. We are
authorized to amend our partnership agreement in the manner
necessary to maintain uniformity of intrinsic tax
characteristics of units and to adjust later distributions, so
that after giving effect to these distributions, the priority
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and characterization of distributions otherwise applicable under
our partnership agreement is maintained as nearly as is
practicable. Payments by us as described above could give rise
to an overpayment of tax on behalf of an individual unitholder
in which event the unitholder would be required to file a claim
in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and Deduction. In
general, if we have a net profit, our items of income, gain,
loss and deduction will be allocated among our general partner
and the unitholders in accordance with their percentage
interests in us. At any time that distributions are made to the
common units in excess of distributions to the subordinated
units, or incentive distributions are made to our general
partner, gross income will be allocated to the recipients to the
extent of these distributions. If we have a net loss for the
entire year, that loss will be allocated first to our general
partner and the unitholders in accordance with their percentage
interests in us to the extent of their positive capital accounts
and, second, to our general partner.
We will be treated as the successor of Calumet Predecessor for
federal income tax purposes. Specified items of our income,
gain, loss and deduction will be allocated to account for the
difference between the tax basis and fair market value of our
property at the time of the offering, referred to in this
discussion as “Contributed Property.” The effect of
these allocations to a unitholder purchasing common units in
this offering will be essentially the same as if the tax basis
of our assets were equal to their fair market value at the time
of this offering. In addition, items of recapture income will be
allocated to the extent possible to the unitholder who was
allocated the deduction giving rise to the treatment of that
gain as recapture income in order to minimize the recognition of
ordinary income by some unitholders. Finally, although we do not
expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be
allocated in such amount and manner as is needed to eliminate
the negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction,
other than an allocation required by the Internal Revenue Code
to eliminate the difference between a partner’s
“book” capital account, credited with the fair market
value of Contributed Property, and “tax” capital
account, credited with the tax basis of Contributed Property,
referred to in this discussion as the “Book-Tax
Disparity,” will generally be given effect for federal
income tax purposes in determining a partner’s share of an
item of income, gain, loss or deduction only if the allocation
has substantial economic effect. In any other case, a
partner’s share of an item will be determined on the basis
of his interest in us, which will be determined by taking into
account all the facts and circumstances, including:
•
his relative contributions to us;
•
the interests of all the partners in profits and losses;
•
the interest of all the partners in cash flow; and
•
the rights of all the partners to distributions of capital upon
liquidation.
Vinson & Elkins L.L.P. is of the opinion that, with the
exception of the issues described in “— Tax
Consequences of Unit Ownership — Section 754
Election” and “— Disposition of Common
Units — Allocations Between Transferors and
Transferees,” allocations under our partnership agreement
will be given effect for federal income tax purposes in
determining a partner’s share of an item of income, gain,
loss or deduction.
Treatment of Short Sales. A unitholder whose units
are loaned to a “short seller” to cover a short sale
of units may be considered as having disposed of those units. If
so, he would no longer be treated for tax purposes as a partner
with respect to those units during the period of the loan and
may recognize gain or loss from the disposition. As a result,
during this period:
•
any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
137
•
any cash distributions received by the unitholder as to those
units would be fully taxable; and
•
all of these distributions would appear to be ordinary income.
Vinson & Elkins L.L.P. has not rendered an opinion
regarding the treatment of a unitholder where common units are
loaned to a short seller to cover a short sale of common units;
therefore, unitholders desiring to assure their status as
partners and avoid the risk of gain recognition from a loan to a
short seller are urged to modify any applicable brokerage
account agreements to prohibit their brokers from borrowing
their units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of
partnership interests. Please also read
“— Disposition of Common Units —
Recognition of Gain or Loss.”
Alternative Minimum Tax. Each unitholder will be
required to take into account his distributive share of any
items of our income, gain, loss or deduction for purposes of the
alternative minimum tax. The current minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of
alternative minimum taxable income in excess of the exemption
amount and 28% on any additional alternative minimum taxable
income. Prospective unitholders are urged to consult with their
tax advisors as to the impact of an investment in units on their
liability for the alternative minimum tax.
Tax Rates. In general, the highest effective
United States federal income tax rate for individuals is
currently 35.0% and the maximum United States federal income tax
rate for net capital gains of an individual is currently 15.0%
if the asset disposed of was held for more than twelve months at
the time of disposition.
Section 754 Election. Calumet Predecessor
made, and we are bound by the election permitted by
Section 754 of the Internal Revenue Code. That election is
irrevocable without the consent of the IRS. The election will
generally permit us to adjust a common unit purchaser’s tax
basis in our assets (“inside basis”) under
Section 743(b) of the Internal Revenue Code to reflect his
purchase price. This election does not apply to a person who
purchases common units directly from us. The Section 743(b)
adjustment belongs to the purchaser and not to other
unitholders. For purposes of this discussion, a
unitholder’s inside basis in our assets will be considered
to have two components: (1) his share of our tax basis in
our assets (“common basis”) and (2) his
Section 743(b) adjustment to that basis.
Where the remedial allocation method is adopted (which we have
adopted as to property other than goodwill), the Treasury
Regulations under Section 743 of the Internal Revenue Code
require a portion of the Section 743(b) adjustment that is
attributable to recovery property to be depreciated over the
remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury
Regulation Section 1.167(c)-1(a)(6), a
Section 743(b) adjustment attributable to property subject
to depreciation under Section 167 of the Internal Revenue
Code, rather than cost recovery deductions under
Section 168, is generally required to be depreciated using
either the straight-line method or the 150% declining balance
method. Under our partnership agreement, our general partner is
authorized to take a position to preserve the uniformity of
units even if that position is not consistent with these
Treasury Regulations. Please read “— Uniformity
of Units.”
Although Vinson & Elkins L.L.P. is unable to opine as
to the validity of this approach because there is no controlling
authority on this issue, we intend to depreciate the portion of
a Section 743(b) adjustment attributable to unrealized
appreciation in the value of Contributed Property, to the extent
of any unamortized Book-Tax Disparity, using a rate of
depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the common basis
of the property, or treat that portion as non-amortizable to the
extent attributable to property the common basis of which is not
amortizable. This method is consistent with the regulations
under Section 743 of the Internal Revenue Code but is
arguably inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6), which is not
expected to directly apply to a material portion of our assets.
To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity,
138
we will apply the rules described in the Treasury Regulations
and legislative history. If we determine that this position
cannot reasonably be taken, we may take a depreciation or
amortization position under which all purchasers acquiring units
in the same month would receive depreciation or amortization,
whether attributable to common basis or a Section 743(b)
adjustment, based upon the same applicable rate as if they had
purchased a direct interest in our assets. This kind of
aggregate approach may result in lower annual depreciation or
amortization deductions than would otherwise be allowable to
some unitholders. Please read “— Uniformity of
Units.”
A Section 754 election is advantageous if the
transferee’s tax basis in his units is higher than the
units’ share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of
the election, the transferee would have, among other items, a
greater amount of depreciation and depletion deductions and his
share of any gain or loss on a sale of our assets would be less.
Conversely, a Section 754 election is disadvantageous if
the transferee’s tax basis in his units is lower than those
units’ share of the aggregate tax basis of our assets
immediately prior to the transfer. Thus, the fair market value
of the units may be affected either favorably or unfavorably by
the election. A basis adjustment is required regardless of
whether a Section 754 election is made in the case of a
transfer of an interest in us if we have a substantial
built-in loss
immediately after the transfer, or if we distribute property and
have a substantial basis reduction. Generally a
built-in loss or a
basis reduction is substantial if it exceeds $250,000.
The calculations involved in the Section 754 election are
complex and will be made on the basis of assumptions as to the
value of our assets and other matters. For example, the
allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue
Code. The IRS could seek to reallocate some or all of any
Section 743(b) adjustment allocated by us to our tangible
assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a
less accelerated method than our tangible assets. We cannot
assure you that the determinations we make will not be
successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed
altogether. Should the IRS require a different basis adjustment
to be made, and should, in our opinion, the expense of
compliance exceed the benefit of the election, we may seek
permission from the IRS to revoke our Section 754 election.
If permission is granted, a subsequent purchaser of units may be
allocated more income than he would have been allocated had the
election not been revoked.
Tax Treatment of Operations
Accounting Method and Taxable Year. We use the
year ending December 31 as our taxable year and the accrual
method of accounting for federal income tax purposes. Each
unitholder will be required to include in income his share of
our income, gain, loss and deduction for our taxable year ending
within or with his taxable year. In addition, a unitholder who
has a taxable year ending on a date other than December 31
and who disposes of all of his units following the close of our
taxable year but before the close of his taxable year must
include his share of our income, gain, loss and deduction in
income for his taxable year, with the result that he will be
required to include in income for his taxable year his share of
more than one year of our income, gain, loss and deduction.
Please read “— Disposition of Common
Units — Allocations Between Transferors and
Transferees.”
Initial Tax Basis, Depreciation and Amortization.
The tax basis of our assets will be used for purposes of
computing depreciation and cost recovery deductions and,
ultimately, gain or loss on the disposition of these assets. The
federal income tax burden associated with the difference between
the fair market value of our assets and their tax basis
immediately prior to this offering will be borne by our general
partner and its affiliates. Please read “— Tax
Consequences of Unit Ownership — Allocation of Income,
Gain, Loss and Deduction.”
To the extent allowable, we may elect to use the depreciation
and cost recovery methods that will result in the largest
deductions being taken in the early years after assets are
placed in service.
139
We may not be entitled to any amortization deductions with
respect to any goodwill held by us at the time of this offering.
Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain, determined by reference
to the amount of depreciation previously deducted and the nature
of the property, may be subject to the recapture rules and taxed
as ordinary income rather than capital gain. Similarly, a
unitholder who has taken cost recovery or depreciation
deductions with respect to property we own will likely be
required to recapture some or all of those deductions as
ordinary income upon a sale of his interest in us. Please read
“— Tax Consequences of Unit Ownership —
Allocation of Income, Gain, Loss and Deduction” and
“— Disposition of Common Units —
Recognition of Gain or Loss.”
The costs we incur in selling our units (called
“syndication expenses”) must be capitalized and cannot
be deducted currently, ratably or upon our termination. There
are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as
syndication expenses, which may not be amortized by us. The
underwriting discounts and commissions we incur will be treated
as syndication expenses.
Valuation and Tax Basis of Our Properties. The
federal income tax consequences of the ownership and disposition
of units will depend in part on our estimates of the relative
fair market values, and the initial tax bases, of our assets.
Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the
relative fair market value estimates ourselves. These estimates
and determinations of basis are subject to challenge and will
not be binding on the IRS or the courts. If the estimates of
fair market value or basis are later found to be incorrect, the
character and amount of items of income, gain, loss or
deductions previously reported by unitholders might change, and
unitholders might be required to adjust their tax liability for
prior years and incur interest and penalties with respect to
those adjustments.
Disposition of Common Units
Recognition of Gain or Loss. Gain or loss will be
recognized on a sale of units equal to the difference between
the amount realized and the unitholder’s tax basis for the
units sold. A unitholder’s amount realized will be measured
by the sum of the cash or the fair market value of other
property received by him plus his share of our nonrecourse
liabilities. Because the amount realized includes a
unitholder’s share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability
in excess of any cash received from the sale.
Prior distributions from us in excess of cumulative net taxable
income for a common unit that decreased a unitholder’s tax
basis in that common unit will, in effect, become taxable income
if the common unit is sold at a price greater than the
unitholder’s tax basis in that common unit, even if the
price received is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder,
other than a “dealer” in units, on the sale or
exchange of a unit held for more than one year will generally be
taxable as capital gain or loss. Capital gain recognized by an
individual on the sale of units held more than twelve months
will generally be taxed at a maximum rate of 15%. However, a
portion of this gain or loss will be separately computed and
taxed as ordinary income or loss under Section 751 of the
Internal Revenue Code to the extent attributable to assets
giving rise to depreciation recapture or other “unrealized
receivables” or to “inventory items” we own. The
term “unrealized receivables” includes potential
recapture items, including depreciation recapture. Ordinary
income attributable to unrealized receivables, inventory items
and depreciation recapture may exceed net taxable gain realized
upon the sale of a unit and may be recognized even if there is a
net taxable loss realized on the sale of a unit. Thus, a
unitholder may recognize both ordinary income and a capital
loss upon a sale of units. Net capital losses may offset capital
gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gains in the
case of corporations.
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The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Upon a sale or other disposition of less than all of
those interests, a portion of that tax basis must be allocated
to the interests sold using an “equitable
apportionment” method, which generally means that the tax
basis allocated to the interest sold equals an amount that bears
the same relation to the partner’s tax basis in his entire
interest in the partnership as the value of the interest sold
bears to the value of the partner’s entire interest in the
partnership. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling unitholder who can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. Thus, according to the ruling, a common
unitholder will be unable to select high or low basis common
units to sell as would be the case with corporate stock, but,
according to the regulations, may designate specific common
units sold for purposes of determining the holding period of
units transferred. A unitholder electing to use the actual
holding period of common units transferred must consistently use
that identification method for all subsequent sales or exchanges
of common units. A unitholder considering the purchase of
additional units or a sale of common units purchased in separate
transactions is urged to consult his tax advisor as to the
possible consequences of this ruling and application of the
regulations.
Specific provisions of the Internal Revenue Code affect the
taxation of some financial products and securities, including
partnership interests, by treating a taxpayer as having sold an
“appreciated” partnership interest, one in which gain
would be recognized if it were sold, assigned or terminated at
its fair market value, if the taxpayer or related persons
enter(s) into:
•
a short sale;
•
an offsetting notional principal contract; or
•
a futures or forward contract with respect to the partnership
interest or substantially identical property.
Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
the Treasury is also authorized to issue regulations that treat
a taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations Between Transferors and Transferees.
In general, our taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be
subsequently apportioned among the unitholders in proportion to
the number of units owned by each of them as of the opening of
the applicable exchange on the first business day of the month,
which we refer to in this prospectus as the “Allocation
Date.” However, gain or loss realized on a sale or other
disposition of our assets other than in the ordinary course of
business will be allocated among the unitholders on the
Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring units may be
allocated income, gain, loss and deduction realized after the
date of transfer.
The use of this method may not be permitted under existing
Treasury Regulations as there is no controlling authority on the
issue. Accordingly, Vinson & Elkins L.L.P. is unable to
opine on the validity of this method of allocating income and
deductions between unitholders. If this method is not allowed
under the Treasury Regulations, or only applies to transfers of
less than all of the unitholder’s interest, our taxable
income or losses might be reallocated among the unitholders. We
are authorized to revise our method of allocation between
unitholders, as well as unitholders whose interests vary during
a taxable year, to conform to a method permitted under future
Treasury Regulations.
141
A unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash
distribution for that quarter will be allocated items of our
income, gain, loss and deductions attributable to that quarter
but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who sells
any of his units is generally required to notify us in writing
of that sale within 30 days after the sale (or, if earlier,
January 15 of the year following the sale). A purchaser of units
who purchases units from another unitholder is also generally
required to notify us in writing of that purchase within
30 days after the purchase. Upon receiving such
notifications, we are required to notify the IRS of that
transaction and to furnish specified information to the
transferor and transferee. Failure to notify us of a purchase
may, in some cases, lead to the imposition of penalties.
However, these reporting requirements do not apply to a sale by
an individual who is a citizen of the United States and who
effects the sale or exchange through a broker who will satisfy
such requirements.
Constructive Termination. We will be considered to
have been terminated for tax purposes if there is a sale or
exchange of 50% or more of the total interests in our capital
and profits within a twelve-month period. A constructive
termination results in the closing of our taxable year for all
unitholders. In the case of a unitholder reporting on a taxable
year other than a fiscal year ending December 31, the
closing of our taxable year may result in more than twelve
months of our taxable income or loss being includable in his
taxable income for the year of termination. We would be required
to make new tax elections after a termination, including a new
election under Section 754 of the Internal Revenue Code,
and a termination would result in a deferral of our deductions
for depreciation. A termination could also result in penalties
if we were unable to determine that the termination had
occurred. Moreover, a termination might either accelerate the
application of, or subject us to, any tax legislation enacted
before the termination.
Uniformity of Units
Because we cannot match transferors and transferees of units, we
must maintain uniformity of the economic and tax characteristics
of the units to a purchaser of these units. In the absence of
uniformity, we may be unable to completely comply with a number
of federal income tax requirements, both statutory and
regulatory. A lack of uniformity can result from a literal
application of Treasury
Regulation Section 1.167(c)-1(a)(6). Any
non-uniformity could have a negative impact on the value of the
units. Please read “— Tax Consequences of Unit
Ownership — Section 754 Election.”
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized
Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful
life applied to the common basis of that property, or treat that
portion as nonamortizable, to the extent attributable to
property the common basis of which is not amortizable,
consistent with the regulations under Section 743 of the
Internal Revenue Code, even though that position may be
inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6), which is not
expected to directly apply to a material portion of our assets.
Please read “— Tax Consequences of Unit
Ownership — Section 754 Election.” To the
extent that the Section 743(b) adjustment is attributable
to appreciation in value in excess of the unamortized Book-Tax
Disparity, we will apply the rules described in the Treasury
Regulations and legislative history. If we determine that this
position cannot reasonably be taken, we may adopt a depreciation
and amortization position under which all purchasers acquiring
units in the same month would receive depreciation and
amortization deductions, whether attributable to a common basis
or Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our property. If this position is adopted, it may result in
lower annual depreciation and amortization deductions than would
otherwise be allowable to some unitholders and risk the loss of
depreciation and amortization deductions not taken in the year
that these deductions are otherwise allowable. This position
will not
142
be adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on
the unitholders. If we choose not to utilize this aggregate
method, we may use any other reasonable depreciation and
amortization method to preserve the uniformity of the intrinsic
tax characteristics of any units that would not have a material
adverse effect on the unitholders. The IRS may challenge any
method of depreciating the Section 743(b) adjustment
described in this paragraph. If this challenge were sustained,
the uniformity of units might be affected, and the gain from the
sale of units might be increased without the benefit of
additional deductions. Please read “— Disposition
of Common Units — Recognition of Gain or Loss.”
Tax-Exempt Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations and
other foreign persons raises issues unique to those investors
and, as described below, may have substantially adverse tax
consequences to them.
Employee benefit plans and most other organizations exempt from
federal income tax, including individual retirement accounts and
other retirement plans, are subject to federal income tax on
unrelated business taxable income. Virtually all of our income
allocated to a unitholder that is a tax-exempt organization will
be unrelated business taxable income and will be taxable to them.
Non-resident aliens and foreign corporations, trusts or estates
that own units will be considered to be engaged in business in
the United States because of the ownership of units. As a
consequence, they will be required to file federal tax returns
to report their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on their share of our
net income or gain. Moreover, under rules applicable to publicly
traded partnerships, we will withhold at the highest applicable
effective tax rate from cash distributions made quarterly to
foreign unitholders. Each foreign unitholder must obtain a
taxpayer identification number from the IRS and submit that
number to our transfer agent on a
Form W-8BEN or
applicable substitute form in order to obtain credit for these
withholding taxes. A change in applicable law may require us to
change these procedures.
In addition, because a foreign corporation that owns units will
be treated as engaged in a United States trade or business, that
corporation may be subject to the United States branch profits
tax at a rate of 30%, in addition to regular federal income tax,
on its share of our income and gain, as adjusted for changes in
the foreign corporation’s “U.S. net equity,”
which are effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated
by an income tax treaty between the United States and the
country in which the foreign corporate unitholder is a
“qualified resident.” In addition, this type of
unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue
Code.
Under a ruling of the IRS, a foreign unitholder who sells or
otherwise disposes of a unit will be subject to federal income
tax on gain realized on the sale or disposition of that unit to
the extent that this gain is effectively connected with a United
States trade or business of the foreign unitholder. Because a
foreign unitholder is considered to be engaged in business in
the United States by virtue of the ownership of units, under
this ruling a foreign unitholder who sells or otherwise disposes
of a unit generally will be subject to federal income tax on
gain realized on the sale or disposition of units. Apart from
the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the sale or disposition of a unit if he has
owned less than 5% in value of the units during the five-year
period ending on the date of the disposition and if the units
are regularly traded on an established securities market at the
time of the sale or disposition.
Administrative Matters
Information Returns and Audit Procedures. We
intend to furnish to each unitholder, within 90 days after
the close of each calendar year, specific tax information,
including a Schedule K-1, which describes his share of our
income, gain, loss and deduction for our preceding taxable year.
In
143
preparing this information, which will not be reviewed by
counsel, we will take various accounting and reporting
positions, some of which have been mentioned earlier, to
determine each unitholder’s share of income, gain, loss and
deduction. We cannot assure you that those positions will in all
cases yield a result that conforms to the requirements of the
Internal Revenue Code, Treasury Regulations or administrative
interpretations of the IRS. Neither we nor Vinson &
Elkins L.L.P. can assure prospective unitholders that the IRS
will not successfully contend in court that those positions are
impermissible. Any challenge by the IRS could negatively affect
the value of the units.
The IRS may audit our federal income tax information returns.
Adjustments resulting from an IRS audit may require each
unitholder to adjust a prior year’s tax liability, and
possibly may result in an audit of his return. Any audit of a
unitholder’s return could result in adjustments not related
to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for
purposes of federal tax audits, judicial review of
administrative adjustments by the IRS and tax settlement
proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership
proceeding rather than in separate proceedings with the
partners. The Internal Revenue Code requires that one partner be
designated as the “Tax Matters Partner” for these
purposes. The partnership agreement names Calumet GP, LLC as our
Tax Matters Partner.
The Tax Matters Partner will make some elections on our behalf
and on behalf of unitholders. In addition, the Tax Matters
Partner can extend the statute of limitations for assessment of
tax deficiencies against unitholders for items in our returns.
The Tax Matters Partner may bind a unitholder with less than a
1% profits interest in us to a settlement with the IRS unless
that unitholder elects, by filing a statement with the IRS, not
to give that authority to the Tax Matters Partner. The Tax
Matters Partner may seek judicial review, by which all the
unitholders are bound, of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek
judicial review, judicial review may be sought by any unitholder
having at least a 1% interest in profits or by any group of
unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go
forward, and each unitholder with an interest in the outcome may
participate.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is
not consistent with the treatment of the item on our return.
Intentional or negligent disregard of this consistency
requirement may subject a unitholder to substantial penalties.
Since we are the successor of Calumet Predecessor for federal
tax purposes, we may be subject to audit by the IRS for tax
periods preceding this offering. Liability for federal taxes
other than income taxes, such as employment taxes, is imposed
directly upon us, so any tax liability resulting from such an
audit may reduce cash available for distribution to unitholders.
Nominee Reporting. Persons who hold an interest in
us as a nominee for another person are required to furnish to us:
(a)
the name, address and taxpayer identification number of the
beneficial owner and the nominee;
(b)
whether the beneficial owner is:
(1)
a person that is not a United States person;
(2)
a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the
foregoing; or
(3)
a tax-exempt entity;
(c)
the amount and description of units held, acquired or
transferred for the beneficial owner; and
144
(d)
specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from
sales.
Brokers and financial institutions are required to furnish
additional information, including whether they are United States
persons and specific information on units they acquire, hold or
transfer for their own account. A penalty of $50 per
failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that
information to us. The nominee is required to supply the
beneficial owner of the units with the information furnished to
us.
Accuracy-Related and Assessable Penalties. An
additional tax equal to 20% of the amount of any portion of an
underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or
regulations, substantial understatements of income tax and
substantial valuation misstatements, is imposed by the Internal
Revenue Code. No penalty will be imposed, however, for any
portion of an underpayment if it is shown that there was a
reasonable cause for that portion and that the taxpayer acted in
good faith regarding that portion.
For individuals, a substantial understatement of income tax in
any taxable year exists if the amount of the understatement
exceeds the greater of 10% of the tax required to be shown on
the return for the taxable year or $5,000. The amount of any
understatement subject to penalty generally is reduced if any
portion is attributable to a position adopted on the return:
(1)
for which there is, or was, “substantial
authority”; or
(2)
as to which there is a reasonable basis and the pertinent facts
of that position are disclosed on the return.
If any item of income, gain, loss or deduction included in the
distributive shares of unitholders might result in that kind of
an “understatement” of income for which no
“substantial authority” exists, we must disclose the
pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for
unitholders to make adequate disclosure on their returns and to
take other actions as may be appropriate to permit unitholders
to avoid liability for this penalty. More stringent rules apply
to “tax shelters,” which we do not believe includes us.
A substantial valuation misstatement exists if the value of any
property, or the adjusted basis of any property, claimed on a
tax return is 200% or more of the amount determined to be the
correct amount of the valuation or adjusted basis. No penalty is
imposed unless the portion of the underpayment attributable to a
substantial valuation misstatement exceeds $5,000 ($10,000 for
most corporations). If the valuation claimed on a return is 400%
or more than the correct valuation, the penalty imposed
increases to 40%.
Reportable Transactions. If we were to engage in a
“reportable transaction,” we (and possibly you and
others) would be required to make a detailed disclosure of the
transaction to the IRS. A transaction may be a reportable
transaction based upon any of several factors, including the
fact that it is a type of tax avoidance transaction publicly
identified by the IRS as a “listed transaction” or
that it produces certain kinds of losses in excess of
$2 million. Our participation in a reportable transaction
could increase the likelihood that our federal income tax
information return (and possibly your tax return) would be
audited by the IRS. Please read “— Information
Returns and Audit Procedures.”
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
provisions of the American Jobs Creation Act of 2004:
•
accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at “— Accuracy-related
Penalties,”
145
•
for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability and
•
in the case of a listed transaction, an extended statute of
limitations.
We do not expect to engage in any “reportable
transactions.”
State, Local, Foreign and Other Tax Considerations
In addition to federal income taxes, you likely will be subject
to other taxes, such as state, local and foreign income taxes,
unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in
which you are a resident. Although an analysis of those various
taxes is not presented here, each prospective unitholder should
consider their potential impact on his investment in us. We own
property or do business in Arkansas, California, Connecticut,
Florida, Georgia, Indiana, Illinois, Kentucky, Louisiana,
Massachusetts, Mississippi, Missouri, New Jersey, New York,
Ohio, South Carolina, Pennsylvania, Texas, Utah and Virginia,
and each of these states, other than Texas and Florida, impose a
personal income tax on individuals and many impose an income tax
on corporations and other entities. We may also own property or
do business in other jurisdictions in the future. Although you
may not be required to file a return and pay taxes in some
jurisdictions because your income from that jurisdiction falls
below the filing and payment requirement, you will be required
to file income tax returns and to pay income taxes in many of
these jurisdictions in which we do business or own property and
may be subject to penalties for failure to comply with those
requirements. In some jurisdictions, tax losses may not produce
a tax benefit in the year incurred and may not be available to
offset income in subsequent taxable years. Some of the
jurisdictions may require us, or we may elect, to withhold a
percentage of income from amounts to be distributed to a
unitholder who is not a resident of the jurisdiction.
Withholding, the amount of which may be greater or less than a
particular unitholder’s income tax liability to the
jurisdiction, generally does not relieve a nonresident
unitholder from the obligation to file an income tax return.
Amounts withheld will be treated as if distributed to
unitholders for purposes of determining the amounts distributed
by us. Please read “— Tax Consequences of Unit
Ownership — Entity-Level Collections.” Based
on current law and our estimate of our future operations, the
general partner anticipates that any amounts required to be
withheld will not be material.
It is the responsibility of each unitholder to investigate
the legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult, and depend upon, his
tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all
state, local and foreign, as well as United States federal tax
returns, that may be required of him. Vinson & Elkins
L.L.P. has not rendered an opinion on the state, local or
foreign tax consequences of an investment in us.
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INVESTMENT IN CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to
additional considerations because the investments of these plans
are subject to the fiduciary responsibility and prohibited
transaction provisions of ERISA and restrictions imposed by
Section 4975 of the Internal Revenue Code. For these
purposes the term “employee benefit plan” includes,
but is not limited to, qualified pension, profit-sharing and
stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other
things, consideration should be given to:
•
whether the investment is prudent under
Section 404(a)(1)(B) of ERISA;
•
whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of
ERISA; and
•
whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential
after-tax investment return.
The person with investment discretion with respect to the assets
of an employee benefit plan, often called a fiduciary, should
determine whether an investment in us is authorized by the
appropriate governing instrument and is a proper investment for
the plan.
Section 406 of ERISA and Section 4975 of the Internal
Revenue Code prohibit employee benefit plans, and also IRAs that
are not considered part of an employee benefit plan, from
engaging in specified transactions involving “plan
assets” with parties that are “parties in
interest” under ERISA or “disqualified persons”
under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units
is a prohibited transaction, a fiduciary of an employee benefit
plan should consider whether the plan will, by investing in us,
be deemed to own an undivided interest in our assets, with the
result that our operations would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction
rules, as well as the prohibited transaction rules of the
Internal Revenue Code.
The Department of Labor regulations provide guidance with
respect to whether the assets of an entity in which employee
benefit plans acquire equity interests would be deemed
“plan assets” under some circumstances. Under these
regulations, an entity’s assets would not be considered to
be “plan assets” if, among other things:
(a)
the equity interests acquired by employee benefit plans are
publicly offered securities — i.e., the equity
interests are widely held by 100 or more investors independent
of the issuer and each other, freely transferable and registered
under some provisions of the federal securities laws;
(b)
the entity is an “operating company,” meaning it is
primarily engaged in the production or sale of a product or
service other than the investment of capital either directly or
through a majority-owned subsidiary or subsidiaries; or
(c)
there is no significant investment by benefit plan investors,
which is defined to mean that less than 25% of the value of each
class of equity interest is held by the employee benefit plans
referred to above, IRAs and other employee benefit plans not
subject to ERISA, including governmental plans.
Our assets should not be considered “plan assets”
under these regulations because it is expected that the
investment will satisfy the requirements in (a) above.
Plan fiduciaries contemplating a purchase of common units are
encouraged to consult with their own counsel regarding the
consequences under ERISA and the Internal Revenue Code in light
of the serious penalties imposed on persons who engage in
prohibited transactions or other violations.
UNDERWRITING
We and the underwriters named below have entered into an
underwriting agreement with respect to the common units being
offered. Subject to specified conditions, each underwriter has
severally agreed to purchase the number of common units
indicated in the following table. Goldman, Sachs & Co.
is the representative of the underwriters.
| Underwriters | Number of Common Units | ||||
|
Goldman, Sachs &
Co.
|
2,303,400 | ||||
|
Deutsche Bank Securities
Inc.
|
818,400 | ||||
|
Petrie Parkman & Co.,
Inc.
|
178,200 | ||||
|
Total
|
3,300,000 | ||||
| Paid by the Partnership | No Exercise | Full Exercise | ||||||
|
Per Common Unit
|
1.40 | 1.40 | ||||||
|
Total
|
4,620,000 | 5,313,000 | ||||||
147
148
Our common units are listed on the NASDAQ National Market under
the symbol “CLMT.”
In connection with the offering, the underwriters may purchase
and sell common units in the open market. These transactions may
include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Shorts sales involve the
sale by the underwriters of a greater number of common units
than they are required to purchase in the offering.
“Covered” short sales are sales made in an amount not
greater than the underwriters’ option to purchase
additional common units from us in the offering. The
underwriters may close out any covered short position by either
exercising their option to purchase additional common units or
purchasing common units in the open market. In determining the
source of common units to close out the covered short position,
the underwriters will consider, among other things, the price of
common units available for purchase in the open market as
compared to the price at which they may purchase additional
common units pursuant to the option granted to them.
“Naked” short sales are any sales in excess of such
option. The underwriters must close out any naked short position
by purchasing common units in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common units in the open market after pricing that could
adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or
purchases of common units made by the underwriters in the open
market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
underwriters have repurchased common units sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions
may have the effect of preventing or retarding a decline in the
market price of the common units, and, together with the
imposition of the penalty bid, may stabilize, maintain or
otherwise affect the market price of the common units. As a
result, the price of the common units may be higher than the
price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued at any time.
These transactions may be effected on the NASDAQ National
Market, in the
over-the-counter market
or otherwise.
Because the National Association of Securities Dealers, Inc.
views the common units offered under this prospectus as
interests in a direct participation program, the offering is
being made in compliance with Rule 2810 of the NASD’s
Conduct Rules. Investor suitability with respect to the common
units should be judged similarly to the suitability with respect
to other securities that are listed for quotation on the NASDAQ
National Market or a national securities exchange.
A prospectus in electronic format may be made available on the
website maintained by the representative and may also be made
available on websites maintained by other underwriters. The
representative may agree to allocate a number of common units to
underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by the representative
to underwriters that may make Internet distributions on the same
basis as other allocations.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of common units
offered.
We estimate that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately
$1.0 million.
In no event will the maximum amount of compensation to be paid
to NASD members in connection with this offering exceed 10% plus
0.5% for bona fide due diligence.
We and our general partner have agreed to indemnify the several
underwriters against certain liabilities, including liabilities
under the Securities Act.
149
Certain of the underwriters and their respective affiliates
have, from time to time, performed, and may in the future
perform, various financial advisory and investment banking
services for our predecessor, us and our general partner and its
subsidiaries, for which they received or will receive customary
fees and expenses. We have entered, in the ordinary course of
business, into various derivative financial instrument
transactions related to our finished fuel products, including
diesel and gasoline crack spread hedges, with
J. Aron & Co., an affiliate of Goldman,
Sachs & Co, and issued to J. Aron & Co. a
$50.0 million letter of credit. We may enter into similar
arrangements with J. Aron & Co. in the future.
VALIDITY OF THE COMMON UNITS
The validity of the common units will be passed upon for us by
Vinson & Elkins L.L.P., Houston, Texas. Certain legal
matters in connection with the common units offered hereby will
be passed upon for the underwriters by Baker Botts L.L.P.,
Houston, Texas.
EXPERTS
The balance sheet of Calumet Specialty Products Partners, L.P.
as of December 31, 2005 and the balance sheet of Calumet
GP, LLC as of December 31, 2005 appearing in this
prospectus and the registration statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports
given on the authority of such firm as experts in accounting and
auditing.
The financial statements of Calumet Lubricants Co., Limited
Partnership as of December 31, 2005 and 2004 and for each
of the three years in the period ended December 31,
2005 appearing in this prospectus and the registration statement
have been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1 regarding
the common units. This prospectus does not contain all of the
information found in the registration statement. For further
information regarding us and the common units offered by this
prospectus, you may desire to review the full registration
statement, including its exhibits and schedules, filed under the
Securities Act. The registration statement of which this
prospectus forms a part, including its exhibits and schedules,
may be inspected and copied at the public reference room
maintained by the SEC at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Copies of the
materials may also be obtained from the SEC at prescribed rates
by writing to the public reference room maintained by the SEC at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC
maintains a web site at http://www.sec.gov. Our registration
statement, of which this prospectus constitutes a part, can be
downloaded from the SEC’s web site.
We furnish our unitholders annual reports containing our audited
financial statements and furnish or make available quarterly
reports containing our unaudited interim financial information
for the first three fiscal quarters of each of our fiscal years.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may contain
forward-looking statements. These statements can be identified
by the use of forward-looking terminology including
“may,” “believe,” “expect,”
“anticipate,” “estimate,”
“continue,” or other similar words. These statements
discuss
150
future expectations, contain projections of results of
operations or of financial condition, or state other
“forward-looking” information. These forward-looking
statements involve risks and uncertainties. When considering
these forward-looking statements, you should keep in mind the
risk factors and other cautionary statements included in this
prospectus. The risk factors and other factors noted throughout
this prospectus could cause our actual results to differ
materially from those contained in any forward-looking statement.
INDEX TO FINANCIAL STATEMENTS
|
UNAUDITED CALUMET SPECIALTY
PRODUCTS PARTNERS, L.P. PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS:
|
|||||
| F-2 | |||||
| F-3 | |||||
| F-4 | |||||
| F-5 | |||||
|
CALUMET PREDECESSOR COMPANY
CONSOLIDATED FINANCIAL STATEMENTS:
|
|||||
| Consolidated Financial Statements of Calumet Lubricants Co., Limited Partnership as of December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005: | |||||
| F-7 | |||||
| F-8 | |||||
| F-9 | |||||
| F-10 | |||||
| F-11 | |||||
| F-12 | |||||
|
CALUMET SPECIALTY PRODUCTS
PARTNERS, L.P. FINANCIAL STATEMENTS:
|
|||||
| Financial Statements of Calumet Specialty Products Partners, L.P. as of December 31, 2005: | |||||
| F-33 | |||||
| F-34 | |||||
| F-35 | |||||
| Condensed Consolidated Financial Statements of Calumet Specialty Products Partners, L.P. as of March 31, 2006 and for the three months ended March 31, 2005 and 2006 (unaudited): | |||||
| F-36 | |||||
| F-37 | |||||
| F-38 | |||||
| F-39 | |||||
| F-40 | |||||
| CALUMET GP, LLC FINANCIAL STATEMENTS: | |||||
| F-52 | |||||
| F-53 | |||||
| Financial Statements of Calumet GP, LLC as of December 31, 2005: | |||||
| F-65 | |||||
| F-66 | |||||
| F-67 | |||||
F-1
F-2
INTRODUCTION
The pro forma consolidated financial statements are based upon
the historical financial position and results of the operations
of Calumet Specialty Products Partners, L.P. (Calumet) as of
March 31, 2006 and of Calumet Lubricants Co., Limited
Partnership (Calumet Predecessor) as of December 31, 2005.
Unless the context otherwise requires, references herein to
Calumet include Calumet and its operating subsidiary. The pro
forma consolidated financial statements for Calumet are
qualified in their entirety by reference to the historical
consolidated financial statements and related notes of both
Calumet and Calumet Predecessor contained therein. The pro forma
consolidated financial statements have been prepared on the
basis that Calumet will be treated as a partnership for federal
income tax purposes. The unaudited pro forma consolidated
financial statements should be read in conjunction with the
notes accompanying such pro forma consolidated financial
statements and with the historical consolidated financial
statements and related notes set forth elsewhere in this
prospectus.
The pro forma consolidated balance sheet and the pro forma
consolidated statement of operations were derived by adjusting
the historical consolidated financial statements of Calumet
Predecessor for the period ended December 31, 2005 and by
adjusting the historical consolidated financial statements of
Calumet for the period ended March 31, 2006. The
adjustments are based upon currently available information and
certain estimates and assumptions; therefore, actual adjustments
will differ from the pro forma adjustments. However, management
believes that the assumptions provide a reasonable basis for
presenting the significant effects of the transactions as
contemplated and that the pro forma adjustments give appropriate
effect to those assumptions and are properly applied in the pro
forma consolidated financial statements.
The pro forma consolidated financial statements may not be
indicative of the results that actually would have occurred if
the Partnership had assumed the operations of the Predecessor on
the dates indicated or which would be obtained in the future.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands)
| As of March 31, 2006 | ||||||||||||||
| Calumet | Calumet | |||||||||||||
| Historical | Adjustments | Pro Forma | ||||||||||||
| Assets | ||||||||||||||
|
Current assets:
|
||||||||||||||
|
Cash
|
$ | 85 | $ | 2,218 | (b) | $ | 90,634 | |||||||
| 103,082 | (a) | |||||||||||||
| (14,751 | )(c) | |||||||||||||
|
Accounts receivable:
|
||||||||||||||
|
Trade, less allowance for doubtful
accounts of $774
|
110,931 | — | 110,931 | |||||||||||
|
Other
|
2,686 | — | 2,686 | |||||||||||
| 113,617 | — | 113,617 | ||||||||||||
|
Inventories
|
101,118 | — | 101,118 | |||||||||||
|
Prepaid expenses
|
1,883 | — | 1,883 | |||||||||||
|
Derivative assets
|
313 | — | 313 | |||||||||||
|
Deposits and other current assets
|
1,296 | — | 1,296 | |||||||||||
|
Total current assets
|
218,312 | 90,549 | 308,861 | |||||||||||
|
Property, plant and equipment, net
|
127,674 | 127,674 | ||||||||||||
|
Other noncurrent assets, net
|
3,473 | 3,473 | ||||||||||||
|
Total assets
|
$ | 349,459 | $ | 90,549 | $ | 440,008 | ||||||||
| Liabilities and Partners’ Capital | ||||||||||||||
|
Current liabilities:
|
||||||||||||||
|
Accounts payable
|
$ | 52,216 | $ | — | $ | 52,216 | ||||||||
|
Accrued salaries, wages and benefits
|
2,004 | — | 2,004 | |||||||||||
|
Turnaround costs
|
3,327 | — | 3,327 | |||||||||||
|
Taxes payable
|
4,686 | — | 4,686 | |||||||||||
|
Bank overdraft
|
5,116 | — | 5,116 | |||||||||||
|
Other current liabilities
|
2,207 | — | 2,207 | |||||||||||
|
Current portion of long-term debt
|
500 | — | 500 | |||||||||||
|
Derivative liabilities
|
46,097 | — | 46,097 | |||||||||||
|
Total current liabilities
|
116,153 | — | 116,153 | |||||||||||
|
Long-term debt, less current portion
|
64,126 | (14,751 | )(c) | 49,375 | ||||||||||
|
Total liabilities
|
180,279 | (14,751 | ) | 165,528 | ||||||||||
|
Partners’ capital:
|
||||||||||||||
|
Common unitholders
|
147,442 | 103,082 | (a) | 250,524 | ||||||||||
|
Subordinated unitholders
|
20,273 | — | 20,273 | |||||||||||
|
General partner’s interest
|
966 | 2,218 | (b) | 3,184 | ||||||||||
|
Accumulated other comprehensive
income
|
499 | — | 499 | |||||||||||
|
Total partners’ capital
|
169,180 | 105,300 | 274,480 | |||||||||||
|
Total liabilities and
partners’ capital
|
$ | 349,459 | $ | 90,549 | $ | 440,008 | ||||||||
F-3
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2005 and the Three
Months Ended March 31, 2006
(dollars in thousands except per unit data)
| Year End | Three Months Ended | ||||||||||||||||||||||||||||||||
| December 31, 2005 | March 31, 2006 | ||||||||||||||||||||||||||||||||
| Predecessor | Initial Offering | Secondary Offering | Calumet | Calumet | Initial Offering | Secondary Offering | Calumet | ||||||||||||||||||||||||||
| Historical | Adjustments | Adjustments | Pro Forma | Historical | Adjustments | Adjustments | Pro Forma | ||||||||||||||||||||||||||
|
Sales
|
$ | 1,289,072 | $ | — | $ | — | $ | 1,289,072 | $ | 397,694 | $ | — | $ | — | $ | 397,694 | |||||||||||||||||
|
Cost of sales
|
1,148,715 | — | — | 1,148,715 | 346,744 | — | — | 346,744 | |||||||||||||||||||||||||
|
Gross profit
|
140,357 | — | — | 140,357 | 50,950 | — | — | 50,950 | |||||||||||||||||||||||||
|
Operating costs and expenses:
|
|||||||||||||||||||||||||||||||||
|
Selling, general and administrative
|
22,126 | — | — | 22,126 | 4,929 | — | — | 4,929 | |||||||||||||||||||||||||
|
Transportation
|
46,849 | — | — | 46,849 | 13,907 | — | — | 13,907 | |||||||||||||||||||||||||
|
Taxes other than income taxes
|
2,493 | — | — | 2,493 | 914 | — | — | 914 | |||||||||||||||||||||||||
|
Other
|
871 | — | — | 871 | 115 | — | — | 115 | |||||||||||||||||||||||||
|
Restructuring, decommissioning and
asset impairments
|
2,333 | — | — | 2,333 | — | — | — | — | |||||||||||||||||||||||||
|
Operating income (loss)
|
65,685 | — | — | 65,685 | 31,085 | — | — | 31,085 | |||||||||||||||||||||||||
|
Other income (expense):
|
|||||||||||||||||||||||||||||||||
|
Interest expense
|
(22,961 | ) | 9,687 | (d) | 4,732 | (d) | (8,542 | ) | (3,976 | ) | 915 | (d) | 1,050 | (d) | (2,011 | ) | |||||||||||||||||
|
Debt extinguishment costs
|
(6,882 | ) | (6,882 | ) | (2,967 | ) | (2,967 | ) | |||||||||||||||||||||||||
|
Realized gain (loss) on derivative
instruments
|
2,830 | — | — | 2,830 | (3,080 | ) | — | — | (3,080 | ) | |||||||||||||||||||||||
|
Unrealized gain (loss) on
derivative instruments
|
(27,586 | ) | — | — | (27,586 | ) | (17,715 | ) | — | — | (17,715 | ) | |||||||||||||||||||||
|
Other
|
242 | — | — | 242 | 199 | — | — | 199 | |||||||||||||||||||||||||
|
Total other income (expense)
|
(54,357 | ) | 9,687 | 4,732 | (39,938 | ) | (27,539 | ) | 915 | 1,050 | (25,574 | ) | |||||||||||||||||||||
|
Net income (loss) before income
taxes
|
11,328 | 9,687 | 4,732 | 25,747 | 3,546 | 915 | 1,050 | 5,511 | |||||||||||||||||||||||||
|
Income tax expense
|
— | 90 | (e) | — | 90 | 14 | — | — | 14 | ||||||||||||||||||||||||
|
Net income (loss)
|
$ | 11,328 | $ | 9,597 | $ | 4,732 | $ | 25,657 | $ | 3,532 | $ | 915 | $ | 1,050 | $ | 5,497 | |||||||||||||||||
|
General Partner’s interest in
net income (loss)
|
$ | 10,675 | $ | (18 | ) | $ | 110 | ||||||||||||||||||||||||||
|
Limited Partners’ interest in
net income (loss)
|
$ | 14,982 | $ | (858 | ) | $ | 5,387 | ||||||||||||||||||||||||||
|
Basic and diluted net income (loss)
per limited partners’ unit:
|
|||||||||||||||||||||||||||||||||
|
Common
|
$ | 2.47 | $ | 0.30 | $ | 0.45 | |||||||||||||||||||||||||||
|
Subordinated
|
$ | (1.94 | ) | $ | (0.36 | ) | $ | (0.15 | ) | ||||||||||||||||||||||||
|
Weighted average number of limited
partner units outstanding:
|
|||||||||||||||||||||||||||||||||
|
Common
|
16,366,000 | 12,950,000 | 16,366,000 | ||||||||||||||||||||||||||||||
|
Subordinated
|
13,066,000 | 13,066,000 | 13,066,000 | ||||||||||||||||||||||||||||||
F-4
F-5
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 1.
Basis of Presentation, the Offering and Other Transactions
The historical financial information as of March 31, 2006
is derived from the historical consolidated financial statements
of Calumet. The historical financial information as of
December 31, 2005 is derived from the historical
consolidated financial statements of Calumet Predecessor. The
pro forma adjustments have been prepared as if the transactions
listed below had taken place on March 31, 2006, in the case
of the pro forma balance sheet, or as of January 1, 2005,
in the case of the pro forma statement of operations for the
year ended December 31, 2005 and the three months ended
March 31, 2006.
The pro forma balance sheet reflects the following transactions:
•
the sale by Calumet of 3,300,000 common units to the public in
this offering;
•
the payment of estimated underwriting commissions and other
offering expenses of this offering; and
•
the repayment by the Partnership of a portion of its
indebtedness under its revolving credit facility with the net
proceeds from this offering.
The pro forma statement of operations reflect the following
transactions:
•
the refinancing by the Predecessor of its long-term debt
obligations pursuant to new credit facilities it entered into
December 2005;
•
the sale by Calumet of 6,450,000 common units to the public in
its initial public offering;
•
the sale by Calumet of 854,985 common units to the public as a
result of the exercise of the underwriters’ option to
purchase additional units from our initial public offering;
•
the sale by Calumet of 3,300,000 common units to the public in
this offering;
•
the payment of estimated underwriting commissions and other
offering expenses of both offerings; and
•
the repayment by the Partnership of a portion of its
indebtedness under its new credit facilities with the net
proceeds from both offerings.
Note 2.
Pro Forma Adjustments and Assumptions
(a) Reflects the estimated net proceeds to Calumet of
$103.1 million from the issuance and sale of
3,300,000 common units at an offering price of $32.94 (last
reported sales price on June 28, 2006) per unit after
deducting underwriting discounts, commissions and fees, and
after paying estimated offering and related transaction expenses
of $1.0 million.
(b) Reflects Calumet GP, LLC’s contribution of
$2.2 million to maintain its two percent general partner
interest after this offering.
(c) Reflects the repayment of $14.8 million of
borrowings on our revolving credit facility with the net
proceeds of this offering.
(d) Reflects net change in interest expense as a result of
entering into the new credit facilities and the repayment of
borrowings under the facilities from the net proceeds of this
offering and our initial public offering. After the consummation
of the transactions described in Note 1, the
Partnership’s outstanding indebtedness on a pro forma basis
as of March 31, 2006 will consist of (i) no
outstanding borrowings on the $225 million senior secured
revolving credit facility,
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
(ii) $49.9 million of borrowings under the senior
secured first lien term loan facility that bears interest at
LIBOR plus 350 basis points, an assumed rate of 8.49%, and
(iii) a $50 million letter of credit facility to
support crack spread hedging that bears interest at an assumed
rate of 3.5%. Should the actual interest rate increase or
decrease by 100 basis points, pro forma interest expense
would increase or decrease by $0.5 million for the year
ended December 31, 2005 and $0.1 million for the three
months ended March 31, 2006. The individual components of
the net change in interest expense are as follows:
| Three Months | |||||||||
| Ended | |||||||||
| Year Ended | March 31, | ||||||||
| December 31, 2005 | 2006 | ||||||||
|
Interest expense as reported for
the Predecessor
|
$ | 22,961 | $ | 3,976 | |||||
|
Removal of prior related party and
other long-term debt interest expense
|
(22,961 | ) | (3,976 | ) | |||||
|
Pro forma interest expense
associated with the new credit facilities after the pay down of
debt from offering net proceeds
|
8,542 | 2,011 | |||||||
|
Net adjustment
|
14,419 | 1,965 | |||||||
|
Pro forma as adjusted interest
expense
|
8,542 | 2,011 | |||||||
| Note 3. | Pro Forma Net Income (Loss) Per Unit |
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of
Calumet Lubricants Co., Limited Partnership
We have audited the accompanying consolidated balance sheets of
Calumet Lubricants Co., Limited Partnership as of
December 31, 2005 and 2004 and the related consolidated
statements of operations, partners’ capital, and cash flows
for each of the three years in the period ended
December 31, 2005. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Calumet Lubricants Co.,
Limited Partnership at December 31, 2005 and 2004 and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31,
2005, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands)
| December 31, | ||||||||||
| 2004 | 2005 | |||||||||
|
Assets
|
||||||||||
|
Current assets:
|
||||||||||
|
Cash
|
$ | 18,087 | $ | 12,173 | ||||||
|
Accounts receivable:
|
||||||||||
|
Trade, less allowance for doubtful
accounts of $456 in 2004 and $750 in 2005
|
53,798 | 109,757 | ||||||||
|
Other
|
4,912 | 5,537 | ||||||||
| 58,710 | 115,294 | |||||||||
|
Inventories
|
82,990 | 108,431 | ||||||||
|
Prepaid expenses
|
17,272 | 10,799 | ||||||||
|
Derivative assets
|
4,011 | 3,359 | ||||||||
|
Deposits and other current assets
|
3,150 | 8,851 | ||||||||
|
Total current assets
|
184,220 | 258,907 | ||||||||
|
Property, plant and equipment, net
|
126,585 | 127,846 | ||||||||
|
Other noncurrent assets, net
|
7,401 | 12,964 | ||||||||
|
Total assets
|
$ | 318,206 | $ | 399,717 | ||||||
|
Liabilities and partners’
capital
|
||||||||||
|
Current liabilities:
|
||||||||||
|
Accounts payable
|
$ | 58,027 | $ | 44,759 | ||||||
|
Accrued salaries, wages and benefits
|
1,978 | 8,164 | ||||||||
|
Turnaround costs
|
2,098 | 2,679 | ||||||||
|
Other taxes payable
|
435 | 4,209 | ||||||||
|
Asset retirement obligation
|
100 | — | ||||||||
|
Other accrued expenses
|
2,747 | 2,418 | ||||||||
|
Other current liabilities
|
4,238 | — | ||||||||
|
Current portion of long-term debt
|
19,795 | 500 | ||||||||
|
Derivative liabilities
|
— | 30,449 | ||||||||
|
Total current liabilities
|
89,418 | 93,178 | ||||||||
|
Long-term debt, less current portion
|
194,274 | 267,485 | ||||||||
|
Total liabilities
|
283,692 | 360,663 | ||||||||
|
Commitments and contingencies
|
||||||||||
|
Total partners’ capital
|
34,514 | 39,054 | ||||||||
|
Total liabilities and
partners’ capital
|
$ | 318,206 | $ | 399,717 | ||||||
F-8
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per unit data)
| Year Ended December 31, | |||||||||||||
| 2003 | 2004 | 2005 | |||||||||||
|
Sales
|
$ | 430,381 | $ | 539,616 | $ | 1,289,072 | |||||||
|
Cost of sales
|
385,890 | 501,284 | 1,148,715 | ||||||||||
|
Gross profit
|
44,491 | 38,332 | 140,357 | ||||||||||
|
Operating costs and expenses:
|
|||||||||||||
|
Selling, general and administrative
|
9,432 | 13,133 | 22,126 | ||||||||||
|
Transportation
|
28,139 | 33,923 | 46,849 | ||||||||||
|
Taxes other than income taxes
|
2,419 | 2,309 | 2,493 | ||||||||||
|
Other
|
905 | 839 | 871 | ||||||||||
|
Restructuring, decommissioning and
asset impairments
|
6,694 | 317 | 2,333 | ||||||||||
|
Operating income (loss)
|
(3,098 | ) | (12,189 | ) | 65,685 | ||||||||
|
Other income (expense):
|
|||||||||||||
|
Equity in (loss) income of
unconsolidated affiliates
|
867 | (427 | ) | — | |||||||||
|
Interest expense
|
(9,493 | ) | (9,869 | ) | (22,961 | ) | |||||||
|
Debt extinguishment costs
|
— | — | (6,882 | ) | |||||||||
|
Realized gain (loss) on derivative
instruments
|
(961 | ) | 39,160 | 2,830 | |||||||||
|
Unrealized gain (loss) on
derivative instruments
|
7,228 | (7,788 | ) | (27,586 | ) | ||||||||
|
Other
|
32 | 83 | 242 | ||||||||||
|
Total other income (expense)
|
(2,327 | ) | 21,159 | (54,357 | ) | ||||||||
|
Net income (loss)
|
$ | (5,425 | ) | $ | 8,970 | $ | 11,328 | ||||||
|
General partner’s interest in
net income (loss)
|
$ | (542 | ) | $ | 897 | $ | 1,133 | ||||||
|
Limited partners’ interest in
net income (loss)
|
$ | (4,883 | ) | $ | 8,073 | $ | 10,195 | ||||||
|
Basic and diluted net income (loss)
per limited partner unit
|
$ | (4,883 | ) | $ | 8,073 | $ | 10,195 | ||||||
|
Limited partnership units, basic
and diluted
|
1,000 | 1,000 | 1,000 | ||||||||||
F-9
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in thousands)
| Partners’ Capital | |||||||||||||||||
| Accumulated Other | |||||||||||||||||
| Comprehensive | General | Limited | |||||||||||||||
| Income | Partner | Partners | Total | ||||||||||||||
|
Balance at December 31, 2002
|
$ | — | $ | 3,097 | $ | 27,872 | $ | 30,969 | |||||||||
|
Net loss
|
— | (542 | ) | (4,883 | ) | (5,425 | ) | ||||||||||
|
Balance at December 31, 2003
|
— | 2,555 | 22,989 | 25,544 | |||||||||||||
|
Net income
|
— | 897 | 8,073 | 8,970 | |||||||||||||
|
Balance at December 31, 2004
|
— | 3,452 | 31,062 | 34,514 | |||||||||||||
|
Net income
|
— | 1,133 | 10,195 | 11,328 | |||||||||||||
|
Distributions to partners
|
— | (728 | ) | (6,557 | ) | (7,285 | ) | ||||||||||
|
Other comprehensive income
|
497 | — | — | 497 | |||||||||||||
|
Balance at December 31, 2005
|
$ | 497 | $ | 3,857 | $ | 34,700 | $ | 39,054 | |||||||||
F-10
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended December 31, | ||||||||||||||
| 2003 | 2004 | 2005 | ||||||||||||
|
Operating activities
|
||||||||||||||
|
Net income (loss)
|
$ | (5,425 | ) | $ | 8,970 | $ | 11,328 | |||||||
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities:
|
||||||||||||||
|
Depreciation
|
6,181 | 6,224 | 9,920 | |||||||||||
|
Amortization
|
588 | 703 | 466 | |||||||||||
|
Provision for doubtful accounts
|
12 | 216 | 294 | |||||||||||
|
Loss on disposal of property and
equipment
|
943 | 59 | 232 | |||||||||||
|
Equity in loss (income) of
unconsolidated affiliates
|
(867 | ) | 427 | — | ||||||||||
|
Restructuring charge
|
874 | — | 1,693 | |||||||||||
|
Debt extinguishment costs
|
— | — | 4,173 | |||||||||||
|
Other
|
926 | 332 | 497 | |||||||||||
|
Dividends received from
unconsolidated affiliates
|
750 | 3,470 | — | |||||||||||
|
Changes in assets and liabilities:
|
||||||||||||||
|
Accounts receivable
|
(4,670 | ) | (19,399 | ) | (56,878 | ) | ||||||||
|
Inventories
|
15,547 | (20,304 | ) | (25,441 | ) | |||||||||
|
Prepaid expenses
|
(834 | ) | (8,472 | ) | 6,473 | |||||||||
|
Derivative activity
|
(6,265 | ) | 5,046 | 31,101 | ||||||||||
|
Deposits and other current assets
|
271 | (3,124 | ) | (5,904 | ) | |||||||||
|
Other noncurrent assets
|
(550 | ) | 161 | (4,561 | ) | |||||||||
|
Accounts payable
|
(1,809 | ) | 25,764 | (13,268 | ) | |||||||||
|
Accrued salaries, wages and benefits
|
(1,107 | ) | 1,323 | 6,186 | ||||||||||
|
Accrued turnaround costs
|
375 | 246 | 581 | |||||||||||
|
Other taxes payable
|
191 | (53 | ) | 3,774 | ||||||||||
|
Asset retirement obligation
|
1,376 | (1,276 | ) | (100 | ) | |||||||||
|
Other accrued expenses
|
544 | 963 | (329 | ) | ||||||||||
|
Other current liabilities
|
436 | (1,135 | ) | (4,238 | ) | |||||||||
|
Other noncurrent liabilities
|
(439 | ) | (753 | ) | — | |||||||||
|
Net cash provided by (used in)
operating activities
|
7,048 | (612 | ) | (34,001 | ) | |||||||||
|
Investing activities
|
||||||||||||||
|
Additions to property, plant and
equipment
|
(12,163 | ) | (43,033 | ) | (12,963 | ) | ||||||||
|
Proceeds from disposal of property,
plant and equipment
|
223 | 103 | 60 | |||||||||||
|
Net cash used in investing
activities
|
(11,940 | ) | (42,930 | ) | (12,903 | ) | ||||||||
|
Financing activities
|
||||||||||||||
|
Proceeds from
borrowings — credit agreements with third parties
|
— | 93,940 | 1,415,374 | |||||||||||
|
Payments of borrowings —
credit agreements with third parties
|
— | (44,145 | ) | (1,197,184 | ) | |||||||||
|
Debt issuance costs
|
— | (5,656 | ) | (5,641 | ) | |||||||||
|
Proceeds from
borrowings — credit agreement with limited partners
|
260,159 | 586,410 | 546,565 | |||||||||||
|
Payments of borrowings —
credit agreement with limited partners
|
(255,275 | ) | (568,988 | ) | (710,839 | ) | ||||||||
|
Distributions to partners
|
— | — | (7,285 | ) | ||||||||||
|
Cash provided by financing
activities
|
4,884 | 61,561 | 40,990 | |||||||||||
|
Net increase (decrease) in cash
|
(8 | ) | 18,019 | (5,914 | ) | |||||||||
|
Cash at beginning of period
|
76 | 68 | 18,087 | |||||||||||
|
Cash at end of period
|
$ | 68 | $ | 18,087 | $ | 12,173 | ||||||||
|
Supplemental disclosure of cash
flow information
|
||||||||||||||
|
Interest paid
|
$ | 9,189 | $ | 9,367 | $ | 22,890 | ||||||||
F-11
F-12
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except operating, unit and per unit data)
1.
Description of the Business
Calumet Lubricants Co., Limited Partnership (Calumet or the
Company) is an Indiana limited partnership. The general partner
is Calumet, Incorporated. The general partner owns 10% of
Calumet while the remaining 90% is owned by limited partners,
which collectively hold all 1,000 of Calumet’s limited
partnership units. Calumet is engaged in the production and
marketing of crude oil-based specialty lubricating oils, fuels,
solvents and waxes. Calumet owns a refinery located in
Princeton, Louisiana, a refinery located in Cotton Valley,
Louisiana, a terminal located in Burnham, Illinois, a wax
blending, packaging and warehousing facility located in Reno,
Pennsylvania, and a refinery located in Shreveport, Louisiana
(the Shreveport Refinery).
Effective October 25, 2004 in conjunction with financing
agreements entered into related to the Shreveport Refinery as
discussed in Notes 3 and 6, Calumet contributed the
assets and certain liabilities related to the Shreveport
Refinery to an Indiana limited liability company, Calumet
Shreveport, LLC (Calumet Shreveport). Calumet is the sole member
of Calumet Shreveport. Calumet Shreveport, LLC then contributed
the assets and certain liabilities of the Shreveport Refinery to
two Indiana limited liability companies, Calumet Shreveport
Fuels, LLC (Fuels) and Calumet Shreveport Lubricants &
Waxes, LLC (Lubricants & Waxes). The sole member of
both Fuels and Lubricants & Waxes is Calumet Shreveport.
2.
Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
Calumet and its wholly-owned subsidiary, Calumet Shreveport and
Calumet Shreveport’s wholly owned subsidiaries Fuels and
Lubricants & Waxes. All intercompany transactions and
accounts have been eliminated. Hereafter, the consolidated
companies are referred to as the Company.
Use of Estimates
The Company’s financial statements are prepared in
conformity with U.S. generally accepted accounting
principles which require management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash
Cash includes all highly liquid investments with a maturity of
three months or less at the time of purchase.
Inventories
The cost of inventories is determined using the
last-in, first-out
(LIFO) method. Inventories are valued at the lower of cost
or market value.
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
Inventories consist of the following:
| December 31, | ||||||||
| 2004 | 2005 | |||||||
|
Raw materials
|
$ | 39,476 | $ | 28,299 | ||||
|
Work in process
|
12,669 | 29,737 | ||||||
|
Finished goods
|
30,845 | 50,395 | ||||||
| $ | 82,990 | $ | 108,431 | |||||
| December 31, | ||||||||||||
| 2003 | 2004 | 2005 | ||||||||||
|
Beginning balance
|
$ | 242 | $ | 240 | $ | 456 | ||||||
|
Provision
|
12 | 216 | 317 | |||||||||
|
Write-offs, net
|
(14 | ) | — | (23 | ) | |||||||
|
Ending balance
|
$ | 240 | $ | 456 | $ | 750 | ||||||
F-13
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
Property, plant and equipment, including depreciable lives,
consists of the following:
| December 31, | ||||||||
| 2004 | 2005 | |||||||
|
Land
|
$ | 957 | $ | 973 | ||||
|
Buildings and improvements (10 to
40 years)
|
1,550 | 1,602 | ||||||
|
Machinery and equipment (2 to
20 years)
|
148,992 | 162,651 | ||||||
|
Furniture and fixtures (5 to
10 years)
|
1,928 | 2,235 | ||||||
|
Construction-in-progress
|
5,368 | 3,878 | ||||||
| 158,795 | 171,339 | |||||||
|
Less accumulated depreciation
|
(32,210 | ) | (43,493 | ) | ||||
| $ | 126,585 | $ | 127,846 | |||||
| December 31, | ||||||||||||
| 2003 | 2004 | 2005 | ||||||||||
|
Beginning balance
|
$ | 1,477 | $ | 1,852 | $ | 2,098 | ||||||
|
Provision
|
2,125 | 2,129 | 3,939 | |||||||||
|
Usage
|
(1,750 | ) | (1,883 | ) | (3,358 | ) | ||||||
|
Ending balance
|
$ | 1,852 | $ | 2,098 | $ | 2,679 | ||||||
F-14
F-15
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
Revenue Recognition
The Company recognizes revenue on orders received from its
customers when there is persuasive evidence of an arrangement
with the customer that is supportive of revenue recognition, the
customer has made a fixed commitment to purchase the product for
a fixed or determinable sales price, collection is reasonably
assured under the Company’s normal billing and credit
terms, all of the Company’s obligations related to product
have been fulfilled and ownership and all risks of loss have
been transferred to the buyer, which is upon shipment to the
customer.
Income Taxes
The Company, as a partnership, is not liable for income taxes.
Income taxes are the responsibility of the partners, with
earnings of the Company included in partners’ earnings.
Derivatives
The Company enters into several types of derivative instruments
related to the purchase of crude oil, natural gas, as well as
fuels product margins (crack spreads), in an effort to minimize
the financial impact of fluctuations in the prices of certain
commodities related to its business, as further described in
Note 7. The Company’s policy is generally to enter
into crude oil contracts for a period no greater than three to
six months forward and for 50% to 70% of anticipated crude oil
purchases related to speciality products production. The
Company’s policy is generally to enter into crack spread
contracts for a period no greater than five years forward and
for no more than 75% of fuels production. Although the
counterparties expose the Company to credit risk in the event of
nonperformance, the Company does not expect nonperformance.
During 2003, 2004 and through November 30, 2005, the
Company had not designated any of its derivative instruments as
hedges in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities. Changes in the fair value of derivatives which
have not been designated as hedges are recorded each period in
earnings and reflected in unrealized gain (loss) on derivative
instruments in the consolidated statements of operations.
Beginning on December 1, 2005, the Company began
designating certain derivative contracts related to the purchase
of crude oil for its specialty products segment and natural gas
purchases for all of the Company’s refineries as cash flow
hedges to the extent they were effective. Changes in the fair
value of these derivative hedge contracts subsequent to
December 1, 2005 are recorded in other comprehensive
income. The crude and natural gas other comprehensive income
balances of $1,231 and $(734), respectively, will be
reclassified to earnings in the same period as the hedged
transaction. The entire other comprehensive income balance at
December 31, 2005 will be reclassified to earnings by April
2006 for the crude hedges and March 2006 for the natural gas
hedges.
Equity Investments in Unconsolidated Affiliates
Bareco Products (Bareco) was a South Carolina general
partnership which marketed finished wax products. The Company
acquired a 50% interest in Bareco during 2000. The Company
accounts for this investment under the equity method of
accounting. Therefore, the Company’s share of income and
loss generated by Bareco is reflected as equity in income (loss)
of unconsolidated affiliates in the consolidated statements of
operations. As further discussed in Note 4, during
F-16
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
December 2003 the Company and its joint venture partner entered
into an agreement to dissolve the Bareco Products partnership.
Other Noncurrent Assets
Other noncurrent assets at December 31, 2004 and 2005
include $5,647 and $5,565, net of accumulated amortization of
$226 and $76 of deferred debt issuance costs, which are being
amortized on a straight-line basis over the life of the related
debt instruments.
Other noncurrent assets also include $1,476 and $1,021 at
December 31, 2004 and 2005, respectively, of intangible
assets, net of accumulated amortization, purchased to facilitate
the sales of horticultural spray oil products. These intangible
assets are being amortized using the straight-line method, over
an estimated useful life of five years. Annual amortization for
2006 and 2007 will be $455, with the remaining balance of
approximately $111 amortized in 2008. Accumulated amortization
on these intangible assets was $800 and $1,255 at
December 31, 2004 and 2005, respectively.
Shipping and Handling Costs
The Company adheres to Emerging Issues Task Force
(EITF) 00-10, Accounting for Shipping and Handling Fees
and Costs. This EITF requires the classification of shipping
and handling costs billed to customers in sales and the
classification of shipping and handling costs incurred in cost
of sales, or if classified elsewhere to be disclosed. The
Company has reflected $28,139, $33,923 and $46,849 for the years
ended December 31, 2003, 2004, and 2005, respectively, for
costs billed to customers in transportation in the consolidated
statements of operations.
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
(SFAS) No. 151, Inventory Costs — an
amendment of Accounting Research Bulletin
(ARB) No. 43, Chapter 4. The Statement clarifies
that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials should be recognized as
current-period expenses regardless of how abnormal the
circumstances. In addition, this Statement requires that the
allocation of fixed overheads to the costs of conversion be
based upon normal production capacity levels. The Statement is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not
anticipate that this Statement will have a material effect on
its financial position, results of operations or cash flows.
On December 16, 2004, the FASB issued Statement
No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock
Based Compensation. Statement 123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and
amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to
the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative.
Statement 123(R) is effective for fiscal years beginning
after July 1, 2005. The Company expects to adopt
Statement 123(R) using the “modified prospective”
method in which compensation cost is recognized beginning with
the effective date based on the requirements of
Statement 123(R) for all share-based payments granted after
the effective date and based on the requirements of
F-17
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
Statement 123 for all awards granted to employees prior to
the effective date of Statement 123(R) that remain unvested
on the effective date. The total impact of adoption of
Statement 123(R) cannot be predicted at this time because
it will depend on levels of share-based payments granted in the
future.
In 2005, the FASB Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement Obligations
was issued. The Company adopted this interpretation as of
December 31, 2005. The Company has conditional asset
retirement obligations related to its Cotton Valley, Shreveport
and Princeton refineries related to asbestos. However, the
Company believes that there is an indeterminate settlement date
for these obligations and; thus, fair value cannot be reasonably
estimated. Therefore, at the date of adoption, December 31,
2005, the Company did not record any liability for asset
retirement obligations related to these refineries.
3.
Shreveport Reconfiguration
During 2004, the Company substantially completed the
reconfiguration of the Shreveport Refinery to add motor fuels
production, including gasoline, diesel and jet fuel, as well as
to increase overall feedstock throughput. The Shreveport
Refinery was fully operational and met its completion
requirements as of February 28, 2005, as required by the
Company’s loan agreements then in effect. The capital
project, of which $35,967 had been expended through
December 31, 2004, and $39,663 had been expended through
December 31, 2005, included the recommissioning of several
existing idled fuel production units. As discussed in
Note 1, the Company formed legal entities to hold the
assets and liabilities related to the Shreveport Refinery. In
conjunction with the reconfiguration and as described in
Note 6, Calumet Shreveport, Fuels and Lubricants &
Waxes entered into standalone financing arrangements during
2004, including a term loan agreement and a revolving loan
agreement to fund capital expenditures and additional working
capital requirements. These financing arrangements were repaid
on December 9, 2005 as described in Note 6.
4.
Restructuring, Decommissioning and Asset Impairments
Rouseville
In connection with the Company’s decision to exit its
multigrade wax processing facility located in Rouseville,
Pennsylvania (Rouseville), in 2003 the Company began
implementation of a plan to demolish the Rouseville facility
assets. The demolition was completed during 2004. The facility
assets included operating units, equipment, tankage and real
property. As a result of the decision to demolish the Rouseville
facility assets, the Company recorded a facility asset
impairment charge in 2003 for the full amount of the carrying
value of the assets as of the decision date to demolish the
assets. The Company also incurred asset decommissioning costs
during 2003, consisting primarily of asbestos abatement costs at
the Rouseville wax processing facility. Asset decommissioning
costs of $4,202 and the asset impairment charge of $2,492
related to this facility are reflected in restructuring,
decommissioning and asset impairments in the consolidated
statements of operations for the year ended December 31,
2003. In 2004, the Company incurred additional charges totaling
$317 primarily related to the completion of the Rouseville asset
decommissioning.
In accordance with Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement
Obligations, the Company recorded an asset retirement
obligation during 2003 for obligations associated with the
retirement of fixed assets at its Rouseville wax processing
facility as of its decision date to demolish the facility, as
discussed above. This obligation consisted primarily of
remaining asbestos abatement costs as well as other costs, which
were substantially completed by the end of 2004.
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
A rollforward of the Company’s asset retirement obligation
for the years ended December 31, 2003, 2004 and 2005 is as
follows:
|
Balance January 1, 2003
|
$ | — | ||
|
2003 Rouseville asset retirement
obligation provision
|
1,618 | |||
|
2003 Interest cost accretion
|
14 | |||
|
2003 Payments
|
(256 | ) | ||
|
Balance December 31, 2003
|
1,376 | |||
|
2004 Rouseville asset retirement
obligation provision
|
— | |||
|
2004 Interest cost accretion
|
35 | |||
|
2004 Payments
|
(1,311 | ) | ||
|
Balance December 31, 2004
|
100 | |||
|
2005 Payments
|
(100 | ) | ||
|
Balance December 31, 2005
|
$ | — | ||
F-18
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
5.
Commitments and Contingencies
Leases
The Company has various operating leases for the use of land,
storage tanks, compressor stations, rail cars, equipment,
precious metals, operating unit catalyst and office facilities
that extend through August 2015. Renewal options are available
on certain of these leases in which the Company is the lessee.
Rent expense for the years ended December 31, 2003, 2004,
and 2005 was $7,317, $7,415 and $8,389, respectively.
As of December 31, 2005, the Company had estimated minimum
commitments for the payment of rentals under leases which, at
inception, had a noncancelable term of more than one year, as
follows:
| Year | Commitment | |||
|
2006
|
$ | 8,387 | ||
|
2007
|
6,075 | |||
|
2008
|
3,938 | |||
|
2009
|
3,660 | |||
|
2010
|
3,051 | |||
|
Thereafter
|
9,002 | |||
|
Total
|
$ | 34,113 | ||
| Year | Commitment | |||
|
2006
|
$ | 375,295 | ||
|
2007
|
305,309 | |||
|
2008
|
69,813 | |||
|
2009
|
25,069 | |||
|
2010
|
4,052 | |||
|
2011
|
— | |||
|
Thereafter
|
— | |||
|
Total
|
$ | 779,538 | ||
F-19
F-20
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
Environmental
The Company operates crude oil and specialty hydrocarbon
refining and terminal operations, which are subject to stringent
and complex federal, state, and local laws and regulations
governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and
regulations can impair the Company’s operations that affect
the environment in many ways, such as requiring the acquisition
of permits to conduct regulated activities; restricting the
manner in which the Company can release materials into the
environment; requiring remedial activities or capital
expenditures to mitigate pollution from former or current
operations; and imposing substantial liabilities for pollution
resulting from its operations. Certain environmental laws impose
joint and several, strict liability for costs required to
remediate and restore sites where petroleum hydrocarbons,
wastes, or other materials have been released or disposed.
Failure to comply with environmental laws and regulations may
result in the triggering of administrative, civil and criminal
measures, including the assessment of monetary penalties, the
imposition of remedial obligations, and the issuance of
injunctions limiting or prohibiting some or all of the
Company’s operations. On occasion, the Company receives
notices of violation, enforcement and other complaints from
regulatory agencies alleging non-compliance with applicable
environmental laws and regulations. In particular, the Louisiana
Department of Environmental Quality (“LDEQ”) has
proposed penalties and supplemental projects totaling $191,280
for the following alleged violations: (i) a May 2001
notification received by the Cotton Valley refinery from the
LDEQ regarding several alleged violations of various air
emission regulations, as identified in the course of the
Company’s Leak Detection and Repair program, and also for
failure to submit various reports related to the facility’s
air emissions; (ii) a December 2002 notification received
by the Company’s Cotton Valley refinery from the LDEQ
regarding alleged violations for excess emissions, as identified
in the LDEQ’s file review of the Cotton Valley refinery;
and (iii) a December 2004 notification received by the
Cotton Valley refinery from the LDEQ regarding alleged
violations for the construction of a multi-tower pad and
associated pump pads without a permit issued by the agency. The
Company is currently in settlement negotiations with the LDEQ to
resolve these matters, as well as a number of similar matters at
the Princeton refinery, for which no penalty has yet been
proposed. Management is of the opinion that the ultimate
resolution of this matter will not have a material adverse
impact on the Company’s financial position or results of
operations.
The Company has recently entered into discussions on a voluntary
basis with the LDEQ regarding the Company’s participation
in that agency’s “Small Refinery and Single Site
Refinery Initiative.” This state initiative is patterned
after the EPA’s “National Petroleum Refinery
Initiative,” which is a coordinated, integrated compliance
and enforcement strategy to address federal Clean Air Act
compliance issues at the nation’s largest petroleum
refineries. The Company expects that the LDEQ’s primary
focus under the state initiative will be on four compliance and
enforcement concerns: (i) Prevention of Significant
Deterioration/ New Source Review; (ii) New Source
Performance Standards for fuel gas combustion devices, including
flares, heaters and boilers; (iii) Leak Detection and
Repair requirements; and (iv) Benzene Waste Operations
National Emission Standards for Hazardous Air Pollutants. The
Company is only in the beginning stages of discussion with the
LDEQ and, consequently, while no significant compliance and
enforcement expenditures have been requested as a result of the
Company’s discussions, the Company anticipates that it will
ultimately be required to make emissions reductions requiring
capital investments and/or increased operating expenditures at
the Company’s three Louisiana refineries.
The Company is indemnified by Shell Oil Company, as successor to
Pennzoil-Quaker State Company and Atlas Processing Company, for
specified environmental liabilities arising from the
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
operations of the Shreveport refinery prior to its acquisition
of the facility. The indemnity is unlimited in amount and
duration, but requires the Company to contribute up to
$1.0 million of the first $5.0 million of indemnified
costs for certain of the specified environmental liabilities.
Standby Letters of Credit
The Company has agreements with various financial institutions
for standby letters of credit which have been issued to domestic
vendors. As of December 31, 2004 and 2005, the Company had
outstanding standby letters of credit of $19,430 and $37,746,
respectively.
6.
Long-Term Debt
Long-term debt consisted of the following:
| December 31, | ||||||||
| 2004 | 2005 | |||||||
|
Borrowings under revolving credit
agreement with third-party lenders, interest at prime (7.25% at
December 31, 2005), interest payments monthly, borrowings
due December 2010
|
$ | — | $ | 92,985 | ||||
|
Borrowings under term loan
agreement with third-party lenders, interest at rate of LIBOR
plus 3.50% (7.99% at December 31, 2005), interest payments
quarterly, borrowings due December 2012
|
— | 175,000 | ||||||
|
Borrowings under credit agreement
with a limited partner, interest at variable rates (5.3% at
December 31, 2004), interest payments monthly, borrowings
due June 30, 2007
|
152,874 | — | ||||||
|
Notes payable to limited partners,
interest at prime rate (5.3% at December 31, 2004),
interest payments monthly, principal due June 30, 2007
|
11,400 | — | ||||||
|
Borrowings under term loan
agreement with a third-party lender, interest at a fixed rate of
14%, interest payments monthly, borrowings due December 31,
2008
|
30,000 | — | ||||||
|
Borrowings under revolving loan
agreement with third-party lenders, interest at variable rates
(5.3% at December 31, 2004), interest payments monthly,
borrowings due December 31, 2008
|
19,795 | — | ||||||
|
Total long-term debt
|
214,069 | 267,985 | ||||||
|
Less current portion of long-term
debt
|
19,795 | 500 | ||||||
| $ | 194,274 | $ | 267,485 | |||||
F-21
F-22
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
repaid approximately $13.7 million of the revolving credit
facility with proceeds from the closing of the IPO. The term
loan facility borrowings are secured by a first lien on the
property, plant and equipment of the Company and its
subsidiaries. After the repayment of approximately
$125.7 million of the term loan facility and the associated
accrued interest with proceeds from the closing of the IPO, the
term loan requires quarterly principal payments of
$0.1 million through December 2011 and quarterly principal
payments of approximately $11.8 million thereafter until
maturing in December 2012. The Company is in compliance with all
covenants and restrictions defined in these credit agreements.
As of December 31, 2005, the Company had $11.0 million
of letters of credit outstanding on the crack spread hedging
facility.
The credit agreement with a limited partner that was repaid on
December 9, 2005 with the above credit facilities provided
up to $180,000 in long-term borrowings. The Company was a
limited guarantor of a bank credit facility of the limited
partner and two other related party co-obligors. The guarantee
was limited to advances to the Company from any party to the
bank credit facility, which would include the credit agreement
with a limited partner of $152,874 and the notes payable to
limited partners of $11,400 as of December 31, 2004. In
addition, all assets of the Company, excluding those assets
related to the Shreveport Refinery, were pledged as collateral
to the bank credit facility. All guarantees and pledges of
assets under this agreement were released with the entering into
the current credit agreements on December 9, 2005.
The term loan agreement with a third-party lender was entered
into effective October 25, 2004 by Calumet Shreveport,
Fuels and Lubricants & Waxes to fund the
reconfiguration of the Shreveport Refinery and was repaid on
December 9, 2005 with the above credit facilities. The term
loan agreement allowed for prepayments; however, such
prepayments were subject to additional fees of $2.7 million
which were paid on December 9, 2005 upon the repayment of
this loan. All of the assets of Calumet Shreveport, Fuels and
Lubricants & Waxes were pledged as collateral to the
term loan agreement. All guarantees and pledges of assets under
this agreement were released with the entering into the current
credit agreements on December 9, 2005.
The revolving loan agreement with third-party lenders was
entered into effective October 25, 2004 by Calumet
Shreveport, Fuels and Lubricants & Waxes to fund
working capital requirements related to the reconfiguration of
the Shreveport Refinery. Calumet Lubricants Co., Limited
Partnership was neither an obligor nor guarantor under the
revolving loan agreement. The revolving loan agreement provided
up to $125,000 in total borrowings. Borrowings under the
revolving loan were limited generally by advance rates of
percentages of eligible accounts receivable and inventory as
defined in the revolving loan agreement. All of the assets of
Calumet Shreveport, Fuels and Lubricants & Waxes were
pledged as collateral to the revolving loan agreement. All
guarantees and pledges of assets under this agreement were
released with the entering into the current credit agreements on
December 9, 2005.
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
As of December 31, 2005, maturities of the Company’s
long-term debt is as follows:
| Year | Maturity | |||
|
2006
|
$ | 500 | ||
|
2007
|
500 | |||
|
2008
|
500 | |||
|
2009
|
500 | |||
|
2010
|
93,485 | |||
|
2011 and thereafter
|
$ | 172,500 | ||
|
Total
|
$ | 267,985 | ||
| 7. | Derivatives |
| Crude Oil Call Option Contracts |
| Option Contract | Low Call | High Call | ||||||||||||||
| Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | Average | ||||||||||||
| 1,460,000 | $ | 45.00 | $ | 45.00 | $ | 45.00 | ||||||||||
| Crude Oil Collar Contracts |
F-23
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
(ii), the counterparty will pay the Company if the market price
is greater than the purchased call option strike price stated in
the contract, the Company will pay the counterparty if the
market price is less than the sold put option strike price
stated in the contract, and the Company will pay the
counterparty if the market price is greater than the sold call
option strike price. No payments are made between the Company
and the counterparty if the market price is greater than or
equal to the sold put option strike price but less than or equal
to the purchased call option strike price stated in the contract
as both options would expire unexercised by both the Company and
the counterparty. For agreements for collar type (iii), the
counterparty pays the Company if the market price is greater
than the purchased call option strike price and the payment from
the counterparty to the Company is capped at the difference
between the sold call option strike price and the purchased call
option strike price. The Company pays the counterparty if the
market price is lower than the sold put option strike price and
the payment from the Company to the counterparty is capped at
the difference between the purchased put option strike price and
the sold put option strike price. If the market price is greater
than the sold put option strike price, but lower than the
purchased call option strike price, no payments between the
Company and the counterparty are made. The payments are
calculated based on the difference between the market price and
the call option or put option strike price per barrel, whichever
is applicable, multiplied by the number of barrels stated in
each contract.
Crude oil collar contracts consisted of the following at
December 31, 2004:
| Crude Oil Put/Call Spread | Lower Put | Call Floor | Call Ceiling | |||||||||||||
| Contracts Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | ($/Bbl) | ||||||||||||
| 2,920,000 | $ | 38.67 | $ | 50.99 | $ | 60.06 | ||||||||||
| Crude Oil Put/Call | ||||||||||||||||||||
| Spread Contracts | Lower Put | Upper Put | Call Floor | Call Ceiling | ||||||||||||||||
| Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | ($/Bbl) | ($/Bbl) | |||||||||||||||
|
January 2006
|
248,000 | $ | 46.02 | $ | 55.57 | $ | 65.57 | $ | 75.57 | |||||||||||
|
February 2006
|
224,000 | 46.13 | 55.71 | 65.71 | 75.71 | |||||||||||||||
|
March 2006
|
248,000 | 45.64 | 55.41 | 65.41 | 75.41 | |||||||||||||||
|
April 2006
|
240,000 | 45.85 | 55.58 | 65.58 | 75.58 | |||||||||||||||
|
Totals
|
960,000 | |||||||||||||||||||
|
Average price
|
$ | 45.90 | $ | 55.56 | $ | 65.56 | $ | 75.56 | ||||||||||||
| Fuels Product Margin (Crack Spread) Swap Contracts |
F-24
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
on the difference between the market crack spread and the stated
crack spread per barrel multiplied by the number of barrels
stated in each contract.
Fuel product margin swap contracts consisted of the following at
December 31, 2004:
| 2/1/1 Crack Spread Swap Contracts Expiration Dates | Barrels | ($/Bbl) | ||||||
| 2,482,000 | $ | 6.91 | ||||||
| 912,500 | 6.91 | |||||||
|
Totals
|
3,394,500 | |||||||
|
Average price
|
$ | 6.91 | ||||||
| 2/1/1 Crack Spread Swap Contracts | ||||||||
| Expiration Dates | Barrels | ($/Bbl) | ||||||
|
First Quarter 2006
|
1,035,000 | $ | 9.00 | |||||
|
Second Quarter 2006
|
1,039,000 | 8.98 | ||||||
|
Third Quarter 2006
|
1,043,000 | 8.65 | ||||||
|
Fourth Quarter 2006
|
1,043,000 | 8.28 | ||||||
|
First Quarter 2007
|
1,260,000 | 11.59 | ||||||
|
Second Quarter 2007
|
1,273,000 | 11.56 | ||||||
|
Third Quarter 2007
|
1,282,000 | 11.60 | ||||||
|
Fourth Quarter 2007
|
1,282,000 | 11.60 | ||||||
|
Totals
|
9,257,000 | |||||||
|
Average price
|
$ | 10.30 | ||||||
| Fuels Product Margin (Crack Spread) Collar Contracts |
| Put Option | Call Option | |||||||||||
| 2/1/1 Crack Spread Collar Contracts | Strike Price | Strike Price | ||||||||||
| Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | |||||||||
| 2,372,500 | $ | 5.36 | $ | 8.00 | ||||||||
F-25
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
Fuel product margin collar contracts consisted of the following
at December 31, 2005:
| Put Option | Call Option | |||||||||||
| 2/1/1 Crack Spread Collar Contracts | Strike Price | Strike Price | ||||||||||
| Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | |||||||||
|
First Quarter 2006
|
675,000 | $ | 7.29 | $ | 9.62 | |||||||
|
Second Quarter 2006
|
680,000 | 7.82 | 10.15 | |||||||||
|
Third Quarter 2006
|
685,000 | 7.59 | 9.59 | |||||||||
|
Fourth Quarter 2006
|
685,000 | 6.30 | 8.30 | |||||||||
|
Totals
|
2,725,000 | |||||||||||
|
Average price
|
$ | 7.25 | $ | 9.41 | ||||||||
| Natural Gas Swap Contracts |
| Natural Gas Swap Contracts Expiration Dates | MMbtu | $/MMbtu | ||||||
|
First Quarter 2006
|
600,000 | $ | 9.84 | |||||
|
Second Quarter 2006
|
— | — | ||||||
|
Third Quarter 2006
|
— | — | ||||||
|
Fourth Quarter 2006
|
— | — | ||||||
|
Totals
|
600,000 | |||||||
|
Average price
|
$ | 9.84 | ||||||
| 8. | Fair Value of Financial Instruments |
| 9. | Partnership Distributions |
F-26
F-27
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
10.
Employee Benefit Plan
The Company participates in a defined contribution plan
sponsored by one of the limited partners. All full-time
employees who have completed at least one hour of service are
eligible to participate in the plan. Participants are allowed to
contribute 0% to 100% of their pre-tax earnings to the plan,
subject to government imposed limitations. The Company matches
100% of each 1% contribution by the participant up to 3% and 50%
of each additional 1% contribution up to 5% for a maximum
contribution by the Company of 4% per participant. The
Company’s matching contribution was $742, $791, and $839
for the years ended December 31, 2003, 2004 and 2005,
respectively. The plan also includes a profit-sharing component.
Contributions under the profit-sharing component are determined
by the Board of Directors of the Company’s general partner
and are discretionary. The Company’s profit sharing
contribution was $0, $426, and $452 for the years ended
December 31, 2003, 2004 and 2005, respectively.
11.
Transactions with Related Parties
During the years ended December 31, 2003, 2004 and 2005,
the Company had sales to related parties of $29,037, $9 and
$209, respectively. Trade accounts and other receivables from
related parties at December 31, 2004 and 2005 were $90 and
$110, respectively. The Company also had purchases from related
parties during the years ended December 31, 2003, 2004 and
2005 of $687, $864 and $1,114, respectively. Accounts payable to
related parties at December 31, 2004 and 2005 were $1,517
and $1,704, respectively.
Certain of the Company’s partners had loaned the Company
funds under long-term notes, which have been repaid as discussed
in Note 6. The interest expense associated with the
affiliated borrowings was approximately $9,493, $8,940 and
$9,659 for the years ended December 31, 2003, 2004 and
2005, respectively.
A limited partner provides management, administrative, and
accounting services to the Company for an annual fee. Such
services include, but are not necessarily limited to, advice and
assistance concerning any and all aspects of the operation,
planning, and financing of the Company. Payments for the years
ended December 31, 2003, 2004 and 2005 were $604, $623 and
$633, respectively.
The Company participates in a self-insurance program for medical
benefits with a limited partner and several other related
companies. In connection with this program, contributions are
made to a voluntary employees’ benefit association
(VEBA) trust. Contributions made by the Company to the VEBA
for the years ended December 31, 2003, 2004 and 2005
totaled $3,239, $2,784 and $3,167, respectively.
The Company participates in a self-insurance program for
workers’ compensation with a limited partner and several
related companies. In connection with this program,
contributions are made to the limited partner. Contributions
made by the Company to the limited partner for the years ended
December 31, 2003, 2004 and 2005 totaled $230, $327 and
$294, respectively.
The Company participates in a self-insurance program for general
liability with a limited partner and several related companies.
In connection with this program, contributions are made to the
limited partner. Contributions made by the Company to the
limited partner for the years ended December 31, 2003, 2004
and 2005 totaled $415, $337 and $590, respectively.
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
12.
Segments and Related Information
a.
Segment Reporting
Under the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, the
Company has two reportable segments: Specialty Products and Fuel
Products. The Specialty Products segment produces a variety of
lubricating oils, solvents and waxes. These products are sold to
customers who purchase these products primarily as raw material
components for basic automotive, industrial and consumer goods.
The Fuel Products segment produces a variety of fuel and
fuel-related products including gasoline, diesel and jet fuel.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies
except that the Company evaluates segment performance based on
income from operations. The Company accounts for intersegment
sales and transfers at cost plus a specified mark-up. Reportable
segment information is as follows (in thousands):
| Year Ended | Specialty | Fuel | Combined | Consolidated | |||||||||||||||||
| December 31, 2003 | Products | Products | Segments | Eliminations | Total | ||||||||||||||||
|
Sales:
|
|||||||||||||||||||||
|
External customers
|
$ | 430,381 | $ | — | $ | 430,381 | $ | — | $ | 430,381 | |||||||||||
|
Intersegment sales
|
— | — | — | — | — | ||||||||||||||||
|
Total sales
|
$ | 430,381 | $ | — | $ | 430,381 | $ | — | $ | 430,381 | |||||||||||
|
Depreciation and amortization
|
6,769 | — | 6,769 | — | 6,769 | ||||||||||||||||
|
Income (loss) from operations
|
(3,098 | ) | — | (3,098 | ) | — | (3,098 | ) | |||||||||||||
|
Reconciling items to net income:
|
|||||||||||||||||||||
|
Equity in (loss) income of
unconsolidated affiliates
|
867 | ||||||||||||||||||||
|
Interest expense
|
(9,493 | ) | |||||||||||||||||||
|
Gain (loss) on derivative
instruments
|
6,267 | ||||||||||||||||||||
|
Other
|
32 | ||||||||||||||||||||
|
Net loss
|
(5,425 | ) | |||||||||||||||||||
|
Capital expenditures
|
$ | 12,163 | $ | — | $ | 12,163 | $ | — | $ | 12,163 | |||||||||||
|
Assets
|
$ | 216,941 | $ | — | $ | 216,941 | $ | — | $ | 216,941 | |||||||||||
F-28
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
| Year Ended | Specialty | Fuel | Combined | Consolidated | |||||||||||||||||
| December 31, 2004 | Products | Products | Segments | Eliminations | Total | ||||||||||||||||
|
Sales:
|
|||||||||||||||||||||
|
External customers
|
$ | 530,009 | $ | 9,607 | $ | 539,616 | $ | — | $ | 539,616 | |||||||||||
|
Intersegment sales
|
15,651 | — | 15,651 | (15,651 | ) | — | |||||||||||||||
|
Total sales
|
$ | 545,660 | $ | 9,607 | $ | 555,267 | $ | (15,651 | ) | $ | 539,616 | ||||||||||
|
Depreciation and amortization
|
6,927 | — | 6,927 | — | 6,927 | ||||||||||||||||
|
Income (loss) from operations
|
(9,406 | ) | (2,783 | ) | (12,189 | ) | — | (12,189 | ) | ||||||||||||
|
Reconciling items to net income:
|
|||||||||||||||||||||
|
Equity in (loss) income of
unconsolidated affiliates
|
(427 | ) | |||||||||||||||||||
|
Interest expense
|
(9,869 | ) | |||||||||||||||||||
|
Gain (loss) on derivative
instruments
|
31,372 | ||||||||||||||||||||
|
Other
|
83 | ||||||||||||||||||||
|
Net income
|
8,970 | ||||||||||||||||||||
|
Capital expenditures
|
$ | 43,033 | $ | — | $ | 43,033 | $ | — | $ | 43,033 | |||||||||||
|
Assets
|
$ | 315,336 | $ | 69,400 | $ | 384,736 | $ | (66,530 | ) | $ | 318,206 | ||||||||||
F-29
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
| Year Ended | Specialty | Fuel | Combined | Consolidated | |||||||||||||||||
| December 31, 2005 | Products | Products | Segments | Eliminations | Total | ||||||||||||||||
|
Sales:
|
|||||||||||||||||||||
|
External customers
|
$ | 703,214 | $ | 585,858 | $ | 1,289,072 | $ | — | $ | 1,289,072 | |||||||||||
|
Intersegment sales
|
552,563 | 15,020 | 567,583 | (567,583 | ) | — | |||||||||||||||
|
Total sales
|
$ | 1,255,777 | $ | 600,878 | $ | 1,856,655 | $ | (567,583 | ) | $ | 1,289,072 | ||||||||||
|
Depreciation and amortization
|
10,386 | — | 10,386 | — | 10,386 | ||||||||||||||||
|
Income (loss) from operations
|
4,430 | 61,255 | 65,685 | — | 65,685 | ||||||||||||||||
|
Reconciling items to net income:
|
|||||||||||||||||||||
|
Equity in (loss) income of
unconsolidated affiliates
|
— | ||||||||||||||||||||
|
Interest expense
|
(22,961 | ) | |||||||||||||||||||
|
Debt extinguishment costs
|
(6,882 | ) | |||||||||||||||||||
|
Gain (loss) on derivative
instruments
|
(24,756 | ) | |||||||||||||||||||
|
Other
|
242 | ||||||||||||||||||||
|
Net income
|
11,328 | ||||||||||||||||||||
|
Capital expenditures
|
$ | 12,963 | $ | — | $ | 12,963 | $ | — | $ | 12,963 | |||||||||||
|
Assets
|
$ | 606,023 | $ | 375,153 | $ | 981,176 | $ | (581,459 | ) | $ | 399,717 | ||||||||||
| b. | Geographic Information |
| c. | Product Information |
| December 31, | ||||||||||||
| 2003 | 2004 | 2005 | ||||||||||
|
Fuels
|
$ | 83,564 | $ | 82,288 | $ | 619,842 | ||||||
|
Lubricants
|
205,871 | 251,880 | 394,363 | |||||||||
|
Waxes
|
32,276 | 39,526 | 43,638 | |||||||||
|
Solvents
|
87,599 | 114,694 | 144,967 | |||||||||
|
Other
|
21,071 | 51,228 | 86,262 | |||||||||
|
Total sales
|
$ | 430,381 | $ | 539,616 | $ | 1,289,072 | ||||||
F-30
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
d.
Major Customers
No customer represented 10% or greater of consolidated sales in
each of the three years ended December 31, 2003, 2004 and
2005.
13.
Quarterly Financial Data (Unaudited)
| First | Second | Third | Fourth | |||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Total(1) | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
2005
|
||||||||||||||||||||
|
Sales
|
$ | 229,549 | $ | 301,562 | $ | 363,870 | $ | 394,091 | $ | 1,289,072 | ||||||||||
|
Gross profit
|
26,117 | 30,536 | 38,754 | 44,950 | 140,357 | |||||||||||||||
|
Operating income
|
10,745 | 13,539 | 20,767 | 20,634 | 65,685 | |||||||||||||||
|
Net income (loss)
|
(128 | ) | 18,717 | (39,406 | ) | 32,145 | 11,328 | |||||||||||||
|
2004
|
||||||||||||||||||||
|
Sales
|
$ | 115,235 | $ | 137,337 | $ | 140,464 | $ | 146,580 | $ | 539,616 | ||||||||||
|
Gross profit
|
11,196 | 9,731 | 10,289 | 7,116 | 38,332 | |||||||||||||||
|
Operating loss
|
(192 | ) | (3,281 | ) | (3,224 | ) | (5,492 | ) | (12,189 | ) | ||||||||||
|
Net income (loss)
|
12,926 | (2,651 | ) | 8,491 | (9,796 | ) | 8,970 | |||||||||||||
| (1) | The sum of the four quarters may not equal the total year due to rounding. |
| 14. | Subsequent Events |
F-31
F-32
CALUMET LUBRICANTS CO., LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(in thousands, except operating, unit and per unit data)
options and substitute awards and, with respect to unit options
and phantom units, the grant of distribution equivalent rights
(“DERs”). Subject to adjustment for certain events, an
aggregate of 783,960 common units may be delivered pursuant to
awards under the Plan. Units withheld to satisfy our general
partner’s tax withholding obligations are available for
delivery pursuant to other awards. If the Plan is implemented,
the Plan will be administered by the compensation committee of
the GP’s board of directors.
F-33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Calumet Specialty Products Partners, L.P.
We have audited the accompanying balance sheet of Calumet
Specialty Products Partners, L.P. as of December 31, 2005.
This financial statement is the responsibility of the
Partnership’s management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Partnership’s internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Partnership’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above
presents fairly, in all material respects, the financial
position of Calumet Specialty Products Partners, L.P. at
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
BALANCE SHEET
|
Assets
|
||||||
|
Cash
|
$ | 965 | ||||
|
Total assets
|
$ | 965 | ||||
|
Partners’ capital
|
||||||
|
Limited partners’ capital
|
$ | 946 | ||||
|
General partner’s capital
|
19 | |||||
|
Total partners’ capital
|
$ | 965 | ||||
F-34
F-35
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTE TO BALANCE SHEET
1.
Nature of Operations
Calumet Specialty Products Partners, L.P.
(“Partnership”) is a Delaware limited partnership
formed on September 27, 2005, to acquire a 100% undivided
ownership interest in Calumet Lubricants Co., Limited
Partnership (“Predecessor”). In order to simplify
Partnership’s obligations under the laws of selected
jurisdictions in which Partnership will conduct business,
Partnership’s activities will be conducted through wholly
owned operating subsidiaries.
On January 31, 2006, the Partnership offered 6,450,000
common units representing limited partner interests to the
public, pursuant to an initial public offering. The Partnership
concurrently issued to Fred M. Fehsenfeld, Jr.,
F. William Grube, Calumet, Incorporated, The Heritage Group
and certain affiliated trusts 5,761,015 common units and
13,066,000 subordinated units, representing additional limited
partner interests, and to Calumet GP, LLC (the “General
Partner”) a 2% general partner interest and incentive
distribution rights in exchange for the contribution of 100% of
the ownership interests in Calumet Lubricants Co., Limited
Partnership. In addition, on February 8, 2006, the
Partnership sold an additional 854,985 common units to the
public at $21.50 per common unit pursuant to the
underwriters’ overallotment option.
The General Partner initially contributed $20 and The Heritage
Group, Calumet Incorporated, F. William Grube, Fred M.
Fehsenfeld, Jr. and trusts for the benefit of the
Fehsenfeld family, as the organizational limited partners,
initially contributed an aggregate of $980 to Partnership on
September 29, 2005. There have been no other significant
transactions involving Partnership as of December 31, 2005.
On February 8, 2006, Calumet GP, LLC contributed an
additional $375,147 to the Partnership to maintain its 2%
general partner interest in the Partnership as a result of the
exercise of the overallotment option by the underwriters of the
initial public offering of the Partnership.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| Predecessor | Calumet | |||||||||
| December 31, | March 31, | |||||||||
| 2005 | 2006 | |||||||||
| (Unaudited) | ||||||||||
|
Assets
|
||||||||||
|
Current assets:
|
||||||||||
|
Cash
|
$ | 12,173 | $ | 85 | ||||||
|
Accounts receivable:
|
||||||||||
|
Trade, less allowance for doubtful
accounts of $750 and $774, respectively
|
109,757 | 110,931 | ||||||||
|
Other
|
5,537 | 2,686 | ||||||||
| 115,294 | 113,617 | |||||||||
|
Inventories
|
108,431 | 101,118 | ||||||||
|
Prepaid expenses
|
10,799 | 1,883 | ||||||||
|
Derivative assets
|
3,359 | 313 | ||||||||
|
Deposits and other current assets
|
8,851 | 1,296 | ||||||||
|
Total current assets
|
258,907 | 218,312 | ||||||||
|
Property, plant and equipment, net
|
127,846 | 127,674 | ||||||||
|
Other noncurrent assets, net
|
12,964 | 3,473 | ||||||||
|
Total assets
|
$ | 399,717 | $ | 349,459 | ||||||
|
Liabilities and partners’
capital
|
||||||||||
|
Current liabilities:
|
||||||||||
|
Accounts payable
|
$ | 44,759 | $ | 52,216 | ||||||
|
Accrued salaries, wages and benefits
|
8,164 | 2,004 | ||||||||
|
Turnaround costs
|
2,679 | 3,327 | ||||||||
|
Taxes payable
|
4,209 | 4,686 | ||||||||
|
Bank overdraft
|
— | 5,116 | ||||||||
|
Other current liabilities
|
2,418 | 2,207 | ||||||||
|
Current portion of long-term debt
|
500 | 500 | ||||||||
|
Derivative liabilities
|
30,449 | 46,097 | ||||||||
|
Total current liabilities
|
93,178 | 116,153 | ||||||||
|
Long-term debt, less current portion
|
267,485 | 64,126 | ||||||||
|
Total liabilities
|
360,663 | 180,279 | ||||||||
|
Commitments and contingencies
|
||||||||||
|
Partners’ capital:
|
||||||||||
|
Predecessor’s partners’
capital
|
$ | 38,557 | $ | — | ||||||
|
Common unitholders (13,066,000 and
0 units issued and outstanding, respectively)
|
— | 147,442 | ||||||||
|
Subordinated unitholders
(13,066,000 and 0 units issued and outstanding,
respectively)
|
— | 20,273 | ||||||||
|
General partner’s interest
|
— | 966 | ||||||||
|
Accumulated other comprehensive
income
|
497 | 499 | ||||||||
|
Total partners’ capital
|
39,054 | 169,180 | ||||||||
|
Total liabilities and
partners’ capital
|
$ | 399,717 | $ | 349,459 | ||||||
F-36
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per unit data)
| Predecessor | Calumet | ||||||||
| For the Three Months | |||||||||
| Ended March 31, | |||||||||
| 2005 | 2006 | ||||||||
|
Sales
|
$ | 229,549 | $ | 397,694 | |||||
|
Cost of sales
|
203,432 | 346,744 | |||||||
|
Gross profit
|
26,117 | 50,950 | |||||||
|
Operating costs and expenses:
|
|||||||||
|
Selling, general and administrative
|
3,392 | 4,929 | |||||||
|
Transportation
|
10,723 | 13,907 | |||||||
|
Taxes other than income taxes
|
732 | 914 | |||||||
|
Other
|
157 | 115 | |||||||
|
Restructuring, decommissioning and
asset impairments
|
368 | — | |||||||
|
Operating income (loss)
|
10,745 | 31,085 | |||||||
|
Other income (expense):
|
|||||||||
|
Interest expense
|
(4,864 | ) | (3,976 | ) | |||||
|
Debt extinguishment costs
|
— | (2,967 | ) | ||||||
|
Realized loss on derivative
instruments
|
(6,651 | ) | (3,080 | ) | |||||
|
Unrealized (loss) gain on
derivative instruments
|
603 | (17,715 | ) | ||||||
|
Other
|
39 | 199 | |||||||
|
Total other income (expense)
|
(10,873 | ) | (27,539 | ) | |||||
|
Net income (loss) before income
taxes
|
(128 | ) | 3,546 | ||||||
|
Income tax expense
|
— | 14 | |||||||
|
Net income (loss)
|
$ | (128 | ) | $ | 3,532 | ||||
|
Allocation of net income:
|
|||||||||
|
Less net income applicable to
Predecessor for the period through January 31, 2006
|
(4,408 | ) | |||||||
|
Net loss applicable to Calumet for
the period February 1, 2006 through March 31, 2006
|
(876 | ) | |||||||
|
Minimum quarterly distribution to
common unitholders, prorated
|
(3,885 | ) | |||||||
|
General partner’s interest in
net loss
|
18 | ||||||||
|
Subordinated limited partners’
interest in net loss
|
(4,743 | ) | |||||||
|
Basic and diluted net income (loss)
per limited partner unit:
|
|||||||||
|
Common
|
$ | 0.30 | |||||||
|
Subordinated
|
$ | (0.36 | ) | ||||||
|
Weighted average limited partner
common units outstanding — basic and diluted
|
12,950 | ||||||||
|
Weighted average limited partner
subordinated units outstanding — basic and diluted
|
13,066 | ||||||||
F-37
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’
CAPITAL
(In thousands)
| Partners’ Capital | |||||||||||||||||||||||||
| Accumulated | |||||||||||||||||||||||||
| Predecessor | Other | Limited Partners | |||||||||||||||||||||||
| Partners’ | Comprehensive | General | |||||||||||||||||||||||
| Capital | Income | Partner | Common | Subordinated | Total | ||||||||||||||||||||
|
Balance at December 31, 2005
|
$ | 38,557 | $ | 497 | $ | — | $ | — | $ | — | $ | 39,054 | |||||||||||||
|
Net income through January 31,
2006
|
4,408 | 4,408 | |||||||||||||||||||||||
|
Other comprehensive income through
January 31, 2006
|
1,081 | 1,081 | |||||||||||||||||||||||
|
Distributions to Predecessor
partners
|
(6,900 | ) | (6,900 | ) | |||||||||||||||||||||
|
Assets and liabilities not
contributed to Calumet
|
(5,626 | ) | (5,626 | ) | |||||||||||||||||||||
|
Allocation of Predecessor’s
capital
|
(30,439 | ) | 609 | 9,128 | 20,702 | — | |||||||||||||||||||
|
Proceeds from initial public
offering, net
|
138,743 | 138,743 | |||||||||||||||||||||||
|
Contribution from Calumet GP, LLC
|
375 | 375 | |||||||||||||||||||||||
| (18 | ) | (429 | ) | (429 | ) | (876 | ) | ||||||||||||||||||
|
Other comprehensive income from
February 1, 2006 through March 31, 2006
|
— | (1,079 | ) | — | — | — | (1,079 | ) | |||||||||||||||||
|
Balance at March 31, 2006
|
$ | — | $ | 499 | $ | 966 | $ | 147,442 | $ | 20,273 | $ | 169,180 | |||||||||||||
F-38
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Predecessor | Calumet | |||||||||
| For the Three Months | ||||||||||
| Ended March 31, | ||||||||||
| 2005 | 2006 | |||||||||
|
Operating activities
|
||||||||||
|
Net income (loss)
|
$ | (128 | ) | $ | 3,532 | |||||
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities:
|
||||||||||
|
Depreciation and amortization
|
2,796 | 2,673 | ||||||||
|
Provision for doubtful accounts
|
50 | 127 | ||||||||
|
Loss on disposal of property and
equipment
|
— | 6 | ||||||||
|
Unrealized loss on derivative
instruments
|
(603 | ) | 17,715 | |||||||
|
Debt extinguishment costs
|
— | 2,967 | ||||||||
|
Changes in assets and liabilities:
|
||||||||||
|
Accounts receivable
|
(22,506 | ) | 1,400 | |||||||
|
Inventories
|
(3,009 | ) | 7,313 | |||||||
|
Prepaid expenses
|
(4,287 | ) | 8,916 | |||||||
|
Derivative activity
|
6,908 | 979 | ||||||||
|
Deposits and other current assets
|
(830 | ) | 7,555 | |||||||
|
Other noncurrent assets
|
1,027 | 4,408 | ||||||||
|
Accounts payable
|
(29,974 | ) | 7,457 | |||||||
|
Accrued salaries, wages and benefits
|
(1,390 | ) | (6,160 | ) | ||||||
|
Turnaround costs
|
(599 | ) | 648 | |||||||
|
Taxes payable
|
4,732 | 611 | ||||||||
|
Other current liabilities
|
(192 | ) | (32 | ) | ||||||
|
Net cash provided by (used in)
operating activities
|
(48,005 | ) | 60,115 | |||||||
|
Investing activities
|
||||||||||
|
Additions to property, plant and
equipment
|
(6,933 | ) | (2,975 | ) | ||||||
|
Proceeds from disposal of property,
plant and equipment
|
— | 54 | ||||||||
|
Net cash used in investing
activities
|
(6,933 | ) | (2,921 | ) | ||||||
|
Financing activities
|
||||||||||
|
(Repayment of) proceeds from
borrowings — credit agreements with third parties, net
|
36,672 | (203,359 | ) | |||||||
|
Proceeds from
borrowings — credit agreement with Predecessor limited
partners, net
|
634 | — | ||||||||
|
Proceeds from initial public
offering, net
|
— | 138,743 | ||||||||
|
Contribution from Calumet GP, LLC
|
— | 375 | ||||||||
|
Cash distribution to Calumet
Holding, LLC
|
— | (3,257 | ) | |||||||
|
Change in bank overdraft
|
— | 5,116 | ||||||||
|
Distributions to Predecessor’s
partners
|
— | (6,900 | ) | |||||||
|
Net cash provided by (used in)
financing activities
|
37,306 | (69,282 | ) | |||||||
|
Net decrease in cash
|
(17,632 | ) | (12,088 | ) | ||||||
|
Cash at beginning of period
|
18,087 | 12,173 | ||||||||
|
Cash at end of period
|
$ | 455 | $ | 85 | ||||||
|
Supplemental disclosure of cash
flow information
|
||||||||||
|
Interest paid
|
$ | 2,134 | $ | 3,797 | ||||||
F-39
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except operating, unit and per unit data)
1.
Partnership Organization and Basis of Presentation
Calumet Specialty Products Partners, L.P. (Calumet, Partnership,
or the Company) is a Delaware limited partnership. The general
partner is Calumet GP, LLC, a Delaware limited liability
company. On January 31, 2006, the Partnership completed the
initial public offering of its common units. See Note 6 for
further discussion of our initial public offering. As of
March 31, 2006, we have 13,066,000 common units, 13,066,000
subordinated units, and 533,306 general partner equivalent units
outstanding. The general partner owns 2% of Calumet while the
remaining 98% is owned by limited partners. Calumet is engaged
in the production and marketing of crude oil-based specialty
lubricating oils, fuels, solvents and waxes. Calumet owns
refineries located in Princeton, Louisiana, Cotton Valley,
Louisiana, and Shreveport, Louisiana, and a terminal located in
Burnham, Illinois.
The unaudited condensed consolidated financial statements of the
Company as of March 31, 2006 and for the three months ended
March 31, 2006 and 2005 included herein have been prepared,
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
disclosures normally included in the consolidated financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations,
although the Company believes that the following disclosures are
adequate to make the information presented not misleading. These
unaudited condensed consolidated financial statements reflect
all adjustments that, in the opinion of management, are
necessary to present fairly the results of operations for the
interim periods presented. All adjustments are of a normal
nature, unless otherwise disclosed. The results of operations
for the three months ended March 31, 2006 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 2006. These unaudited condensed
consolidated financial statements should be read in conjunction
with the Company’s annual report on
Form 10-K for the
year ended December 31, 2005 filed on March 20, 2006.
2.
Inventory
The cost of inventories is determined using the
last-in, first-out
(LIFO) method. Inventories are valued at the lower of cost
or market value.
Inventories consist of the following:
| Predecessor | Calumet | |||||||
| December 31, | March 31, | |||||||
| 2005 | 2006 | |||||||
|
Raw materials
|
$ | 28,299 | $ | 36,985 | ||||
|
Work in process
|
29,737 | 28,556 | ||||||
|
Finished goods
|
50,395 | 35,577 | ||||||
| $ | 108,431 | $ | 101,118 | |||||
| 3. | Derivatives |
F-40
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Derivative Instruments and Hedging Activities, the
Company recognizes all derivative transactions as either assets
or liabilities at fair value on the balance sheet. To the extent
a derivative instrument is designated effective as a cash flow
hedge of an exposure to future changes in the value of a
purchase or sale transaction, the change in fair value of the
derivative is deferred in other comprehensive income. For cash
flow hedges of future purchases of natural gas and crude oil,
the realized gain or loss is recorded to cost of goods sold in
the statement of operations upon the settlement of the contract.
The realized gain or loss upon settlement of a cash flow hedge
of the future sale of diesel fuel or gasoline is recorded to
sales in the statement of operations. For derivative instruments
not designated as cash flow hedges and the portion of any cash
flow hedge that is determined to be ineffective, the change in
fair value of the asset or liability for the period is recorded
to unrealized gain or loss on derivative instruments in the
statement of operations. Upon the settlement of these
derivatives not designated as hedges, the gain or loss for the
period is recorded to realized gain or loss on derivative
instruments in the statement of operations.
Crude Oil Collar Contracts
The Company utilizes combinations of options to manage crude
price risk and volatility of cash flows. These combinations of
options are designated as cash flow hedges of the future
purchase of crude oil. The Company’s policy is generally to
enter into crude oil derivative contracts for a period no
greater than three to six months forward and for 50% to 75% of
anticipated crude oil purchases related to the production of
certain specialty products. This represents approximately 30% to
40% of our total specialty products production. At
March 31, 2006, the Company had the following hedge
positions related to crude oil purchases.
At December 31, 2005, the Company had the following hedge
positions related to crude oil purchases.
| Crude Oil Put/Call | ||||||||||||||||||||
| Spread Contracts | Lower Put | Upper Put | Lower Call | Upper Call | ||||||||||||||||
| Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | ($/Bbl) | ($/Bbl) | |||||||||||||||
|
January 2006
|
248,000 | $ | 46.02 | $ | 55.57 | $ | 65.57 | $ | 75.57 | |||||||||||
|
February 2006
|
224,000 | 46.13 | 55.71 | 65.71 | 75.71 | |||||||||||||||
|
March 2006
|
248,000 | 45.64 | 55.41 | 65.41 | 75.41 | |||||||||||||||
|
April 2006
|
240,000 | 45.85 | 55.58 | 65.58 | 75.58 | |||||||||||||||
|
Totals
|
960,000 | |||||||||||||||||||
|
Average price
|
$ | 45.90 | $ | 55.56 | $ | 65.56 | $ | 75.56 | ||||||||||||
| Crude Oil Put/Call | ||||||||||||||||||||
| Spread Contracts | Lower Put | Upper Put | Lower Call | Upper Call | ||||||||||||||||
| Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | ($/Bbl) | ($/Bbl) | |||||||||||||||
|
April 2006
|
240,000 | $ | 45.85 | $ | 55.58 | $ | 65.58 | $ | 75.58 | |||||||||||
|
May 2006
|
248,000 | 52.60 | 62.60 | 72.60 | 82.60 | |||||||||||||||
|
June 2006
|
240,000 | 51.06 | 61.06 | 71.06 | 81.06 | |||||||||||||||
|
Totals
|
728,000 | |||||||||||||||||||
|
Average price
|
$ | 49.87 | $ | 59.78 | $ | 69.78 | $ | 79.78 | ||||||||||||
F-41
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Fuels Product Margin (Crack Spread) Swap Contracts
The Company utilizes combinations of options and forward swap
contracts to manage fuels product margin (crack spread) price
risk and volatility of cash flows. Through March 31, 2006,
the Company had not designated any fuels product margin
derivatives as hedges under SFAS 133. The Company’s
policy is generally to enter into crack spread derivative
contracts for a period no greater than five years forward and
for no more than 75% of fuels production. For purposes of these
swap contracts, crack spread is defined as the difference
between the selling price of one barrel of refined product
(gasoline or diesel fuel) less the price of one barrel of crude
oil, with all component pricing based on standard market indices
as defined in the contracts. The Company enters into various
combinations of these swap contracts to achieve an approximate
2/1/1 crack spread ratio, which means two barrels of crude oil
and one barrel each of gasoline and diesel fuel. At
March 31, 2006, the Company had the following derivatives
related to fuels product margins.
At December 31, 2005, the Company had the following
derivative positions related to fuels product margins.
| Crack Spread Swap | ||||||||
| Contracts Expiration Dates | Barrels | ($/Bbl) | ||||||
|
First Quarter 2006
|
1,035,000 | $ | 9.00 | |||||
|
Second Quarter 2006
|
1,039,000 | 8.98 | ||||||
|
Third Quarter 2006
|
1,043,000 | 8.65 | ||||||
|
Fourth Quarter 2006
|
1,043,000 | 8.28 | ||||||
|
First Quarter 2007
|
1,260,000 | 11.59 | ||||||
|
Second Quarter 2007
|
1,273,000 | 11.56 | ||||||
|
Third Quarter 2007
|
1,282,000 | 11.60 | ||||||
|
Fourth Quarter 2007
|
1,282,000 | 11.60 | ||||||
|
Totals
|
9,257,000 | |||||||
|
Average price
|
$ | 10.30 | ||||||
| Crack Spread Swap | ||||||||
| Contracts Expiration Dates | Barrels | ($/Bbl) | ||||||
|
Second Quarter 2006
|
1,039,000 | $ | 8.94 | |||||
|
Third Quarter 2006
|
1,043,000 | 8.61 | ||||||
|
Fourth Quarter 2006
|
1,043,000 | 8.25 | ||||||
|
First Quarter 2007
|
1,620,000 | 12.43 | ||||||
|
Second Quarter 2007
|
1,637,000 | 12.41 | ||||||
|
Third Quarter 2007
|
1,650,000 | 12.45 | ||||||
|
Fourth Quarter 2007
|
1,650,000 | 12.45 | ||||||
|
Calendar Year 2008
|
5,124,000 | 11.49 | ||||||
|
Calendar Year 2009
|
4,745,000 | 10.94 | ||||||
|
Calendar Year 2010
|
1,825,000 | 10.46 | ||||||
|
Totals
|
21,376,000 | |||||||
|
Average price
|
$ | 11.15 | ||||||
F-42
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
selling a crack spread call option. These crack spread collar
contracts require no net premium to be paid by the Company to
the counterparties as the premium for the purchased crack spread
put option is offset by the premium for the sold crack spread
call option.
Fuel product margin collar contracts consisted of the following
at December 31, 2005:
| Put Option | Call Option | |||||||||||
| Crack Spread Collar | Strike Price | Strike Price | ||||||||||
| Contracts Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | |||||||||
|
First Quarter 2006
|
675,000 | $ | 7.29 | $ | 9.62 | |||||||
|
Second Quarter 2006
|
680,000 | 7.82 | 10.15 | |||||||||
|
Third Quarter 2006
|
685,000 | 7.59 | 9.59 | |||||||||
|
Fourth Quarter 2006
|
685,000 | 6.30 | 8.30 | |||||||||
|
Totals
|
2,725,000 | |||||||||||
|
Average price
|
$ | 7.25 | $ | 9.41 | ||||||||
| Put Option | Call Option | |||||||||||
| Crack Spread Collar | Strike Price | Strike Price | ||||||||||
| Contracts Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | |||||||||
|
Second Quarter 2006
|
680,000 | $ | 7.82 | $ | 10.15 | |||||||
|
Third Quarter 2006
|
685,000 | 7.59 | 9.59 | |||||||||
|
Fourth Quarter 2006
|
685,000 | 6.30 | 8.30 | |||||||||
|
Totals
|
2,050,000 | |||||||||||
|
Average price
|
$ | 7.24 | $ | 9.35 | ||||||||
| Natural Gas Swap | ||||||||
| Contracts Expiration Dates | MMbtu | $/MMbtu | ||||||
|
First Quarter 2006
|
600,000 | $ | 9.84 | |||||
|
Totals
|
600,000 | |||||||
|
Average price
|
$ | 9.84 | ||||||
F-43
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
At March 31, 2006, the Company had the following positions
related to natural gas purchases.
| Natural Gas Swap | ||||||||
| Contracts Expiration Dates | MMbtu | $/MMbtu | ||||||
|
Third Quarter 2006
|
200,000 | $ | 8.52 | |||||
|
Fourth Quarter 2006
|
300,000 | $ | 8.52 | |||||
|
First Quarter 2007
|
300,000 | $ | 8.52 | |||||
|
Totals
|
800,000 | |||||||
|
Average price
|
$ | 8.52 | ||||||
| 4. | Contingencies |
F-44
F-45
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
LDEQ’s file review of the Cotton Valley refinery; and
(iii) a December 2004 notification received by the Cotton
Valley refinery from the LDEQ regarding alleged violations for
the construction of a multi-tower pad and associated pump pads
without a permit issued by the agency. The Company is currently
in settlement negotiations with the LDEQ to resolve these
matters, as well as a number of similar matters at the Princeton
refinery, for which no penalty has yet been proposed. Management
is of the opinion that the ultimate resolution of this matter
will not have a material adverse impact on the Company’s
financial position or results of operations.
The Company has recently entered into discussions on a voluntary
basis with the LDEQ regarding the Company’s participation
in that agency’s “Small Refinery and Single Site
Refinery Initiative.” This state initiative is patterned
after the EPA’s “National Petroleum Refinery
Initiative,” which is a coordinated, integrated compliance
and enforcement strategy to address federal Clean Air Act
compliance issues at the nation’s largest petroleum
refineries. The Company expects that the LDEQ’s primary
focus under the state initiative will be on four compliance and
enforcement concerns: (i) Prevention of Significant
Deterioration/ New Source Review; (ii) New Source
Performance Standards for fuel gas combustion devices, including
flares, heaters and boilers; (iii) Leak Detection and
Repair requirements; and (iv) Benzene Waste Operations
National Emission Standards for Hazardous Air Pollutants. The
Company is only in the beginning stages of discussion with the
LDEQ and, consequently, while no significant compliance and
enforcement expenditures have been requested as a result of the
Company’s discussions, the Company anticipates that it will
ultimately be required to make emissions reductions requiring
capital investments and/or increased operating expenditures at
the Company’s three Louisiana refineries.
The Company is indemnified by Shell Oil Company, as successor to
Pennzoil-Quaker State Company and Atlas Processing Company, for
specified environmental liabilities arising from the operations
of the Shreveport refinery prior to its acquisition of the
facility. The indemnity is unlimited in amount and duration, but
requires the Company to contribute up to $1,000 of the first
$5,000 of indemnified costs for certain of the specified
environmental liabilities.
Standby Letters of Credit
The Company has agreements with various financial institutions
for standby letters of credit which have been issued to domestic
vendors. As of December 31, 2005 and March 31, 2006,
the Company had outstanding standby letters of credit of $37,746
and $40,045, respectively. As discussed in Note 5 below, as
of March 31, 2006 the Company had issued a $50,000 letter
of credit under the letter of credit facility to support crack
spread hedging.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
5.
Long-Term Debt
Long-term debt consisted of the following:
| Predecessor | Calumet | |||||||
| December 31, | March 31, | |||||||
| 2005 | 2006 | |||||||
|
Borrowings under revolving credit
agreement with third-party lenders, interest at prime (7.25% and
7.75%, respectively), interest payments monthly, borrowings due
December 2010
|
$ | 92,985 | $ | 14,751 | ||||
|
Borrowings under term loan
agreement with third-party lenders, interest at rate of LIBOR
plus 3.50% (7.99% and 8.37%, respectively), interest payments
quarterly, borrowings due December 2012
|
175,000 | 49,875 | ||||||
|
Total long-term debt
|
267,985 | 64,626 | ||||||
|
Less current portion of long-term
debt
|
500 | 500 | ||||||
| $ | 267,485 | $ | 64,126 | |||||
| Year | Maturity | |||
|
2006
|
$ | 500 | ||
|
2007
|
500 | |||
|
2008
|
500 | |||
|
2009
|
500 | |||
|
2010
|
15,251 | |||
|
2011 and thereafter
|
$ | 47,375 | ||
|
Total
|
$ | 64,626 | ||
F-46
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
6.
Partners’ Capital
On January 31, 2006, the Partnership completed the initial
public offering of its common units and sold 5,699,900 of those
units to the underwriters in the initial public offering. The
Partnership also sold a total of 750,100 common units to certain
relatives of the chairman of our general partner (the
“Fehsenfeld Investors”). In addition, on
February 8, 2006, the Partnership sold an additional
854,985 common units to the underwriters pursuant to the
underwriters’ overallotment option. Each of these issuances
was made pursuant to the Partnership’s Registration
Statement on
Form S-1 (File
No. 333-128880)
declared effective by the Securities and Exchange Commission on
January 29, 2006. The proceeds received by the Partnership
(net of underwriting discounts and structuring fees and before
expenses) from the sale of an aggregate of 7,304,985 units
were approximately $144,400. The net proceeds were used to:
(i) repay indebtedness and accrued interest under the first
lien term loan facility in the amount of approximately $125,700,
(ii) repay indebtedness under the secured revolving credit
facility in the amount of approximately $13,100 and
(iii) pay transaction fees and expenses in the amount of
approximately $5,600. Underwriting discounts totaled
approximately $11,600 (including certain structuring fees paid
to certain of the underwriters of approximately $2,400).
The following table represents the assets and liabilities of the
Predecessor immediately prior to contributing assets to Calumet,
the assets and liabilities contributed to Calumet, and the
Predecessor’s assets and liabilities that were not
contributed to Calumet.
| Predecessor | |||||||||||||
| January 31, | Net Assets Not | February 1, | |||||||||||
| 2006 | Contributed | 2006 | |||||||||||
| Assets | |||||||||||||
|
Current assets:
|
|||||||||||||
|
Cash
|
$ | 128,262 | $ | 3,257 | $ | 125,005 | |||||||
|
Accounts receivable
|
113,261 | 150 | 113,111 | ||||||||||
|
Inventories
|
114,624 | — | 114,624 | ||||||||||
|
Derivative assets
|
2,407 | — | 2,407 | ||||||||||
|
Other current assets
|
9,798 | — | 9,798 | ||||||||||
|
Total current assets
|
368,352 | 3,407 | 364,945 | ||||||||||
|
Property, plant and equipment, net
|
126,886 | 529 | 126,357 | ||||||||||
|
Other noncurrent assets, net
|
4,289 | 2,002 | 2,287 | ||||||||||
|
Total assets
|
$ | 499,527 | $ | 5,938 | $ | 493,589 | |||||||
| Liabilities | |||||||||||||
|
Current liabilities:
|
|||||||||||||
|
Accounts payable
|
$ | 44,832 | $ | — | $ | 44,832 | |||||||
|
Other current liabilities
|
12,124 | 312 | 11,812 | ||||||||||
|
Current portion of long-term debt
|
500 | — | 500 | ||||||||||
|
Derivative liabilities
|
28,498 | — | 28,498 | ||||||||||
|
Total current liabilities
|
85,954 | 312 | 85,642 | ||||||||||
|
Long-term debt, less current portion
|
259,393 | — | 259,393 | ||||||||||
|
Total liabilities
|
345,347 | 312 | 345,035 | ||||||||||
|
Net assets:
|
$ | 154,180 | $ | 5,626 | $ | 148,554 | |||||||
F-47
F-48
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Predecessor’s policy was that distributions were
limited to the amount necessary to pay each partner’s
federal income tax and any state income tax on the amount of
partnership income. However, additional distributions to the
partners could be made at the sole discretion of the general
partner. During the year ended December 31, 2005 and the
quarter ended March 31, 2006 distributions of $7,300 and
$6,900, respectively, were made to the Predecessor partners.
Going forward, Calumet’s distribution policy is as defined
in the Partnership Agreement.
7.
Earnings per Unit
The Partnership calculates earnings per unit in accordance with
SFAS 128, Earnings per share, as interpreted by
Emerging Issues Task Force Issue
No. 03-06,
Participating Securities and the Two-Class Method under
FASB Statement No. 128. Under this approach, common and
subordinated limited units represent separate classes of limited
partner units that require two-class presentation under
SFAS No. 128. Therefore, the Partnership calculates
basic and diluted earnings per unit on a discreet quarterly
basis assuming the minimum quarterly distribution, prorated if
necessary, is paid on all common units outstanding and that all
undistributed earnings or losses in the period are fully
allocated to limited units based on their contractual
participation rights as if all of the earnings or losses for the
period had been distributed.
8.
Segments and Related Information
a.
Segment Reporting
Under the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, the
Company has two reportable segments: Specialty Products and Fuel
Products. The Specialty Products segment produces a variety of
lubricating oils, solvents and waxes. These products are sold to
customers who purchase these products primarily as raw material
components for basic automotive, industrial and consumer goods.
The Fuel Products segment produces a variety of fuel and
fuel-related products including gasoline, diesel and jet fuel.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies
except that the Company evaluates segment performance based on
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
income from operations. The Company accounts for intersegment
sales and transfers at cost plus a specified mark-up. Reportable
segment information is as follows (in thousands):
| Three Months Ended | Specialty | Fuel | Combined | Consolidated | ||||||||||||||||
| March 31, 2005 | Products | Products | Segments | Eliminations | Total | |||||||||||||||
|
Sales:
|
||||||||||||||||||||
|
External customers
|
$ | 141,820 | $ | 87,729 | $ | 229,549 | $ | — | $ | 229,549 | ||||||||||
|
Intersegment sales
|
94,060 | 1,014 | 95,074 | (95,074 | ) | — | ||||||||||||||
|
Total sales
|
$ | 235,880 | $ | 88,743 | $ | 324,623 | $ | (95,074 | ) | $ | 229,549 | |||||||||
|
Depreciation and amortization
|
2,796 | — | 2,796 | — | 2,796 | |||||||||||||||
|
Income from operations
|
2,799 | 7,946 | 10,745 | — | 10,745 | |||||||||||||||
|
Reconciling items to net income:
|
||||||||||||||||||||
|
Interest expense
|
(4,864 | ) | ||||||||||||||||||
|
Debt extinguishment costs
|
— | |||||||||||||||||||
|
Loss on derivative instruments
|
(6,048 | ) | ||||||||||||||||||
|
Other
|
39 | |||||||||||||||||||
|
Net income
|
(128 | ) | ||||||||||||||||||
|
Capital expenditures
|
$ | 6,933 | $ | — | $ | 6,933 | $ | — | $ | 6,933 | ||||||||||
| Three Months Ended | Specialty | Fuel | Combined | Consolidated | ||||||||||||||||
| March 31, 2006 | Products | Products | Segments | Eliminations | Total | |||||||||||||||
|
Sales:
|
||||||||||||||||||||
|
External customers
|
$ | 229,657 | $ | 168,037 | $ | 397,694 | $ | — | $ | 397,694 | ||||||||||
|
Intersegment sales
|
166,177 | 9,551 | 175,728 | (175,728 | ) | — | ||||||||||||||
|
Total sales
|
$ | 395,834 | $ | 177,588 | $ | 573,422 | $ | (175,728 | ) | $ | 397,694 | |||||||||
|
Depreciation and amortization
|
2,673 | — | 2,673 | — | 2,673 | |||||||||||||||
|
Income from operations
|
19,587 | 11,498 | 31,085 | — | 31,085 | |||||||||||||||
|
Reconciling items to net income:
|
||||||||||||||||||||
|
Interest expense
|
(3,976 | ) | ||||||||||||||||||
|
Debt extinguishment costs
|
(2,967 | ) | ||||||||||||||||||
|
Loss on derivative instruments
|
(20,795 | ) | ||||||||||||||||||
|
Other
|
199 | |||||||||||||||||||
|
Income tax expense
|
(14 | ) | ||||||||||||||||||
|
Net income
|
3,532 | |||||||||||||||||||
|
Capital expenditures
|
$ | 2,975 | $ | — | $ | 2,975 | $ | — | $ | 2,975 | ||||||||||
F-49
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Predecessor | Calumet | ||||||||
| December 31, | March 31, | ||||||||
| 2005 | 2006 | ||||||||
|
Segment Assets:
|
|||||||||
|
Specialty Products
|
$ | 606,023 | $ | 576,580 | |||||
|
Fuel Products
|
375,153 | 374,532 | |||||||
|
Combined Segments
|
981,176 | 951,112 | |||||||
|
Eliminations
|
(581,459 | ) | (601,653 | ) | |||||
|
Total Assets
|
$ | 399,717 | $ | 349,459 | |||||
| b. | Geographic Information |
| c. | Product Information |
| Three Months | ||||||||
| Ended March 31, | ||||||||
| 2005 | 2006 | |||||||
|
Fuels
|
$ | 95,648 | $ | 178,601 | ||||
|
Lubricants
|
79,032 | 132,910 | ||||||
|
Solvents
|
27,528 | 52,360 | ||||||
|
Waxes
|
8,514 | 15,455 | ||||||
|
Other
|
18,827 | 18,368 | ||||||
|
Total sales
|
$ | 229,549 | $ | 397,694 | ||||
| d. | Major Customers |
| 9. | Subsequent Events |
F-50
F-51
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
under its term loan facility. The notional amount of the
interest rate swap agreement is 85% of the outstanding term loan
balance over its remaining term, with LIBOR fixed at 5.44%.
Borrowings under the term loan facility bear interest at LIBOR
plus 3.50%.
On April 26, 2006, the Company declared a prorated quarter
cash distribution of $0.30 per unit, or $8,000, for the
period from the closing of the Partnership’s initial public
offering on January 31, 2006 through March 31, 2006.
The distribution will be paid on May 15, 2006 to the
general partner as well as common and subordinated unitholders
of record as of the close of business on May 2, 2006. This
prorated quarterly distribution of $0.30 equates to a
$0.45 per unit distribution for a complete quarter, or
$1.80 per unit on an annual basis.
CALUMET GP, LLC
UNAUDITED CONSOLIDATED BALANCE SHEET
(in thousands)
|
Assets
|
||||||
|
Current assets:
|
||||||
|
Cash
|
$ | 600 | ||||
|
Accounts receivable:
|
||||||
|
Trade, less allowance for doubtful
accounts of $750
|
110,931 | |||||
|
Other
|
2,687 | |||||
| 113,618 | ||||||
|
Inventory
|
101,118 | |||||
|
Prepaid expenses
|
1,883 | |||||
|
Derivative assets
|
313 | |||||
|
Deposits and other current assets
|
1,296 | |||||
|
Total current assets
|
218,828 | |||||
|
Property, plant and equipment, net
|
127,674 | |||||
|
Other noncurrent assets
|
3,473 | |||||
|
Total assets
|
$ | 349,975 | ||||
|
Liabilities
|
||||||
|
Current liabilities:
|
||||||
|
Accounts payable
|
$ | 52,216 | ||||
|
Accrued salaries, wages, and
benefits
|
2,004 | |||||
|
Turnaround costs
|
3,327 | |||||
|
Taxes payable
|
4,686 | |||||
|
Bank overdraft.
|
5,116 | |||||
|
Other current liabilities
|
2,207 | |||||
|
Current portion of long-term debt
|
500 | |||||
|
Derivative liabilities
|
46,097 | |||||
|
Total current liabilities
|
116,153 | |||||
|
Long-term debt
|
64,126 | |||||
|
Minority interest
|
82,569 | |||||
|
Commitments and contingencies
|
||||||
|
Owners’ equity
|
$ | 87,127 | ||||
|
Total liabilities and owners’
equity
|
$ | 349,975 | ||||
F-52
F-53
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except unit and per unit data)
1.
Organization
Calumet GP, LLC (the GP) is a Delaware limited liability company
formed on September 27, 2005 and is the general partner of
Calumet Specialty Products Partners, L.P. (the Partnership). The
GP is owned by The Heritage Group as well as Fred M.
Fehsenfeld, Jr. family trusts and an F. William Grube
family trust. The GP owns a two percent general partner interest
in the Partnership and manages and operates all of the assets of
the Partnership. However, due to the substantive control granted
to the GP by the partnership agreement we consolidate our
interest in the Partnership (collectively Calumet or the
Company).
2.
Initial Public Offering and Related Transactions
On January 31, 2006, the Partnership completed the initial
public offering of its common units and sold 5,699,900 of those
units to the underwriters in the initial public offering. The
Partnership also sold a total of 750,100 common units to
certain relatives of the chairman of our general partner (the
“Fehsenfeld Investors”). In addition, on
February 8, 2006, the Partnership sold an additional
854,985 common units to the underwriters pursuant to the
underwriters’ option to purchase additional units. Each of
these issuances was made pursuant to the Partnership’s
Registration Statement on
Form S-1 (File
No. 333-128880)
declared effective by the Securities and Exchange Commission on
January 29, 2006. The proceeds received by the Partnership
(net of underwriting discounts and structuring fees and before
expenses) from the sale of an aggregate of 7,304,985 units
were approximately $144,400. The net proceeds were used to:
(i) repay indebtedness and accrued interest under the first
lien term loan facility in the amount of approximately $125,700,
(ii) repay indebtedness under the secured revolving credit
facility in the amount of approximately $13,100 and
(iii) pay transaction fees and expenses in the amount of
approximately $5,600. Underwriting discounts totaled
approximately $11,600 (including certain structuring fees paid
to certain of the underwriters of approximately $2,400).
3.
Description of the Business
Calumet is engaged in the production and marketing of crude
oil-based specialty lubricating oils, fuels, solvents and waxes.
Calumet owns a refinery located in Princeton, Louisiana, a
refinery located in Cotton Valley, Louisiana, a terminal located
in Burnham, Illinois and a refinery located in Shreveport,
Louisiana (the Shreveport Refinery).
4.
Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
the GP, the Partnership and its wholly-owned subsidiary, Calumet
Shreveport and Calumet Shreveport’s wholly owned
subsidiaries Fuels and Lubricants & Waxes. All
intercompany transactions and accounts have been eliminated.
Use of Estimates
The Company’s financial statements are prepared in
conformity with U.S. generally accepted accounting
principles which require management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
Cash
Cash includes all highly liquid investments with a maturity of
three months or less at the time of purchase.
Inventories
The cost of inventories is determined using the
last-in, first-out
(LIFO) method. Inventories are valued at the lower of cost or
market value.
Inventories consist of the following:
| Calumet | ||||
| March 31, | ||||
| 2006 | ||||
|
Raw materials
|
$ | 36,985 | ||
|
Work in process
|
28,556 | |||
|
Finished goods
|
35,577 | |||
| $ | 101,118 | |||
| Calumet | ||||
| March 31, | ||||
| 2006 | ||||
|
Buildings and improvements (10 to
40 years)
|
$ | 2,571 | ||
|
Machinery and equipment (2 to
20 years)
|
163,323 | |||
|
Furniture and fixtures (5 to
10 years)
|
2,243 | |||
|
Construction-in-progress
|
2,797 | |||
| 170,934 | ||||
|
Less accumulated depreciation
|
(43,260 | ) | ||
| $ | 127,674 | |||
F-54
F-55
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
property, plant and equipment are charged to cost of sales as
incurred. Renewals, betterments and major repairs that
materially extend the life of the properties are capitalized.
Impairment of Long-Lived Assets
The Company periodically evaluates the carrying value of
long-lived assets to be held and used, including definite-lived
intangible assets, when events or circumstances warrant such a
review. The carrying value of a long-lived asset to be held and
used is considered impaired when the anticipated separately
identifiable undiscounted cash flows from such an asset are less
than the carrying value of the asset. In that event, a
write-down of the asset would be recorded through a charge to
operations, based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved.
Long-lived assets to be disposed of other than by sale are
considered held and used until disposal.
Revenue Recognition
The Company recognizes revenue on orders received from its
customers when there is persuasive evidence of an arrangement
with the customer that is supportive of revenue recognition, the
customer has made a fixed commitment to purchase the product for
a fixed or determinable sales price, collection is reasonably
assured under the Company’s normal billing and credit
terms, all of the Company’s obligations related to product
have been fulfilled and ownership and all risks of loss have
been transferred to the buyer, which is upon shipment to the
customer.
Derivatives
The Company uses derivative instruments to minimize its price
risk and volatility of cash flows associated with the purchase
of crude oil and natural gas, and the sale of diesel fuel and
gasoline and accounts for these derivative instruments in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, as further described in
Note 5.
Other Noncurrent Assets
Other noncurrent assets at March 31, 2006 include $2,449,
net of accumulated amortization of $3,191 of deferred debt
issuance costs, which are being amortized on a straight-line
basis over the life of the related debt instruments.
Other noncurrent assets also include $907 at March 31, 2006
of intangible assets, net of accumulated amortization, purchased
to facilitate the sales of horticultural spray oil products.
These intangible assets are being amortized using the
straight-line method, over an estimated useful life of five
years. Annual amortization for 2006 and 2007 will be $455, with
the remaining balance of approximately $111 amortized in 2008.
Accumulated amortization on these intangible assets was $1,369
at March 31, 2006.
New Accounting Pronouncements
On December 16, 2004, the FASB issued Statement
No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock
Based Compensation. Statement 123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and
amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to
the approach described in Statement 123. However,
F-56
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative.
Statement 123(R) is effective for fiscal years beginning
after July 1, 2005. The Company has adopted
Statement 123(R) using the “modified prospective”
method in which compensation cost is recognized beginning with
the effective date based on the requirements of
Statement 123(R) for all share-based payments granted after
the effective date and based on the requirements of
Statement 123 for all awards granted to employees prior to
the effective date of Statement 123(R) that remain unvested
on the effective date. There was no impact from the adoption of
Statement 123(R) as the Company has not granted any
share-based payments.
In 2005, the FASB Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement Obligations
was issued. The Company adopted this interpretation as of
December 31, 2005. The Company has conditional asset
retirement obligations related to its Cotton Valley, Shreveport
and Princeton refineries related to asbestos. However, the
Company believes that there is an indeterminate settlement date
for these obligations and; thus, fair value cannot be reasonably
estimated. Therefore, at the date of adoption, December 31,
2005, the Company did not record any liability for asset
retirement obligations related to these refineries.
5.
Derivatives
The Company uses derivative instruments to minimize its price
risk and volatility of cash flows associated with the purchase
of crude oil and natural gas, and the sale of diesel fuel and
gasoline. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, the Company recognizes
all derivative transactions as either assets or liabilities at
fair value on the balance sheet. To the extent a derivative
instrument is designated effective as a cash flow hedge of an
exposure to future changes in the value of a purchase or sale
transaction, the change in fair value of the derivative is
deferred in other comprehensive income. For cash flow hedges of
future purchases of natural gas and crude oil, the realized gain
or loss is recorded to cost of goods sold in the statement of
operations upon the settlement of the contract. The realized
gain or loss upon settlement of a cash flow hedge of the future
sale of diesel fuel or gasoline is recorded to sales in the
statement of operations. For derivative instruments not
designated as cash flow hedges and the portion of any cash flow
hedge that is determined to be ineffective, the change in fair
value of the asset or liability for the period is recorded to
unrealized gain or loss on derivative instruments in the
statement of operations. Upon the settlement of these
derivatives not designated as hedges, the gain or loss for the
period is recorded to realized gain or loss on derivative
instruments in the statement of operations.
Crude Oil Collar Contracts
The Company utilizes combinations of options to manage crude
price risk and volatility of cash flows. These combinations of
options are designated as cash flow hedges of the future
purchase of crude oil. The Company’s policy is generally to
enter into crude oil derivative contracts for a period no
greater than three to six months forward and for 50% to 70% of
anticipated crude oil purchases related to the production of
certain specialty products. This represents approximately 30% to
40% of our total specialty products production.
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
At March 31, 2006, the Company had the following hedge
positions related to crude oil purchases.
| Crude Oil Put/Call | ||||||||||||||||||||
| Spread Contracts | Lower Put | Upper Put | Lower Call | Upper Call | ||||||||||||||||
| Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | ($/Bbl) | ($/Bbl) | |||||||||||||||
|
April 2006
|
240,000 | $ | 45.85 | $ | 55.58 | $ | 65.58 | $ | 75.58 | |||||||||||
|
May 2006
|
248,000 | 52.60 | 62.60 | 72.60 | 82.60 | |||||||||||||||
|
June 2006
|
240,000 | 51.06 | 61.06 | 71.06 | 81.06 | |||||||||||||||
|
Totals
|
728,000 | |||||||||||||||||||
|
Average price
|
$ | 49.87 | $ | 59.78 | $ | 69.78 | $ | 79.78 | ||||||||||||
| Fuels Product Margin (Crack Spread) Swap Contracts |
| Crack Spread Swap | ||||||||
| Contracts Expiration Dates | Barrels | ($/Bbl) | ||||||
|
Second Quarter 2006
|
1,039,000 | $ | 8.94 | |||||
|
Third Quarter 2006
|
1,043,000 | 8.61 | ||||||
|
Fourth Quarter 2006
|
1,043,000 | 8.25 | ||||||
|
First Quarter 2007
|
1,620,000 | 12.43 | ||||||
|
Second Quarter 2007
|
1,637,000 | 12.41 | ||||||
|
Third Quarter 2007
|
1,650,000 | 12.45 | ||||||
|
Fourth Quarter 2007
|
1,650,000 | 12.45 | ||||||
|
Calendar Year 2008
|
5,124,000 | 11.49 | ||||||
|
Calendar Year 2009
|
4,745,000 | 10.94 | ||||||
|
Calendar Year 2010
|
1,825,000 | 10.46 | ||||||
|
Totals
|
21,376,000 | |||||||
|
Average price
|
$ | 11.15 | ||||||
| Fuels Product Margin (Crack Spread) Collar Contracts |
F-57
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
Fuel product margin collar contracts consisted of the following
at March 31, 2006:
| Put Option | Call Option | |||||||||||
| Crack Spread Collar | Strike Price | Strike Price | ||||||||||
| Contracts Expiration Dates | Barrels | ($/Bbl) | ($/Bbl) | |||||||||
|
Second Quarter 2006
|
680,000 | $ | 7.82 | $ | 10.15 | |||||||
|
Third Quarter 2006
|
685,000 | 7.59 | 9.59 | |||||||||
|
Fourth Quarter 2006
|
685,000 | 6.30 | 8.30 | |||||||||
|
Totals
|
2,050,000 | |||||||||||
|
Average price
|
$ | 7.24 | $ | 9.35 | ||||||||
| Natural Gas Swap Contracts |
| Natural Gas Swap | ||||||||
| Contracts Expiration Dates | MMbtu | $/MMbtu | ||||||
|
Third Quarter 2006
|
200,000 | $ | 8.52 | |||||
|
Fourth Quarter 2006
|
300,000 | $ | 8.52 | |||||
|
First Quarter 2007
|
300,000 | $ | 8.52 | |||||
|
Totals
|
800,000 | |||||||
|
Average price
|
$ | 8.52 | ||||||
| 6. | Contingencies |
F-58
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
Leases
The Company has various operating leases for the use of land,
storage tanks, compressor stations, rail cars, equipment,
precious metals, operating unit catalyst and office facilities
that extend through August 2015. Renewal options are available
on certain of these leases in which the Company is the lessee.
As of March 31, 2006, the Company had estimated minimum
commitments for the payment of rentals under leases which, at
inception, had a noncancelable term of more than one year, as
follows:
| Year | Commitments | |||
|
2006
|
$ | 6,226 | ||
|
2007
|
6,252 | |||
|
2008
|
4,745 | |||
|
2009
|
4,097 | |||
|
2010
|
3,396 | |||
|
Thereafter
|
9,050 | |||
|
Total
|
$ | 33,766 | ||
| Year | Commitment | |||
|
2006
|
$ | 312,960 | ||
|
2007
|
340,724 | |||
|
2008
|
88,157 | |||
|
2009
|
38,388 | |||
|
2010
|
4,412 | |||
|
2011
|
— | |||
|
Thereafter
|
— | |||
|
Total
|
$ | 784,641 | ||
| Environmental |
F-59
F-60
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
substantial liabilities for pollution resulting from its
operations. Certain environmental laws impose joint and several,
strict liability for costs required to remediate and restore
sites where petroleum hydrocarbons, wastes, or other materials
have been released or disposed.
Failure to comply with environmental laws and regulations may
result in the triggering of administrative, civil and criminal
measures, including the assessment of monetary penalties, the
imposition of remedial obligations, and the issuance of
injunctions limiting or prohibiting some or all of the
Company’s operations. On occasion, the Company receives
notices of violation, enforcement and other complaints from
regulatory agencies alleging non-compliance with applicable
environmental laws and regulations. In particular, the Louisiana
Department of Environmental Quality (“LDEQ”) has
proposed penalties and supplemental projects totaling $191 for
the following alleged violations: (i) a May 2001
notification received by the Cotton Valley refinery from the
LDEQ regarding several alleged violations of various air
emission regulations, as identified in the course of the
Company’s Leak Detection and Repair program, and also for
failure to submit various reports related to the facility’s
air emissions; (ii) a December 2002 notification received
by the Company’s Cotton Valley refinery from the LDEQ
regarding alleged violations for excess emissions, as identified
in the LDEQ’s file review of the Cotton Valley refinery;
and (iii) a December 2004 notification received by the
Cotton Valley refinery from the LDEQ regarding alleged
violations for the construction of a multi-tower pad and
associated pump pads without a permit issued by the agency. The
Company is currently in settlement negotiations with the LDEQ to
resolve these matters, as well as a number of similar matters at
the Princeton refinery, for which no penalty has yet been
proposed. Management is of the opinion that the ultimate
resolution of this matter will not have a material adverse
impact on the Company’s financial position or results of
operations.
The Company has recently entered into discussions on a voluntary
basis with the LDEQ regarding the Company’s participation
in that agency’s “Small Refinery and Single Site
Refinery Initiative.” This state initiative is patterned
after the EPA’s “National Petroleum Refinery
Initiative,” which is a coordinated, integrated compliance
and enforcement strategy to address federal Clean Air Act
compliance issues at the nation’s largest petroleum
refineries. The Company expects that the LDEQ’s primary
focus under the state initiative will be on four compliance and
enforcement concerns: (i) Prevention of Significant
Deterioration/New Source Review; (ii) New Source
Performance Standards for fuel gas combustion devices, including
flares, heaters and boilers; (iii) Leak Detection and
Repair requirements; and (iv) Benzene Waste Operations
National Emission Standards for Hazardous Air Pollutants. The
Company is only in the beginning stages of discussion with the
LDEQ and, consequently, while no significant compliance and
enforcement expenditures have been requested as a result of the
Company’s discussions, the Company anticipates that it will
ultimately be required to make emissions reductions requiring
capital investments and/or increased operating expenditures at
the Company’s three Louisiana refineries.
The Company is indemnified by Shell Oil Company, as successor to
Pennzoil-Quaker State Company and Atlas Processing Company, for
specified environmental liabilities arising from the operations
of the Shreveport refinery prior to its acquisition of the
facility. The indemnity is unlimited in amount and duration, but
requires the Company to contribute up to $1,000 of the first
$5,000 of indemnified costs for certain of the specified
environmental liabilities.
Standby Letters of Credit
The Company has agreements with various financial institutions
for standby letters of credit which have been issued to domestic
vendors. As of March 31, 2006, the Company had outstanding
standby letters of credit of $40,045. As discussed in
Note 7 below, as of March 31, 2006 the
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
Company had issued a $50,000 letter of credit under the letter
of credit facility to support crack spread hedging.
7.
Long-Term Debt
Long-term debt consisted of the following:
| Calumet | ||||
| March 31, | ||||
| 2006 | ||||
|
Borrowings under revolving credit
agreement with third-party lenders, interest at prime (7.75%),
interest payments monthly, borrowings due December 2010
|
$ | 14,751 | ||
|
Borrowings under term loan
agreement with third-party lenders, interest at rate of LIBOR
plus 3.50% (8.37%), interest payments quarterly, borrowings due
December 2012
|
49,875 | |||
|
Total long-term debt
|
64,626 | |||
|
Less current portion of long-term
debt
|
500 | |||
| $ | 64,126 | |||
| Year | Maturity | |||
|
2006
|
$ | 500 | ||
|
2007
|
500 | |||
|
2008
|
500 | |||
|
2009
|
500 | |||
|
2010
|
15,251 | |||
|
2011 and thereafter
|
$ | 47,375 | ||
|
Total
|
$ | 64,626 | ||
F-61
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
8.
Segments and Related Information
a.
Segment Reporting
Under the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, the
Company has two reportable segments: Specialty Products and Fuel
Products. The Specialty Products segment produces a variety of
lubricating oils, solvents and waxes. These products are sold to
customers who purchase these products primarily as raw material
components for basic automotive, industrial and consumer goods.
The Fuel Products segment produces a variety of fuel and
fuel-related products including gasoline, diesel and jet fuel.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies
except that the Company evaluates segment performance based on
income from operations. The Company accounts for intersegment
sales and transfers at cost plus a specified mark-up. Reportable
segment information is as follows (in thousands):
| Calumet | |||||
| March 31, | |||||
| 2006 | |||||
|
Segment Assets:
|
|||||
|
Specialty Products
|
$ | 576,838 | |||
|
Fuel Products
|
374,790 | ||||
|
Combined Segments
|
951,628 | ||||
|
Eliminations
|
(601,653 | ) | |||
|
Total Assets
|
$ | 349,975 | |||
| b. | Geographic Information |
| c. | Major Customers |
| 9. | Fair Value of Financial Instruments |
| 10. | Employee Benefit Plan |
F-62
F-63
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
was $309 for the three months ended March 31, 2006. The
plan also includes a profit-sharing component. Contributions
under the profit-sharing component are determined by the Board
of Directors of the Company’s general partner and are
discretionary. The Company’s profit sharing contribution
was $165 for the three months ended March 31, 2006.
11.
Long-Term Incentive Plan
Calumet GP, LLC (the GP), the Partnership’s general
partner, has adopted a Long-Term Incentive Plan (the
“Plan”) for its employees, consultants and directors
and its affiliates who perform services for the Partnership. The
Plan provides for the grant of restricted units, phantom units,
unit options and substitute awards and, with respect to unit
options and phantom units, the grant of distribution equivalent
rights (“DERs”). Subject to adjustment for certain
events, an aggregate of 783,960 common units may be delivered
pursuant to awards under the Plan. Units withheld to satisfy our
general partner’s tax withholding obligations are available
for delivery pursuant to other awards. If the Plan is
implemented, the Plan will be administered by the compensation
committee of the GP’s board of directors.
12.
Transactions with Related Parties
During the three months ended March 31, 2006, the Company
had sales to related parties of $70. Trade accounts and other
receivables from related parties at March 31, 2006 were
$44. The Company also had purchases from related parties during
the three months ended March 31, 2006 of $288. Accounts
payable to related parties at March 31, 2006 were $249.
A limited partner provides management, administrative, and
accounting services to the Company for an annual fee. Such
services include, but are not necessarily limited to, advice and
assistance concerning any and all aspects of the operation,
planning, and financing of the Company. Payments for the three
months ended March 31, 2006 were $160.
The Company participates in a self-insurance program for medical
benefits with a limited partner and several other related
companies. In connection with this program, contributions are
made to a voluntary employees’ benefit association (VEBA)
trust. Contributions made by the Company to the VEBA for the
three months ended March 31, 2006 totaled $780.
The Company participates in a self-insurance program for
workers’ compensation with a limited partner and several
related companies. In connection with this program,
contributions are made to the limited partner. Contributions
made by the Company to the limited partner for the three months
ended March 31, 2006 totaled $58.
The Company participates in a self-insurance program for general
liability with a limited partner and several related companies.
In connection with this program, contributions are made to the
limited partner. Contributions made by the Company to the
limited partner for the three months ended March 31, 2006
totaled $120.
13.
Subsequent Events
On April 21, 2006, the Company closed on an asset purchase
agreement entered into on March 31, 2006 related to certain
refinery equipment to be placed into service as a part of a
capacity expansion project at its Shreveport refinery. The
purchase price for the equipment was $16,500, including a
nonrefundable deposit of $1,000 paid by the Company on
March 31, 2006 and applied to the purchase price at
closing. This deposit of $1,000 was recorded as
construction-in-process
in property, plant, and equipment in the March 31, 2006
balance sheet. The Company financed the equipment purchase
through borrowings under the revolving credit facility.
F-64
CALUMET GP, LLC
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET —
(Continued)
On April 24, 2006, the Company entered into an interest
rate swap agreement with a counterparty to fix the LIBOR
component of the interest rate on a portion of outstanding
borrowings under its term loan facility. The notional amount of
the interest rate swap agreement is 85% of the outstanding term
loan balance over its remaining term, with LIBOR fixed at 5.44%.
Borrowings under the term loan facility bear interest at LIBOR
plus 3.50%.
On April 26, 2006, the Company declared a prorated quarter
cash distribution of $0.30 per unit, or $8,000, for the
period from the closing of the Partnership’s initial public
offering on January 31, 2006 through March 31, 2006.
The distribution will be paid on May 15, 2006 to the
general partner as well as common and subordinated unitholders
of record as of the close of business on May 2, 2006. This
prorated quarterly distribution of $0.30 equates to a
$0.45 per unit distribution for a complete quarter, or
$1.80 per unit on an annual basis.
F-65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
Calumet GP, LLC
We have audited the accompanying balance sheet of Calumet GP,
LLC as of December 31, 2005. This financial statement is
the responsibility of Calumet GP, LLC’s management. Our
responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of Calumet GP, LLC’s internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
Calumet GP, LLC’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above
presents fairly, in all material respects, the financial
position of Calumet GP, LLC at December 31, 2005, in
conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
CALUMET GP, LLC
BALANCE SHEET
|
Assets
|
||||||
|
Cash
|
$ | 945 | ||||
|
Investment in Calumet Specialty
Products Partners, L.P
|
19 | |||||
|
Total assets
|
$ | 964 | ||||
|
Members’ capital
|
||||||
|
Members’ capital
|
$ | 964 | ||||
|
Total members’ capital
|
$ | 964 | ||||
F-66
F-67
CALUMET GP, LLC
NOTE TO BALANCE SHEET
1.
Nature of Operations
Calumet GP, LLC (“General Partner”) is a Delaware
limited liability company formed on September 27, 2005 to
become the general partner of Calumet Specialty Products
Partners, L.P. (“Partnership”). General Partner is
owned by The Heritage Group, Fred M. Fehsenfeld, Jr.
and F. William Grube. General Partner owns a 2% general partner
interest in Partnership.
On September 29, 2005, the members contributed $1,000 to
Calumet GP, LLC in exchange for a 100% ownership interest.
General Partner has invested $20 in Partnership as of
December 31, 2005. There have been no other significant
transactions involving General Partner as of December 31,
2005.
On February 8, 2006, the General Partner contributed an
additional $375,147 to the Partnership to maintain its 2%
general partner interest in the Partnership as a result of the
exercise of the overallotment option by the underwriters of the
initial public offering of the Partnership.
A-1
APPENDIX A
GLOSSARY OF TERMS
adjusted operating surplus: For any period,
operating surplus generated during that period is adjusted to:
(a)
decrease operating surplus by:
(1)
any net increase in working capital borrowings with respect to
that period; and
(2)
any net decrease in cash reserves for operating expenditures
with respect to that period not relating to an operating
expenditure made with respect to that period; and
(b)
increase operating surplus by:
(1)
any net decrease in working capital borrowings with respect to
that period; and
(2)
any net increase in cash reserves for operating expenditures
with respect to that period required by any debt instrument for
the repayment of principal, interest or premium.
Adjusted operating surplus does not include that portion of
operating surplus included in clauses (a) (1) and
(a) (2) of the definition of operating surplus.
asphalt: A
dark-brown-to-black
cement-like material containing bitumens as the predominant
constituent obtained by petroleum processing. The conversion
factor for asphalt is 5.5 barrels per short ton.
available cash: For any quarter ending prior to
liquidation:
(a)
the sum of:
(1)
all cash and cash equivalents of Calumet Specialty Products
Partners, L.P. and its subsidiaries on hand at the end of that
quarter; and
(2)
if our general partner so determines, all or a portion of any
additional cash or cash equivalents of Calumet Specialty
Products Partners, L.P. and its subsidiaries on hand on the date
of determination of available cash for that quarter;
(b)
less the amount of cash reserves established by our general
partner to:
(1)
provide for the proper conduct of the business of Calumet
Specialty Products Partners, L.P. and it subsidiaries (including
reserves for future capital expenditures and for future credit
needs of Calumet Specialty Products Partners, L.P. and its
subsidiaries) after that quarter;
(2)
comply with applicable law or any financial instrument or other
agreement or obligation to which Calumet Specialty Products
Partners, L.P. or any of its subsidiaries is a party or its
assets are subject; and
(3)
provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters;
provided, however, that disbursements made by us or any
of our subsidiaries or cash reserves established, increased or
reduced after the end of that quarter but on or before the date
of determination of available cash for that quarter shall be
deemed to have been made, established, increased or reduced, for
purposes of determining available cash, within that quarter if
our general partner so determines.
bpd: Barrels per day.
A-2
Bbls: Barrels.
Btu: British Thermal Units.
by-products: Products, other than gasoline and
diesel, that are produced from refining crude oil to gasoline
and diesel.
capital account: The capital account maintained
for a partner under the partnership agreement. The capital
account of a partner for a common unit, a subordinated unit, an
incentive distribution right or any other partnership interest
will be the amount which that capital account would be if that
common unit, subordinated unit, incentive distribution right or
other partnership interest were the only interest in Calumet
Specialty Products Partners, L.P. held by a partner.
capital surplus: All available cash distributed by
us from any source will be treated as distributed from operating
surplus until the sum of all available cash distributed since
the closing of the initial public offering equals the operating
surplus as of the end of the quarter before that distribution.
Any excess available cash will be deemed to be capital surplus.
closing price: The last sale price on a day,
regular way, or in case no sale takes place on that day, the
average of the closing bid and asked prices on that day, regular
way, in either case, as reported in the principal consolidated
transaction reporting system for securities listed or admitted
to trading on the principal national securities exchange on
which the units of that class are listed or admitted to trading.
If the units of that class are not listed or admitted to trading
on any national securities exchange, that last quoted price on
that day. If no quoted price exists, the average of the high bid
and low asked prices on that day in the over-the counter market,
as reported by the NASDAQ National Market or any other system
then in use. If on any day the units of that class are not
quoted by any organization of that type, the average of the
closing bid and asked prices on that day as furnished by a
professional market maker making a market in the units of the
class selected by the board of directors of our general partner.
If on that day no market maker is making a market in the units
of that class, the fair value of the units on that day as
determined reasonably and in good faith by our general
partner’s board of directors.
common unit arrearage: The amount by which the
minimum quarterly distribution for a quarter during the
subordination period exceeds the distribution of available cash
from operating surplus actually made for that quarter on a
common unit, cumulative for that quarter and all prior quarters
during the subordination period.
crack spread: A simplified model that measures the
difference between the price for light products and crude oil.
For example, 3/2/1 crack spread is often referenced and
represents the approximate gross margin resulting from
processing one barrel of crude oil, assuming that three barrels
of a benchmark crude oil are converted, or cracked, into two
barrels of gasoline and one barrel of heating oil. Likewise,
2/1/1 crack spread represents the approximate gross margin
resulting from processing one barrel of crude oil, assuming that
two barrels of a benchmark crude oil are converted into one
barrel of gasoline and one barrel of diesel.
crude oil: A mixture of hydrocarbons that exists
in liquid phase in underground reservoirs.
crude oil throughput capacity: The amount of crude
oil that can be processed by separating the crude oil according
to boiling point under high heat and low pressure to recover
various hydrocarbon fractions.
current market price: For any class of units
listed or admitted to trading on any national securities
exchange as of any date, the average of the daily closing prices
for the 20 consecutive trading days immediately prior to that
date.
distillates: Primarily diesel fuel, kerosene and
jet fuel.
feedstocks: Hydrocarbon compounds, such as crude
oil and natural gas liquids, that are processed and blended into
refined products.
A-3
imports: Receipts of crude oil and petroleum
products into the 50 States and the District of Columbia from
foreign countries, Puerto Rico, the Virgin Islands, and other
U.S. possessions and territories.
interim capital transactions: The following
transactions if they occur prior to liquidation:
(a)
borrowings, refinancings or refundings of indebtedness and sales
of debt securities other than for items purchased on open
account in the ordinary course of business) by Calumet Specialty
Products Partners, L.P. or any of its subsidiaries;
(b)
sales of equity interests by Calumet Specialty Products
Partners, L.P. or any of its subsidiaries; and
(c)
sales or other voluntary or involuntary dispositions of any
assets of Calumet Specialty Products Partners, L.P. or any of
its subsidiaries (other than sales or other dispositions of
inventory, accounts receivable and other assets in the ordinary
course of business, and sales or other dispositions of assets as
a part of normal retirements or replacements).
lubricants or lubricating oils: A substance used
to reduce friction between bearing surfaces or as process
materials either incorporated into other materials used as
processing aids in the manufacturing of other products, or as
carriers of other materials. Categories include:
(a)
paraffinic, which includes all grades of bright stock and
neutrals with a Viscosity Index > 75; and
(b)
naphthenic, which includes all lubricating oil base stocks with
a Viscosity Index < 75.
MMBbls: One million barrels.
MMBtu: One million British Thermal Units.
MMcf: One million cubic feet of natural gas.
MBbls/d: One thousand barrels per day.
MMBtu/d: One million British Thermal Units per day.
MMcf/d: One million cubic feet per day.
motor gasoline: A complex mixture of relatively
volatile hydrocarbons, with or without small quantities of
additives, that has been blended to form a fuel suitable for use
in spark-ignition engines.
operating expenditures: All of our expenditures
and expenditures of our subsidiaries, including, but not limited
to, taxes, reimbursements of our general partner, interest
payments and maintenance capital expenditures, subject to the
following:
(a)
payments (including prepayments) of principal of and premium on
indebtedness will not constitute operating expenditures.
(b)
operating expenditures will not include:
(1)
capital expenditures made for acquisitions or capital
improvements;
(2)
payment of transaction expenses relating to interim capital
transactions; or
(3)
distributions to unitholders.
Where capital expenditures consist of both maintenance capital
expenditures and expansion capital expenditures, the general
partner, with the concurrence of the conflicts committee of the
board of directors of our general partner, shall determine the
allocation between the amounts paid for each.
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operating surplus: For any period prior to
liquidation, on a cumulative basis and without duplication:
(a)
the sum of:
(1)
$10.0 million; and
(2)
all cash receipts of Calumet Specialty Products Partners, L.P.
and its subsidiaries on hand on the closing date of our initial
public offering; and
(3)
all cash receipts of Calumet Specialty Products Partners, L.P.
and its subsidiaries for the period beginning on the closing
date of the initial public offering and ending with the last day
of that period, other than cash receipts from interim capital
transactions; and
(4)
all cash receipts of Calumet Specialty Products Partners, L.P.
and its subsidiaries after the end of that period but on or
before the date of determination of operating surplus for the
period resulting from working capital borrowings; less
(b)
the sum of:
(1)
operating expenditures for the period beginning on the closing
date of our initial public offering and ending with the last day
of that period; and
(2)
the amount of cash reserves that is established by our general
partner to provide funds for future operating expenditures;
provided however, that disbursements made (including
contributions to a partner of Calumet Specialty Products
Partners, L.P. and our subsidiaries or disbursements on behalf
of a partner of Calumet Specialty Products Partners, L.P. and
our subsidiaries) or cash reverse established, increased or
reduced after the end of that period but on or before the date
of determination of available cash for that period shall be
deemed to have been made, established, increased or reduced for
purposes of determining operating surplus, within that period if
our general partner so determines.
petroleum products: Petroleum products are
obtained from processing of crude oil (including lease
condensate), natural gas, and other hydrocarbon compounds.
Petroleum products include unfinished oils, liquefied petroleum
gases, pentanes, aviation gasoline, motor gasoline, naphtha-type
jet fuel, kerosene-type jet fuel, kerosene, distillate fuel oil,
residual fuel oil, petrochemical feedstocks, special naphthas,
lubricants, waxes, petroleum coke, asphalt, road oil, still gas,
and miscellaneous products.
refined products or finished products: Hydrocarbon
compounds, such as gasoline, diesel fuel, jet fuel and residual
fuel, that are produced by a refinery.
solvent: A compound that has the ability to
dissolve a given substance.
sour crude oil: A crude oil containing hydrogen
sulfide, carbon dioxide or mercaptans.
subordination period: The subordination period
will extend from the closing of the initial public offering
until the first to occur of:
(a) the first day of any quarter beginning after
December 31, 2010 for which:
(1)
distributions of available cash from operating surplus on each
of the outstanding common units and subordinated units and
general partner units equaled or exceeded the sum of the minimum
quarterly distribution on all of the outstanding common units
and subordinated units and general partner units for each of the
three consecutive, non-overlapping four-quarter periods
immediately preceding that date;
A-5
(2)
the adjusted operating surplus generated in the aggregate during
each of the three consecutive, non-overlapping four-quarter
periods immediately preceding that date equaled or exceeded the
sum of the minimum quarterly distributions on all of the common
units and subordinated units that were outstanding during those
periods on a fully diluted basis and the general partner
units; and
(3)
there are no outstanding cumulative common units arrearages.
(b)
the date on which the general partner is removed as our general
partner upon the requisite vote by the limited partners under
circumstances where cause does not exist and units held by our
general partner and its affiliates are not voted in favor of the
removal.
sweet crude oil: Oil containing small amounts of
hydrogen sulfide and carbon dioxide.
throughput capacity: The amount of crude oil that
can be processed by separating the crude oil according to
boiling point under high heat and low pressure to recover
various hydrocarbon fractions.
turnaround: A periodically required standard
procedure to refurbish and maintain a refinery that involves the
shutdown and inspection of major processing units and occurs
every three to five years.
utilization: Ratio of total refinery throughput to
the rated capacity of the refinery.
wax: A solid or semi-solid material derived from
petroleum distillates or residues by such treatments as
chilling, precipitating with a solvent, or de-oiling. It is
light-colored, more-or-less translucent crystalline mass,
slightly greasy to the touch, consisting of a mixture of solid
hydrocarbons in which the paraffin series predominates.
Categories include:
(a)
microcrystalline, which is extracted from certain petroleum
residues having a finer and less apparent crystalline structure
than paraffin was; and
(b)
crystalline or paraffinic, which is a light-colored paraffin wax.
yield: The percentage of refined products that are
produced from feedstocks.
No dealer, salesperson or
other person is authorized to give any information or to
represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations.
This prospectus is an offer to sell only the common units
offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
Prospectus
| This ‘424B1’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 12/31/15 | ||||
| 12/31/11 | 10-K, 4 | |||
| 12/31/10 | 10-K, 4 | |||
| 12/31/08 | 10-K, 4 | |||
| 10/31/08 | ||||
| 6/30/07 | 10-Q | |||
| 4/30/07 | ||||
| 3/31/07 | 10-Q | |||
| 12/31/06 | 10-K, 4, 5 | |||
| 7/5/06 | 8-K | |||
| Filed on: | 6/29/06 | |||
| 6/28/06 | ||||
| 6/23/06 | 8-K | |||
| 5/15/06 | 10-Q | |||
| 5/2/06 | ||||
| 4/26/06 | ||||
| 4/24/06 | ||||
| 4/21/06 | ||||
| 4/11/06 | SC 13G | |||
| 4/1/06 | ||||
| 3/31/06 | 10-Q | |||
| 3/20/06 | 10-K | |||
| 3/9/06 | ||||
| 2/8/06 | ||||
| 2/1/06 | ||||
| 1/31/06 | 4, 8-K | |||
| 1/29/06 | ||||
| 1/26/06 | 3, 4, 424B4 | |||
| 1/24/06 | ||||
| 1/1/06 | ||||
| 12/31/05 | 10-K | |||
| 12/30/05 | ||||
| 12/9/05 | ||||
| 12/1/05 | ||||
| 11/30/05 | ||||
| 9/30/05 | ||||
| 9/29/05 | ||||
| 9/27/05 | ||||
| 7/1/05 | ||||
| 6/15/05 | ||||
| 3/31/05 | ||||
| 3/1/05 | ||||
| 2/28/05 | ||||
| 1/1/05 | ||||
| 12/31/04 | ||||
| 12/16/04 | ||||
| 10/25/04 | ||||
| 10/22/04 | ||||
| 12/31/03 | ||||
| 3/31/03 | ||||
| 1/1/03 | ||||
| 12/31/02 | ||||
| 3/31/02 | ||||
| 12/31/01 | ||||
| 3/31/01 | ||||
| List all Filings | ||||