CALUMET SPECIALTY PRODUCTS PARTNERS, L.P. The historical unaudited condensed consolidated financial statements included in this Quarterly Report reflect all of the assets, liabilities and results of operations ofCalumet Specialty Products Partners, L.P. ("Calumet," the "Company," "we," "our," or "us"). The following discussion analyzes the financial condition and results of operations of the Company for the three months endedMarch 31, 2022 . Unitholders should read the following discussion and analysis of our financial condition and results of operations in conjunction with our 2021 Annual Report and our historical unaudited condensed consolidated financial statements and notes included elsewhere in this Quarterly Report.
Overview
We manufacture, formulate and market a diversified slate of specialty products to customers across a broad range of consumer-facing and industrial markets. We also own what we believe will be one ofNorth America's leading renewable diesel manufacturing facilities, which is expected to be commissioned in the fall of 2022. We are headquartered inIndianapolis, Indiana and operate twelve facilities throughoutNorth America . Our operations are managed by the chief operating decision maker ("CODM") using the following reportable segments: Specialty Products and Solutions; Performance Brands;Montana /Renewables; and Corporate. For additional information, see Note 12 - "Segments and Related Information" under Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements." In our Specialty Products and Solutions segment, we manufacture and market a wide variety of solvents, waxes, customized lubricating oils, white oils, petrolatums, gels, esters, and other products. Our specialty products are sold to domestic and international customers who purchase them primarily as raw material components for consumer-facing and industrial products. In our Performance Brands segment, we blend, package and market high performance products through ourRoyal Purple , Bel-Ray, and TruFuel brands. OurMontana /Renewables segment is comprised of two businesses - renewable diesel and specialty asphalt. When ourGreat Falls renewable diesel facility is operational, we will process a variety of geographically advantaged renewable feedstocks into renewable diesel, sustainable aviation fuel, renewable hydrogen, renewable natural gas, renewable propane, and renewable naphtha that we expect to distribute into renewable markets in the western half ofNorth America . At ourMontana specialty asphalt facility, we continue to process Canadian crude oil into conventional gasoline, diesel, jet fuel and specialty grades of asphalt, with production sized to serve local markets. Our Corporate segment primarily consists of general and administrative expenses not allocated to the Specialty Products and Solutions, Performance Brands orMontana /Renewables segments. First Quarter 2022 Update Outlook and Trends The world continues to navigate through the COVID-19 pandemic, significant geopolitical tension, and inflationary pressures. Global economic conditions have improved compared to the outset of the pandemic, driven by increases in vaccination rates in theU.S. and across the world, which has resulted in increased demand and higher prices for many industrial and consumer goods products, as well as energy prices. Despite this, most industries have continued to see supply chain disruptions during the first quarter of 2022, and while this global dynamic is receiving elevated attention in all areas, it's difficult to predict when such challenges will be fully resolved. Further, a global energy shortage and instability inUkraine have created extreme volatility in global energy prices. These challenges have impacted Calumet's businesses in various ways. Currently, our businesses continue to see strong, growing demand for products across our segments. Our Performance Brands segment has been most impacted by the global supply chain disruption and the inflationary feedstock trend. As we navigate this environment in a time of rapidly growing demand, our order backlog remains high. Our Specialty Products and Solutions segment continues to experience strong specialty unit margins and fuels margins have increased for the fifth straight quarter as the industry reacts to a global economic recovery and a shortage of hydrocarbon products in certain markets. These fundamentals allowed for healthy unit margins in the first quarter of 2022 compared to the first quarter of 2021, despite a significantly higher price environment during this quarter. The following factors have impacted our results of operations during 2022 or may impact our results of operations in the future: •We continue to see an increase in demand for our products as the domestic and global economies recover from the COVID-19 pandemic. We continue to monitor the impact of COVID-19 variants, any increase in cases and/or the reinstatement of lockdowns and other restrictions, each of which could negatively impact the recovery from the COVID-19 pandemic. •Supply chains are improving, but we expect disruption to remain, which is expected to continue to provide challenges to the availability and pricing of feedstocks, additives, packaging materials and transportation. •We continue to focus on managing inflationary feedstock pressures primarily through focus on the pricing of our products and extending price increases more quickly than normal. 30 -------------------------------------------------------------------------------- •We continue to focus on improving operations. Our total feedstock runs were 88,452 barrels per day ("bpd") during the first quarter 2022 compared to 60,985 bpd during the first quarter 2021. This increase is primarily attributed to higher production volumes at our Shreveport facility. •Our Specialty Products and Solutions margins have remained strong but certain of our end markets are susceptible to changes in Gross Domestic Product. As markets and results improve, we expect to make small investments in this segment that we believe are low-risk, high-return investments. •It is not possible to predict what future Renewable Identification Numbers ("RINs") costs may be given prices are directly tied to unpredictable government actions, but RINs continue to have the potential to remain a significant non-cash expense in our results of operations. Please read Item 2 "Management's Discussion and Analysis - Renewable Fuel Standard Update" below for additional information. •We continue to evaluate opportunities to improve our capital structure and better focus on the advancement of our core business through asset divestitures. Also, we may pursue acquisitions of assets that management believes will be financially accretive and consistent with our strategic goals. We developed and executed a plan to manage health and safety risks and business continuity to help protect our workforce and business during the COVID-19 pandemic. Comprehensive guidelines and requirements for the return to work of personnel to their locations have been implemented and these will continue to be monitored as we manage COVID-19. To reinforce cost control and preserve cash, we expect to continue to diligently manage operating and capital costs. As markets continue to improve, high-return low risk projects may be added opportunistically. Furthermore, the Company's conversion of ourGreat Falls, MT asset into a leading Renewable Diesel facility is on track to be operational in the fall of 2022. Contingencies For a summary of litigation and other contingencies, please read Note 6 - "Commitments and Contingencies" under Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements." Based on information available to us at the present time, we do not believe that any liabilities beyond the amounts already accrued, which may result from these contingencies, will have a material adverse effect on our liquidity, financial condition or results of operations.
Financial Results
We reported a net loss of$95.5 million in the first quarter 2022 versus a net loss of$146.1 million in the first quarter 2021. We reported Adjusted EBITDA (as defined in Note 12 - "Segments and Related Information" under Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements") of$23.3 million in the first quarter 2022 versus negative$5.4 million in the first quarter 2021. We used cash from operating activities of$2.9 million in the first quarter 2022 versus using cash of$50.3 million in the first quarter of 2021, driven by a decrease of$50.6 million in net loss between the comparative periods, which was partially offset by an increase in the cash required for working capital. Please read Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" for a reconciliation of EBITDA, Adjusted EBITDA and Distributable Cash Flow to Net income (loss), our most directly comparable financial performance measure calculated and presented in accordance withU.S. generally accepted accounting principles ("GAAP"). Specialty Products and Solutions segment Adjusted EBITDA was$28.1 million in the first quarter 2022 versus negative$2.2 million in the first quarter 2021. Compared to the first quarter of 2021, Specialty Products and Solutions first quarter 2022 segment Adjusted EBITDA was favorably impacted by an increase in sales volumes driven by strong operations and the absence of a planned turnaround at our Shreveport facility followed by the polar vortex that both occurred in the first quarter of 2021. This impact was coupled with the favorable impact of stronger specialty products net unit margins resulting from higher specialty product pricing and continued fuels market recovery. These impacts were partially offset by higher operating costs as a result of higher utility costs.Montana /Renewables segment Adjusted EBITDA was$9.0 million in the first quarter 2022 versus negative$2.0 million in the first quarter 2021. Compared to the first quarter of 2021,Montana /Renewables first quarter 2022 segment Adjusted EBITDA was favorably impacted by an increase in net unit margins as a result of a wider WCS-WTI crude spread and improved crack spreads for transportation fuels. These impacts were partially offset by an increase in operating costs driven by higher utility costs and a price lag in the asphalt business. Performance Brands segment Adjusted EBITDA was$5.3 million in the first quarter 2022 versus$16.0 million in the first quarter 2021. Compared to the first quarter of 2021, Performance Brands segment Adjusted EBITDA was unfavorably impacted by a$10.2 million decrease in gross profit due to the natural lag in passing increasing costs through to customers in these branded and consumer markets. Supply chain difficulties challenge our ability to get ahead of strong demand. Despite these difficulties, we have seen favorable improvements in pricing and demand for our TruFuel,Royal Purple , and Bel-Ray brands. 31 -------------------------------------------------------------------------------- Corporate Adjusted EBITDA was negative$19.1 million in the first quarter 2022 versus negative$17.2 million in the first quarter 2021 primarily due to higher labor and benefits expenses.
Liquidity Update
As ofMarch 31, 2022 , we had total liquidity of$412.4 million comprised of$10.7 million of unrestricted cash and$401.7 million of availability under our revolving credit facility. As ofMarch 31, 2022 , our revolving credit facility had a$448.5 million borrowing base,$35.8 million in outstanding standby letters of credit and$11.0 million of outstanding borrowings. We believe we will continue to have sufficient liquidity from cash on hand, projected cash flow from operations, borrowing capacity and other means by which to meet our financial commitments, debt service obligations, contingencies, and anticipated capital expenditures for at least the next 12 months. Please read Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional information.
Renewable Fuel Standard Update
Along with the broader refining industry, we remain subject to compliance costs under the RFS unless or until we receive a small refinery exemption from theEPA , which we have historically received. Under the regulation of theEPA , the RFS provides annual requirements for the total volume of renewable transportation fuels that are mandated to be blended into finished transportation fuels. If a refiner does not meet its required annual Renewable Volume Obligation, the refiner can purchase blending credits in the open market, referred to as RINs. During the first quarter 2022, we recorded a non-cash expense of$31.1 million for RINs, as compared to a non-cash RINs expense of$85.7 million for the first quarter 2021. Our gross RINs Obligation, which includes RINs that are required to be secured through either our own blending or through the purchase of RINs in the open market, is spread across four compliance categories (D3, D4, D5 and D6). The gross RINs obligations exclude our own renewables blending as well as the potential for receiving any subsequent small refinery exemptions. Expenses related to RFS compliance have the potential to remain a significant expense for our two segments containing fuels products. If legal or regulatory changes occur that have the effect of increasing our RINs Obligation or eliminating or narrowing the availability of the small refinery exemption under the RFS program, we could be required to purchase additional RINs in the open market, which may materially increase our costs related to RFS compliance and could have a material adverse effect on our results of operations and liquidity. See Note 6 - "Commitments and Contingencies" under Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements" in this Quarterly Report for further information on the Company's RINs obligation.
Unrestricted Subsidiaries
See Note 13 - "Unrestricted Subsidiaries" under Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements" in this Quarterly Report for further information regarding certain financial information of our unrestricted subsidiaries.
Key Performance Measures
Our sales and results of operations are principally affected by demand for specialty products, fuel product demand, global fuel crack spreads, the price of natural gas used as fuel in our operations, our ability to operate our production facilities at high utilization, and our results from derivative instrument activities.
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Our primary raw materials are crude oil and other specialty feedstocks, and our primary outputs are specialty consumer-facing and industrial products, specialty branded products, and fuel products. The prices of crude oil, specialty products and fuel products are subject to fluctuations in response to changes in supply, demand, market uncertainties and a variety of factors beyond our control. We monitor these risks and from time-to-time enter into derivative instruments designed to help mitigate the impact of commodity price fluctuations on our business. The primary purpose of our commodity risk management activities is to economically hedge our cash flow exposure to commodity price risk. We also may hedge when market conditions exist that we believe to be out of the ordinary and particularly supportive of our financial goals. We enter into derivative contracts for future periods in quantities that do not exceed our projected purchases of crude oil and natural gas and sales of fuel products. Please read Note 9 - "Derivatives" under Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements" for additional information.
Our management uses several financial and operational measurements to analyze our performance. These measurements include the following:
•sales volumes;
•segment gross profit;
•segment Adjusted gross profit;
•segment Adjusted EBITDA; and
•selling, general and administrative expenses.
Sales volumes. We view the volumes of Specialty Products and Solutions products,Montana /Renewables products and Performance Brands products sold as an important measure of our ability to effectively utilize our operating assets. Our ability to meet the demands of our customers is driven by the volumes of feedstocks that we run at our facilities. Higher volumes improve profitability both through the spreading of fixed costs over greater volumes and the additional gross profit achieved on the incremental volumes. Segment gross profit. Specialty Products and Solutions,Montana /Renewables and Performance Brands products gross profit are important measures of profitability of our segments. We define gross profit as sales less the cost of crude oil and other feedstocks, LCM/LIFO adjustments, and other production-related expenses, the most significant portion of which includes labor, plant fuel, utilities, contract services, maintenance, transportation, RINs, depreciation and amortization and processing materials. We use gross profit as an indicator of our ability to manage margins in our business over the long-term. The increase or decrease in selling prices typically lags behind the rising or falling costs, respectively, of feedstocks throughout our business. Other than plant fuel, RINs mark-to-market adjustments, and LCM/LIFO adjustments, production related expenses generally remain stable across broad ranges but can fluctuate depending on maintenance activities performed during a specific period. Segment Adjusted gross profit. Specialty Products and Solutions,Montana /Renewables and Performance Brands products segment Adjusted gross profit measures are useful as they exclude transactions not related to our core cash operating activities and provide metrics to analyze the profitability of the core cash operations of our segments. We define segment Adjusted gross profit as segment gross profit excluding the impact of (a) LCM inventory adjustments; (b) the impact of liquidation of inventory layers calculated using the LIFO method; (c) RINs mark-to-market adjustments; and (d) depreciation and amortization. Segment Adjusted EBITDA. We believe that Specialty Products and Solutions,Montana /Renewables and Performance Brands segment Adjusted EBITDA measures are useful as they exclude transactions not related to our core cash operating activities and provide metrics to analyze our ability to pay interest to our noteholders. Adjusted EBITDA allows us to meaningfully analyze the trends and performance of our core cash operations as well as to make decisions regarding the allocation of resources to segments. Corporate Adjusted EBITDA primarily reflects general and administrative costs. 33
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Results of Operations for the Three Months Ended
Production Volume. The following table sets forth information about our
continuing operations. Facility production volume differs from sales volume due
to changes in inventories and the sale of purchased blendstocks such as ethanol
and specialty blendstocks, as well as the resale of crude oil.
Three Months Ended
2022 2021 % Change
(In bpd)
Total sales volume (1) 90,422 71,097 27.2 %
Total feedstock runs (2) 88,452 60,985 45.0 %
Facility production: (3)
Specialty Products and Solutions:
Lubricating oils 10,765 7,400 45.5 %
Solvents 6,977 6,388 9.2 %
Waxes 1,519 882 72.2 %
Fuels, asphalt and other by-products 40,429 16,690 142.2 %
Total Specialty Products and Solutions 59,690 31,360 90.3 %
Montana/Renewables:
Gasoline 5,020 5,817 (13.7) %
Diesel 9,671 10,060 (3.9) %
Jet fuel 1,108 869 27.5 %
Asphalt, heavy fuel oils and other 9,865 10,628 (7.2) %
Total Montana/Renewables 25,664 27,374 (6.2) %
Performance Brands 1,619 1,547 4.7 %
Total facility production (3) 86,973 60,281 44.3 %
(1)Total sales volume includes sales from the production at our facilities and
certain third-party facilities pursuant to supply and/or processing agreements,
sales of inventories and the resale of crude oil to third-party customers. Total
sales volume includes the sale of purchased blendstocks.
(2)Total feedstock runs represent the barrels per day of crude oil and other
feedstocks processed at our facilities and at certain third-party facilities
pursuant to supply and/or processing agreements.
(3)The difference between total facility production and total feedstock runs is primarily a result of the time lag between the input of feedstocks and production of finished products and volume loss.
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The following table reflects our unaudited condensed consolidated results of
operations and includes the non-GAAP financial measures EBITDA, Adjusted EBITDA
and Distributable Cash Flow. For a reconciliation of EBITDA, Adjusted EBITDA and
Distributable Cash Flow to Net income (loss), our most directly comparable
financial performance measure calculated and presented in accordance with GAAP,
please read "- Non-GAAP Financial Measures."
Three Months Ended March 31,
2022 2021
(In millions)
Sales $ 1,097.9 $ 600.3
Cost of sales 1,065.2 642.3
Gross profit (loss) 32.7 (42.0)
Operating costs and expenses:
Selling 12.6 13.1
General and administrative 32.6 36.7
Other operating expense 4.8 14.9
Operating loss (17.3) (106.7)
Other income (expense):
Interest expense (51.6) (34.2)
Loss on derivative instruments (22.1) (5.2)
Other income (expense) (3.8) 0.2
Total other expense (77.5) (39.2)
Net loss before income taxes (94.8) (145.9)
Income tax expense 0.7 0.2
Net loss $ (95.5) $ (146.1)
EBITDA $ (18.9) $ (85.5)
Adjusted EBITDA $ 23.3 $ (5.4)
Distributable Cash Flow $ (43.3) $ (50.8) Non-GAAP Financial Measures
We include in this Quarterly Report the non-GAAP financial measures EBITDA, Adjusted EBITDA and Distributable Cash Flow. We provide reconciliations of EBITDA, Adjusted EBITDA and Distributable Cash Flow to Net income (loss), our most directly comparable financial performance measure.
EBITDA, Adjusted EBITDA and Distributable Cash Flow are used as supplemental financial measures by our management and by external users of our financial statements such as investors, commercial banks, research analysts and others, to assess:
•the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
•the ability of our assets to generate cash sufficient to pay interest costs 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.
Management believes that these non-GAAP measures are useful to analysts and investors as they exclude transactions not related to our core cash operating activities and provide metrics to analyze our ability to pay interest to our noteholders. However, the indentures governing our senior notes contain covenants that, among other things, restrict our ability to pay distributions. We believe that excluding these transactions allows investors to meaningfully analyze trends and performance of our core cash operations.
We define EBITDA for any period as net income (loss) plus interest expense (including amortization of debt issuance costs), income taxes and depreciation and amortization.
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We define Adjusted EBITDA for any period as EBITDA adjusted for (a) impairment; (b) unrealized gains and losses from mark-to-market accounting for hedging activities; (c) realized gains and losses under derivative instruments excluded from the determination of net income (loss); (d) non-cash equity-based compensation expense and other non-cash items (excluding items such as accruals of cash expenses in a future period or amortization of a prepaid cash expense) that were deducted in computing net income (loss); (e) debt refinancing fees, extinguishment costs, premiums and penalties; (f) any net gain or loss realized in connection with an asset sale that was deducted in computing net income (loss); (g) amortization of turnaround costs; (h) LCM inventory adjustments; (i) the impact of liquidation of inventory layers calculated using the LIFO method; (j) RINs mark-to-market adjustments; and (k) all extraordinary, unusual or non-recurring items of gain or loss, or revenue or expense. We define Distributable Cash Flow for any period as Adjusted EBITDA less replacement and environmental capital expenditures, turnaround costs, cash interest expense (consolidated interest expense less non-cash interest expense), gain (loss) from unconsolidated affiliates, net of cash distributions and income tax expense (benefit).
We define Adjusted EBITDA Margin as Adjusted EBITDA divided by sales.
The definition of Adjusted EBITDA presented in this Quarterly Report is similar
to the calculation of "Consolidated Cash Flow" contained in the indentures
governing our Senior Notes (as defined in this Quarterly Report) and the
calculation of "Consolidated EBITDA" contained in the Credit Agreement. We are
required to report Consolidated Cash Flow to the holders of our Senior Notes and
Consolidated EBITDA to the lenders under our revolving credit facility, and
these measures are used by them to determine our compliance with certain
covenants governing those debt instruments. Please read Note 8 - "Long-Term
Debt" under Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed
Consolidated Financial Statements" in this Quarterly Report for additional
details regarding the covenants governing our debt instruments.
EBITDA, Adjusted EBITDA and Distributable Cash Flow should not be considered
alternatives to Net income (loss) or Operating income (loss) or any other
measure of financial performance presented in accordance with GAAP. In
evaluating our performance as measured by EBITDA, Adjusted EBITDA and
Distributable Cash Flow, management recognizes and considers the limitations of
these measurements. EBITDA and Adjusted EBITDA do not reflect our liabilities
for the payment of income taxes, interest expense or other obligations such as
capital expenditures. Accordingly, EBITDA, Adjusted EBITDA and Distributable
Cash Flow are only three of several measurements that management utilizes.
Moreover, our EBITDA, Adjusted EBITDA and Distributable Cash Flow may not be
comparable to similarly titled measures of another company because all companies
may not calculate EBITDA, Adjusted EBITDA and Distributable Cash Flow in the
same manner.
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The following tables present a reconciliation of Net income (loss), our most directly comparable GAAP financial performance measure to EBITDA, Adjusted EBITDA and Distributable Cash Flow, for each of the periods indicated.
Three Months Ended
2022 2021
(In millions)
Reconciliation of Net loss to EBITDA, Adjusted EBITDA and
Distributable Cash Flow:
Net loss $ (95.5) $ (146.1)
Add:
Interest expense 51.6 34.2
Depreciation and amortization 24.3 26.2
Income tax expense 0.7 0.2
EBITDA $ (18.9) $ (85.5)
Add:
LCM / LIFO gain $ (6.0) $ (22.7)
Unrealized loss on derivative instruments 22.1 6.3
Amortization of turnaround costs 5.9 4.7
Loss on impairment and disposal of assets - 0.7
RINs mark-to-market loss 9.4 75.0
Equity-based compensation and other items 7.0 13.6
Other non-recurring expenses 3.8 2.5
Adjusted EBITDA $ 23.3 $ (5.4)
Less:
Replacement and environmental capital expenditures (1) $ 8.6 $ 5.2
Cash interest expense (2) 47.5 32.7
Turnaround costs 9.8 7.3
Income tax expense 0.7 0.2
Distributable Cash Flow $ (43.3) $ (50.8)
(1)Replacement capital expenditures are defined as those capital expenditures
which do not increase operating capacity or reduce operating costs and exclude
turnaround costs. Environmental capital expenditures include asset additions to
meet or exceed environmental and operating regulations.
(2)Represents consolidated interest expense less non-cash interest expense.
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Changes in Results of Operations for the Three Months Ended
Sales. Sales increased$497.6 million , or 82.9%, to$1,097.9 million in the three months endedMarch 31, 2022 , from$600.3 million in the same period in 2021. Sales for each of our principal product categories in these periods were as follows: Three Months Ended March 31, 2022 2021 % Change (Dollars in millions, except barrel and per barrel data) Sales by segment: Specialty Products and Solutions: Lubricating oils $ 209.5$ 131.4 59.4 % Solvents 92.0 65.7 40.0 % Waxes 44.5 32.7 36.1 % Fuels, asphalt and other by-products (1) 423.4 150.3 181.7 % Total Specialty Products and Solutions $ 769.4$ 380.1 102.4 %
Total Specialty Products and Solutions sales volume (in barrels)
5,517,000 3,753,000 47.0 %
Average Specialty Products and Solutions sales price per
barrel $ 139.46 $ 101.28 37.7 %
Montana/Renewables:
Gasoline $ 58.6 $ 42.8 36.9 %
Diesel 116.5 65.0 79.2 %
Jet Fuel 11.4 5.0 128.0 %
Asphalt, heavy fuel oils and other (2) 68.8 41.2 67.0 %
Total Montana/Renewables $ 255.3 $ 154.0 65.8 %
Total Montana/Renewables sales volume (in barrels) 2,488,000 2,505,000 (0.7) %
Average Montana/Renewables sales price per barrel $ 102.61 $ 61.48 66.9 %
Performance Brands:
Total Performance Brands (3) $ 73.2$ 66.2 10.6 % Total Performance Brands sales volume (in barrels) 133,000 141,000 (5.7) % Average Performance Brands sales price per barrel$ 550.38 $ 469.50 17.2 % Total sales$ 1,097.9 $ 600.3 82.9 %
Total Specialty Products and Solutions,
8,138,000 6,399,000 27.2 % (1)Represents (a) by-products, including fuels and asphalt, produced in connection with the production of specialty products at thePrinceton andCotton Valley refineries and Dickinson and Karns City facilities, (b) polyolester synthetic lubricants produced at theMissouri facility, and (c) fuels products produced at theShreveport refinery .
(2)Represents asphalt, heavy fuel oils and other products produced in connection
with the production of fuels at the
(3)Represents packaged and synthetic specialty products at the Royal Purple,
Bel-Ray and
The components of the
Dollar Change
(In millions)
Volume $ 178.7
Sales price 210.6
Total Specialty Products and Solutions segment sales increase
Specialty Products and Solutions segment sales increased period over period,
primarily due to the significantly higher price environment in the current year
period and strong throughput. The favorable volumes impact was due to reliable
operations and the absence of the turnaround at our Shreveport facility and the
polar vortex in the prior year comparative period.
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The components of the
Dollar Change
(In millions)
Volume $ (1.1)
Sales price 102.4
Total
Montana /Renewables segment sales increased primarily due to increased sales prices as a result of the significantly higher price environment in the current year, in-line with the overall improvement in market conditions. Sales volumes were relatively flat between the two comparative periods. The components of the$7.0 million increase in Performance Brands segment sales for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , were as follows: Dollar Change (In millions) Volume $ (3.4) Sales price 10.4
Total Performance Brands segment sales increase $ 7.0
Performance Brands segment sales increased due to an increase in product prices, the impact of which was partially offset by slightly lower sales volumes due to industry wide supply chain disruptions. Gross Profit. Gross profit increased$74.7 million , or 177.9%, to$32.7 million in the three months endedMarch 31, 2022 , from a$42.0 million gross loss in the same period in 2021. Gross profit (loss) for our business segments were as follows: Three Months Ended March 31, 2022 2021 % Change (Dollars in millions, except per barrel data) Gross profit by segment: Specialty Products and Solutions: Gross profit (loss) $ 17.7$ (38.3) 146.2 % Percentage of sales 2.3 % (10.1) % 12.4 % Specialty Products and Solutions gross profit (loss) per barrel $ 3.21$ (10.21) 131.4 % Montana/Renewables: Gross profit (loss) $ 1.7$ (27.2) 106.3 % Percentage of sales 0.7 % (17.7) % 18.4 % Montana/Renewables gross profit (loss) per barrel $ 0.68$ (10.86) 106.3 % Performance Brands: Gross profit $ 13.3$ 23.5 (43.4) % Percentage of sales 18.2 % 35.5 % (17.3) % Performance Brands gross profit per barrel $ 100.00$ 166.67 (40.0) % Total gross profit (loss) $ 32.7$ (42.0) 177.9 % Percentage of sales 3.0 % (7.0) % 10.0 % 39
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The components of the$56.0 million increase in Specialty Products and Solutions segment gross profit for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , were as follows: Dollar
Change
(In millions)
Three months ended March 31, 2021 reported gross profit (loss)$ (38.3) Cost of materials (200.4) Operating costs (10.6) LCM / LIFO inventory adjustments (14.2) Volumes 42.8 Sales price 210.6 RINs expense 27.8 Three months ended March 31, 2022 reported gross profit $
17.7
The increase in Specialty Products and Solutions segment gross profit for the three months endedMarch 31, 2022 , as compared to the same period in 2021, was primarily due to a favorable volumes impact driven by the absence in the current year period of the planned turnaround at our Shreveport facility that occurred in the first quarter of 2021 and the absence of unplanned downtime resulting from the polar vortex that occurred in the prior year comparative period. This impact was coupled with the favorable impact of stronger net unit margins as a result of strong specialty market demand. These factors were partially offset by higher operating costs due to higher utility costs.
The components of the
Dollar Change
(In millions)
Three months ended
(85.3)
LCM / LIFO inventory adjustments (2.5) Volumes (0.1) Operating costs (5.2) RINs expense 19.6 Sales price 102.4 Three months endedMarch 31, 2022 reported gross profit $
1.7
The increase inMontana /Renewables segment gross profit (loss) for the three months endedMarch 31, 2022 , as compared to the same period in 2021, was primarily due to stronger net unit margins and lower RINs expense. These factors were partially offset by an increase in operating costs driven by higher utility costs.
The components of the
Dollar Change
(In millions)
Three months ended March 31, 2021 reported gross profit $ 23.5
Cost of materials (18.1)
Volumes (1.6)
Operating costs (0.9)
Sales price 10.4
Three months ended
The decrease in Performance Brands segment gross profit for the three months endedMarch 31, 2022 , as compared to the same period in 2021, was primarily driven by higher material and feedstock costs. The impact of these items were partially offset by higher sales prices as a result of our continued growth in the business for our TruFuel,Royal Purple , and Bel-Ray brands. 40
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General and administrative. General and administrative expenses decreased$4.1 million , or 11.2%, to$32.6 million in the three months endedMarch 31, 2022 , from$36.7 million in the same period in 2021. The decrease was due primarily to a$6.6 million decrease in equity-based compensation related expenses, partially offset by increases in labor and benefits related expenses. Interest expense. Interest expense increased$17.4 million , or 50.9%, to$51.6 million in the three months endedMarch 31, 2022 , from$34.2 million in the same period in 2021. The increase was primarily due to interest expense incurred for our MRL credit facility in the current quarter, which was absent the prior year comparative period, and higher financing costs related to our Supply and Offtake Agreements in the current quarter in comparison to the prior year comparative period. Gain (loss) on derivative instruments. There was a$22.1 million loss on derivative instruments in the three months endedMarch 31, 2022 , compared to a$5.2 million loss in the same period in 2021. The change was primarily driven by a$19.2 million unrealized loss on the inventory financing embedded derivative in the current quarter, as compared to a$7.6 million unrealized loss in the prior year comparative period.
Liquidity and Capital Resources
General
The following should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" included under Part II, Item 7 in our 2021 Annual Report. There have been no material changes in that information other than as discussed below. Also, see Note 7 - "Inventory Financing Agreements" and Note 8 - "Long-Term Debt" under Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements" in this Quarterly Report for additional discussions related to our Supply and Offtake Agreements and our long-term debt.
Cash Flows from Operating, Investing and Financing Activities
We believe that we have sufficient liquid assets, cash flow from operations,
borrowing capacity and adequate access to capital markets to meet our financial
commitments, debt service obligations and anticipated capital expenditures for
at least the next 12 months. We continue to seek to lower our operating costs,
selling expenses and general and administrative expenses as a means to further
improve our cash flow from operations with the objective of having our cash flow
from operations support all of our capital expenditures and interest payments.
However, we are subject to business and operational risks that could materially
adversely affect our cash flows. A material decrease in our cash flow from
operations including a significant, sudden decrease in crude oil prices would
likely produce a corollary effect on our borrowing capacity under our revolving
credit facility and potentially our ability to comply with the covenants under
our revolving credit facility. A significant, sudden increase in crude oil
prices, if sustained, would likely result in increased working capital
requirements which would be funded by borrowings under our revolving credit
facility. In addition, our cash flow from operations may be impacted by the
timing of settlement of our derivative activities. Gains and losses from
derivative instruments that do not qualify as cash flow hedges are recorded in
unrealized gain (loss) on derivative instruments until settlement and will
impact operating cash flow in the period settled.
The following table summarizes our primary sources and uses of cash in each of
the periods presented:
Three Months Ended March 31,
2022 2021
(In millions)
Net cash used in operating activities $ (2.9) $ (50.3)
Net cash used in investing activities (67.0) (6.2)
Net cash provided by financing activities 2.6 61.3
Net increase (decrease) in cash, cash equivalents and restricted cash
$
(67.3)
Operating Activities. Operating activities used cash of$2.9 million during the three months endedMarch 31, 2022 compared to using cash of$50.3 million during the same period in 2021. The change was impacted by a decrease in net loss of$50.6 million , which was partially offset by an increase in the cash required for working capital. Investing Activities. Investing activities used cash of$67.0 million during the three months endedMarch 31, 2022 compared to a use of cash of$6.2 million during the same period in 2021. The change is related to an increase in cash expenditures for additions to property, plant and equipment in the current year in comparison to the prior year. The cash expenditures for additions to property, plant and equipment in the current year are mainly related to our renewable diesel project. 41
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Financing Activities. Financing activities provided cash of$2.6 million in the three months endedMarch 31, 2022 compared to providing cash of$61.3 million during the same period in 2021. The change is primarily due to$70.0 million of proceeds received from our Shreveport terminal asset financing arrangement in the prior year comparative period, which was partially offset by$13.9 million of proceeds we received in the current year period from our MRL asset financing arrangement. Capital Expenditures Our property, plant and equipment capital expenditure requirements consist of capital improvement expenditures, replacement capital expenditures, environmental capital expenditures and turnaround capital expenditures. Capital improvement expenditures include the acquisition of assets to grow our business, facility expansions, or capital initiatives that reduce operating costs. Replacement capital expenditures replace worn out or obsolete equipment or parts. Environmental capital expenditures include asset additions to meet or exceed environmental and operating regulations. Turnaround capital expenditures represent capitalized costs associated with our periodic major maintenance and repairs. The following table sets forth our capital improvement expenditures, replacement capital expenditures, environmental capital expenditures and turnaround capital expenditures in each of the periods shown (including capitalized interest): Three Months EndedMarch 31, 2022
2021
(In millions)
Capital improvement expenditures $ 58.6 $ 1.2
Replacement capital expenditures 6.9
4.5
Environmental capital expenditures 1.7
0.7
Turnaround capital expenditures 9.8 7.3 Total $ 77.0$ 13.7
2022 Capital Spending Forecast
Excluding MRL capital expenditures, we are forecasting total capital expenditures of approximately$115 million to$135 million in 2022, of which$19.6 million was spent in the first quarter of 2022. Forecasted capital expenditures related to our Montana Renewable Diesel project will be funded, in part, by restricted cash on hand and cash flows from operations. In addition to this, our forecasted capital expenditures related to MRL include amounts for the construction of a new renewable hydrogen plant,$50.0 million of which will be financed through our Master Lease Agreement with Stonebriar. We anticipate that capital expenditure requirements will be provided primarily through cash flow from operations, cash on hand, available borrowings under our revolving credit facility and by accessing capital markets as necessary. If future capital expenditures require expenditures in excess of our then-current cash flow from operations and borrowing availability under our revolving credit facility, we may be required to issue debt or equity securities in public or private offerings or incur additional borrowings under bank credit facilities to meet those costs. Debt and Credit Facilities
As of
•$500.0 million senior secured revolving credit facility maturing in
•$306.3 million senior secured term loan facility (the "MRL Credit Facility");
•$200.0 million of 9.25% Senior Secured First Lien Notes due 2024 ("2024 Secured Notes");
•$550.0 million of 11.00% Senior Notes due 2025 ("2025 Notes");
•$325.0 million of 8.125% Senior Notes due 2027 ("2027 Notes"); and
•$13.9 million of financing through our MRL asset financing arrangement.
We were in compliance with all covenants under the debt instruments in place as
of
OnJanuary 20, 2022 , we issued and sold$325.0 million in aggregate principal amount of our 2027 Notes, in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933 to eligible purchasers at par. We received net proceeds of$319.1 million , after deducting the initial purchasers' discount and offering expenses. OnJanuary 12, 2022 , we issued a notice of conditional redemption for$325.0 million in aggregate principal amount of the 2023 Notes at a redemption price of par, plus accrued and unpaid interest to the redemption date ofFebruary 11, 2022 , conditioned on the completion of an offering of at least$300.0 million aggregate principal amount of senior debt securities on 42
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or beforeFebruary 11, 2022 . As the conditions precedent were met onJanuary 20, 2022 , we funded the redemption of the 2023 Notes with the net proceeds from the offering of the 2027 Notes and the remainder from cash on hand. In conjunction with the redemption, we incurred debt extinguishment costs of$1.0 million . OnJanuary 20, 2022 , we entered into the Credit Facility Amendment governing our senior secured revolving credit facility, which among other changes, (a) extends the term of the revolving credit facility for five years from the date of the Credit Facility Amendment, (b) reduces aggregate commitments under the revolving credit facility to$500.0 million , which includes a FILO tranche, and (c) replaces LIBOR as a reference interest rate with a new reference interest rate based on daily SOFR. The borrowing base on our revolving credit facility increased from approximately$307.9 million as ofMarch 31, 2021 , to approximately$448.5 million atMarch 31, 2022 , resulting in a corresponding increase in our borrowing availability from approximately$175.0 million atMarch 31, 2021 , to approximately$401.7 million atMarch 31, 2022 . Total liquidity, consisting of unrestricted cash and available funds under our revolving credit facility, increased from$289.2 million atMarch 31, 2021 to$412.4 million atMarch 31, 2022 .
Inventory Financing
Please refer to Note 7 - "Inventory Financing Agreements" in Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements" for additional information regarding our Supply and Offtake Agreements.
Short-Term Liquidity
As ofMarch 31, 2022 , our principal sources of short-term liquidity were (i)$401.7 million of availability under our revolving credit facility, (ii) inventory financing agreements related to theGreat Falls and Shreveport refineries and (iii)$10.7 million of unrestricted cash on hand. Borrowings under our revolving credit facility can be used for, among other things, working capital, capital expenditures and other lawful partnership purposes including acquisitions. For additional information regarding our revolving credit facility, see Note 8 - "Long-Term Debt" under Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements" in this Quarterly Report. Long-Term Financing In addition to our principal sources of short-term liquidity listed above, subject to market conditions, we may meet our cash requirements (other than distributions of Available Cash (as defined in our partnership agreement) to our common unitholders) through the issuance of long-term notes or additional common units. From time to time, we issue long-term debt securities referred to as our senior notes. All of our outstanding senior notes, other than the 2024 Secured Notes, are unsecured obligations that rank equally with all of our other senior debt obligations to the extent they are unsecured. As ofMarch 31, 2022 we had$306.3 million in secured loan facility,$200.0 million in 2024 Secured Notes,$550.0 million in 2025 Notes, and$325.0 million in 2027 Notes outstanding. The 2024 Secured Notes and the related guarantees are secured by a first priority lien (subject to certain exceptions) on all the fixed assets that secure our obligations under the secured hedge agreements, as governed by the Collateral Trust Agreement, which governs how secured hedging counterparties and holders of the 2024 Secured Notes share collateral pledged as security for the payment obligations owed by us to the secured hedging counterparties under their respective master derivatives contracts and the holders of the 2024 Secured Notes. In addition, as ofMarch 31, 2022 , we had$306.3 million of debt outstanding for the MRL Credit Facility,$62.7 million of other debt outstanding for the Shreveport terminal asset financing arrangement, and$13.9 million of financing for our MRL asset financing arrangement. The MRL Credit Facility is secured by substantially all of the assets of MRL and a pledge of 100% of the equity interest in MRL held byMontana Renewables Holdings . Borrowings under the MRL Credit Facility are obligations of our unrestricted subsidiariesMRL and Montana Renewables Holdings solely, and are non-recourse to the Company and its restricted subsidiaries. InJanuary 2022 , we issued and sold$325.0 million in aggregate principal amount of the 2027 Notes, the proceeds of which were used, together with cash on hand, to fund the redemption of the 2023 Notes. To date, our debt balances have not adversely affected our operations, our ability to repay or refinance our indebtedness. Based on our historical record, we believe that our capital structure will continue to allow us to achieve our business objectives. For additional information regarding our senior notes, please read Note 8 - "Long-Term Debt" under Part I, Item 1 "Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements" in this Quarterly Report and Note 9 - "Long-Term Debt" in Part II, Item 8 "Financial Statements and Supplementary Data" of our 2021 Annual Report.
Master Derivative Contracts and Collateral Trust Agreement
For additional discussion regarding our master derivative contracts and collateral trust agreement, see "Master Derivative Contracts and Collateral Trust Agreement" under Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Annual Report.
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Critical Accounting Estimates
For additional discussion regarding our critical accounting estimates, see "Critical Accounting Estimates" under Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Annual Report.
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