CALUMET SPECIALTY PRODUCTS PARTNERS, LP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
The historical consolidated financial statements included in this Annual Report reflect all of the assets, liabilities and results of operations of
Calumet Specialty Products Partners, L.P.and its consolidated subsidiaries ("Calumet," the "Company," "we," "our," or "us"). The following discussion analyzes the financial condition and results of operations of the Company for the years ended December 31, 2021and 2020. Unitholders should read the following discussion and analysis of the financial condition and results of operations of the Company in conjunction with the historical consolidated financial statements and notes included elsewhere in this Annual Report.
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 of
North America'sleading renewable diesel manufacturing facilities, which is expected to be commissioned in the fourth quarter of 2022. We are headquartered in Indianapolis, Indianaand operate twelve facilities through North America. During 2021, we reorganized our business segments as a result of a change in how the chief operating decision maker ("CODM") allocates resources, makes operating decisions and assesses the performance of the business. As a result, as of January 1, 2021, our operations are managed by the CODM using the following reportable segments: Specialty Products and Solutions; Performance Brands; Montana/Renewables; and Corporate. Segment information presented herein reflects the impact of this reorganization for all periods presented. For additional information, see Note 19 - "Segments and Related Information" under Part II, Item 8 "Financial Statements and Supplementary Data." 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 our Royal Purple, Bel-Ray, and TruFuel brands. Our Montana/Renewables segment is comprised of two businesses - renewable diesel and specialty asphalt. When our Great Fallsrenewable diesel facility is operational, we will process a variety of geographically advantaged renewable feedstocks into renewable hydrogen, renewable natural gas, renewable propane, renewable naphtha, renewable kerosene/aviation fuel, and renewable diesel that we expect to distribute into renewable markets in the western half of North America. At our Montanaspecialty 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 or Montana/Renewables segments.
Outlook and trends
The world continues to navigate the COVID-19 pandemic. Global economic conditions have improved compared to the outset of the pandemic, driven by increases in vaccination rates in the
U.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 fourth quarter of 2021, and while this global dynamic is receiving elevated attention in all areas, it's difficult to predict when all challenges will be fully resolved. 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. As we navigate this environment in a time of rapidly growing demand, our order backlog has grown. Our Specialty Products and Solutions segment is experiencing record specialty unit margins and fuels margins have increased for the fourth 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 fourth quarter of 2021 compared to the fourth quarter of 2020, despite a significantly higher price environment during this quarter. The following factors have impacted our results of operations during 2021 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 improving operations. Our total feedstock runs were 75,818 barrels per day ("bpd") in 2021 compared to 84,829 bpd in 2020. This decrease is primarily attributed to lower production volumes at our Shreveport facility as a result of major turnaround activity and damages caused by Winter Storm Uri. 49
•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. The approximate 40% increase in the 2021 period-end market price of RINs in comparison to the 2020 period-end market price of RINs unfavorably affected our financial results. Please read Item 7 "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 our
Great Falls, MTasset into a leading Renewable Diesel facility is on track.
For a summary of litigation and other contingencies, please read Note 7 - "Commitments and Contingencies" under Part II, Item 8 "Financial Statements and Supplementary Data - Notes to 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.
We reported a net loss of
$260.1 millionin 2021, versus a net loss of $149.0 millionin 2020. We reported Adjusted EBITDA (as defined in Item 7 "Management's Discussion and Analysis - Non-GAAP Financial Measures") of $110.3 millionin 2021, versus $217.3 millionin 2020. We used cash from operating activities of $44.0 millionin 2021 versus generating cash from operating activities of $62.8 millionin 2020, driven by a larger net loss and increases in the cash required for working capital and turnaround costs. Please read Item 7 "Management's Discussion and Analysis - 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 with U.S.generally accepted accounting principles ("GAAP"). Specialty Products and Solutions segment Adjusted EBITDA was $104.6 millionin 2021 compared to $151.0 millionin the prior year. Compared to the prior year, Specialty Products and Solutions 2021 segment Adjusted EBITDA was favorably impacted by an increase in specialty products net unit margins as a result of higher specialty product pricing and continued fuels market recovery, the impact of which was more than offset by lower production volumes stemming largely from a planned full plant turnaround at our Shreveport facility in the first quarter of 2021 and impacts from Winter Storm Uri, $30.1 millionin realized gains on derivative instruments in the prior year comparative period that did not recur in 2021 and higher non-cash RINs incurrence expense. Montana/Renewables segment Adjusted EBITDA was $44.4 millionin 2021 compared to $71.4 millionin 2020. Compared to the prior year, Montana/Renewables 2021 segment Adjusted EBITDA was unfavorably impacted by lower production volumes due to planned maintenance, some of which was pulled forward to de-risk the Renewable Diesel project, $19.5 millionin realized gains on derivative instruments in the prior year comparative period that did not recur in 2021 and higher non-cash RINs incurrence expense. These impacts were partially offset by the favorable impacts of an increase in net unit margins as a result of a wider WCS-WTI crude spread and improved crack spreads for transportation fuels. 50
Performance Brands segment Adjusted EBITDA was
$33.8 millionin 2021 compared to $61.1 millionin 2020. Compared to the prior year, Performance Brands segment Adjusted EBITDA was unfavorably impacted by an $11.3 milliondecrease in gross profit due to the natural lag in passing increasing costs through to customers in these branded and consumer markets, increased operating costs due to supply chain related production inefficiencies, and high costs associated with replacing grease and additive supply that was unavailable due to force majeure. Supply chain difficulties, including packaging availability, difficult logistics markets, and additive and grease supply shortages continue to challenge our ability to keep pace with strong demand. Despite these difficulties, we have seen favorable improvements in pricing and demand for our TruFuel, Royal Purple, and Bel-Ray brands. Unfortunately, much of the demand currently sits in our backorder queue pending our industry's supply chains returning to normal.
Corporate segment Adjusted EBITDA was negative
December 31, 2021, we had total liquidity of $334.1 millioncomprised of $38.1 millionof unrestricted cash and $296.0 millionof availability under our revolving credit facility. As of December 31, 2021, our revolving credit facility had a $328.7 millionborrowing base, $32.7 millionin outstanding standby letters of credit and no 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 7 "Management's Discussion and Analysis - Liquidity and Capital Resources" and Part I, Item 1A. "Risk Factors" for additional information.
Renewable Fuels 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 the
EPA, which we have historically received. Under the regulation of the EPA, 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. For the year ended December 31, 2021, our non-cash RINs expense was $116.0 million, as compared to a non-cash RINs expense for the year ended December 31, 2020of $110.8 million. Our annual 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 approximately 65 million RINs 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 7 - "Commitments and Contingencies" under Part II, Item 8 "Financial Statements - Notes to Consolidated Financial Statements" for further information on the Company's RINs obligation.
See Note 20 – “Unrestricted Subsidiaries” under Part II, Item 8 “Financial Statements – Notes to Consolidated Financial Statements” for more information regarding certain financial information of our unrestricted subsidiaries.
Key Performance Measures
Our sales and results of operations are primarily impacted by demand for specialty products, demand for petroleum products, global fuel cracking differentials, the price of natural gas used as fuel in our operations, our ability to operate our facilities high utilization rate of production and our results from the derivatives business.
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 10 - "Derivatives" under Part II, Item 8 "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements."
Our management uses several financial and operational measures to analyze our performance. These measures include the following:
•segment gross margin;
•segment adjusted gross margin;
•Adjusted EBITDA segment; 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 typically 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. 52
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. Year Ended December 31, 2021 2020 (In bpd) Total sales volume (1) 79,281 86,727 Total feedstock runs (2) 75,818 84,829 Facility production: (3) Specialty Products and Solutions: Lubricating oils 9,867 10,143 Solvents 6,833 6,819 Waxes 1,335 1,318 Fuels, asphalt and other by-products 27,869 35,052 Total Specialty Products and Solutions 45,904 53,332
Gasoline 4,907 5,369 Diesel 9,711 10,389 Jet fuel 901 647 Asphalt, heavy fuel oils and other 10,379 10,337 Total Montana/Renewables 25,898 26,742 Performance Brands 1,304 1,381 Total facility production (3) 73,106 81,455 (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 the total production of the installation and the total number of cycles of raw materials results mainly from the time lag between the input of raw materials and the production of finished products and the loss of volume.
The following table reflects our consolidated results of operations and includes the non-GAAP financial measures EBITDA, Adjusted EBITDA and Distributable Cash Flow. For a reconciliation of EBITDA, Adjusted EBITDA and Distributable Cash Flow to Net income (loss), our most directly comparable financial performance measure calculated and presented in accordance with GAAP, please read "Non-GAAP Financial Measures." Year Ended December 31, 2021 2020 (In millions) Sales
$ 3,148.0 $ 2,268.2Cost of sales 3,005.1 2,169.1 Gross profit 142.9 99.1 Operating costs and expenses: Selling 52.8 47.8 General and administrative 151.1 91.1 Taxes other than income taxes 12.5
Loss on impairment and disposal of assets 4.1 6.8 Gain on sale of business, net (0.2) (1.0) Other operating expense 8.2 16.5 Operating loss (85.6) (71.9) Other income (expense): Interest expense (149.5) (125.9) Gain (loss) on derivative instruments (23.3) 52.4 Other expense (0.2) (2.5) Total other expense (173.0) (76.0) Net loss before income taxes (258.6) (147.9) Income tax expense 1.5 1.1 Net loss
$ (260.1) $ (149.0)EBITDA $ (1.4) $ 83.1Adjusted EBITDA $ 110.3 $ 217.3Distributable Cash Flow $ (120.1) $ 41.154
Non-GAAP Financial Measures
We include in this Annual 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 calculated and presented in accordance with GAAP. 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 sufficient cash to pay interest costs and support our indebtedness;
• our operating performance and return on capital relative to those of other companies in our industry, regardless of funding or capital structure; and
•the viability of acquisition and investment projects and the overall rates of return of alternative investment opportunities.
We believe 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 (net loss) plus interest expense (including amortization of debt issuance costs), income taxes, and depreciation and amortization .
During the first quarter of 2021, the CODM changed the definition and calculation of Adjusted EBITDA, which we use for evaluating performance, allocating resources and managing the business. The revised definition and calculation of Adjusted EBITDA now excludes RINs mark-to-market adjustments (see item (j) below), which were previously included. We believe this revised definition and calculation better reflects the performance of our Company's business segments including cash flows and core operating activities. Adjusted EBITDA has been revised for all periods presented to reflect this change. 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 Annual Report is similar to the calculation of "Consolidated Cash Flow" contained in the indentures governing our senior notes. We are required to report Consolidated Cash Flow to the holders of our senior notes and Adjusted 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 "Liquidity and Capital Resources - Debt and Credit Facilities" for additional details regarding the covenants governing our debt instruments. 55
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.
The following tables provide a reconciliation of net earnings (loss), our most directly comparable GAAP financial performance measure, to EBITDA, adjusted EBITDA and distributable cash flow, for each of the periods indicated.
Year Ended December 31, 2021 2020 (In millions) Reconciliation of Net loss to EBITDA, Adjusted EBITDA and Distributable Cash Flow: Net loss
$ (260.1) $ (149.0)Add: Interest expense 149.5 125.9 Depreciation and amortization 107.7 105.1 Income tax expense 1.5 1.1 EBITDA $ (1.4) $ 83.1Add: LCM / LIFO (gain) loss $ (50.3) $ 28.5Unrealized (gain) loss on derivative instruments 24.4 (2.8) Amortization of turnaround costs 17.0 14.6 Loss on impairment and disposal of assets 4.1 6.8 RINs mark-to-market loss 57.7 75.8 Gain on sale of business, net (0.2) (1.0) Other non-recurring expenses 8.3 2.4 Equity based compensation and other items 50.7 9.9 Adjusted EBITDA $ 110.3 $ 217.3Less: Replacement and environmental capital expenditures (1) $ 29.0 $ 31.8Cash interest expense (2) 138.9 119.9 Turnaround costs 61.0 23.4 Income tax expense 1.5 1.1 Distributable Cash Flow $ (120.1) $ 41.1(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.
Sales. Sales increased
Year Ended December 31, 2021 2020 % Change (In millions, except barrel and per barrel data) Sales by segment: Specialty Products and Solutions: Lubricating oils $ 658.7
$ 473.539.1 % Solvents 303.7 236.2 28.6 % Waxes 151.7 129.1 17.5 % Fuels, asphalt and other by-products (1) 997.3 690.1 44.5 % Total Specialty Products and Solutions $ 2,111.4 $ 1,528.938.1 % Total Specialty Products and Solutions sales volume (in 18,394,000 20,803,000 (11.6) %
Average Specialty Products and Solutions sales price per $ 114.79
$ 73.4956.2 % barrel Montana/Renewables: Gasoline $ 188.3 $ 135.938.6 % Diesel 324.9 204.1 59.2 % Jet fuel 27.5 14.6 88.4 % Asphalt, heavy fuel oils and other (2) 243.0 150.6 61.4 % Total Montana/Renewables $ 783.7 $ 505.255.1 % Total Montana/Renewables sales volume (in barrels) 10,038,000 10,435,000 (3.8) % Average Montana/Renewables sales price per barrel $ 78.07 $ 48.4161.3 % Total Performance Brands (3) $ 252.9 $ 234.18.0 % Total Performance Brands sales volume (in barrels) 505,000 504,000 0.2 % Average Performance Brands sales price per barrel $ 500.79 $ 464.487.8 % Total sales $ 3,148.0 $ 2,268.238.8 % Total sales volume (in barrels) 28,937,000 31,742,000 (8.8) % (1)Represents (a) by-products, including fuels and asphalt, produced in connection with the production of specialty products at the Princetonand Cotton Valleyrefineries and Dickinson and Karns City facilities, (b) polyol ester synthetic lubricants produced at the Missourifacility, and (c) fuels products produced at the Shreveport refinery.
(2) Represents asphalt, heavy fuel oils and other products produced in connection with the production of fuels at the plant
(3) Represents specialty packaged and synthetic products at our
The components of the
Dollar Change (In millions) Sales price
$ 759.6Volume (177.1)
Increase in total sales of the specialized products and solutions segment
Specialty Products and Solutions segment sales increased period over period, primarily due to the significantly higher price environment in the current year period. The favorable price impact was partially offset by a decrease in sales volumes as a result of the planned turnaround at our Shreveport facility in the first quarter of 2021, unplanned downtime resulting from the polar vortex and supply chain disruptions. 57
The components of the
Dollar Change (In millions) Sales price
$ 297.7Volume (19.2)
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. The favorable price impact was partially offset by a decrease in sales volumes as a result of the planned turnaround at our Great Fallsfacility in the fourth quarter of 2021.
The components of the
Dollar Change (In millions) Sales price $ 18.1 Volume 0.7
Performance Brands segment total sales increase by $18.8
Performance Brands segment sales increased due to higher volumes and pricing, both of which were driven by continued growth in our TruFuel business,
Gross Profit. Gross profit increased
$43.8 million, or 44.2%, to $142.9 millionin 2021 from $99.1 millionin 2020. Gross profit for our business segments were as follows: Year Ended December 31, 2021 2020 % Change (Dollars in millions, except per barrel data) Gross profit by segment: Specialty Products and Solutions: Gross profit $ 62.6 $ 18.7234.8 % Percentage of sales 3.0 % 1.2 % 1.8 % Specialty Products and Solutions gross profit per barrel $ 3.40 $ 0.90277.8 % Montana/Renewables: Gross profit $ 12.0 $ 0.81,400.0 % Percentage of sales 1.5 % 0.2 % 1.3 % Montana/Renewables gross profit per barrel $ 1.20 $ 0.081,400.0 % Performance Brands: Gross profit $ 68.3 $ 79.6(14.2) % Percentage of sales 27.0 % 34.0 % (7.0) % Performance Brands gross profit per barrel $ 135.25 $ 157.94(14.4) % Total gross profit $ 142.9 $ 99.144.2 % Percentage of sales 4.5 % 4.4 % 0.1 % 58
The components of the
Dollar Change (In millions) 2020 reported gross profit $ 18.7 Sales price 759.6 RINs (3.2) Operating costs (52.5) LCM / LIFO inventory adjustments 58.7 Volume (42.7) Cost of materials (676.0) 2021 reported gross profit $ 62.6 The increase in Specialty Products and Solutions segment gross profit for the year ended
December 31, 2021, as compared to the same period in 2020, was primarily due to stronger net unit margins as a result of strong specialty market demand. These factors were partially offset by the unfavorable volumes impact resulting from the planned turnaround at our Shreveport facility in the first quarter of 2021 and unplanned downtime resulting from the polar vortex and logistics disruptions. Higher operating costs were due to expenses for freeze-related repairs and higher utility costs.
The components of the
Dollar Change (In millions) 2020 reported gross profit $ 0.8 Sales price 297.7 RINs (5.8) Operating costs (16.3) Volume (5.3) LCM / LIFO inventory adjustments 14.7 Cost of materials (273.8) 2021 reported gross profit $ 12.0 The increase in
Montana/Renewables segment gross profit for the year ended December 31, 2021, as compared to the same period in 2020, was primarily due to stronger net unit margins. These factors were partially offset by an increase in operating costs driven by higher utility costs.
The components of the
Dollar Change (In millions) 2020 reported gross profit $ 79.6 Sales price 18.1 Operating costs 1.6 LCM / LIFO inventory adjustments 5.3 Volume 0.4 Cost of materials (36.7) 2021 reported gross profit $ 68.3 The decrease in Performance Brands segment gross profit for the year ended
December 31, 2021, as compared to the same period in 2020, was primarily driven by higher material and feedstock costs and supply chain challenges that resulted in a growing order backlog. The impact of these items were partially offset by higher volumes and sales prices as a result of our continued growth in the business for our TruFuel, Royal Purple, and Bel-Ray brands. 59
General and administrative. General and administrative expenses increased
$60.0 million, or 65.9%, to $151.1 millionin 2021 from $91.1 millionin 2020. The increase was due primarily to a $45.2 millionincrease in equity-based compensation related expenses, which was primarily the result of an increase in the Company's unit price, and a $9.0 millionincrease in labor and benefits expenses in the current year in comparison to the prior year. Interest expense. Interest expense increased $23.6 million, or 18.7%, to $149.5 millionin 2021 from $125.9 millionin 2020. The increase was primarily due to higher financing costs related to our Supply and Offtake Agreements in the current year in comparison to the prior year. Gain on derivative instruments. There was a $23.3 millionloss on derivative instruments in 2021, compared to a $52.4 milliongain in the same period in 2020. We had a $49.6 millionrealized gain on derivative instruments in the prior year comparative period compared to a $1.1 millionrealized gain in the current year. This decrease was due to the settlement of our crack spread swaps and WCS crude oil basis swaps positions during 2020; whereas we did not enter into any new hedge contracts during 2021. In addition, the unrealized loss on the inventory financing embedded derivative was $25.7 millionin the current year period, compared to an unrealized gain of $5.1 millionin the prior year comparative period.
Cash and capital resources
Our principal sources of cash have historically included cash flow from operations, proceeds from public equity offerings, proceeds from notes offerings, bank borrowings and other financial arrangements. Principal uses of cash have included capital expenditures, acquisitions, distributions to our limited partners and general partner and debt service. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In general, we expect that our short-term liquidity needs, including debt service, working capital, replacement and environmental capital expenditures and capital expenditures related to internal growth projects, will be met primarily through projected cash flow from operations, borrowings under our revolving credit facility and asset sales.
In 2021, we redeemed
$150.0 millionin aggregate principal amount of our 7.625% Senior Notes due 2022 (the "2022 Notes") at a redemption price of par, plus accrued and unpaid interest. In conjunction with the redemption, we incurred debt extinguishment costs of $0.5 million. On November 18, 2021, we entered into a Credit Agreement with Oaktree Fund Administration, LLC(the "MRL Credit Facility"), which provided us a $300.0 millionsenior secured term loan facility. We drew $300.0 millionunder the MRL Credit Facility to finance the transfer for value of various assets at our Great Falls refineryto MRL, including the hydrocracker, a hydrogen plant, and several products tanks. Borrowings under the MRL Credit Facility are obligations of our unrestricted subsidiaries MRL and Montana Renewables Holdingssolely, and are non-recourse to the Company and its restricted subsidiaries. On December 31, 2021, MRL entered into a Master Lease Agreement (the "Lease Agreement") and an Interim Funding Agreement (the "Funding Agreement") with Stonebriar Commercial Finance LLC("Stonebriar") for $50.0 millionrelated to financing of certain equipment for the construction of a new renewable hydrogen plant. As of December 31, 2021, no amounts have been funded under the Master Lease. However, we expect amounts to be funded under the Master Lease in the first quarter of 2022.
In 2020, we entered into a transaction whereby we exchanged approximately
We expect to fund planned capital expenditures in 2022 of approximately
$115 millionto $135 million, excluding MRL capital expenditures, primarily with cash on hand, and cash flows from operations. Future internal growth projects or acquisitions may require expenditures in excess of our then-current cash flow from operations and borrowing availability under our revolving credit facility and may require us to issue debt or equity securities in public or private offerings or incur additional borrowings under bank credit facilities to meet those costs. 60
The borrowing base on our revolving credit facility increased from approximately
$286.1 millionas of December 31, 2020, to approximately $328.7 millionat December 31, 2021, resulting in a corresponding increase in our borrowing availability from approximately $154.4 millionat December 31, 2020, to approximately $296.0 millionat December 31, 2021. Total liquidity, consisting of unrestricted cash and available funds under our revolving credit facility, increased from $263.8 millionat December 31, 2020to $334.1 millionat December 31, 2021.
Cash flow 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 most recent two years: Year Ended December 31, 2021 2020 (In millions) Net Cash provided by (used in) operating activities
$ (44.0) $ 62.8Net Cash used in investing activities (82.8) (46.3) Net Cash provided by financing activities 139.3 73.8 Net increase in cash and cash equivalents $
Operating Activities. Operating activities used cash of
$44.0 millionin 2021 compared to providing cash of $62.8 millionin 2020. The change was impacted by an increase in net loss of $111.1 millionand increases in the cash required for working capital and turnaround costs. Investing Activities. Investing activities used cash of $82.8 millionin 2021 compared to a use of cash of $46.3 millionin 2020. The change is related to increases 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. Financing Activities. Financing activities provided cash of $139.3 millionin 2021 compared to providing cash of $73.8 millionin 2020. The change is primarily due to $70.0 millionof proceeds received from our Shreveport terminal asset financing arrangement and $300.0 millionof net proceeds received from the MRL Credit Facility in the current year, partially offset by the redemption of $150.0 millionof our 2022 Notes and $108.0 millionof lower borrowings on our revolving credit facility in the current year compared to the prior year.
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. 61
The following table sets forth our capital improvement expenditures, replacement capital expenditures, environmental capital expenditures and turnaround capital expenditures in each of the periods shown (including capitalized interest): Year Ended December 31, 2021 2020 (In millions) Capital improvement expenditures
$ 53.9 $ 12.2Replacement capital expenditures 24.0 24.7 Environmental capital expenditures 5.0 7.1 Turnaround capital expenditures 61.0 23.4 Total $ 143.9 $ 67.4
2022 Capital Expenditure Forecast
Excluding MRL capital expenditures, we are forecasting total capital expenditures of approximately
$115 millionto $135 millionin 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 include amounts for the construction of a new renewable hydrogen plant, $50.0 millionof 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
•$600.0 million senior secured revolving credit facility maturing in
February 2023(before giving effect to the Third Amendment to our revolving credit facility (the "Credit Facility Amendment")), subject to borrowing base limitations, with a maximum letter of credit sub-limit equal to $300.0 million, which amount may be increased to 90% of revolver commitments in effect with the consent of the Agent (as defined in the Credit Agreement) ("revolving credit facility");
• a $303.5 million senior secured term loan facility (the “MRL Credit Facility”);
• $325.0 million of 7.75% senior notes due 2023;
• $200.0 million of 9.25% Senior Secured Notes due 2024; and
• $550.0 million of 11.00% senior notes due 2025.
We complied with all the covenants of our debt instruments in place at
January 20, 2022, we issued and sold $325.0 millionin 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. On January 12, 2022, we issued a notice of conditional redemption for $325.0 millionin aggregate principal amount of the 2023 Notes at a redemption price of par, plus accrued and unpaid interest to the redemption date of February 11, 2022, conditioned on the completion of an offering of at least $300.0 millionaggregate principal amount of senior debt securities on or before February 11, 2022. As the conditions precedent were met on January 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 $2.5 million. On January 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. 62
Please refer to Note 8 – “Inventory financing agreements” in Part II, point 8 “Financial statements and additional data” for additional information regarding our supply and off-take agreements.
Short term liquidity
December 31, 2021, our principal sources of short-term liquidity were (i) approximately $296.0 millionof availability under our revolving credit facility, (ii) inventory financing agreements related to our Great Fallsand Shreveport refineries and (iii) $38.1 millionof 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, please read Note 9 "Long-Term Debt" in Part II, Item 8 "Financial Statements and Supplementary Data."
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 of
December 31, 2021, we had $303.5 millionin secured loan facility, $325.0 millionin 2023 Notes, $200.0 millionin 2024 Secured Notes and $550.0 millionin 2025 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 of December 31, 2021, we had $303.5 millionof debt outstanding for the MRL Credit Facility and $64.3 millionof other debt outstanding for the Shreveport terminal 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 by Montana Renewables Holdings. Borrowings under the MRL Credit Facility are obligations of our unrestricted subsidiaries MRL and Montana Renewables Holdingssolely, and are non-recourse to the Company and its restricted subsidiaries. In January 2022, we issued and sold $325.0 millionin 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 more information regarding our senior notes, please read Note 9 - "Long-Term Debt" under Part II, Item 8 "Financial Statements and Supplementary Data" in this Annual Report.
Derivative Master Agreements and Collateral Trust Agreement
Under our credit support arrangements, our payment obligations under all of our master derivatives contracts for commodity hedging generally are secured by a first priority lien on our and our subsidiaries' real property, plant and equipment, fixtures, intellectual property, certain financial assets, certain investment property, commercial tort claims, chattel paper, documents, instruments and proceeds of the foregoing (including proceeds of hedge arrangements). We had no additional letters of credit or cash margin posted with any hedging counterparty as of
December 31, 2021. Our master derivatives contracts and Collateral Trust Agreement (as defined below) continue to impose a number of covenant limitations on our operating and financing activities, including limitations on liens on collateral, limitations on dispositions of collateral and collateral maintenance and insurance requirements. For financial reporting purposes, we do not offset the collateral provided to a counterparty against the fair value of our obligation to that counterparty. Any outstanding collateral is released to us upon settlement of the related derivative instrument liability. Our various hedging agreements contain language allowing our hedge counterparties to request additional collateral if a specified credit support threshold is exceeded. However, these credit support thresholds are set at levels that would require a substantial increase in hedge exposure to require us to post additional collateral. As a result, we do not expect further increases in fuel products crack spreads or interest rates to significantly impact our liquidity due to requirements to post additional collateral. 63
Additionally, we have a collateral trust agreement (the "
Collateral TrustAgreement") 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. The Collateral Trust Agreement limits to $150.0 millionthe extent to which forward purchase contracts for physical commodities are covered by, and secured under, the Collateral Trust Agreement and the Parity Lien Security Documents (as defined in the Collateral Trust Agreement). There is no such limit on financially settled derivative instruments used for commodity hedging. Subject to certain conditions set forth in the Collateral Trust Agreement, we have the ability to add secured hedging counterparties from time to time.
January 2022, S&P reaffirmed a rating of B1 on our senior unsecured notes and upgraded our Company outlook to stable. Also in January 2022, Moody's reaffirmed a rating of Caa1 on our senior unsecured notes and a Company rating of B3, with the stable outlook maintained. Our 2024 Secured Notes issued in 2020 are rated B+ by S&P and B1 by Moody's. Equity Transactions
Impacts of seasonality on liquidity
The fuel and fuel related products that we manufacture, including asphalt products, are subject to seasonal demand and trends. Asphalt demand is generally lower in the first and fourth quarters of the year, as compared to the second and third quarters, due to the seasonality of the road construction and roofing industries we supply. Demand for gasoline and diesel is generally higher during the summer months than during the winter months due to seasonal increases in highway traffic and agricultural activity. In addition, our natural gas costs can be higher during the winter months, as demand for natural gas as a heating fuel increases during the winter. As a result, our operating results for the first and fourth calendar quarters may be lower than those for the second and third calendar quarters of each year due to seasonality related to these and other products that we produce and sell.
Critical accounting estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to use estimates and make judgements and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. Considerable judgement is often involved in making these determinations. Critical estimates are those that require the most difficult, subjective or complex judgements in the preparation of the financial statements and the accompanying notes. We evaluate these estimates and judgements on a regular basis. We believe our assumptions and estimates are reasonable and appropriate. However, the use of different assumptions could result in significantly different results and actual results could differ from those estimates. The following discussion of accounting estimates is intended to supplement the Summary of Significant Accounting Policies presented in Note 3 to our consolidated financial statements in Part II, Item 8.
We consider an accounting estimate to be critical if:
•The accounting estimate requires us to make assumptions about highly uncertain items at the time the accounting estimate is made; and
•We reasonably could have used different estimates in the current period, or changes in these estimates are reasonably likely to occur from period to period as new information becomes available, and a change in these estimates would have a material impact on our financial condition or results from operations.
We assess goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable. The Company tests goodwill either quantitatively or qualitatively for impairment. The Company assessed goodwill for impairment qualitatively and quantitatively during the years ended
December 31, 2021and 2020, respectively. In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we assess relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit's fair value or carrying amount involve significant judgment and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and Company specific events and the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact. In the first step of the quantitative assessment, our assets and liabilities, including existing goodwill and other intangible assets, are assigned to the identified reporting units to determine the carrying value of the reporting units. If the carrying value of a reporting unit is in excess of its fair value, an impairment may exist, and we must perform an impairment analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any. When performing the quantitative assessment, as required in the impairment test, the fair value of the reporting unit is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the reporting unit. If the carrying value of a reporting unit is in excess of its fair value, an impairment would be recognized in an amount equal to the excess that the carrying value exceeded the estimated fair value, limited to the carrying value of goodwill.
The inputs used to estimate the fair value of the Company’s reporting units are considered Level 3 inputs in the fair value hierarchy and include the following:
•The Company's financial projections for its reporting units are based on its analysis of various supply and demand factors which include, among other things, industry-wide capacity, planned utilization rates, end-user demand, crack spreads, capital expenditures and economic conditions. Such estimates are consistent with those used in the Company's planning and capital investment reviews and include recent historical prices and published forward prices. •The discount rate used to measure the present value of the projected future cash flows is based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible.
For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates, singly or in combination, could result in a significantly lower or higher fair value measurement.
Fair values calculated for the purpose of testing our goodwill for impairment are estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in performing these fair value estimates since the results are based on forecasted assumptions. Meaningful factors that would significantly impact our financial projections are changes in customer demand levels or loss of significant portions of our business. We believe that the assumptions and estimates used in the assessment of our goodwill as of
October 1, 2021were reasonable.
Valuation of finished long-lived assets
Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the estimated undiscounted future cash flows related to the asset are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the estimated fair value, usually determined by the estimated discounted future cash flows of the asset. When a decision has been made to dispose of property, plant and equipment prior to the end of the previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life. Estimated undiscounted future cash flows are used for the purpose of testing our finite long-lived assets for impairment. Fair values calculated for the purpose of measuring impairments on finite long-lived assets are estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in estimating undiscounted future cash flows and performing these fair value estimates since the results are based on forecasted assumptions.
We base our estimated undiscounted future cash flows and fair value estimates on projected financial information that we believe to be reasonable. However, actual results may differ from these projections.
Obligation to evaluate renewable identification numbers (“RIN”)
We account for our current period RINs obligation by multiplying the quantity of RINs shortage (based on actual results) by the period end RINs spot price, which is recorded as a RINs obligation in the consolidated balance sheets. This liability is revalued at the end of each subsequent accounting period, which produces non-cash mark-to-market adjustments that are reflected in cost of sales in the consolidated statements of operations (with the exception of RINs for compliance year 2019 related to the
San Antonio refinery, which amount is reflected in other operating expense in the consolidated statements of operations). RINs generated by blending renewable fuels may be sold or held to offset future RINs Obligations. Any gains or losses from RINs sales are recorded in cost of sales in the consolidated statements of operations. The liabilities associated with our RINs obligation are considered recurring fair value measurements. Certain inputs used to estimate the fair value of our RINs Obligation are considered Level 2 inputs of the fair value hierarchy, as the inputs include RINs spot prices obtained from an independent pricing service. However, certain vintage RINs are very thinly traded, and the period end spot prices might not be an accurate reflection of the actual amount that we could purchase RINs in the open market in the quantities that would be required to satisfy our RINs volume obligation. The RFS allows small refineries to apply at any time for a Small RefineryExemption ("SRE") from the renewable blending requirements, and we have applied in respect of compliance years 2019 and 2020. However, the EPAhas not taken final action on our 2019 and 2020 SRE petitions (or on other SRE petitions for compliance years 2019, 2020 and 2021 submitted by other small refineries). In December 2021, EPAissued a proposal to deny all currently pending petitions from small refineries seeking SREs, including for program years 2019 and 2020, based on an across the board determination that no refinery suffers disproportionate economic hardship from the RFS program. Please read Note 7 - "Commitments and Contingencies" for further information on our RINs obligation. We believe that our small refineries ("the refineries") qualify for SREs on the merits and has asked EPAto approve our petitions. In the event our petitions are denied, management believes that we have viable legal arguments to challenge a denial, including that denial would be inconsistent with the Clean Air Act, the Administrative Procedure Act. EPA's regulations, the Department of Energy'sanalysis and/or the factual record, and we would exercise our legal rights to challenge the denial. If we are ultimately forced to litigate and are successful, a court would likely direct EPAto issue a new decision on the refineries' SRE petitions. However, as with any legal action, a challenge to an EPAdecision denying the refineries' SRE petitions may ultimately be unsuccessful. This would present a number of uncertainties and complexities caused primarily by the passage of time since we first submitted the SRE petitions, including for example the potential expiration and/or unavailability or limited availability in the market of vintage 2019 and 2020 RINs, the specifics of other potential forthcoming EPAactions, the results of other parties' potential litigation avenues and outcomes, and post-litigation uncertainties around the timing and magnitude of any resolution. Based on current information we believe the most likely outcome is either obtaining the refineries' SREs or reaching an alternative resolution. If we are ultimately successful in obtaining the refineries' SREs, the value of the liability would be zero. If we are ultimately unsuccessful in obtaining the refineries' SREs, the timing, amount and form our actual liability may depend upon the resolution obtained, potentially as part of subsequent litigation. For example, if resolution for the 2019 and 2020 compliance years used the market price of RINs on the day the EPAwas obligated to rule on the refineries' 2019 SRE petitions, the value of the liability would be approximately $50.7 million.
Recent accounting pronouncements
For a summary of recently issued and adopted accounting standards applicable to us, please see Note 3 “Summary of Significant Accounting Policies” in Part II, Item 8 “Financial Statements and Supplementary Data”.
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