Commitments and Contingencies

Contingencies

From time to time, the Company is a party to certain claims and litigation incidental to its business, including claims made by various taxation and regulatory authorities, such as the Internal Revenue Service, the EPA and the U.S. Occupational Safety and Health Administration (“OSHA”), as well as various state environmental regulatory bodies and state and local departments of revenue, as the result of audits or reviews of the Company’s business. In addition, the Company has property, business interruption, general liability and various other insurance policies that may result in certain losses or expenditures being reimbursed to the Company.

Environmental

The Company conducts crude oil and specialty hydrocarbon refining, blending and terminal operations, and such activities are subject to stringent federal, regional, state and local laws and regulations governing worker health and safety, the discharge of materials into the environment and environmental protection. These laws and regulations impose legal standards and obligations that are applicable to the Company’s operations, such as requiring the acquisition of permits to conduct regulated activities, restricting the manner in which the Company may release materials into the environment, requiring remedial activities to mitigate pollution from former or current operations that may include incurring capital expenditures to limit or prevent unauthorized releases from our equipment and facilities, requiring the application of specific health and safety criteria addressing worker protection and imposing substantial liabilities for pollution resulting from its operations. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil and criminal penalties; the imposition of investigatory, remedial or corrective action obligations or the incurrence of capital expenditures; the occurrence of restrictions, delays or cancellations in the permitting, development or expansion of projects; and the issuance of injunctive relief limiting or prohibiting Company activities. Moreover, certain of these laws impose joint and several strict liability for costs required to remediate and restore sites where petroleum hydrocarbons, wastes or other materials have been released or disposed. In addition, new laws and regulations, new interpretations of existing laws and regulations, reinterpretation of legal requirements, increased governmental enforcement or other developments, some of which legal requirements are discussed below, could significantly increase the Company’s operational or compliance expenditures.

Remediation of subsurface contamination continues at certain of the Company’s refinery sites and is being overseen by the appropriate state agencies. Based on current investigative and remedial activities, the Company believes that the soil and groundwater contamination at these refineries can be controlled or remediated without having a material adverse effect on the Company’s financial condition. However, such costs are often unpredictable and, therefore, there can be no assurance that the future costs of these remedial projects will not become material. As of December 31, 2019 and 2018, the Company had accrued $2.4 million and $2.8 million, respectively, for environmental liabilities recorded in the other current liabilities in the consolidated balance sheets.

Great Falls Refinery

In connection with the acquisition of the Great Falls refinery from Connacher Oil and Gas Limited (“Connacher”), the Company became a party to an existing 2002 Refinery Initiative Consent Decree (the “Great Falls Consent Decree”) with the EPA and the Montana Department of Environmental Quality. The material obligations imposed by the Great Falls Consent Decree have been completed. On September 27, 2012, Montana Refining Company, Inc. received a final Corrective Action Order on Consent, replacing the refinery’s previously held hazardous waste permit. This Corrective Action Order on Consent governs the investigation and remediation of contamination at the Great Falls refinery. The Company believes the majority of damages related to such contamination at the Great Falls refinery are covered by a contractual indemnity provided by a subsidiary of HollyFrontier Corporation (the “Seller”), the owner and operator of the Great Falls refinery prior to its acquisition by Connacher, under an asset purchase agreement between the Seller and Connacher, pursuant to which Connacher acquired the Great Falls refinery. Under this asset purchase agreement, the Seller agreed to indemnify Connacher and Montana Refining Company, Inc., subject to timely notification, certain conditions and certain monetary baskets and caps, for environmental conditions arising under the Seller’s ownership and operation of the Great Falls refinery and existing as of the date of sale to Connacher. During 2014, the Seller provided the Company a notice challenging the Company’s position that the Seller is obligated to indemnify the Company’s remediation expenses for environmental conditions to the extent arising under the Seller’s ownership and operation of the refinery and existing as of the date of sale to Connacher, which expenditures totaled in excess of $17.0 million as of December 31, 2019, of which $14.6 million was capitalized into the cost of the Company’s refinery expansion project and the remainder was expensed. On September 22, 2015, the Company initiated a lawsuit against the Seller. On November 24, 2015, the Seller filed a motion to dismiss the case pending arbitration. On February 10, 2016, the court ordered that all of the claims be addressed in arbitration. The arbitration panel conducted the first phase of the arbitration in July 2018 and issued its ruling on September 13, 2018. In its ruling, the arbitration panel confirmed that the Seller retained the liability for all pre-closing contamination with respect to third-party claims indefinitely and with respect to first party claims for which the Seller received notice within five years after the sale of the refinery, which claims are subject to the requirements otherwise set forth in the asset purchase agreement. The second phase of the arbitration regarding damages occurred in April 2019. The arbitration panel issued its final ruling on August 25, 2019. Among other things, the panel denied the Company’s demands for reimbursement for costs incurred and left open the Company’s ability to make future claims. The Company expects that it may incur costs to remediate other environmental conditions at the Great Falls refinery. The Company currently believes that these other costs it may incur will not be material to its financial position or results of operations.

Cotton Valley, Princeton and Shreveport Refineries

Since 2013, the Louisiana Department of Environmental Quality (the “LDEQ”) has issued Consolidated Compliance Orders & Notices of Proposed Penalties to the Cotton Valley, Princeton and Shreveport refineries relating to various alleged air quality and wastewater regulatory violations. The Company has responded to various orders and submitted a consolidated proposal to the LDEQ in December 2018 to resolve all of the applicable matters and it is likely a resolution of this matter will result in a penalty in excess of $0.1 million. The Company is awaiting a response from the LDEQ on the Company’s proposal. The Company expects that the amount of the penalty will not be material to its financial position or results of operations and any conditions established by the LDEQ on the Company’s operations will not be material to the Company’s operations.

Renewable Identification Numbers Obligation

The Company’s RINs Obligation represents a liability for the purchase of RINs to satisfy the EPA requirement to blend biofuels into the fuel products it produces pursuant to the RFS. RINs are assigned to biofuels produced in the U.S. as required by the EPA. The EPA sets annual quotas for the percentage of biofuels that must be blended into transportation fuels consumed in the U.S., and as a producer of motor fuels from petroleum, the Company is required to blend biofuels into the fuel products it produces at a rate that will meet the Company’s prorated share of the EPA’s annual quota. To the extent the Company is unable to blend biofuels at that rate, it must purchase RINs in the open market to satisfy the annual requirement. The Company’s RINs Obligation is based on the amount of RINs it must purchase net of amounts internally generated or purchased and the price of those RINs as of the balance sheet date.

In August 2019, the EPA granted certain of the Company’s refineries a “small refinery exemption” under the RFS for the 2018 calendar year, as provided for under the federal Clean Air Act, as amended (“CAA”). In granting those exemptions, the EPA in consultation with the Department of Energy determined that for the 2018 calendar year, compliance with the RFS would represent a “disproportionate economic hardship” for these small refineries.

In March 2018, the EPA granted certain of the Company’s refineries a “small refinery exemption” under the RFS for the 2017 calendar year, as provided for under the CAA. In granting those exemptions, the EPA in consultation with the Department of Energy determined that for the 2017 calendar year, compliance with the RFS would represent a “disproportionate economic hardship” for these small refineries.

In February 2017 and in May 2017, the EPA granted certain of the Company’s refineries a “small refinery exemption” under the RFS for the 2016 calendar year, as provided for under the CAA, as amended. In granting those exemptions, the EPA determined that for the 2016 calendar year, compliance with the RFS would represent a “disproportionate economic hardship” for these refineries.

The RINs exemptions resulted in a decrease in the RINs obligation and is charged to cost of sales in the audited consolidated statements of operations with the exception of the portion related to the Superior Refinery which is charged to other (income) expense within operating income in the audited consolidated statements of operations.

Occupational Health and Safety

The Company is subject to various laws and regulations relating to occupational health and safety, including the federal Occupational Safety and Health Act, as amended, and comparable state laws. These laws and regulations strictly govern the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard, the EPA’s community right-to-know regulations under Title III of CERCLA and similar state statutes require the Company to maintain information about hazardous materials used or produced in the Company’s operations and provide this information to employees, contractors, state and local government authorities and customers. The Company maintains safety and training programs as part of its ongoing efforts to promote compliance with applicable laws and regulations. The Company conducts periodic audits of Process Safety Management systems at each of its locations subject to this standard. The Company’s compliance with applicable health and safety laws and regulations has required, and continues to require, substantial expenditures. Changes in occupational safety and health laws and regulations or a finding of non-compliance with current laws and regulations could result in additional capital expenditures or operating expenses, as well as civil penalties and, in the event of a serious injury or fatality, criminal charges.

Labor Matters

The Company has approximately 400 employees covered by various collective bargaining agreements, or approximately 27% of its total workforce of approximately 1,500 employees. These agreements have expiration dates of October 31, 2020, December 12, 2021, April 30, 2022, July 31, 2022, January 15, 2023 and January 31, 2023. The Company has approximately 52 employees, or 3% of its total workforce, who are covered by a collective bargaining agreement which will expire in less than one year and does not expect any work stoppages.

Other Matters, Claims and Legal Proceedings

The Company was a party to a 2014 Throughput and Deficiency Agreement with TexStar pursuant to which TexStar delivered crude oil to the Company’s San Antonio refinery through a crude oil pipeline system owned and operated by TexStar (the “Pipeline Agreement”). The Pipeline Agreement had an initial term of 20 years and was accounted for as a finance lease on the Company’s consolidated balance sheets. TexStar and the Company have each terminated the Pipeline Agreement for alleged breaches of the agreement. The Company ceased using the asset as of February 28, 2019, wrote off the associated net book value of $10.7 million in Loss on impairment and disposal of assets and reclassified the $38.1 million present value of financing lease obligation from current and long-term debt to Other current liabilities on the consolidated balance sheets. The Company was in a dispute with TexStar over whether any additional monies were owed with TexStar claiming certain minimum amounts of $0.0 to $0.5 million a month continued to be owed through the remainder of the original term of the Pipeline Agreement. The Company filed a lawsuit against TexStar on May 17, 2019 in Bexar County, Texas, seeking a declaratory judgment that the Company properly terminated the Pipeline Agreement and the Company is not obligated to make further payments under the Pipeline Agreement. On November 10, 2019, in connection with the San Antonio Trasaction, the Company, TexStar, and related parties entered into a Settlement and Release Agreement with respect to the litigation. Please read Note 5 - “Divestitures” for further information.

On October 31, 2018, the Company received an indemnity claim notice (the “Claim Notice”) from Husky Superior Refining Holding Corp. (“Husky”) under the Membership Interest Purchase Agreement, dated August 11, 2017 (“MIPA”), which was entered into in connection with the Superior Transaction. The Claim Notice relates to alleged losses Husky incurred in connection with a fire at the Husky Superior refinery on April 26, 2018, over five months after Calumet sold Husky 100% of the membership interests in the entity that owns the Husky Superior refinery. Based on public reports, Calumet understands the fire occurred during a turnaround of the Husky Superior refinery at a time when Husky owned, operated, and supervised the refinery. Calumet was not involved with the turnaround. The U.S. Chemical Safety and Hazard Investigation Board (“CSB”) is currently investigating the fire, but has not contacted Calumet in connection with that investigation or suggested that Calumet is responsible for the fire. Husky’s Claim Notice alleges that Husky “has become aware of facts which may give rise to losses” for which it reserved the right to seek indemnification at a later date. The Claim Notice further alleges breaches of certain representations, warranties, and covenants contained in the MIPA. The information currently available about the fire and the CSB investigation does not support Husky’s threatened claims, and Husky has not filed a lawsuit against Calumet. If Husky were to assert such claims, they would be subject to certain limits on indemnification liability under the MIPA that may reduce or eliminate any potential indemnification liability.

On July 9, 2019, Calumet Shreveport Refining, LLC entered into a Settlement Agreement and Mutual Release with Enterprise TE Products Pipeline Company LLC and Enterprise Refined Products Company LLC to resolve disputes regarding transportation charges, product downgrades and transmix recovery fee charges, and truck terminal loading charges that arose between the parties under the Transportation Agreement dated July 1, 2015. In July 2019, the final settlement amount actually paid by the Company to Enterprise TE Products Pipeline Company LLC and Enterprise Refined Products Company LLC, collectively, was $3.7 million.

On May 4, 2018, the SEC requested that the Company and certain of its executives voluntarily produce certain communications and documents prepared or maintained from January 2017 to May 2018 and generally related to the Company’s finance and accounting staff, financial reporting, public disclosures, accounting policies, disclosure controls and procedures and internal controls. Beginning on July 11, 2018, the SEC issued several subpoenas formally requesting the same documents previously subject to the voluntary production requests by the SEC as well as additional, related documents and information. The SEC has also interviewed and taken testimony from current and former Company employees and other individuals. The Company has, from the outset, cooperated with the SEC’s requests. In November 2019, the Company and the SEC settled the matter. The matter was settled without the Company admitting or denying any charges arising from the SEC’s investigation, and the Company paid a penalty of less than $0.3 million.

The Company is subject to other matters, claims and litigation incidental to its business. The Company has recorded accruals with respect to certain of its matters, claims and litigation where appropriate, that are reflected in the audited consolidated financial statements but are not individually considered material. For other matters, claims and litigation, the Company has not recorded accruals because it has not yet determined that a loss is probable or because the amount of loss cannot be reasonably estimated. While the ultimate outcome of matters, claims and litigation currently pending cannot be determined, the Company currently does not expect these outcomes, individually or in the aggregate (including matters for which the Company has recorded accruals), to have a material adverse effect on its financial position, results of operations or cash flows. The outcome of any matter, claim or litigation is inherently uncertain, however, and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on its financial position, results of operations or cash flows.

Standby Letters of Credit

The Company has agreements with various financial institutions for standby letters of credit which have been issued primarily to vendors. As of December 31, 2019 and 2018, the Company had outstanding standby letters of credit of $42.5 million and $35.1 million, respectively, under its senior secured revolving credit facility (the “revolving credit facility”). Please read Note 10 - “Long-Term Debt” for additional information regarding the Company’s revolving credit facility. At December 31, 2019 and 2018, the maximum amount of letters of credit the Company could issue under its revolving credit facility was subject to borrowing base limitations, with a maximum letter of credit sublimit equal to $300.0 million, which may be increased with consent of the Agent (as defined in the Credit Agreement) to 90% of revolver commitments then in effect ($600.0 million at December 31, 2019 and 2018).

As of December 31, 2019 and 2018, the Company had availability to issue letters of credit of approximately $359.4 million and approximately $295.7 million, respectively, under its revolving credit facility.

Crude Oil Supply, Other Feedstocks and Finished Products

Purchase commitments consist primarily of obligations to purchase fixed volumes of crude oil, other feedstocks and finished products for resale from various suppliers based on current market prices at the time of delivery. The Company is currently purchasing a majority of its crude oil under month-to-month evergreen contracts or on a spot basis. Certain other feedstocks are purchased under long-term supply contracts.

As of December 31, 2019, the estimated minimum purchase commitments under the Company’s crude oil, other feedstock supply and finished product agreements were as follows (in millions):



Year	Commitment
2020	$	170.8
2021	30.0
2022	30.2
2023	21.0
2024	21.1
Thereafter	42.0
Total	$	315.1

Throughput Contract

The Company has entered into a long-term agreement to transport crude oil at a minimum of 5,000 bpd through a pipeline yet to be constructed. The agreement also contains a capital recovery charge that increases 2% per annum. The agreement is for seven years commencing once the pipeline is in service.

As of December 31, 2019, the estimated minimum unconditional purchase commitments under the agreement were as follows (in millions):



Year	Commitment ⁽¹⁾
2020	$	2.6
2021	3.9
2022	3.9
2023	3.9
2024	4.0
Thereafter	9.4
Total ⁽¹⁾	$	27.7


⁽¹⁾	As of December 31, 2019, the estimated minimum payments for the unconditional purchase commitments have been accrued and are included in other current liabilities and other long-term liabilities in the consolidated balance sheets.