Inventories

6 Months Ended

Jun. 30, 2020

The cost of inventory is recorded using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. In certain circumstances, the Company may decide not to replenish inventory for certain products or product lines during an interim period, in which case, the Company may record interim LIFO adjustments during that period. During the three and six months ended June 30, 2020, the Company recorded no increases (exclusive of lower of cost or market (“LCM”) adjustments) in cost of sales in the unaudited condensed consolidated statements of operations due to the permanent liquidation of inventory layers. The Company recorded no activity during the three months ended June 30, 2019, while the Company recorded a $0.9 million increase in cost of sales as a result of such activity during the six months ended June 30, 2019.

Costs include crude oil and other feedstocks, labor, processing costs and refining overhead costs. Inventories are valued at the lower of cost or market value. The replacement cost of these inventories, based on current market values, would have been $34.2 million lower and $17.7 million higher as of June 30, 2020 and December 31, 2019, respectively.

On March 31, 2017 and June 19, 2017, the Company sold inventory comprised of crude oil and refined products to Macquarie Energy North America Trading Inc. (“Macquarie”) under Supply and Offtake Agreements as described in Note 7 — “Inventory Financing Agreements” related to the Great Falls and Shreveport refineries, respectively. The crude oil remains in the legal title of Macquarie and is stored in the Company’s refinery storage tanks governed by storage agreements. Legal title to the crude oil passes to the Company at the storage tank outlet for processing into refined products. After processing, Macquarie takes title to the refined products stored in the Company’s storage tanks until sold to third parties. While title to certain inventories will reside with Macquarie, the Supply and Offtake Agreements are accounted for by the Company similar to a product financing arrangement; therefore, the inventories sold to Macquarie will continue to be included in the Company’s condensed consolidated balance sheets until processed and sold to a third party. The Company is obligated to repurchase the inventory in certain scenarios.

Inventories consist of the following (in millions):



	June 30, 2020						December 31, 2019
	Titled Inventory		Supply and Offtake Agreements ⁽¹⁾		Total		Titled Inventory		Supply and Offtake Agreements ⁽¹⁾		Total
Raw materials	$	32.1	$	9.5	$	41.6	$	48.3	$	11.6	$	59.9
Work in process	26.1		26.1		52.2		35.0		29.1		64.1
Finished goods	109.0		37.6		146.6		124.8		43.8		168.6
	$	167.2	$	73.2	$	240.4	$	208.1	$	84.5	$	292.6


⁽¹⁾	Amounts represent LIFO value and do not necessarily represent the value of product financing. Please read Note 7 - “Inventory Financing Agreements” for further information.

In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers

in prior periods. During the three months ended June 30, 2020 and 2019, the Company recorded LCM valuation decreases of $32.1 million and $2.6 million, respectively, in cost of sales, as a result of declining market prices. During the six months ended June 30, 2020 and 2019, the Company recorded an increase of $34.2 million and a decrease of $41.5 million, respectively, in cost of sales due to the sale of inventory previously adjusted through the LCM valuation.