Derivatives

6 Months Ended

Jun. 30, 2024

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

Derivatives

9. Derivatives

The Company is exposed to price risks due to fluctuations in the price of crude oil, refined products, natural gas and precious metals. The Company uses various strategies to reduce its exposure to commodity price risk. The strategies to reduce the Company’s risk utilize both physical forward contracts and financially settled derivative instruments, such as swaps, collars, options and futures, to attempt to reduce the Company’s exposure with respect to:

● crude oil purchases and sales;

● fuel product sales and purchases;

● natural gas purchases;

● precious metals purchases; and

● fluctuations in the value of crude oil between geographic regions and between the different types of crude oil such as New York Mercantile Exchange West Texas Intermediate (“NYMEX WTI”), Light Louisiana Sweet, Western Canadian Select (“WCS”), WTI Midland, Mixed Sweet Blend, Magellan East Houston and ICE Brent.

The Company manages its exposure to commodity markets, credit, volumetric and liquidity risks to manage its costs and volatility of cash flows as conditions warrant or opportunities become available. These risks may be managed in a variety of ways that may include the use of derivative instruments. Derivative instruments may be used for the purpose of mitigating risks associated with an asset, liability and anticipated future transactions and the changes in fair value of the Company’s derivative instruments will affect its earnings and cash flows; however, such changes should be offset by price or rate changes related to the underlying commodity or financial transaction that is part of the risk management strategy. The Company does not speculate with derivative instruments or other contractual arrangements that are not associated with its business objectives.

Speculation is defined as increasing the Company’s natural position above the maximum position of its physical assets or trading in commodities, currencies or other risk bearing assets that are not associated with the Company’s business activities and objectives. The Company’s positions are monitored routinely by a risk management committee to ensure compliance with its stated risk management policy and documented risk management strategies. All strategies are reviewed on an ongoing basis by the Company’s risk management committee, which will add, remove or revise strategies in anticipation of changes in market conditions and/or its risk profiles. Such changes in strategies are to position the Company in relation to its risk exposures in an attempt to capture market opportunities as they arise.

As of June 30, 2024 and December 31, 2023, the Company was obligated to repurchase crude oil and refined products from its counterparties, then in effect, at the termination of the Supply and Offtake Agreements in certain scenarios. The Company has determined that the redemption feature on the initially recognized liability related to the Supply and Offtake Agreements is an embedded derivative indexed to commodity prices. As such, the Company has accounted for these embedded derivatives at fair value with changes in the fair value, if any, recorded in Gain (loss) on derivative instruments in the Company’s unaudited condensed consolidated statements of operations.

The Company recognizes all derivative instruments at their fair values (please read Note 10 — “Fair Value Measurements”) as either current assets or derivative liabilities or other noncurrent assets, net or other long-term liabilities in the condensed consolidated balance sheets. Fair value includes any premiums paid or received and unrealized gains and losses. Fair value does not include any amounts receivable from or payable to counterparties, or collateral provided to counterparties. Derivative asset and liability amounts with the same counterparty are netted against each other for financial reporting purposes in accordance with the provisions of our master netting arrangements.

The following tables summarize the Company’s gross fair values of its derivative instruments, presenting the impact of offsetting derivative assets in the Company’s condensed consolidated balance sheets (in millions):

June 30, 2024

December 31, 2023

Gross

Net Amounts

Gross

Net Amounts

Amounts

of Assets

Amounts

of Assets

Offset in the

Presented

Offset in the

Presented

Gross

Condensed

in the

Gross

Condensed

in the

Amounts of

Consolidated

Condensed

Amounts of

Consolidated

Condensed

Balance Sheet

Recognized

Balance

Consolidated

Recognized

Balance

Consolidated

Location

Assets

Sheets

Balance Sheets

Assets

Sheets

Balance Sheets

Derivative instruments not designated as hedges:

Specialty Products and Solutions segment:

Crack spread swaps

Derivative assets / Other noncurrent assets, net

$

3.7

$

—

$

3.7

$

11.6

$

—

$

11.6

Total derivative instruments

$

3.7

$

—

$

3.7

$

11.6

$

—

$

11.6

The following tables summarize the Company’s gross fair values of its derivative instruments, presenting the impact of offsetting derivative liabilities in the Company’s condensed consolidated balance sheets (in millions):

June 30, 2024

December 31, 2023

Net Amounts

Gross

of Liabilities

Gross

Net Amounts

Amounts

Presented in

Amounts

of Liabilities

Offset in the

the

Offset in the

Presented in

Gross

Condensed

Condensed

Gross

Condensed

the

Amounts of

Consolidated

Consolidated

Amounts of

Consolidated

Condensed

Balance Sheet

Recognized

Balance

Balance

Recognized

Balance

Consolidated

Location

Liabilities

Sheets

Sheets

Liabilities

Sheets

Balance Sheets

Derivative instruments not designated as hedges:

Specialty Products and Solutions segment:

Inventory financing obligation

Other long-term liabilities / Obligations under inventory financing agreements

$

(6.1)

$

—

$

(6.1)

$

(52.5)

$

—

$

(52.5)

Total derivative instruments

$

(6.1)

$

—

$

(6.1)

$

(52.5)

$

—

$

(52.5)

Certain of the Company’s outstanding derivative instruments are subject to credit support agreements with the applicable counterparties which contain provisions setting certain credit thresholds above which the Company may be required to post agreed-upon collateral, such as cash or letters of credit, with the counterparty to the extent that the Company’s mark-to-market net liability, if any, on all outstanding derivatives exceeds the credit threshold amount per such credit support agreement. The majority of the credit support agreements covering the Company’s outstanding derivative instruments also contain a general provision stating that if the Company experiences a material adverse change in its business, in the reasonable discretion of the counterparty, the Company’s credit threshold could be lowered by such counterparty. The Company does not expect that it will experience a material adverse change in its business. The cash flow impact of the Company’s derivative activities are included within cash flows from operating activities in the unaudited condensed consolidated statements of cash flows.

Derivative Instruments Not Designated as Hedges

For derivative instruments not designated as hedges, the change in fair value of the asset or liability for the period is recorded to Gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. Upon the settlement of a derivative not designated as a hedge, the gain or loss at settlement is recorded to Gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations. The Company has entered into crack spread swaps and crude oil basis swaps that do not qualify as cash flow hedges for accounting purposes. However, these instruments provide economic hedges of the purchases and sales of the Company’s natural gas, crude oil, gasoline and refined products.

The Company recorded the following gains (losses) in its unaudited condensed consolidated statements of operations for the three months ended June 30, 2024 and 2023, related to its derivative instruments not designated as hedges (in millions):

	Amount of Realized Gain (Loss)
	Recognized in Gain (Loss) on				Amount of Unrealized Gain (Loss)
	Derivative				Recognized in Gain (Loss) on  Derivative
	Instruments				Instruments
	Three Months Ended June 30,				Three Months Ended June 30,
Type of Derivative	2024		2023		2024		2023
Specialty Products and Solutions segment:
Inventory financing obligation	$	(3.4)	$	—	$	(1.8)	$	1.3
Crack spread swaps		8.2		0.2		4.8		12.7
Montana/Renewables segment:
Inventory financing obligation		3.5		—		—		0.1
Total	$	8.3	$	0.2	$	3.0	$	14.1

The Company recorded the following gains (losses) in its unaudited condensed consolidated statements of operations for the six months ended June 30, 2024 and 2023, related to its derivative instruments not designated as hedges (in millions):

	Amount of Realized
	Loss Recognized in Gain (Loss) on				Amount of Unrealized Gain (Loss)
	Derivative				Recognized in Gain (Loss) on Derivative
	Instruments				Instruments
	Six Months Ended June 30,				Six Months Ended June 30,
Type of Derivative	2024		2023		2024		2023
Specialty Products and Solutions segment:
Inventory financing obligation	$	(57.7)	$	—	$	46.6	$	(2.7)
Crack spread swaps		7.5		(15.3)		(7.9)		51.5
Montana/Renewables segment:
Inventory financing obligation		5.9		—		—		6.3
Total	$	(44.3)	$	(15.3)	$	38.7	$	55.1

Derivative Positions

At June 30, 2024, the Company had the following notional contract volumes related to outstanding derivative instruments:

		Notional Contract Volumes by
		Year of Maturity
	Total
	Outstanding
	Notional	2024	Unit of Measure
Derivative instruments not designated as hedges:
Crack spread swaps - sales	736,000	736,000	Barrels