Fair Value Measurements

6 Months Ended

Jun. 30, 2024

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

Fair Value Measurements

10. Fair Value Measurements

In accordance with ASC 820, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Observable inputs are from sources independent of the Company. Unobservable inputs reflect the

Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. These tiers include the following:

● Level 1 — inputs include observable unadjusted quoted prices in active markets for identical assets or liabilities

● Level 2 — inputs include other than quoted prices in active markets that are either directly or indirectly observable

● Level 3 — inputs include unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions

In determining fair value, the Company uses various valuation techniques and prioritizes the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded and other characteristics particular to the instrument. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants and the valuation does not require significant management judgment. For other financial instruments, pricing inputs are less observable in the marketplace and may require management judgment.

Recurring Fair Value Measurements

Derivative Assets and Liabilities

Derivative instruments are reported in the accompanying unaudited condensed consolidated financial statements at fair value. The Company’s derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange. Substantially all of the Company’s derivative instruments are with counterparties that have long-term credit ratings of at least A3 and BBB+ by Moody’s and S&P, respectively.

Commodity derivative instruments are measured at fair value using a market approach. To estimate the fair values of the Company’s commodity derivative instruments, the Company uses the forward rate, the strike price, contractual notional amounts, the risk-free rate of return and contract maturity. Various analytical tests are performed to validate the counterparty data. The fair values of the Company’s derivative instruments are adjusted for nonperformance risk and creditworthiness of the counterparty through the Company’s credit valuation adjustment (“CVA”). The CVA is calculated at the counterparty level utilizing the fair value exposure at each payment date and applying a weighted probability of the appropriate survival and marginal default percentages. The Company uses the counterparty’s marginal default rate and the Company’s survival rate when the Company is in a net asset position at the payment date and uses the Company’s marginal default rate and the counterparty’s survival rate when the Company is in a net liability position at the payment date. As a result of applying the applicable CVA at June 30, 2024 and December 31, 2023, the Company’s net assets and net liabilities changed, in each case, by an immaterial amount.

Observable inputs utilized to estimate the fair values of the Company’s derivative instruments were based primarily on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Based on the use of various unobservable inputs, principally non-performance risk, creditworthiness of the counterparties and unobservable inputs in the forward rate, the Company has categorized these derivative instruments as Level 3. Significant increases (decreases) in any of those unobservable inputs in isolation would result in a significantly lower (higher) fair value measurement. The Company believes it has obtained the most accurate information available for the types of derivative instruments it holds. Please read Note 9 — “Derivatives” for further information on derivative instruments.

Pension Assets

Pension assets are reported at fair value in the accompanying unaudited condensed consolidated financial statements. At June 30, 2024 and December 31, 2023, the Company’s investments associated with its pension plan consisted of (i) cash and cash equivalents, (ii) fixed income bond funds, (iii) mutual equity funds, and (iv) mutual balanced funds. The fixed income bond funds, mutual equity funds, and mutual balanced funds that are measured at fair value using a market approach based on quoted prices from national securities exchanges and are categorized in Level 1 of the fair value hierarchy. The fixed income bond funds, mutual equity funds, and mutual balanced funds that are measured at fair value

using a market approach based on prices obtained from an independent pricing service are categorized in Level 2 of the fair value hierarchy.

Liability Awards

Unit-based compensation liability awards are awards that are currently expected to be settled in cash on their vesting dates, rather than in equity units (“Liability Awards”). The Liability Awards are categorized as Level 1 because the fair value of the Liability Awards is based on the Company’s quoted closing unit price as of each balance sheet date.

Precious Metals Obligations

The fair value of precious metals obligations is based upon unadjusted exchange-quoted prices and is, therefore, classified within Level 1 of the fair value hierarchy.

Hierarchy of Recurring Fair Value Measurements

The Company’s recurring assets and liabilities measured at fair value were as follows (in millions):

	June 30, 2024								December 31, 2023
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Derivative assets:
Crack spread swaps	$	—	$	—	$	3.7	$	3.7	$	—	$	—	$	11.6	$	11.6
Total derivative assets	$	—	$	—	$	3.7	$	3.7	$	—	$	—	$	11.6	$	11.6
Pension plan investments	$	3.6	$	22.7	$	—	$	26.3	$	3.5	$	23.5	$	—	$	27.0
Total recurring assets at fair value	$	3.6	$	22.7	$	3.7	$	30.0	$	3.5	$	23.5	$	11.6	$	38.6
Liabilities:
Derivative liabilities:
Inventory financing obligation	$	—	$	—	$	(6.1)	$	(6.1)	$	—	$	—	$	(52.5)	$	(52.5)
Total derivative liabilities	$	—	$	—	$	(6.1)	$	(6.1)	$	—	$	—	$	(52.5)	$	(52.5)
Precious metals obligations		(5.7)		—		—		(5.7)		(6.9)		—		—		(6.9)
Liability awards		(47.0)		—		—		(47.0)		(64.2)		—		—		(64.2)
Total recurring liabilities at fair value	$	(52.7)	$	—	$	(6.1)	$	(58.8)	$	(71.1)	$	—	$	(52.5)	$	(123.6)

The table below sets forth a summary of net changes in fair value of the Company’s Level 3 financial assets and liabilities (in millions):

	Six Months Ended June 30,
		2024		2023
Fair value at January 1,	$	(40.8)	$	(73.8)
Realized loss on derivative instruments		(44.3)		(15.3)
Unrealized gain (loss) on derivative instruments		38.7		55.1
Settlements		44.3		15.3
Fair value at June 30,	$	(2.1)	$	(18.7)
Total gain (loss) included in net income (loss) attributable to changes in unrealized gain (loss) relating to financial assets and liabilities held as of June 30,	$	38.7	$	55.1

Nonrecurring Fair Value Measurements

Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

The Company assesses goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable. The fair value of the reporting units 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. These assets would generally be classified within Level 3, in the event that the Company were required to measure and record such assets at fair value within its unaudited condensed consolidated financial statements.

The Company periodically evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets and property, plant and equipment, when events or circumstances warrant such a review. Fair value is determined primarily using anticipated cash flows assumed by a market participant discounted at a rate commensurate with the risk involved and these assets would generally be classified within Level 3, in the event that the Company was required to measure and record such assets at fair value within its unaudited condensed consolidated financial statements.

Estimated Fair Value of Financial Instruments

Cash, cash equivalents and restricted cash

The carrying value of cash, cash equivalents and restricted cash are each considered to be representative of their fair value.

Debt

The estimated fair value of long-term debt at March 31, 2024 and December 31, 2023, consists primarily of senior notes. The estimated fair value of the Company’s 2024 Secured Notes, 2025, 2027, and 2028 Senior Notes, and 2029 Secured Notes defined as Level 2 was based upon quoted prices for identical or similar liabilities in markets that are not active. The carrying value of borrowings, if any, under the Company’s revolving credit facility, MRL revolving credit agreement, MRL asset financing arrangements, MRL term loan credit agreement, finance lease obligations and other obligations are classified as Level 3. Please read Note 8 — “Long-Term Debt” for further information on long-term debt.

The Company’s carrying value and estimated fair value of the Company’s financial instruments, carried at adjusted historical cost, were as follows (in millions):

	June 30, 2024					December 31, 2023
	Level	Fair Value		Carrying Value		Fair Value		Carrying Value
Financial Instrument:
2024 Secured Notes, 2025 Notes, 2027 Notes, 2028 Notes, and 2029 Secured Notes	2	$	1,181.4	$	1,204.4	$	1,247.2	$	1,232.3
Revolving credit facility	3	$	315.1	$	311.3	$	136.7	$	134.4
MRL revolving credit agreement	3	$	6.4	$	5.8	$	13.0	$	12.4
MRL term loan credit agreement	3	$	74.1	$	71.6	$	74.4	$	71.6
Shreveport terminal asset financing arrangement	3	$	46.9	$	46.3	$	50.8	$	50.1
MRL asset financing arrangements	3	$	376.6	$	373.6	$	384.6	$	381.6
Finance leases and other obligations	3	$	2.5	$	2.5	$	3.0	$	3.0