UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008.

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM            TO          

Commission File Number: 000-51734

Calumet Specialty Products Partners, L.P.

Delaware		37-1516132
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
2780 Waterfront Pkwy E. Drive, Suite 200
Indianapolis, Indiana		46214
(Address of principal executive officers)		(Zip code)

Registrant’s telephone number including area code (317) 328-5660

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

     At May 9, 2008, the registrant had 19,166,000 common units and 13,066,000 subordinated units outstanding.

 

 

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
FORM 10-Q — March 31, 2008 QUARTERLY REPORT

Table of Contents

		Page
Part I
Item 1. Financial Statements
Condensed Consolidated Balance Sheets			5
Unaudited Condensed Consolidated Statements of Operations			6
Unaudited Condensed Consolidated Statements of Partners’ Capital			7
Unaudited Condensed Consolidated Statements of Cash Flows			8
Notes to Unaudited Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			45
Part II
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			46
Item 4. Submission of Matters to a Vote of Security Holders			46
Item 5. Other Information			46
Item 6. Exhibits			47
Certification of F. William Grube Pursuant to Section 302
Certification of R. Patrick Murray, II Pursuant to Section 302
Certification of F. William Grube and R. Patrick Murray, II Pursuant to Section 1350

FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q includes certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements can be identified by the use of forward-looking terminology including “may,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” or other similar words. The statements regarding (i) the Shreveport refinery expansion project’s estimated cost and resulting increases in production levels, (ii) expected settlements with the Louisiana Department of Environmental Quality (“LDEQ”) or other environmental liabilities, (iii) the expected purchase price, goodwill, and future benefits and risks of the Penreco acquisition and (iv) future compliance with our debt covenants, as well as other matters discussed in this Form 10-Q that are not purely historical data, are forward-looking statements. These statements discuss future expectations or state other “forward-looking” information and involve risks and uncertainties. When considering these forward-looking statements, unitholders should keep in mind the risk factors and other cautionary statements included in this quarterly report and in our 2007 Annual Report on Form 10-K filed on March 4, 2008. These risk factors and cautionary statements noted throughout this Form 10-Q could cause our actual results to differ materially from those contained in any forward-looking statement. These factors include, but are not limited to:

	•		the overall demand for specialty hydrocarbon products, fuels and other refined products;
	•		our ability to produce specialty products and fuels that meet our customers’ unique and precise specifications;
	•		the impact of crude oil and crack spread price fluctuations and rapid increases or decreases;
	•		the results of our hedging and other risk management activities;
	•		risks associated with our Shreveport expansion project;
	•		difficulties in successfully integrating Penreco;
	•		our ability to comply with the financial covenants contained in our credit agreements;
	•		the availability of, and our ability to consummate, acquisition or combination opportunities;
	•		labor relations;
	•		our access to capital to fund expansions or acquisitions and our ability to obtain debt or equity financing on satisfactory terms;
	•		successful integration and future performance of acquired assets or businesses;
	•		environmental liabilities or events that are not covered by an indemnity, insurance or existing reserves;
	•		maintenance of our credit rating and ability to receive open credit from our suppliers;
	•		demand for various grades of crude oil and resulting changes in pricing conditions;
	•		fluctuations in refinery capacity;
	•		the effects of competition;
	•		continued creditworthiness of, and performance by, counterparties;
	•		the impact of current and future laws, rulings and governmental regulations;
	•		shortages or cost increases of power supplies, natural gas, materials or labor;
	•		weather interference with business operations or project construction;
	•		fluctuations in the debt and equity markets; and
	•		general economic, market or business conditions.

     Other factors described herein, or factors that are unknown or unpredictable, could also have a material adverse effect on future results. Please read Part I Item 3 “Quantitative and Qualitative Disclosures About Market Risk.” We will not update these statements unless securities laws require us to do so.

     References in this Form 10-Q to “Calumet,” “the Company,” “we,” “our,” “us” or like terms refer to Calumet Specialty Products Partners, L.P. and its subsidiaries. References in this quarterly report on Form 10-Q to “our general partner” refer to Calumet GP, LLC.

PART I

Item 1. Financial Statements

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

		March 31, 2008				December 31, 2007
		(Unaudited)
		(In thousands)
ASSETS
Current assets:
Cash		$	50			$	35
Accounts receivable:
Trade			168,802				109,501
Other			3,520				4,496
			172,322				113,997
Inventories			147,521				107,664
Prepaid expenses			1,391				7,567
Other current assets			22				21
Total current assets			321,306				229,284
Property, plant and equipment, net			617,651				442,882
Goodwill			49,446				—
Other intangible assets, net			58,461				2,460
Other noncurrent assets, net			12,709				4,231
Total assets		$	1,059,573			$	678,857
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable		$	229,642			$	167,977
Accrued salaries, wages and benefits			7,093				2,745
Taxes payable			8,059				6,215
Other current liabilities			5,455				4,882
Current portion of long-term debt			4,792				943
Derivative liabilities			114,798				57,503
Total current liabilities			369,839				240,265
Pension and postretirement benefit obligations			4,571				—
Long-term debt, less current portion			365,638				38,948
Total liabilities			740,048				279,213
Commitments and contingencies
Partners’ capital:
Common unitholders (19,166,000 units issued and outstanding)			361,788				375,925
Subordinated unitholders (13,066,000 units issued and outstanding)			34,418				43,996
General partner’s interest			17,864				19,364
Accumulated other comprehensive income (loss)			(94,545	)			(39,641	)
Total partners’ capital			319,525				399,644
Total liabilities and partners’ capital		$	1,059,573			$	678,857

See accompanying notes to unaudited condensed consolidated financial statements.

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

		For the Three Months Ended
		March 31,
		2008				2007
		(In thousands, except per unit data)
Sales		$	594,723			$	351,113
Cost of sales			559,889				296,079
Gross profit			34,834				55,034
Operating costs and expenses:
Selling, general and administrative			8,252				5,398
Transportation			23,860				13,569
Taxes other than income taxes			1,054				912
Other			224				180
Operating income (loss)			1,444				34,975
Other income (expense):
Interest expense			(5,166	)			(1,015	)
Interest income			216				991
Debt extinguishment costs			(526	)			—
Realized loss on derivative instruments			(2,877	)			(1,736	)
Unrealized gain (loss) on derivative instruments			3,570				(4,777	)
Other			(45	)			(178	)
Total other income (expense)			(4,828	)			(6,715	)
Net income (loss) before income taxes			(3,384	)			28,260
Income tax expense			8				50
Net income (loss)		$	(3,392	)		$	28,210
Minimum quarterly distribution to common unitholders			(8,625	)			(7,365	)
General partner’s incentive distribution rights			—				(4,749	)
General partner’s interest in net (income) loss			68				(297	)
Common unitholders’ share of income in excess of minimum quarterly distribution			—				(5,516	)
Subordinated unitholders’ interest in net income (loss)		$	(11,949	)		$	10,283
Basic and diluted net income (loss) per limited partner unit:
Common		$	0.45			$	0.79
Subordinated		$	(0.91	)		$	0.79
Weighted average limited partner common units outstanding — basic			19,166				16,366
Weighted average limited partner common units outstanding — diluted			19,166				16,367
Weighted average limited partner subordinated units outstanding — basic and diluted			13,066				13,066
Cash distributions declared per common and subordinated unit		$	0.63			$	0.60

See accompanying notes to unaudited condensed consolidated financial statements.

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

		Accumulated Other				Partners' Capital
		Comprehensive				General				Limited Partners
		Income (Loss)				Partner				Common				Subordinated				Total
		(In thousands)
Balance at December 31, 2007		$	(39,641	)		$	19,364			$	375,925			$	43,996			$	399,644
Comprehensive income (loss):
Net income (loss)							(68	)			(1,977	)			(1,347	)			(3,392	)
Cash flow hedge loss reclassified to net (loss) income			678				—				—				—				678
Change in fair value of cash flow hedges			(55,582	)			—				—				—				(55,582	)
Comprehensive loss																			(58,296	)
Common units repurchased for phantom unit grants											(115	)							(115	)
Amortization of phantom units							—				30				—				30
Distributions to partners							(1,432	)			(12,075	)			(8,231	)			(21,738	)
Balance at March 31, 2008		$	(94,545	)		$	17,864			$	361,788			$	34,418			$	319,525

See accompanying notes to unaudited condensed consolidated financial statements.

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

		For the Three Months Ended
		March 31,
		2008				2007
		(In thousands)
Operating activities
Net income (loss)		$	(3,392	)		$	28,210
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			11,350				3,573
Amortization of turnaround costs			330				968
Non-cash debt extinguishment costs			526				—
Unrealized (gain) loss on derivative instruments			(3,570	)			4,777
Other non-cash activities			897				6
Changes in operating assets and liabilities, net of business acquisition:
Accounts receivable			(16,745	)			(8,648	)
Inventories			24,494				3,279
Prepaid expenses			6,237				(7,608	)
Derivative activity			5,961				(969	)
Other current assets			(1	)			1,940
Other noncurrent assets			1,373				(2,680	)
Accounts payable			32,910				23,573
Accrued salaries, wages and benefits			349				(3,475	)
Taxes payable			1,235				(647	)
Other current liabilities			475				527
Net cash provided by operating activities			62,429				42,826
Investing activities
Additions to property, plant and equipment			(90,274	)			(41,734	)
Acquisition of Penreco, net of cash acquired			(268,969	)			—
Proceeds from disposal of property, plant and equipment			—				19
Net cash used in investing activities			(359,243	)			(41,715	)
Financing activities
Proceeds from (repayments of) borrowings, net — revolving credit facility with third parties			(6,958	)			—
Repayments of borrowings— prior term loan credit facility with third parties			(30,099	)			(125	)
Proceeds from borrowings — new term loan credit facility with third parties, net			367,600				—
Debt issuance costs			(10,996	)			—
Repayments of borrowings — new term loan credit facility with third parties			(963	)			—
Change in bank overdraft			98				—
Purchase of units for unit grants			(115	)			—
Distributions to partners			(21,738	)			(18,673	)
Net cash provided by (used in) financing activities			296,829				(18,798	)
Net increase (decrease) in cash			15				(17,687	)
Cash at beginning of period			35				80,955
Cash at end of period		$	50			$	63,268
Supplemental disclosure of cash flow information
Interest paid		$	5,666			$	1,988
Income taxes paid		$	7			$	32

See accompanying notes to unaudited condensed consolidated financial statements.

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

1. Partnership Organization and Basis of Presentation

     Calumet Specialty Products Partners, L.P. (Calumet, Partnership, or the Company) is a Delaware limited partnership. The general partner is Calumet GP, LLC, a Delaware limited liability company. On January 31, 2006, the Partnership completed the initial public offering of its common units. At that time, substantially all of the assets and liabilities of Calumet Lubricants Co., Limited Partnership and its subsidiaries were contributed to Calumet. On July 5, 2006 and November 20, 2007, the Partnership completed follow-on public offerings of its common units. As of March 31, 2008, Calumet had 19,166,000 common units, 13,066,000 subordinated units, and 657,796 general partner equivalent units outstanding. The general partner owns 2% of Calumet while the remaining 98% is owned by limited partners. On January 3, 2008 the Company closed on the acquisition of Penreco, a Texas general partnership, for approximately $268,969. See Note 4 for further discussion of this acquisition. As a result, the assets and liabilities previously held by Penreco and results of the operation of these assets are included within the Company’s consolidated balance sheet as of March 31, 2008 and consolidated results of operations for the three months ended March 31, 2008. Calumet is engaged in the production and marketing of crude oil-based specialty lubricating oils, white mineral oils, solvents, petrolatums, waxes and fuels. Calumet owns facilities located in Princeton, Louisiana, Cotton Valley, Louisiana, Shreveport, Louisiana, Karns City, Pennsylvania, and Dickinson, Texas, and a terminal located in Burnham, Illinois.

     The unaudited condensed consolidated financial statements of the Company as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal nature, unless otherwise disclosed. The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s 2007 Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 4, 2008.

2. New Accounting Pronouncements

     In April 2007, the FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No. 39 (the “Position”), which amends certain aspects of FASB Interpretation Number 39, Offsetting of Amounts Related to Certain Contracts. The Position permits companies to offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. The Position is effective for fiscal years beginning after November 15, 2007. The Company adopted the Position on January 1, 2008 and the adoption did not have a material effect on its financial position, results of operations, or cash flows.

     In December 2007, FASB issued FASB Statement No. 141(R), Business Combinations (the “Statement”). The Statement applies to the financial accounting and reporting of business combinations. The Statement is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company anticipates that the Statement will not have a material effect on its financial position, results of operations, or cash flows.

     In March 2008, FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 has been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company currently provides an abundance of information about its hedging activities and use of derivatives in its quarterly and annual filings with the SEC, including many of the disclosures contained within SFAS 161.

Thus, the Company currently does not anticipate the adoption of Statement 161 will have a material impact on the disclosures already provided.

     In March 2008, FASB issued Emerging Issues Task Force Issue No. 07-4, Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships (EITF 07-4). EITF 07-4 requires master limited partnerships to treat incentive distribution rights (“IDRs”) as participating securities for the purposes of computing earnings per unit in the period that the general partner becomes contractually obligated to pay the IDR. EITF 07-4 requires that undistributed earnings be allocated to the partnership interests based on the allocation of earnings to capital accounts as specified in the respective partnership agreement. When distributions exceed earnings, EITF 07-4 requires that net income be reduced by the actual distributions with the resulting net loss being allocated to capital accounts as specified in the respective partnership agreement. EITF 07-4 is effective for fiscal years and interim periods beginning after December 15, 2008. The Company is evaluating the potential impacts of EITF 07-4.

3. Inventory

     The cost of inventories is determined using the last-in, first-out (LIFO) method. Inventories are valued at the lower of cost or market value.

     Inventories consist of the following:

		March 31,				December 31,
		2008				2007
Raw materials		$	40,533			$	20,887
Work in process			35,246				21,325
Finished goods			71,742				65,452
		$	147,521			$	107,664

     The replacement cost of these inventories, based on current market values, would have been $129,595 and $107,885 higher at March 31, 2008 and December 31, 2007, respectively. For the three months ended March 31, 2008 and 2007, the Company recorded $9,120 and $0, respectively of income in the unaudited condensed consolidated statements of operations due to the liquidation of a portion of its LIFO inventory.

4. Acquisition of Penreco

     On January 3, 2008 the Company closed on the acquisition of Penreco, a Texas general partnership, for $268,969, net of the cash balance in Penreco’s accounts at closing. Penreco was owned by ConocoPhillips Company and M.E. Zukerman Specialty Oil Corporation. Penreco manufactures and markets highly-refined products and specialty solvents, including white mineral oils, petrolatums, natural petroleum sulfonates, cable-filling compounds, refrigeration oils, food-grade compressor lubricants and gelled products. The acquisition includes facilities in Karns City, Pennsylvania and Dickinson, Texas, as well as several long-term supply agreements with ConocoPhillips Company.

     The Company believes that this acquisition will provide several key strategic benefits, including market synergies within our solvents and lubricating oil product lines as well as additional operational and logistical flexibility. The acquisition will also broaden the Company’s customer base and give the Company access to new markets.

     As a result of the acquisition, the assets and liabilities previously held by Penreco and results of the operation of these assets have been included in the Company’s condensed consolidated balance sheet and condensed consolidated statement of operations since the date of acquisition. The unaudited pro forma summary results of operations for the three months ended March 31, 2007 below combine the results of operations of Calumet and Penreco as if the acquisition had occurred on January 1, 2007.

		March 31,
		2007
		(Unaudited)
Sales		$	450,024
Net income		$	35,328
Basic and diluted net income per limited partner unit		$	0.91

     The Company may be required to make an additional contingent payment to ConocoPhillips Company and M.E. Zukerman Specialty Oil Corporation for working capital adjustments. The Company recorded $49,446 of goodwill as a result of this acquisition, all of which was recorded within the Company’s specialty products segment. The preliminary allocation of the aggregate purchase price, which is preliminary pending the working capital adjustment and the finalization of fair value appraisals of assets acquired, is as follows:

Accounts receivable			41,980
Inventories			64,351
Prepaid expenses and other current assets			61
Property, plant and equipment			91,790
Other noncurrent assets			288
Intangibles			58,604
Goodwill			49,446
Accounts payable			(28,755	)
Other current liabilities			(4,608	)
Other noncurrent liabilities			(4,188	)
Total purchase price, net of cash acquired		$	268,969

     The components of intangible assets listed in the table above as of January 3, 2008, based upon a preliminary appraisal, were as follows:

		Amount				Life
Customer relationships		$	27,998				20
Supplier agreements			21,341				6
Patents			1,573				9
Non-competition agreements			5,732				5
Distributor agreements			1,960				3
Total		$	58,604
Weighted average amortization period							13

     The Company formulated its plan associated with the involuntary termination of certain Penreco employees and has accrued $1,870 for such costs, all of which has been included in the acquisition cost allocation. Certain employees may be added or removed from the termination plan and, as such, the termination plan is not yet finalized. The Company expects that additional liabilities will be minimal. The majority of affected employees had been terminated as of March 31, 2008, with the remaining affected employees expected to be terminated by July 2008. For the three months ended March 31, 2008, the Company paid $773 of termination benefits against the liability and had accrued $1,097 additional liability for termination costs, all of which was charged against the cost of the acquired company.

5. Shreveport Refinery Expansion

     As of December 31, 2007, the Company had invested $254,414 in its Shreveport refinery expansion project. Through March 31, 2008, the Company has invested an additional $65,804 for a total of $320,218 in its Shreveport refinery expansion project. The Shreveport expansion project is expected to increase this refinery’s throughput capacity by 35.7% from 42,000 bpd to 57,000 bpd. As part of this project, the Company has enhanced the Shreveport refinery’s ability to process sour crude oil. As of early May, the Company is processing approximately 16,000 bpd of sour crude oil at the Shreveport refinery and will continue to increase these rates up to operational limits. This current throughput is an increase of at least 3,000 bpd over its previously estimated sour crude oil throughput upon project completion. In certain operating scenarios where overall throughput is reduced, the Company expects it will be able to increase sour crude oil throughput rates to approximately 25,000 bpd. The Company estimates that the total cost of the Shreveport refinery expansion project will be approximately $350,000, an increase of $50,000 from its previous estimate. This increase is primarily due to increased construction labor costs caused by further delay in startup of the project.

     Additionally, for the year ended December 31, 2007 and the three months ended March 31, 2008, the Company had invested $65,633 and $21,810, respectively, in the Shreveport refinery for other capital expenditures including projects to improve efficiency, de-bottleneck certain operating units and for new product development. The remaining capital expenditures for these projects will be less than $5,000.

6. Goodwill and Intangible Assets

     The Company has preliminarily recorded $49,446 of goodwill as a result of the Penreco acquisition, all of which are recorded within the Company’s specialty products segment. The Company had none recorded as of December 31, 2007.

     Intangible assets consist of the following:

						March 31, 2008								December 31, 2007
		Weighted				Gross				Accumulated				Gross				Accumulated
		Average Life				Amount				Amortization				Amount				Amortization
Customer relationships			20			$	30,274			$	(2,627	)		$	2,276			$	(2,165	)
Supplier agreements			6				21,341				(1,639	)			—				—
Patents			9				1,573				(46	)			—				—
Non-competition agreements			5				5,732				(287	)			—				—
Distributor agreements			3				1,960				(163	)			—				—
Royalty agreements			15				2,680				(337	)			2,680				(331	)
			13			$	63,560			$	(5,099	)		$	4,956			$	(2,496	)

     Intangible assets associated with supplier agreements, non-competition agreements and distributor agreements are being amortized over the term of the related agreements. Intangible assets associated with patents are being amortized over the life of the patents. Intangible assets associated with customer relationships of Penreco are being amortized over a useful life estimated using an assumed rate of annual customer attrition. The Company’s intangible assets have no residual values. For the three months ended March 31, 2008 and 2007, the Company recorded amortization expense of intangible assets of $2,602 and $234, respectively. The Company estimates that amortization of intangible assets will be $7,456 for the remainder of 2008, with annual amortization of $7,718, $7,182, $3,851, and $3,851 for the years ended December 31, 2009, 2010, 2011, and 2012, respectively.

7. Fair Value of Financial Instruments

     In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. The Company has adopted the provisions of SFAS 157 as of January 1, 2008, for financial instruments. Although the adoption of SFAS 157 did not materially impact its financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial statements. In February 2008, the FASB agreed to defer for one year the effective date of SFAS 157 for certain nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.

     SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

     As of March 31, 2008, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included the Company’s derivative instruments related to crude oil, gasoline, diesel, natural gas and interest rates, and investments associated with the Company’s Non-Contributory Defined Benefit Plan (Pension Plan).

     The Company’s derivative instruments consist of over-the-counter (OTC) contracts, which are not traded on a public exchange. These contracts include both swaps as well as different types of option contracts. See Note 8 for further information on the Company’s derivative instruments and hedging activities. The fair values of swap contracts for crude oil, natural gas and interest rates are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2. The Company determines the value of its crude oil option contracts utilizing a standard option pricing model based on inputs that can be derived from information available in publicly quoted markets, or are quoted by counterparties to these contracts. In situations where the Company obtains inputs via quotes from its counterparties, it verifies the reasonableness of these quotes via similar quotes from another counterparty as of each date for which financial statements are prepared. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds. Due to the fact that certain of the inputs utilized to determine the fair value of option contracts are unobservable (principally volatility), the Company has categorized these option contracts as Level 3. In addition to these option contracts, the Company determines the value of its diesel and gasoline contracts using certain unobservable inputs in forward years (principally no observable forward curve). Thus, these swaps are categorized as Level 3.

     The Company’s investments associated with its Pension Plan consist of mutual funds that are publicly traded and for which market prices are readily available, thus these investments are categorized as Level 1.

     The Company’s assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at March 31, 2008, were as follows:

		March 31, 2008
		Fair Value Measurements
		Level 1				Level 2				Level 3				Total
Assets:
Crude oil swaps		$	—			$	684,675			$	—			$	684,675
Gasoline swaps			—				—				—				—
Diesel swaps			—				—				—				—
Natural gas swaps			—				570				—				570
Crude collars			—				—				2,366				2,366
Interest rate swaps			—				—				—				—
Pension plan investments			18,142				—				—				18,142
Total assets at fair value		$	18,142			$	685,245			$	2,366			$	705,753
Liabilities:
Crude oil swaps		$	—			$	—			$	—			$	—
Gasoline swaps			—				—				(252,361	)			(252,361	)
Diesel swaps			—				—				(544,569	)			(544,569	)
Natural gas swaps			—				—				—				—
Crude collars			—				—				—				—
Interest rate swaps			—				(5,479	)			—				(5,479	)
Pension plan investments			—				—				—				—
Total liabilities at fair value		$	—			$	(5,479	)		$	(796,930	)		$	(802,409	)

     The table below sets forth a summary of net changes in fair value of the Company’s Level 3 financial assets and liabilities for the three months ended March 31, 2008:

		Derivative
		Instruments, Net
Fair value at January 1, 2008		$	(600,051	)
Realized losses			5,949
Unrealized gains (losses)			7,284
Comprehensive income (loss)			(265,414	)
Purchases, issuances and settlements			57,668
Transfers in (out) of Level 3			—
Fair value at March 31, 2008		$	(794,564	)
Total gains or losses included in net income attributable to changes in unrealized gains (losses) relating to financial assets and liabilities held as of March 31, 2008		$	3,570

     All settlements from derivative contracts that are deemed “effective” as defined in SFAS 133, are included in sales for gasoline and diesel derivatives, cost of sales for crude oil and natural gas derivatives and interest expense for interest rate derivatives in the period that the hedged cash flow occurs. Any “ineffectiveness” associated with these derivative contracts, as defined in SFAS 133, are recorded in earnings immediately in unrealized gain/(loss) on derivative instruments. See Note 8 for further information on SFAS 133 and hedging.

8. Derivatives

     The Company utilizes derivative instruments to minimize its price risk and volatility of cash flows associated with the purchase of crude oil and natural gas, the sale of fuel products and interest payments.

     In accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which was amended in June 2000 by SFAS No. 138 and in May 2003 by SFAS No. 149 (collectively referred to as “SFAS 133”), the

Company recognizes all derivative transactions as either assets or liabilities at fair value on the condensed consolidated balance sheets. The Company utilized third party valuations and published market data to determine the fair value of these derivatives. The Company considers its derivative instruments valuations to be either Level 2 or Level 3 fair value measurements under SFAS 157 (see Note 7).

     To the extent a derivative instrument is designated effective as a cash flow hedge of an exposure to changes in the fair value of a future transaction, the change in fair value of the derivative is deferred in accumulated other comprehensive income (loss), a component of partners’ capital until the underlying transaction hedged is recognized in the consolidated statements of operations. The Company accounts for certain derivatives hedging purchases of crude oil and natural gas, the sale of gasoline, diesel and jet fuel and the payment of interest as cash flow hedges. The derivatives hedging purchases and sales are recorded to cost of sales and sales in the unaudited condensed consolidated statements of operations, respectively, upon recording the related hedged transaction in sales or cost of sales.

     The derivatives hedging payments of interest are recorded in interest expense in the condensed consolidated statements of operations. For the three months ended March 31, 2008 and 2007, the Company has recorded a derivative loss of $62,877 and a derivative gain of $17,797, respectively, to sales and a derivative gain of $63,813 and a derivative loss of $20,959, respectively, to cost of sales. An interest rate swap loss of $39 and $1 for the three months ended March 31, 2008 and 2007, respectively, was recorded to interest expense. For derivative instruments not designated as cash flow hedges and the portion of any cash flow hedge that is determined to be ineffective, the change in fair value of the asset or liability for the period is recorded to unrealized gain or loss on derivative instruments in the unaudited condensed consolidated statements of operations. Upon the settlement of a derivative not designated as a cash flow hedge, the gain or loss at settlement is recorded to realized gain or loss on derivative instruments in the unaudited condensed consolidated statements of operations.

     The Company assesses, both at inception of the hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The Company’s estimate of the ineffective portion of the hedges for the three months ended March 31, 2008 and 2007 were losses of $2,776 and $7,513, respectively, which were recorded to unrealized loss on derivative instruments in the condensed consolidated statements of operations. The Company recorded a time value gain on its crude collars of $92 and $1,001, which is excluded from the assessment of hedge effectiveness, to unrealized (loss) gain on derivative instruments in the consolidated statements of operations, for the three months ended March 31, 2008 and 2007, respectively.

     Comprehensive income (loss) for the Company includes the changes in fair value of cash flow hedges that have not been reclassified to net income (loss). Comprehensive income (loss) for the three months ended March 31, 2008 and 2007 was as follows:

		Three Months Ended
		March 31,
		2008				2007
Net income (loss)		$	(3,392	)		$	28,210
Cash flow hedge loss reclassified to net income			678				(5,451	)
Change in fair value of cash flow hedges			(55,582	)			(61,854	)
Total comprehensive loss		$	(58,296	)		$	(39,095	)

     The effective portion of the hedges classified in accumulated other comprehensive income (loss) is ($94,545) as of March 31, 2008 and, absent a change in the fair market value of the underlying transactions, will be reclassified to earnings by December 31, 2012 with balances being recognized as follows:

		Accumulated Other
		Comprehensive
Year		Income (Loss)
2008		$	(16,091	)
2009			(35,022	)
2010			(32,211	)
2011			(10,775	)
2012			(446	)
Total		$	(94,545	)

     The Company is exposed to credit risk in the event of nonperformance with its counterparties on these derivative transactions. The Company executes all of its derivative instruments with a small number of counterparties, the majority of which are large financial institutions with ratings of at least A1 and A+ by Moody’s and S&P, respectively. In the event of default, the Company would potentially be subject to losses on derivative instruments with mark to market gains. The Company requires collateral from its counterparties when the fair value of the derivatives crosses agreed upon thresholds in its contracts with these counterparties. The Company’s contracts with these counterparties allow for netting of derivative instrument positions executed under each contract. The Company does not expect nonperformance on any derivative contract.

Crude Oil Collar and Swap Contracts -— Specialty Products Segment

     The Company utilizes combinations of options and swaps to manage crude oil price risk and volatility of cash flows in its specialty products segment. These derivatives are designated as cash flow hedges of the future purchase of crude oil. The Company’s policy is generally to enter into crude oil derivative contracts that match our expected future cash out flows for up to 70% of our anticipated crude oil purchases related to our specialty products production. The tenor of these positions generally will be short term in nature and expire within three to nine months from execution; however, we may execute derivative contracts for up to two years forward if our expected future cash flows support lengthening our position. At March 31, 2008, the Company had the following derivatives related to crude oil purchases in the table below, all of which are designated as hedges. For April 2008, the Partnership had a total of 300,000 barrels hedged with four-way collars. We settled approximately 270,000 barrels of these collars by entering into offsetting collars in March 2008, which yielded proceeds of approximately $1,850, or $6.85 per barrel. As a result of such barrels not being designated as hedges, the Company recognized $1,640 of losses in unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2008. These barrels were part of a crude oil collar derivative transaction entered into to economically lock in a portion of the Company’s projected April 2008 settlement of certain derivative instruments.

										Average				Average				Average				Average
										Lower Put				Upper Put				Lower Call				Upper Call
Crude Oil Put/Call Spread Contracts by Expiration Dates		Barrels				BPD				($/Bbl)				($/Bbl)				($/Bbl)				($/Bbl)
April 2008			300,000				10,000			$	74.35			$	84.35			$	94.35			$	104.35
May 2008			248,000				8,000				75.45				85.45				95.45				105.45
June 2008			180,000				6,000				77.20				87.20				97.20				107.20
July 2008			62,000				2,000				74.30				84.30				94.30				104.30
August 2008			62,000				2,000				74.30				84.30				94.30				104.30
September 2008			60,000				2,000				74.30				84.30				94.30				104.30
Totals			912,000
Average price										$	75.20			$	85.20			$	95.20			$	105.20

Crude Oil Swap Contracts by Expiration Dates		Barrels				BPD				($/Bbl)
Second Quarter 2008			90,000				989			$	93.50
Third Quarter 2008			46,000				500				100.45
Fourth Quarter 2008			46,000				500				100.45
Totals			182,000
Average price										$	97.01

     At December 31, 2007, the Company had the following derivatives related to crude oil.

										Average				Average				Average				Average
Crude Oil Put/Call Spread										Lower Put				Upper Put				Lower Call				Upper Call
Contracts by Expiration Dates		Barrels				BPD				($/Bbl)				($/Bbl)				($/Bbl)				($/Bbl)
January 2008			248,000				8,000			$	67.85			$	77.85			$	87.85			$	97.85
February 2008			232,000				8,000				76.13				86.13				96.13				106.13
March 2008			248,000				8,000				77.63				87.63				97.63				107.63
April 2008			60,000				2,000				74.30				84.30				94.30				104.30
May 2008			62,000				2,000				74.30				84.30				94.30				104.30
June 2008			60,000				2,000				74.30				84.30				94.30				104.30
July 2008			62,000				2,000				74.30				84.30				94.30				104.30
August 2008			62,000				2,000				74.30				84.30				94.30				104.30
September 2008			60,000				2,000				74.30				84.30				94.30				104.30
Totals			1,094,000
Average price										$	74.01			$	84.01			$	94.01			$	104.01

Crude Oil Swap Contracts by Expiration Dates

Barrels

BPD

($/Bbl)

First Quarter 2008

91,000

1,000

90.92

Crude Oil Swap Contracts -— Fuel Products Segment

     The Company utilizes swap contracts to manage crude oil price risk and volatility of cash flows in its fuel products segment. The Company’s policy is generally to enter into crude oil swap contracts for a period no greater than five years forward and for no more than 75% of crude purchases used in fuels production. At March 31, 2008, the Company had the following derivatives related to crude oil purchases in its fuel products segment, all of which are designated as hedges.

Crude Oil Swap Contracts by Expiration Dates		Barrels				BPD				($/Bbl)
Second Quarter 2008			2,184,000				24,000				67.87
Third Quarter 2008			2,208,000				24,000				66.54
Fourth Quarter 2008			2,116,000				23,000				66.49
Calendar Year 2009			8,212,500				22,500				66.26
Calendar Year 2010			7,482,500				20,500				67.27
Calendar Year 2011			2,279,000				6,244				70.13
Totals			24,482,000
Average price										$	67.12

     At December 31, 2007, the Company had the following derivatives related to crude oil purchases in its fuel products segment, all of which are designated as hedges.

Crude Oil Swap Contracts by Expiration Dates		Barrels				BPD				($/Bbl)
First Quarter 2008			2,184,000				24,000				67.87
Second Quarter 2008			2,184,000				24,000				67.87
Third Quarter 2008			2,208,000				24,000				66.54
Fourth Quarter 2008			2,116,000				23,000				66.49
Calendar Year 2009			8,212,500				22,500				66.26
Calendar Year 2010			7,482,500				20,500				67.27
Calendar Year 2011			2,096,500				5,744				67.70
Totals			26,483,500
Average Price										$	66.97

Fuel Products Swap Contracts

     The Company utilizes swap contracts to manage diesel, gasoline and jet fuel price risk and volatility of cash flows in its fuel products segment. The Company’s policy is generally to enter into diesel and gasoline swap contracts for a period no greater than five years forward and for no more than 75% of forecasted fuel sales.

Diesel and Jet Fuel Swap Contracts

     At March 31, 2008, the Company had the following derivatives related to diesel and jet fuel sales in its fuel products segment, all of which are designated as hedges except for 21,260 barrels in 2008. As a result of these barrels not being designated as hedges, the Company recognized $627 of losses in unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2008.

Diesel and Jet Fuel Swap Contracts by Expiration Dates		Barrels				BPD				($/Bbl)
Second Quarter 2008			1,319,500				14,500				82.81
Third Quarter 2008			1,334,000				14,500				81.42
Fourth Quarter 2008			1,334,000				14,500				81.42
Calendar Year 2009			4,745,000				13,000				80.51
Calendar Year 2010			4,745,000				13,000				80.41
Calendar Year 2011			1,823,500				4,996				83.28
Totals			15,301,000
Average price										$	81.17

     At December 31, 2007, the Company had the following derivatives related to diesel and jet fuel sales in its fuel products segment, all of which are designated as hedges except for 42,520 barrels in 2008. As a result of these 42,520 barrels not being designated as hedges, the Company recognized $941 of losses in unrealized gain (loss) on derivative instruments in the consolidated statements of operations during the year ended December 31, 2007.

Diesel and Jet Fuel Swap Contracts by Expiration Dates		Barrels				BPD				($/Bbl)
First Quarter 2008			1,319,500				14,500				82.81
Second Quarter 2008			1,319,500				14,500				82.81
Third Quarter 2008			1,334,000				14,500				81.42
Fourth Quarter 2008			1,334,000				14,500				81.42
Calendar Year 2009			4,745,000				13,000				80.51
Calendar Year 20010			4,745,000				13,000				80.41
Calendar Year 2011			1,641,000				4,496				79.93
Totals			16,438,000
Average price										$	80.94

Gasoline Swap Contracts

     At March 31, 2008, the Company had the following derivatives related to gasoline sales in its fuel products segment, all of which are designated as hedges.

Gasoline Swap Contracts by Expiration Dates		Barrels				BPD				($/Bbl)
Second Quarter 2008			864,500				9,500				76.98
Third Quarter 2008			874,000				9,500				74.79
Fourth Quarter 2008			782,000				8,500				74.62
Calendar Year 2009			3,467,500				9,500				73.83
Calendar Year 2010			2,737,500				7,500				75.10
Calendar Year 2011			455,500				1,248				74.98
Totals			9,181,000
Average price										$	74.72

     At December 31, 2007, the Company had the following derivatives related to gasoline sales in its fuel products segment, all of which are designated as hedges.

Gasoline Swap Contracts by Expiration Dates		Barrels				BPD				($/Bbl)
First Quarter 2008			864,500				9,500				76.98
Second Quarter 2008			864,500				9,500				76.98
Third Quarter 2008			874,000				9,500				74.79
Fourth Quarter 2008			782,000				8,500				74.62
Calendar Year 2009			3,467,500				9,500				73.83
Calendar Year 2010			2,737,500				7,500				75.10
Calendar Year 2011			455,500				1,248				74.98
Totals			10,045,500
Average price										$	74.91

Natural Gas Swap Contracts

     The Company utilizes swap contracts to manage natural gas price risk and volatility of cash flows. These swap contracts are designated as cash flow hedges of the future purchase of natural gas. The Company’s policy is generally to enter into natural gas derivative contracts to hedge approximately 50% or more of its upcoming fall and winter months’ anticipated natural gas requirement with time to expiration not to exceed three years. At March 31, 2008, the Company had the following derivatives related to natural gas purchases.

Natural Gas Swap Contracts by Expiration Dates		MMbtu				$/MMbtu
Third Quarter 2008			60,000			$	8.30
Fourth Quarter 2008			90,000			$	8.30
First Quarter 2009			90,000			$	8.30
Totals			240,000
Average price						$	8.30

     At December 31, 2007, the Company had the following derivatives related to natural gas purchases.

Natural Gas Swap Contracts by Expiration Dates		MMbtu				$/MMbtu
First Quarter 2008			850,000			$	8.76
Third Quarter 2008			60,000			$	8.30
Fourth Quarter 2008			90,000			$	8.30
First Quarter 2009			90,000			$	8.30
Totals			1,090,000
Average price						$	8.66

Interest Rate Swap Contracts

     In 2008, the Company entered into a forward swap contract to manage interest rate risk related to its new variable rate senior secured first lien term loan which closed January 3, 2008. The Company has hedged the future interest payments related to $100,000, $150,000 and $50,000 of the total outstanding term loan indebtedness in 2008, 2009 and 2010, respectively, pursuant to this forward swap contract. This swap contract is designated as a cash flow hedge of the future payment of interest with three-month LIBOR fixed at 3.37%, 3.09%, and 3.66% per annum in 2008, 2009 and 2010, respectively.

     In 2006, the Company entered into a forward swap contract to manage interest rate risk related to its then existing variable rate senior secured first lien term loan. Due to the repayment of $19,000 of the outstanding balance of the Company’s then existing term loan facility in August 2007 and subsequent refinancing of the remaining term loan balance, this swap contract was not designated as a cash flow hedge of the future payment of interest. The entire change in the fair value of this interest rate swap is recorded to unrealized gain (loss) on derivative instruments in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2008. During the first quarter of 2008, the Company fixed its unrealized loss on this interest rate swap derivative instrument at ($3,363) by entering into an offsetting interest rate swap which is not designated as a cash flow hedge.

9. Commitments and Contingencies

     From time to time, the Company is a party to certain claims and litigation incidental to its business, including claims made by various taxing and regulatory authorities, such as the Louisiana Department of Environmental Quality (“LDEQ”), Environmental Protection Agency (“EPA”), Internal Revenue Service (“IRS”) and Occupational Safety and Health Administration (“OSHA”), as the result of audits or reviews of the Company’s business. Management is of the opinion that the ultimate resolution of any known claims, either individually or in the aggregate, will not have a material adverse impact on the Company’s financial position, results of operations or cash flow.

Environmental

     The Company operates crude oil and specialty hydrocarbon refining and terminal operations, which are subject to stringent and complex federal, state, and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations can impair the Company’s operations that affect the environment in many ways, such as requiring the acquisition of permits to conduct regulated activities; restricting the manner in which the Company can release materials into the environment; requiring remedial activities or capital expenditures to mitigate pollution from former or current operations; and imposing substantial liabilities for pollution resulting from its operations. Certain environmental 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.

     Failure to comply with environmental laws and regulations may result in the triggering of administrative, civil and criminal measures, including the assessment of monetary penalties, the imposition of remedial obligations, and the issuance of injunctions limiting or prohibiting some or all of the Company’s operations. On occasion, the Company receives notices of violation, enforcement and other complaints from regulatory agencies alleging non-compliance with applicable environmental laws and regulations. In particular, the LDEQ has proposed penalties totaling $391 and supplemental projects for the following alleged violations: (i) a May 2001 notification received by the Cotton Valley refinery from the LDEQ regarding several alleged violations of various air emission regulations, as identified in the course of the Company’s Leak Detection and Repair program, and also for failure to submit various reports related to the facility’s air emissions; (ii) a December 2002 notification received by the Company’s Cotton Valley refinery from the LDEQ regarding alleged violations for excess emissions, as identified in the LDEQ’s file review of the Cotton Valley refinery; (iii) a December 2004 notification received by the Cotton Valley refinery from the LDEQ regarding alleged violations for the construction of a multi-tower pad and associated pump pads without a permit issued by the agency; and (iv) a number of similar matters at the Princeton refinery. The Company anticipates that any penalties that may be assessed due to the alleged violations will be consolidated in a settlement agreement that the Company anticipates executing with the LDEQ in connection with the agency’s “Small Refinery and Single Site Refinery Initiative” described below. The Company has recorded a liability for the proposed penalty within other current liabilities on the condensed consolidated balance sheets. Environmental expenses are recorded within other expenses on the unaudited condensed consolidated statements of operations.

     The Company is party to ongoing discussions on a voluntary basis with the LDEQ regarding the Company’s participation in that agency’s “Small Refinery and Single Site Refinery Initiative.” This state initiative is patterned after the EPA’s “National Petroleum Refinery Initiative,” which is a coordinated, integrated compliance and enforcement strategy to address federal Clean Air Act compliance issues at the nation’s largest petroleum refineries. The Company expects that the LDEQ’s primary focus under the state initiative will be on four compliance and enforcement concerns: (i) Prevention of Significant Deterioration/New Source Review; (ii) New Source Performance Standards for fuel gas combustion devices, including flares, heaters and boilers; (iii) Leak Detection and Repair requirements; and (iv) Benzene Waste Operations National Emission Standards for Hazardous Air Pollutants. While no significant compliance and enforcement expenditures have been requested as a result of the Company’s discussions with the LDEQ, the Company anticipates that it will ultimately be required to make emissions reductions requiring capital investments between approximately $1,000 and $3,000 over a three to five year period at the Company’s three Louisiana refineries.

     Voluntary remediation of subsurface contamination is in process at each of the Company’s facilities. The remedial projects are being overseen by the appropriate state agencies. Based on current investigative and remedial activities, the Company believes that the groundwater contamination at these facilities can be controlled or remedied without having a material adverse effect on its financial condition. However, such costs are often unpredictable and, therefore, there can be no assurance that the future costs will not become material.

     The Company is indemnified by Shell Oil Company, as successor to Pennzoil-Quaker State Company and Atlas Processing Company, for specified environmental liabilities arising from the operations of the Shreveport refinery prior to the Company’s acquisition of the facility.

The indemnity is unlimited in amount and duration, but requires the Company to contribute up to $1,000 of the first $5,000 of indemnified costs for certain of the specified environmental liabilities.

     The Company is indemnified on a limited basis by ConocoPhillips Company and M.E. Zuckerman Specialty Oil Corporation, former owners of Penreco, for pending, threatened, contemplated or contingent environmental claims against Penreco, if any, that were not known and identified as of the Penreco acquisition date. A significant portion of these indemnifications will expire two years from January 1, 2008 if there are no claims asserted by the Company and are generally subject to a $2,000 limit.

Heath and Safety

     The Company received an OSHA citation in the fourth quarter of 2007 for various process safety violations at its Shreveport refinery which resulted in a penalty. During the first quarter of 2008, the Company settled this penalty for $100. With the exception of this citation, the Company believes that its operations are in substantial compliance with OSHA and similar state laws.

Standby Letters of Credit

     The Company has agreements with various financial institutions for standby letters of credit which have been issued to domestic vendors. As of March 31, 2008 and December 31, 2007, the Company had outstanding standby letters of credit of $106,100 and $96,676, respectively, under its senior secured revolving credit facility. As of March 31, 2008 and December 31, 2007, the Company had availability to issue letters of credit of $193,900 and $103,324, respectively, under its senior secured revolving credit facility. The Company also had a $50,000 letter of credit outstanding under the senior secured first lien letter of credit facility for its fuels hedging program, which bears interest at 4.0%.

10. Long-Term Debt

     Long-term debt consisted of the following:

		March 31,				December 31,
		2008				2007
Borrowings under new senior secured first lien term loan with third-party lenders, interest at rate of three-month LIBOR plus 4.00% (7.07% at March 31, 2008), interest and principal payments quarterly with borrowings due January 3, 2015 with an effective interest rate of 7.93%		$	384,038				—
Borrowings under senior secured first lien term loan with third-party lenders, interest at rate of three-month LIBOR plus 3.50% (8.74% at December 31, 2007), interest and principal payments quarterly with borrowings due December 2012			—				30,099
Borrowings under senior secured revolving credit agreement with third-party lenders, interest at prime (5.25% and 7.25% at March 31, 2008 and December 31, 2007, respectively), interest payments monthly, borrowings due January 2013			—				6,958
Capital lease obligations interest at 8.25%, interest and principal payments quarterly with borrowings due January 2012			2,895				2,834
Less unamortized discount on new senior secured first lien term loan with third-party lenders			(16,503	)			—
Total long-term debt			370,430				39,891
Less current portion of long-term debt			4,792				943
		$	365,638			$	38,948

     The maximum borrowing capacity at March 31, 2008 under the senior secured revolving credit agreement was $293,658, with $186,018 available for additional borrowings based on collateral and specified availability limitations. The term loan facility borrowings are secured by a first lien on the property, plant and equipment of the Company and its subsidiaries.

     On January 3, 2008, the Partnership closed a new $435,000 senior secured first lien term loan facility (the “New Term Loan Facility”) which includes a $385,000 term loan (the “New Term Loan”) and a $50,000 prefunded letter of credit facility to support crack spread hedging. In addition, the Company incurred $17.4 million of issuance discount in connection with the New Term Loan Facility. The proceeds of the term loan were used to (i) finance a portion of the acquisition of Penreco, (ii) fund the anticipated growth in working capital and remaining capital expenditures associated with the Shreveport refinery expansion project, (iii) refinance the existing term loan and (iv) to the extent available, for general partnership purposes. The New Term Loan bears interest at a rate equal (i) with respect to a LIBOR Loan, the LIBOR Rate plus 400 basis points (as defined in the New Term Loan Facility) and (ii) with respect to a Base Rate Loan, the Base Rate plus 300 basis points (as defined in the New Term Loan Facility). The letter of credit facility to support crack spread hedging bears interest at 4.0%. Lenders under the New Term Loan Facility have a first priority lien on the Company’s fixed assets and a second priority lien on its cash, accounts

receivable, inventory and other personal property. The New Term Loan Facility matures in January 2015. The New Term Loan Facility requires quarterly principal payments of $963 until September 30, 2014, with the remaining balance due at maturity on January 3, 2015.

     On January 3, 2008, the Partnership amended its existing senior secured revolving credit facility dated as of December 9, 2005 (the “Revolver”). Pursuant to this amendment, the Revolver lenders agreed to, among other things, (i) increase the total availability under the Revolver up to $375,000 and (ii) conform certain of the financial covenants and other terms in the Revolver to those contained in the New Term Loan Credit Agreement. The amended existing senior secured revolving credit facility matures on January 3, 2013.

     The Company has experienced recent adverse financial conditions primarily associated with historically high crude oil costs, which have negatively affected specialty products gross profit. Also contributing to these adverse financial conditions have been the significant cost overruns and delays in the startup of the Shreveport refinery expansion project. Compliance with the financial covenants pursuant to the Company’s credit agreements is tested quarterly, and as of March 31, 2008, the Company was in compliance with all financial covenants. The Company is taking steps to ensure that it continues to meet the requirements of its credit agreements and currently forecasts that it will be in compliance for all future measurement dates. These steps include increased crude oil price hedging for the specialty products segment, reductions in working capital and operating cost reductions.

     While assurances cannot be made regarding its future compliance with these covenants, the Company anticipates that its product pricing strategies, completion of the Shreveport refinery expansion project, continued integration of the Penreco acquisition and other strategic initiatives will allow it to maintain compliance with such financial covenants and improve its Adjusted EBITDA and distributable cash flows.

     Failure to achieve the Company’s anticipated results may result in a breach of certain of the financial covenants contained in its credit agreements. If this occurs, the Company will enter into discussions with its lenders to either modify the terms of the existing credit facilities or obtain waivers of non-compliance with such covenants. There can be no assurances of the timing of the receipt of any such modification or waiver, the term or costs associated therewith or our ultimate ability to obtain the relief sought. The Company’s failure to obtain a waiver of non-compliance with certain of the financial covenants or otherwise amend the credit facilities would constitute an event of default under its credit facilities and would permit the lenders to pursue remedies. These remedies could include acceleration of maturity under the credit facilities and limitations or the elimination of the Company’s ability to make distributions to its unitholders. If the Company’s lenders accelerate maturity under its credit facilities, a significant portion of its indebtedness may become due and payable immediately. The Company might not have, or be able to obtain, sufficient funds to make these accelerated payments. If the Company is unable to make these accelerated payments, its lenders could seek to foreclose on its assets.

     As of March 31, 2008, maturities of the Company’s long-term debt are as follows:

Year		Maturity
2008		$	3,587
2009			4,705
2010			4,463
2011			4,424
2012			369,752
Total		$	386,931

11. Employee Benefit Plans

     The Company has a noncontributory defined benefit plan (“Pension Plan”) for both those salaried employees as well as those employees represented by either the United Steelworkers (“USW”) or the International Union of Operating Engineers (“IUOE”) who were formerly employees of Penreco and who became employees of the Company as a result of the Penreco acquisition on January 3, 2008. The Company also has a contributory defined benefit medical postretirement plan for both those salaried employees as well as those employees represented by either the International Brotherhood of Teamsters (“IBT”), USW or IUOE who were formerly employees of Penreco and who became employees of the Company as a result of the Penreco acquisition, as well as a non-contributory disability plan for those salaried employees who were formerly employees of Penreco (collectively, “Other Plans”). The pension benefits are based primarily on years of service for USW and IUOE represented employees and both years of service and the employee’s final 60 months’ average compensation for salaried employees. The funding policy is consistent with funding requirements of applicable laws and regulations.

The assets of these plans consist of corporate equity securities, municipal and government bonds, and cash equivalents.

     The components of net periodic pension and other post retirement benefits cost for the three months ended March 31, 2008 were as follows:

		Pension				Other Post Retirement
		Benefits				Employee Benefits
Service cost		$	354			$	3
Interest cost			348				13
Expected return on assets			(336	)			—
Net periodic pension cost		$	366			$	16

     In 2008, the Company expects to contribute approximately $1,670 and $114 to its Pension Plan and Other Plans, respectively. During the three months ended March 31, 2008, the Company made no contributions to its Pension Plan and Other Plans, respectively.

     The benefit obligations, plan assets, funded status, and amounts recognized in the condensed consolidated balance sheets were as follows:

		Pension				Other Post Retirement
		Benefits				Employee Benefits
Change in projected benefit obligation (“PBO”):
Benefit obligation at January 3, 2008		$	21,421			$	910
Service cost			354				3
Interest cost			348				13
Expected return on assets			(336	)			—
Benefit obligation at March 31, 2008		$	21,787			$	926
Fair value of plan assets			18,142				—
Funded status—benefit obligation in excess of plan assets			(3,645	)			(926	)
Reconciliation of funded status:
Funded status—benefit obligation in excess of plan assets			(3,645	)			(926	)
Unrecognized prior service cost			—				—
Unrecognized loss			—				—
Prepaid (accrued) pension cost			(3,645	)			(926	)
Accrued benefit obligation			—				—
Net amount recognized on condensed consolidated balance sheet at March 31, 2008		$	(3,645	)		$	(926	)

     The accumulated benefit obligation for the Pension Plan and Other Plans was $17,547 as of January 3, 2008. The accumulated benefit obligations for the Pension Plan and Other Plans was less than plan assets by $636 as of January 3, 2008. As of January 3, 2008, the Company had no prior service costs, actuarial gains (losses) or transition gains (losses) recorded in accumulated other comprehensive income (loss).

     The significant weighted average assumptions used for the three months ended March 31, 2008 and as of January 3, 2008 were as follows:

		Pension				Other Post Retirement
		Benefits				Employee Benefits
Discount rate for benefit obligations			6.58	%			6.20	%
Discount rate for net periodic benefit costs			5.94	%			5.74	%
Expected return on plan assets for net periodic benefit costs			7.50	%			0.00	%
Rate of compensation increase for benefit obligations			4.50	%			0.00	%
Rate of compensation increase for net periodic benefit costs			4.50	%			0.00	%

     The Company uses a measurement date of December 31 for the plans. For measurement purposes, a 9.50% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2008. The rate was assumed to decrease by .75% per year for an ultimate rate of 5% for 2014 and remain at that level thereafter. An increase or decrease by one percentage point in the assumed healthcare cost trend rates would not have a material effect on the benefit obligation and service and interest cost components of benefit costs for the Other Plans as of January 3, 2008. The Company considered the historical returns and the future expectation for returns for each asset class, as well as the target asset

allocation of the Pension Plan portfolio, to develop the expected long-term rate of return on plan assets.

     The Company’s Pension Plan and Other Plans asset allocations, as of January 3, 2008 by asset category, are as follows:

		Pension				Other Post-Retirement
		Benefits				Employee Benefits
Cash			3	%			100	%
U.S equities			60	%			0	%
Foreign equities			20	%			0	%
Fixed income			17	%			0	%
			100	%			100	%

Investment Policy

     The investment objective of the Penreco Pension Plan Trust (the “Trust”) is to generate a long-term rate of return which will fund the related pension liabilities and minimize the Company’s contributions to the Trust. Trust assets are to be invested with an emphasis on providing a high level of current income through fixed income investments and longer-term capital appreciation through equity investments. Trust assets are targeted to achieve an investment return of 7.75% or more compounded annually over any 5-year period. Due to the long-term nature of pension liabilities, the Trust will assume moderate risk only to the extent necessary to achieve its return objective.

     The Trust pursues its investment objectives by investing in a customized profile of asset allocation which corresponds to the investment return target. Full discretion in portfolio investment decisions is given to Wells Fargo & Company or its affiliates (“the Manager”), subject to the investment policy guidelines. The Manager is required to utilize fiduciary care in all investment decisions and is expected to minimize all costs and expenses involved with the managing of these assets.

     With consideration given to the long-term goals of the Trust, the following ranges reflect the long-term strategy for achieving the stated objectives:

		Range of
Asset Class		Asset Allocations		Target Allocation
Cash		0 — 5%		Minimal
Fixed income		20 — 50%			35	%
Equities		50 — 80%			65	%

     Trust assets will be invested in accordance with the prudent expert standard as mandated by ERISA. In the event market environments create asset exposures outside of the policy guidelines, reallocations will be made in an orderly manner.

     Fixed Income Guidelines

     U.S. Treasury, agency securities, and corporate bond issues rated “investment grade” or higher are considered appropriate for this portfolio. Written approval will be obtained to hold securities downgraded below “investment grade” by either Moody’s or Standard & Poors. Money market and fixed-income funds that are consistent with the stated investment objective of the Trust are also considered acceptable.

     Excluding U.S. Treasury and agency obligations, money market or fixed-income mutual funds, no single issuer shall exceed more than 10% of the total portfolio market value. The average maturity range shall be consistent with the objective of providing a high level of current income and long-term growth within the acceptable risk level established for the Trust.

     Equity Guidelines

     Any equity security that is on the Manager’s working list is considered appropriate for this portfolio. Equity mutual funds that are consistent with the stated investment objective of the Trust are also considered acceptable. No individual equity position, with the exception of equity mutual funds, should exceed 10% of the total market value of the Trust’s assets.

     Performance of investment results will be reviewed, at least semi-annually, by the Calumet Retirement Savings Committee (“CRSC”) and annually at a joint meeting between the CRSC and the Manager. Written communication regarding investment performance occurs quarterly.

Any major changes in the Manager’s investment strategy will be communicated to the Chairman of the CRSC on an ongoing basis and as frequently as necessary. The Manager shall be informed of special situations affecting Trust investments including substantial withdrawal or funding pattern changes and changes in investment policy guidelines and objectives.

     The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated as of January 3, 2008:

		Pension				Other Post-Retirement
		Benefits				Employee Benefits
2008		$	527			$	114
2009			602				106
2010			711				77
2011			820				90
2012			955				98
2013 to 2017			7,661				347
Total		$	11,276			$	832

12. Partners’ Capital

     On November 20, 2007, the Partnership completed an offering of its common units in which it sold 2,800,000 common units to the underwriters of the offering at a price to the public of $36.98 per common unit. This issuance was made pursuant to the Partnership’s Registration Statement on Form S-3 (File No. 333-145657) declared effective by the Securities and Exchange Commission on November 9, 2007. The proceeds received by the Partnership (net of underwriting discounts, commissions and expenses but before its general partner’s capital contribution) from this offering was $98,206. The use of proceeds from the offering was to: (i) repay all its borrowings under its revolving credit facility, which were approximately $59,300 on November 20, 2007, (ii) fund approximately $25,100 of the purchase price for the Penreco acquisition and (iii) to the extent available, for general partnership purposes. Underwriting discounts totaled $4,401. The general partner contributed $2,113 to retain its 2% general partner interest.

     Calumet’s distribution policy is defined in the Partnership Agreement. During the three months ended March 31, 2008 and 2007, the Company made distributions of $21,738 and $18,673, respectively, to its partners.

13. Segments and Related Information

a. Segment Reporting

     Under the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company has two reportable segments: Specialty Products and Fuel Products. The Specialty Products segment, which includes Penreco from the date of acquisition, produces a variety of lubricating oils, solvents and waxes. These products are sold to customers who purchase these products primarily as raw material components for basic automotive, industrial and consumer goods. The Fuel Products segment produces a variety of fuel and fuel-related products including gasoline, diesel and jet fuel. Because of the similar economic characteristics, certain operations have been aggregated for segment reporting purposes.

     The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that the Company evaluates segment performance based on income from operations. The Company accounts for intersegment sales and transfers at cost plus a specified mark-up. Reportable segment information is as follows:

		Specialty				Fuel				Combined								Consolidated
Three Months Ended March 31, 2008		Products				Products				Segments				Eliminations				Total
Sales:
External customers		$	378,479			$	216,244			$	594,723			$	—			$	594,723
Intersegment sales			257,102				11,051				268,153				(268,153	)			—
Total sales		$	635,581			$	227,295			$	862,876			$	(268,153	)		$	594,723
Depreciation and amortization			11,680				—				11,680				—				11,680
Income from operations			(9,059	)			10,503				1,444				—				1,444
Reconciling items to net income:
Interest expense																			(5,166	)
Interest income																			216
Debt extinguishment costs																			(526	)
Loss on derivative instruments																			693
Other																			(45	)
Income tax expense																			(8	)
Net income																		$	(3,392	)
Capital expenditures		$	90,274			$				$	90,274			$				$	90,274

		Specialty				Fuel				Combined								Consolidated
Three Months Ended March 31, 2007		Products				Products				Segments				Eliminations				Total
Sales:
External customers		$	201,753			$	149,360			$	351,113			$	—			$	351,113
Intersegment sales			124,891				7,805				132,696				(132,696	)			—
Total sales		$	326,644			$	157,165			$	483,809			$	(132,696	)		$	351,113
Depreciation and amortization			4,541				—				4,541				—				4,541
Income from operations			22,574				12,401				34,975				—				34,975
Reconciling items to net income:
Interest expense																			(1,015	)
Interest income																			991
Loss on derivative instruments																			(6,513	)
Other																			(178	)
Income tax expense																			(50	)
Net income																		$	28,210
Capital expenditures		$	41,734			$	—			$	41,734			$	—			$	41,734