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 September 30, 2006.

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

FOR THE TRANSITION PERIOD FROM           TO

Calumet Specialty Products Partners, L.P.

Delaware		37-1516132
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o           Accelerated filer o           Non-accelerated filer þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o Noþ

     At November 13, 2006, the registrant had 16,366,000 common units and 13,066,000 subordinated units outstanding.

 

 

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
FORM 10-Q — SEPTEMBER 30, 2006 QUARTERLY REPORT

Table of Contents

		Page
Part I
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets			4
Unaudited Condensed Consolidated Statements of Operations			5
Unaudited Condensed Consolidated Statements of Partners’ Capital			6
Unaudited Condensed Consolidated Statements of Cash Flows			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			35
Part II
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			37
Item 4. Submission of Matters to a Vote of Security Holders			37
Item 5. Other Information			37
Item 6. Exhibits			38
Letter Amendment, to ISDA Master Agreement
Section 302 Certification
Section 302 Certification
Section 1350 Certification

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 expected completion date, the estimated cost, and the resulting increases in production levels, (ii) expected settlements with the Louisiana Department of Environmental Quality (“LDEQ”) or other environmental liabilities, (iii) the estimated date for obtaining the air permit for the Shreveport refinery expansion project, and (iv) the estimate of when our increased costs associated with the usage of certain gasoline blendstocks will end, 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 Annual Report on Form 10-K filed on March 20, 2006. 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 results of our hedging activities;
	•		the availability of, and our ability to consummate, acquisition or combination opportunities;
	•		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 crude oil price fluctuations;
	•		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 Item 1A “Risk Factors” and Item 2 “Quantitative and Qualitative Disclosures About Market Risk.” Except as required by applicable securities laws, we do not intend to update these forward-looking statements and information.

     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 to “Predecessor” in this Form 10-Q refer to Calumet Lubricants Co., Limited Partnership. The results of operations for the nine months ended September 30, 2006 for Calumet include the results of operations of the Predecessor for the period of January 1, 2006 through January 31, 2006.

PART I

Item 1. Financial Statements

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

		Calumet				Predecessor
		September 30, 2006				December 31, 2005
		(unaudited)
		(In thousands)
ASSETS
Current assets:
Cash		$	100,282			$	12,173
Accounts receivable:
Trade, less allowance for doubtful accounts of $850 and $750, respectively			115,461				109,757
Other			6,259				5,537
			121,720				115,294
Inventories			98,422				108,431
Prepaid expenses			2,258				10,799
Derivative assets			15,932				3,359
Deposits and other current assets			5,854				8,851
Total current assets			344,468				258,907
Property, plant and equipment, net			158,889				127,846
Other noncurrent assets, net			3,485				12,964
Total assets		$	506,842			$	399,717
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable		$	81,485			$	44,759
Accrued salaries, wages and benefits			4,467				8,164
Turnaround costs			4,837				2,679
Taxes payable			8,083				4,209
Other current liabilities			2,861				2,418
Current portion of long-term debt			500				500
Distributions payable			16,771				—
Derivative liabilities			9,490				30,449
Total current liabilities			128,494				93,178
Long-term debt, less current portion			49,159				267,485
Total liabilities			177,653				360,663
Commitments and contingencies
Partners’ capital:
Predecessor partners’ capital		$	—			$	38,557
Common unitholders (16,366,000 units issued and outstanding)			261,420				—
Subordinated unitholders (13,066,000 units issued and outstanding)			30,152				—
General partner’s interest			3,348				—
Accumulated other comprehensive income			34,269				497
Total partners’ capital			329,189				39,054
Total liabilities and partners’ capital		$	506,842			$	399,717

See accompanying notes to unaudited condensed consolidated financial statements.

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

		Calumet				Predecessor				Calumet				Predecessor
		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		(In thousands except per unit data)
		2006				2005				2006				2005
Sales		$	444,747			$	363,870			$	1,272,366			$	894,981
Cost of sales			393,601				325,116				1,112,195				799,574
Gross profit			51,146				38,754				160,171				95,407
Operating costs and expenses:
Selling, general and administrative			4,752				3,600				14,891				11,998
Transportation			16,002				13,550				44,504				33,544
Taxes other than income taxes			957				557				2,774				2,037
Other			313				286				597				618
Restructuring, decommissioning and asset impairments			—				(6	)			—				2,159
Operating income			29,122				20,767				97,405				45,051
Other income (expense):
Interest expense			(1,705	)			(6,816	)			(7,838	)			(16,771	)
Interest income			1,369				29				1,614				106
Debt extinguishment costs			—				—				(2,967	)			—
Realized loss on derivative instruments			(9,810	)			(1,415	)			(25,630	)			(812	)
Unrealized (loss) gain on derivative instruments			16,780				(51,975	)			(61	)			(48,412	)
Other			(19	)			4				(35	)			21
Total other income (expense)			6,615				(60,173	)			(34,917	)			(65,868	)
Net income (loss) before income taxes			35,737				(39,406	)			62,488				(20,817	)
Income tax expense			64				—				128				—
Net income (loss)		$	35,673			$	(39,406	)		$	62,360			$	(20,817	)
Allocation of net income:
Net income applicable to Predecessor for the period through January 31, 2006			—								4,408
Net income applicable to Calumet			35,673								57,952
Minimum quarterly distribution to common unitholders			(7,365	)							(17,130	)
General partner’s incentive distribution rights			(8,481	)							(11,752	)
General partner’s interest in net income			(297	)							(543	)
Common unitholders’ share of income in excess of minimum quarterly distribution			(7,590	)							(11,521	)
Limited partners’ interest in net income			11,940								17,006
Basic and diluted net income per limited partner unit:
Common		$	0.92							$	1.97
Subordinated		$	0.91							$	1.30
Weighted average limited partner common units outstanding — basic and diluted			16,187								14,068
Weighted average limited partner subordinated units outstanding — basic and diluted			13,066								13,066

See accompanying notes to unaudited condensed consolidated financial statements.

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

						Accumulated Other				Total				Partners’ Capital
		Predecessor				Comprehensive				Comprehensive				General				Limited Partners
		Partners’ Capital				Income (Loss)				Income				Partner				Common				Subordinated				Total
		(In thousands)
Balance at December 31, 2005		$	38,557			$	497							$	—			$	—			$	—			$	39,054
Comprehensive income through January 31, 2006:
Net income through January 31, 2006			4,408							$	4,408																4,408
Hedge (gain)/loss reclassified to net income							(497	)																			(497	)
Change in fair value of cash flow hedges through January 31, 2006							1,578				1,578																1,578
Comprehensive income through January 31, 2006											5,986
Distributions to Predecessor partners			(6,900	)																							(6,900	)
Assets and liabilities not contributed to Calumet			(5,626	)																							(5,626	)
Allocation of Predecessor’s capital			(30,439	)											609				9,128				20,702				—
Proceeds from initial public offering, net																			138,743								138,743
Contribution from Calumet GP, LLC															375												375
Comprehensive income from February 1, 2006 through September 30, 2006:
Net income from February 1, 2006 through September 30, 2006											57,952				1,159				30,356				26,437				57,952
Change in fair value of cash flow hedges from February 1, 2006 through September 30, 2006			—				32,691				32,691				—				—				—				32,691
Comprehensive income from February 1, 2006 through September 30, 2006											90,643
Total comprehensive income										$	96,629
Proceeds from follow-on public offering, net																			103,479								103,479
Contribution from Calumet GP, LLC															2,218												2,218
Distributions to partners															(1,013	)			(20,286	)			(16,987	)			(38,286	)
Balance at September 30, 2006		$	—			$	34,269							$	3,348			$	261,420			$	30,152			$	329,189

See accompanying notes to unaudited condensed consolidated financial statements.

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

		Calumet				Predecessor
		For the Nine Months Ended
		September 30,
		(In thousands)
		2006				2005
Operating activities
Net income (loss)		$	62,360			$	(20,817	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			8,456				7,414
Provision for doubtful accounts			122				195
Loss (gain) on disposal of property, plant and equipment			78				(16	)
Restructuring, decommissioning and asset impairments			—				1,693
Unrealized loss on derivative instruments			61				48,412
Debt extinguishment costs			2,967				—
Changes in assets and liabilities:
Accounts receivable			(6,639	)			(65,077	)
Inventories			10,009				(50,114	)
Prepaid expenses			8,541				3,079
Derivative activity			178				2,606
Deposits and other current assets			2,997				(17,701	)
Other noncurrent assets			4,113				(1,387	)
Accounts payable			36,726				(12,333	)
Accrued salaries, wages and benefits			(3,697	)			2,395
Turnaround costs			2,158				714
Taxes payable			4,007				3,933
Other current liabilities			621				(765	)
Net cash provided by (used in) operating activities			133,058				(97,769	)
Investing activities
Additions to property, plant and equipment			(39,923	)			(9,575	)
Proceeds from disposal of property, plant and equipment			158				11
Net cash used in investing activities			(39,765	)			(9,564	)
Financing activities
(Repayment of) proceeds from borrowings — credit agreements with third parties, net			(218,326	)			81,789
Proceeds from borrowings — credit agreement with Predecessor limited partners, net			—				17,540
Debt issuance costs			—				(44	)
Proceeds from initial public offering, net			138,743				—
Proceeds from follow-on public offering, net			103,479				—
Contributions from Calumet GP, LLC			2,593				—
Cash distribution to Calumet Holding, LLC			(3,258	)			—
Distributions to Predecessor partners			(6,900	)			(7,285	)
Distributions to partners			(21,515	)			—
Net cash provided by (used in) financing activities			(5,184	)			92,000
Net increase (decrease) in cash			88,109				(15,333	)
Cash at beginning of period			12,173				18,087
Cash at end of period		$	100,282			$	2,754
Supplemental disclosure of cash flow information
Interest paid		$	9,933			$	13,933
Taxes paid		$	116			$	—

See accompanying notes to unaudited condensed consolidated financial statements.

CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except operating, unit and per unit data)

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. On July 5, 2006, the Partnership completed a follow-on public offering of its common units. See Note 8 for further discussion of the units sold and proceeds from these offerings. As of September 30, 2006, we have 16,366,000 common units, 13,066,000 subordinated units, and 600,653 general partner equivalent units outstanding. The general partner owns 2% of Calumet while the remaining 98% is owned by limited partners. Calumet is engaged in the production and marketing of crude oil-based specialty lubricating oils, fuels, solvents and waxes. Calumet owns refineries located in Princeton, Louisiana, Cotton Valley, Louisiana, and Shreveport, Louisiana, and a terminal located in Burnham, Illinois.

     The unaudited condensed consolidated financial statements of the Company as of September 30, 2006 and for the three and nine months ended September 30, 2006 and 2005 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 and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed on March 20, 2006.

2. New Accounting Pronouncements

     In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the “Interpretation”), an interpretation of FASB Statement No. 109. The Interpretation clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position to be taken or expected to be taken in a tax return. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company does not anticipate that this Interpretation will have a material effect on its financial position, results of operations or cash flow.

     In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. AUG AIR-1, Accounting for Planned Major Maintenance Activities (the “Position”), which amends certain provisions in the AICPA Industry Audit Guides, Audits of Airlines, and APB Opinion No. 28, Interim Financial Reporting. The Position prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities (turnaround costs) and requires the use of the direct expensing method, built-in overhaul method, or deferral method. The Position is effective for fiscal years beginning after December 15, 2006. The Company has not yet completed its assessment of the impact of this statement on our financial position, results of operations, or cash flow.

     In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, Fair Value Measurements (the “Statement”). The Statement applies to assets and liabilities required or permitted to be measured at fair value under other accounting pronouncements. The Statement defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair value, but does not provide guidance whether assets and liabilities are required or permitted to be measured at fair value. The Statement is effective for fiscal years beginning after November 15, 2007. The Company does not anticipate that this Statement will have a material effect on its financial position, results of operations, or cash flow.

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:

		Calumet				Predecessor
		September 30,				December 31,
		2006				2005
Raw materials		$	24,269			$	28,299
Work in process			24,160				29,737
Finished goods			49,993				50,395
		$	98,422			$	108,431

     The replacement cost of these inventories, based on current market values, would have been $54,031 and $47,763 higher at September 30, 2006 and December 31, 2005, respectively.

4. Shreveport Refinery Expansion

     The Company commenced an expansion project at its Shreveport refinery during the second quarter of 2006. As of September 30, 2006, the Company had capital expenditures of $32,514 related to this expansion project, which is recorded to construction-in-progress, a component of property, plant and equipment. Construction is expected to begin during the fourth quarter of 2006. Management has estimated that the Company will incur approximately $7,500 and $110,000 of additional capital expenditures in 2006 and 2007, respectively, related to the expansion project. Management currently estimates the total cost of the Shreveport refinery expansion project will be approximately $150,000, which represents a $40,000 increase over our previously disclosed estimate. The increase in the estimated cost of the expansion project is primarily due to escalation in construction costs.

5. Derivatives

     The Company uses 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 diesel, gasoline and jet fuel, and payment of interest. In accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, the Company recognizes all derivative transactions as either assets or liabilities at fair value on the balance sheet. 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. 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 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. For the quarter ended September 30, 2006, the Company has recorded a derivative loss of $1,907 to sales and a derivative gain of $1,068 to cost of sales. An interest rate swap loss of $2 for the quarter ended September 30, 2006 was recorded to interest expense. For the 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 derivative asset or liability for the period is recorded to unrealized (loss) gain on derivative instruments in the statements of operations. The Company does not account for fuel products margin swap or collar contracts (“crack spread swaps or collars”) as cash flow hedges. Upon the settlement of derivatives not designated as hedges, the gain or loss for the period is recorded to realized loss on derivative instruments in the 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 nine months ended September 30, 2006, was a loss of $4,451 which was recorded to unrealized (loss) gain on derivative instruments. The effective portion of the hedges classified in accumulated other comprehensive income (loss) is $34,269 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:

Year
2006		$	(3,135	)
2007			9,415
2008			9,876
2009			7,806
2010			10,474
2011			(28	)
2012			(139	)
Total		$	34,269

     The Company is exposed to credit risk in the event of nonperformance with our counterparties on these derivative transactions. The Company does not expect nonperformance on any derivative contract.

     Crude Oil Collar Contracts

     The Company utilizes combinations of options to manage crude oil price risk and volatility of cash flows in its specialty products segment. These combinations of options are designated as cash flow hedges of the future purchase of crude oil under SFAS 133. The Company’s policy is generally to enter into crude oil derivative contracts for a period no greater than three to six months forward and for 50% to 75% of anticipated crude oil purchases related to our specialty products production. At September 30, 2006, the Company had the following derivatives related to crude oil purchases.

						Average				Average				Average				Average
						Lower Put				Upper Put				Lower Call				Upper Call
Crude Oil Put/Call Spread Contracts Expiration Dates		Barrels				($/Bbl)				($/Bbl)				($/Bbl)				($/Bbl)
October 2006			248,000			$	62.38			$	72.38			$	82.38			$	92.38
November 2006			240,000				61.63				71.63				81.63				91.63
December 2006			248,000				52.16				62.16				72.16				82.16
Totals			736,000
Average price						$	58.69			$	68.69			$	78.69			$	88.69

     At December 31, 2005, the Company had the following derivatives related to crude oil purchases.

						Average				Average				Average				Average
						Lower Put				Upper Put				Lower Call				Upper Call
Crude Oil Put/Call Spread Contracts Expiration Dates		Barrels				($/Bbl)				($/Bbl)				($/Bbl)				($/Bbl)
January 2006			248,000			$	46.02			$	55.57			$	65.57			$	75.57
February 2006			224,000				46.13				55.71				65.71				75.71
March 2006			248,000				45.64				55.41				65.41				75.41
April 2006			240,000				45.85				55.58				65.58				75.58
Totals			960,000
Average price						$	45.90			$	55.56			$	65.56			$	75.56

  Crude Oil Swap Contracts

     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. Effective April 1, 2006, these contracts were designated as cash flow hedges of the future purchase of crude oil under SFAS 133. At September 30, 2006, the Company had the following derivatives related to crude oil purchases in its fuel products segment.

						Crude
Crude Oil Swap Contracts Expiration Dates		Barrels				($/Bbl)
Fourth Quarter 2006			818,000			$	54.51
First Quarter 2007			1,710,000				65.14
Second Quarter 2007			1,728,000				64.68
Third Quarter 2007			1,742,000				65.51
Fourth Quarter 2007			1,742,000				65.51
Calendar Year 2008			6,404,000				67.41
Calendar Year 2009			6,752,500				66.02
Calendar Year 2010			4,745,000				67.60
Calendar Year 2011			271,500				65.62
Totals			25,913,000
Average price						$	66.07

   Fuels Product 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 fuels sales.

          Diesel Swap Contracts

     Effective April 1, 2006, these contracts were designated as cash flow hedges of the future sale of either diesel or jet fuel under SFAS 133. At September 30, 2006, the Company had the following derivatives related to diesel and jet fuel sales in its fuel products segment.

						Diesel
Diesel Swap Contracts Expiration Dates		Barrels				($/Bbl)
Fourth Quarter 2006			409,000			$	63.09
First Quarter 2007			1,080,000				81.10
Second Quarter 2007			1,092,000				80.74
Third Quarter 2007			1,102,000				81.36
Fourth Quarter 2007			1,102,000				81.36
Calendar Year 2008			3,294,000				82.50
Calendar Year 2009			3,832,500				80.61
Calendar Year 2010			2,555,000				81.72
Calendar Year 2011			181,000				76.57
Totals			14,647,500
Average price						$	80.85

          Gasoline Swap Contracts

     Effective April 1, 2006, these contracts were designated as cash flow hedges of the future sale of gasoline under SFAS 133. At September 30, 2006, the Company had the following derivatives related to gasoline sales in its fuel products segment.

						Gasoline
Gasoline Swap Contracts Expiration Dates		Barrels				($/Bbl)
Fourth Quarter 2006			409,000			$	63.09
First Quarter 2007			630,000				72.09
Second Quarter 2007			636,000				71.38
Third Quarter 2007			640,000				72.67
Fourth Quarter 2007			640,000				72.67
Calendar Year 2008			3,110,000				76.17
Calendar Year 2009			2,920,000				73.45
Calendar Year 2010			2,190,000				75.27
Calendar Year 2011			90,500				70.87
Totals			11,265,500
Average price						$	73.88

   Fuels Product Margin (Crack Spread) Swap and Collar Contracts

     Additionally, the Company utilizes combinations of options and forward swap contracts to manage fuels product margin (crack spread) price risk and volatility of cash flows. These contracts are not designated as hedges under SFAS 133. For purposes of these swap contracts, crack spread is defined as the difference between the selling price of one barrel of refined product (gasoline or diesel) less the price of one barrel of crude oil, with all component pricing based on standard market indices as defined in the contracts. The Company enters into various combinations of these swap contracts to achieve an approximate 2/1/1 crack spread ratio, which means two barrels of crude oil and one barrel each of gasoline and diesel. At September 30, 2006, the Company had the following fuels product margin derivatives related to its fuel products segment.

						Crack Spread
Crack Spread Swap Contracts Expiration Dates		Barrels				($/Bbl)
Fourth Quarter 2006			225,000			$	7.05

     At December 31, 2005, the Company had the following derivative positions related its fuel products segment. These derivatives have been restructured as of March 31, 2006 as discussed above.

						Crack Spread
Crack Spread Swap Contracts Expiration Dates		Barrels				($/Bbl)
First Quarter 2006			1,035,000			$	9.00
Second Quarter 2006			1,039,000				8.98
Third Quarter 2006			1,043,000				8.65
Fourth Quarter 2006			1,043,000				8.28
First Quarter 2007			1,260,000				11.59
Second Quarter 2007			1,273,000				11.56
Third Quarter 2007			1,282,000				11.60
Fourth Quarter 2007			1,282,000				11.60
Totals			9,257,000
Average price						$	10.30

     The Company enters into fuels product margin (crack spread) collar contracts with counterparties whereby the Company purchases a crack spread put option while simultaneously selling a crack spread call option. These crack spread collar contracts require no net premium to be paid by the Company to the counterparties as the premium for the purchased crack spread put option is offset by the premium for the sold crack spread call option. These contracts are not designated as hedges under SFAS 133.

     Fuels product margin collar contracts consisted of the following at September 30, 2006:

Put Option

Call Option

Strike Price

Strike Price

Crack Spread Collar Contracts Expiration Dates

Barrels

($/Bbl)

($/Bbl)

Fourth Quarter 2006

685,000

$

6.30

$

8.30

     Fuels product margin collar contracts consisted of the following at December 31, 2005:

						Put Option				Call Option
						Strike Price				Strike Price
Crack Spread Collar Contracts Expiration Dates		Barrels				($/Bbl)				($/Bbl)
First Quarter 2006			675,000			$	7.29			$	9.62
Second Quarter 2006			680,000				7.82				10.15
Third Quarter 2006			685,000				7.59				9.59
Fourth Quarter 2006			685,000				6.30				8.30
Totals			2,725,000
Average price						$	7.25			$	9.41

Natural Gas Swap Contracts

     The Company utilizes forward 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 under SFAS 133. 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 requirements. At September 30, 2006, the Company had the following derivatives related to natural gas purchases.

Natural Gas Swap Contracts Expiration Dates		MMbtu				$/MMbtu
Fourth Quarter 2006			800,000			$	8.16
First Quarter 2007			600,000			$	8.87
Third Quarter 2007			100,000			$	7.99
Fourth Quarter 2007			150,000			$	7.99
First Quarter 2008			150,000			$	7.99
Totals			1,800,000
Average price						$	8.36

     At December 31, 2005, the Company had the following derivatives related to natural gas purchases.

Natural Gas Swap Contracts Expiration Dates		MMbtu				$/MMbtu
First Quarter 2006			600,000			$	9.84

Interest Rate Swap Contracts

     The Company has entered into a forward swap contract to manage interest rate risk related to its variable rate term loan. The Company hedges 85% of its future interest payments related to this term loan indebtedness. This swap contract is designated as a cash flow hedge of the future payment of interest under SFAS 133. The interest rate swap contract is for 85% of the outstanding term loan balance over its remaining term, with LIBOR fixed at 5.44% per annum. The Company’s term loan facility requires quarterly interest payments at LIBOR plus 3.50% per annum, which was 8.89% as of September 30, 2006.

6. Commitments and Contingencies

     From time to time, the Company is a party to certain claims and litigation incidental to its 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 Louisiana Department of Environmental Quality (“LDEQ”) has proposed penalties and supplemental projects totaling $191 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; and (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. The Company is currently in settlement negotiations with the LDEQ to resolve these matters, as well as a number of similar matters at the Princeton refinery, for which no penalty has yet been proposed. Management is of the opinion that the ultimate resolution of these matters will not have a material adverse impact on the Company’s financial position or results of operations.

     The Company has recently entered into 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. The Company is only in the beginning stages of discussion with the LDEQ and, consequently, while no significant compliance and enforcement expenditures have been requested as a result of the Company’s discussions, the Company anticipates that it will ultimately be required to make emissions reductions requiring capital investments and/or increased operating expenditures at the Company’s three Louisiana refineries.

     On July 31, 2006, the Company filed a permit application requesting an air quality permit from the LDEQ which the Company must obtain prior to commencing construction of the Shreveport refinery expansion. Based upon its analysis, the Company expects that it can obtain the state air quality permit during the fourth quarter of 2006 and commence construction at the Shreveport refinery. However, if the Company is unable to obtain the state air quality permit, it will be required to obtain a federal Prevention of Significant Deterioration (“PSD”) permit and it expects that the start of construction would be significantly delayed.

     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 $1.0 million of the first $5.0 million of indemnified costs for certain of the specified environmental liabilities.

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 September 30, 2006 and December 31, 2005, the Company had outstanding standby letters of credit of $58,671 and $37,746, respectively. As discussed in Note 7 below, as of September 30, 2006 the Company also had a $50,000 letter of credit outstanding under the letter of credit facility for its fuels hedging program.

7. Long-Term Debt

     Long-term debt consisted of the following:

		Calumet				Predecessor
		September 30,				December 31,
		2006				2005
Borrowings under revolving credit agreement with third-party lenders, interest at prime (8.25% and 7.25%, respectively), interest payments monthly, borrowings due December 2010		$	34			$	92,985
Borrowings under term loan credit agreement with third-party lenders, interest at LIBOR plus 3.50% (8.89% and 7.99%, respectively), interest and principal payments quarterly with final payment due December 2012			49,625				175,000
Total long-term debt			49,659				267,985
Less current portion of long-term debt			500				500
		$	49,159			$	267,485

     On December 9, 2005, the Predecessor paid off its existing indebtedness by entering into a $225,000 senior secured revolving credit facility due December 2010 and a $225,000 senior secured first lien credit facility consisting of a $175,000 term loan facility and a $50,000 letter of credit facility to support fuels hedging, which bears interest at 3.50%. These facilities contain financial covenants including a fixed charge coverage ratio and a consolidated leverage ratio. The revolving credit facility borrowings are limited by advance rates of percentages of eligible accounts receivable and inventory as defined by the revolving credit agreement.

The maximum borrowing capacity at September 30, 2006 was $183,170, with $124,464 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. The net proceeds of our initial public offering (see Note 8) were used to repay indebtedness and accrued interest under the first lien term loan facility in the amount of approximately $125,700 and repay indebtedness under the secured revolving credit facility in the amount of approximately $13,100. A portion of the proceeds of our follow-on public offering (see Note 8) were used to repay indebtedness under the secured revolving credit facility, which was $9,243 as of June 30, 2006. After these repayments, the term loan requires quarterly principal payments of $125 through December 2011 and quarterly principal payments of approximately $11,800 thereafter until maturing in December 2012. The Company is in compliance with all covenants and restrictions defined in these credit agreements. As of September 30, 2006, the Company had issued the entire $50,000 letter of credit under the fuels hedging facility.

     As of September 30, 2006, maturities of the Company’s long-term debt are as follows:

Year		Maturity
2006		$	125
2007			500
2008			500
2009			500
2010			534
2011 and thereafter		$	47,500
Total		$	49,659

     On June 19, 2006 and June 22, 2006, the Company amended its credit agreements to increase the amount of permitted capital expenditures with respect to the Shreveport refinery expansion project as well as annual capital expenditure limitations.

8. Partners’ Capital

     On January 31, 2006, the Partnership completed the initial public offering of its common units and sold 5,699,900 of those units to the underwriters in the initial public offering at a price to the public of $21.50 per common unit. The Partnership also sold a total of 750,100 common units to certain relatives of the chairman of our general partner (the “Fehsenfeld Investors”) at a price of $19.995 per common unit. In addition, on February 8, 2006, the Partnership sold an additional 854,985 common units to the underwriters at a price to the public of $21.50 per common unit pursuant to the underwriters’ over-allotment option. Each of these issuances was made pursuant to the Partnership’s Registration Statement on Form S-1 (File No. 333-128880) declared effective by the Securities and Exchange Commission on January 29, 2006. The proceeds received by the Partnership (net of underwriting discounts and structuring fees and before expenses) from the sale of an aggregate of 7,304,985 units were approximately $144,400. The net proceeds were used to: (i) repay indebtedness and accrued interest under the first lien term loan facility in the amount of approximately $125,700, (ii) repay indebtedness under the secured revolving credit facility in the amount of approximately $13,100 and (iii) pay transaction fees and expenses in the amount of approximately $5,600. Underwriting discounts totaled approximately $11,600 (including certain structuring fees paid to certain of the underwriters of approximately $2,400).

     On July 5, 2006, the Partnership completed a follow-on public offering of its common units in which it sold 3,300,000 common units to the underwriters of the offering at a price to the public of $32.94 per common unit. This issuance was made pursuant to the Partnership’s Registration Statement on Form S-1 (File No. 333-134993) declared effective by the Securities and Exchange Commission on June 28, 2006. The proceeds received by the Partnership (net of underwriting discounts, commissions and expenses but before its general partner’s capital contribution) from the sale of an aggregate of 3,300,000 units were $103,479. The use of proceeds from the offering was to: (i) repay all of its borrowings under its revolving credit facility, which were approximately $9,243 as of June 30, 2006, (ii) fund the future construction and other start-up costs of the planned expansion project at the Shreveport refinery and (iii) to the extent available, for general partnership purposes. Underwriting discounts totaled $4,620. The general partner contributed $2,218 to retain its 2% general partner interest.

     The Predecessor’s policy was that distributions were limited to the amount necessary to pay each partner’s federal income tax and any state income tax on their share of partnership income. However, additional distributions to the partners could be made at the sole discretion of the general partner. During the year ended December 31, 2005, distributions of $7,300 were made to the Predecessor partners. In January 2006, the Predecessor made its final distribution of $6,900 to its partners. Subsequent to January 31, 2006, Calumet’s distribution policy is as defined in the Partnership Agreement. For the quarter ended June 30, 2006, the Company made distributions of $8,000 to its partners. For the quarter ended September 30, 2006, the Company made distributions of $13,515 to its partners.

     On September 28, 2006, the Company declared a quarterly cash distribution of $0.55 per unit on all outstanding units, or $16,771, for the quarter ended September 30, 2006. The distribution will be paid on November 14, 2006 to unitholders of record as of the close of business on November 4, 2006. This quarterly distribution of $0.55 per unit equates to $2.20 per unit on an annualized basis.

9. Earnings per Unit

     The Partnership calculates earnings per unit in accordance with SFAS 128, Earnings per Share, as interpreted by Emerging Issues Task Force Issue No. 03-06, Participating Securities and the Two-Class Method under FASB Statement No. 128. Under this approach, common and subordinated limited units represent separate classes of limited partner units that require two-class presentation under SFAS No. 128. Therefore, the Partnership calculates basic and diluted earnings per unit on a discrete quarterly basis assuming the minimum quarterly distribution, prorated if necessary, is paid on all common units outstanding and that all undistributed earnings or losses in the period are fully allocated to limited partner units and the general partner based on their contractual participation rights as if all of the earnings or losses for the period had been distributed.

10. 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 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.

     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 (in thousands):

		Specialty				Fuel				Combined								Consolidated
Three Months Ended September 30, 2006 (Calumet)		Products				Products				Segments				Eliminations				Total
Sales:
External customers		$	252,396			$	192,351			$	444,747			$	—			$	444,747
Intersegment sales			176,808				6,445				183,253				(183,253	)			—
Total sales		$	429,204			$	198,796			$	628,000			$	(183,253	)		$	444,747
Depreciation and amortization			2,822				—				2,822				—				2,822
Income from operations			19,659				9,463				29,122				—				29,122
Reconciling items to net income:
Interest expense																			(1,705	)
Interest income																			1,369
Debt extinguishment costs																			—
Loss on derivative instruments																			6,970
Other																			(19	)
Income tax expense																			(64	)
Net income																		$	35,673
Capital expenditures		$	17,470			$	—			$	17,470			$	—			$	17,470

		Specialty				Fuel				Combined								Consolidated
Three Months Ended September 30, 2005 (Predecessor)		Products				Products				Segments				Eliminations				Total
Sales:
External customers		$	189,779			$	174,091			$	363,870			$	—			$	363,870
Intersegment sales			153,764				4,941				158,705				(158,705	)			—
Total sales		$	343,543			$	179,032			$	522,575			$	(158,705	)		$	363,870
Depreciation and amortization			2,506				—				2,506				—				2,506
Income (loss) from operations			(4,280	)			25,047				20,767				—				20,767
Reconciling items to net loss:
Interest expense																			(6,816	)
Interest income																			29
Debt extinguishment costs																			—
Loss on derivative instruments																			(53,390	)
Other																			4
Net loss																		$	(39,406	)
Capital expenditures		$	1,243			$	—			$	1,243			$	—			$	1,243

		Specialty				Fuel				Combined								Consolidated
Nine Months Ended September 30, 2006 (Calumet)		Products				Products				Segments				Eliminations				Total
Sales:
External customers		$	727,383			$	544,983			$	1,272,366			$	—			$	1,272,366
Intersegment sales			516,920				27,350				544,270				(544,270	)			—
Total sales		$	1,244,303			$	572,333			$	1,816,636			$	(544,270	)		$	1,272,366
Depreciation and amortization			8,456				—				8,456				—				8,456
Income from operations			61,635				35,770				97,405				—				97,405
Reconciling items to net income:
Interest expense																			(7,838	)
Interest income																			1,614
Debt extinguishment costs																			(2,967	)
Loss on derivative instruments																			(25,691	)
Other																			(35	)
Income tax expense																			(128	)
Net income																		$	62,360
Capital expenditures		$	39,923			$	—			$	39,923			$	—			$	39,923

		Specialty				Fuel				Combined								Consolidated
Nine Months Ended September 30, 2005 (Predecessor)		Products				Products				Segments				Eliminations				Total
Sales:
External customers		$	499,094			$	395,887			$	894,981			$	—			$	894,981
Intersegment sales			382,250				8,499				390,749				(390,749	)			—
Total sales		$	881,344			$	404,386			$	1,285,730			$	(390,749	)		$	894,981
Depreciation and amortization			7,414				—				7,414				—				7,414
Income from operations			2,836				42,215				45,051				—				45,051
Reconciling items to net loss:
Interest expense																			(16,771	)
Interest income																			106
Debt extinguishment costs																			—
Loss on derivative instruments																			(49,224	)
Other																			21
Net loss																		$	(20,817	)
Capital expenditures		$	9,575			$	—			$	9,575			$	—			$	9,575

		Calumet				Predecessor
		September 30,				December 31,
		2006				2005
Segment assets:
Specialty products		$	882,676			$	606,023
Fuel products			574,545				375,153
Combined segments			1,457,221				981,176
Eliminations			(950,379	)			(581,459	)
Total assets		$	506,842			$	399,717

  b. Geographic Information

     International sales accounted for 10.4% of consolidated sales in the three months ended September 30, 2006. International sales accounted for less than 10% of consolidated sales for all other periods reported.

  c. Product Information

     The Company offers products primarily in four general categories consisting of fuels, lubricants, waxes and solvents. Other includes asphalt and other by-products. The following table sets forth the major product category sales (dollars in thousands):

		Calumet				Predecessor
		Three Months Ended September 30,
		2006				2005
Fuels		$	197,190			$	183,776
Lubricants			135,549				102,638
Solvents			55,350				41,467
Waxes			16,439				12,161
Other			40,219				23,828
Total sales		$	444,747			$	363,870

		Calumet				Predecessor
		Nine Months Ended September 30,
		2006				2005
Fuels		$	571,896			$	423,096
Lubricants			404,524				270,173
Solvents			159,742				103,962
Waxes			48,187				31,758
Other			88,017				65,992
Total sales		$	1,272,366			$	894,981

  d. Major Customers

     No customer represented 10% or greater of consolidated sales in each of the three and nine months ended September 30, 2006 and 2005.