Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 736K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 21K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 21K
12: R1 Cover Page HTML 72K
13: R2 Condensed Consolidated Balance Sheets HTML 114K
14: R3 Condensed Consolidated Balance Sheets HTML 25K
(Parenthetical)
15: R4 Unaudited Condensed Consolidated Income Statements HTML 81K
16: R5 Unaudited Condensed Consolidated Statements of HTML 53K
Comprehensive Income
17: R6 Unaudited Condensed Consolidated Statements of HTML 50K
Unitholders' Equity
18: R7 Unaudited Condensed Consolidated Statements of HTML 107K
Cash Flows
19: R8 Description of Business and Summary of Significant HTML 38K
Accounting Policies
20: R9 Revenue HTML 47K
21: R10 Leases HTML 22K
22: R11 Accumulated Other Comprehensive Loss, Net of Tax HTML 27K
23: R12 Inventories HTML 27K
24: R13 Credit Agreement HTML 40K
25: R14 Related Party Transactions HTML 23K
26: R15 Segment Reporting HTML 65K
27: R16 Financial Instruments and Off-Balance Sheet Risk HTML 144K
28: R17 Commitments and Contingencies HTML 25K
29: R18 Equity and Equity-Based Compensation HTML 52K
30: R19 Earnings Per Unit HTML 29K
31: R20 Partnership Distributions HTML 29K
32: R21 Subsequent Events HTML 22K
33: R22 Description of Business and Summary of Significant HTML 27K
Accounting Policies (Policies)
34: R23 Revenue (Tables) HTML 40K
35: R24 Accumulated Other Comprehensive Loss, Net of Tax HTML 27K
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37: R26 Credit Agreement (Tables) HTML 28K
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40: R29 Equity and Equity-Based Compensation (Tables) HTML 49K
41: R30 Earnings Per Unit (Tables) HTML 27K
42: R31 Partnership Distributions (Tables) HTML 28K
43: R32 Description of Business and Summary of Significant HTML 42K
Accounting Policies (Details)
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(Details)
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49: R38 Credit Agreement - Schedule of Debt (Details) HTML 34K
50: R39 Related Party Transactions (Details) HTML 33K
51: R40 Segment Reporting - Narrative (Details) HTML 50K
52: R41 Segment Reporting - Summary of Financial HTML 76K
Information for Partnership's Reportable Segments
(Details)
53: R42 Financial Instruments and Off-Balance Sheet Risk - HTML 26K
Narrative (Details)
54: R43 Financial Instruments and Off-Balance Sheet Risk - HTML 71K
Summary of Financial Assets and Financial
Liabilities of Partnership Measured at Fair Value
on Recurring Basis (Details)
55: R44 Financial Instruments and Off-Balance Sheet Risk - HTML 54K
Summary of Offsetting Arrangements (Details)
56: R45 Financial Instruments and Off-Balance Sheet Risk - HTML 26K
Summary of Realized and Unrealized Gains (Losses)
on Derivative Instruments for Commodity Risk
Management (Details)
57: R46 Financial Instruments and Off-Balance Sheet Risk - HTML 50K
Schedule of Gross Volume of Commodity Derivative
Instruments Outstanding (Details)
58: R47 Commitments and Contingencies (Details) HTML 26K
59: R48 Equity and Equity-Based Compensation - Narrative HTML 48K
(Details)
60: R49 Equity and Equity-Based Compensation - Summary of HTML 44K
Partnership's Unit Awards Subject to Vesting
(Details)
61: R50 Equity and Equity-Based Compensation Change in HTML 41K
Partnership Units (Details)
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63: R52 Partnership Distributions (Details) HTML 36K
64: R53 Subsequent Events (Details) HTML 23K
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(Exact name of registrant as specified in its charter)
iDelaware
i45-2637964
(State
of incorporation)
(I.R.S. Employer Identification No.)
i185 International Drive
iPortsmouth, iNew
Hampshirei03801
(Address of principal executive offices)
Registrant’s telephone number, including area code: (i800) i225-1560
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Units Representing Limited Partner Interests
iSRLP
iNew
York Stock Exchange
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. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
iAccelerated
filer
☒
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands unless otherwise stated)
1. iDescription
of Business and Summary of Significant Accounting Policies
Partnership Businesses
Sprague Resources LP (the “Partnership”) is a Delaware limited partnership formed on June 23, 2011 by Sprague Holdings and its General Partner and engages in the purchase, storage, distribution and sale of refined products and natural gas, and provides storage and handling services for a broad range of materials.
Unless the context otherwise requires, references to “Sprague Resources,” and the “Partnership,” refer to Sprague Resources LP and its subsidiaries; references to the "General Partner" refer to Sprague
Resources GP LLC; references to “Axel Johnson” or the "Sponsor" refer to Axel Johnson Inc. and its controlled affiliates, collectively, other than Sprague Resources, its subsidiaries and its General Partner; references to “Sprague Holdings” refer to Sprague Resources Holdings LLC, a wholly owned subsidiary of Axel Johnson and the owner of the General Partner.
The Partnership owns, operates and/or controls a network of refined products and materials handling terminals located in the Northeast United States and in Quebec, Canada. The Partnership also utilizes third-party terminals in the Northeast United States through which it sells or distributes refined products pursuant to rack, exchange and throughput agreements. The Partnership has ifour
reportable segments: refined products, natural gas, materials handling and other operations.
•The refined products segment purchases a variety of refined products, such as heating oil, diesel fuel, residual fuel oil, kerosene, jet fuel and gasoline - primarily from refining companies, trading organizations and producers - and sells them to wholesale and commercial customers.
•The natural gas segment purchases natural gas from natural gas producers and trading companies and sells and distributes natural gas to commercial and industrial customers.
•The materials handling segment offloads, stores and prepares for delivery a variety of customer-owned products, including asphalt, clay slurry, salt, gypsum, crude oil, residual fuel oil, coal, petroleum coke, caustic soda,
tallow, pulp, and heavy equipment.
•The other operations segment primarily includes the marketing and distribution of coal and certain commercial trucking activities.
See Note 2 - Revenue for a description of the Partnership's revenue activities within these business segments.
As of March 31, 2021, the Sponsor, through its ownership of Sprague Holdings, owned i16,058,484
common units representing i61.2% of the limited partner interest in the Partnership. Sprague Holdings also owns the General Partner, which in turn owns a non-economic interest in the Partnership. Sprague Holdings currently holds incentive distribution rights (“IDRs”) that entitle it to receive increasing percentages, up to a maximum of i50.0%,
of the cash the Partnership distributes from distributable cash flow in excess of $i0.7676 per unit per quarter ($i0.4744
prior to the consummation of the IDR Reset Election, as described below. The maximum distribution of i50% does not include any distributions that Sprague Holdings may receive on any limited partner units that it owns. See Note 12 - Earnings Per Unit and Note 13 - Partnership Distributions.
On February 11, 2021, Sprague Holdings provided notice to the Partnership that Sprague Holdings had made an IDR Reset Election (the “IDR Reset Election”),
as defined in the First Amended and Restated Agreement of Limited Partnership of the Partnership (as amended, the “Partnership Agreement”). Pursuant to the IDR Reset Election, Sprague Holdings relinquished the right to receive incentive distribution payments based on the minimum quarterly and target cash distribution levels set at the time of the Partnership’s initial public offering and the Partnership issued i3,107,248 common units to Sprague Holdings. Pursuant to the IDR Reset Election, the minimum quarterly distribution amount
increased from $i0.4125 per common unit per quarter to $i0.6675
per common unit per quarter and the levels at which the incentive distribution rights participate in distributions will be reset at higher amounts based on current common unit distribution rates and a formula in the Partnership Agreement. The IDR Reset Election was effective on March 5, 2021.
The Condensed Consolidated Financial Statements include the accounts of the Partnership and its wholly-owned subsidiaries. Intercompany transactions between the Partnership and its subsidiaries have been eliminated. The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim financial information. As permitted under those rules, certain notes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) to be included in annual financial statements have been condensed or omitted from these interim financial statements. These interim financial
statements should be read in conjunction with the consolidated financial statements and related notes of the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 5, 2021 (the “2020 Annual Report”).
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and the reported net sales and expenses in the income statement. Actual results could differ from those estimates. Among the estimates made by management are the fair value of derivative assets and liabilities, valuation of contingent consideration, valuation of reporting units within the goodwill impairment assessment, and if necessary long-lived asset impairments and environmental and legal obligations.
The
Condensed Consolidated Financial Statements included herein reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the Partnership’s consolidated financial position at March 31, 2021 and December 31, 2020, the consolidated results of operations for the three months ended March 31, 2021 and 2020, consolidated statement of changes in unitholders' equity for the three months ended March 31, 2021 and 2020, and the consolidated cash flows for the three months ended March 31, 2021 and 2020. The unaudited results of
operations for the interim periods reported are not necessarily indicative of results to be expected for the full year. Demand for some of the Partnership’s refined petroleum products, specifically heating oil and residual oil for space heating purposes, and to a lesser extent natural gas, are generally higher during the first and fourth quarters of the calendar year which may result in significant fluctuations in the Partnership’s quarterly operating results.
COVID-19
The global outbreak of the novel coronavirus (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,”
and created significant disruption of the financial markets.
Beginning in the quarterly period ended March 31, 2020, a wide array of sectors including but not limited to the energy, transportation, manufacturing and commercial, along with global economic conditions generally, have been significantly disrupted by the pandemic. A growing number of the Partnership’s customers in these industries have experienced substantial reductions in their operations due to travel restrictions as well as the extended shutdown of various businesses in affected regions. Furthermore, government measures have also led to a precipitous decline in fuel prices in response to concerns about demand for fuel.
The pandemic and associated impacts on economic activity had an adverse effect
on the Partnership’s operating results for the three months ended March 31, 2021, specifically, the Partnership has seen a decline in demand and related sales volume as large sectors of the global economy have been adversely impacted by the crisis. In response to these developments, the Partnership took swift action to ensure the safety of employees and other stakeholders, and initiated a number of initiatives relating to cost reduction, liquidity and operating efficiencies.
The Partnership makes estimates and assumptions that affect the reported amounts on these condensed consolidated financial statements and accompanying notes as of the date of the financial statements. The Partnership assessed accounting estimates that require consideration of forecasted financial information, including, but not limited to, the allowance for credit losses, the
carrying value of goodwill, intangible assets, and other long-lived assets. This assessment was conducted in the context of information reasonably available to the Partnership, as well as consideration of the future potential impacts of COVID-19 on the Partnership’s business as of March 31, 2021. At this time, the Partnership is unable to predict with specificity the ultimate impact of the crisis, as it will depend on the magnitude, severity and duration of the pandemic, as well as how quickly, and to what extent, normal economic and operating conditions resume on a sustainable basis globally. Accordingly, if the impact is more severe or longer in duration than the Partnership has assumed, such impact could potentially result in impairments and increases in credit allowances.
The Partnership's significant accounting policies are described in Note 1 - Description of Business and Summary of Significant Accounting Policies in the Partnership’s audited consolidated financial statements included in the 2020 Annual Report and are the same as are used in preparing these unaudited interim Condensed Consolidated Financial Statements.
i
Recent Accounting
Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848) which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform, if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. These amendments are effective immediately and may be applied prospectively to contract
modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Partnership has not currently adopted the optional expedients and exceptions provided in this guidance but continues to monitor and evaluate the impact of reference rate reform on relevant transactions.
2. iRevenue
Disaggregated
Revenue
In general, the Partnership's business segmentation is aligned according to the nature and economic characteristics of its products and customer relationships which provides meaningful disaggregation of each business segment's results of operations. The Partnership operates its businesses in the Northeast and Mid-Atlantic United States and Eastern Canada.
The refined products segment purchases a variety of refined products, such as heating oil, diesel fuel, residual fuel oil, kerosene, jet fuel and gasoline (primarily from refining companies, trading organizations and producers), and sells them to wholesale and commercial customers. Refined products revenue-producing activities are direct sales to customers, including throughput transactions. Revenue is recognized when the product is delivered. Revenue is not recognized
on exchange agreements, which are entered into primarily to acquire refined products by taking delivery of products closer to the Partnership’s end markets. Rather, net differentials or fees for exchange agreements are recorded within cost of products sold (exclusive of depreciation and amortization).
The natural gas segment purchases natural gas from natural gas producers and trading companies and sells and distributes natural gas to commercial and industrial customers. Natural gas revenue-producing activities are sales to customers at various points on natural gas pipelines or at local distribution companies (i.e., utilities). Natural gas sales not billed by month-end are accrued based upon gas volumes delivered.
The materials handling segment offloads, stores and prepares for delivery a variety
of customer-owned products. A majority of the materials handling segment revenue is generated under leasing arrangements with revenue recorded over the lease term generally on a straight-line basis. Contingent rentals are recorded as revenue only when billable under the arrangement. For materials handling contracts that are not leases, the Partnership recognizes revenue either at a point in time after services are performed or over a period of time if the services are performed in a continuous fashion over the period of the contract as these methods represent a faithful depiction of the transfer of goods and services.
The other operations segment primarily includes the marketing and distribution of coal and certain commercial trucking activities.
Revenue from other operations is recognized when the product is delivered or the services are rendered.
Contract liabilities primarily relate to advances or deposits received from the Partnership's customers before revenue is recognized. These amounts are included in accrued liabilities and amounted to $i7.5 million and $i9.4
million as of March 31, 2021 and December 31, 2020, respectively. A substantial portion of the contract liabilities as of December 31, 2020 remains outstanding as of March 31, 2021 as they are primarily deposits. The Partnership does not have any material contract assets as of March 31, 2021 or December 31, 2020.
3.
iLeases
From a lessor perspective, the Partnership has entered into various throughput and materials handling arrangements with customers. These arrangements are accounted for as operating leases as determined by the use terms and rights outlined in the underlying agreements. The throughput contracts are agreements with refined products wholesalers that use the Partnership’s terminal facilities for
a fee. The materials handling contracts are arrangements involving rentals of dedicated tanks, pads, land and small office locations for the purposes of storage, parking and other related uses. Income related to the operating leases with the Partnership as the lessor, as described above, totaled $i10.5 million and $i9.4
million for the three months ended March 31, 2021 and 2020, respectively.
4. iAccumulated Other Comprehensive Loss, Net of Tax
i
Amounts
included in accumulated other comprehensive loss, net of tax, consisted of the following:
Less:
current portion of working capital facilities
(i291,094)
(i358,685)
Long-term
portion
$
i387,400
$
i382,400
/
On
May 19, 2020, Sprague Operating Resources LLC (the “U.S. Borrower”) and Kildair Service ULC (the “Canadian Borrower” and, together with the U.S. Borrower, the “Borrowers”), wholly owned subsidiaries of the Partnership, entered into a second amended and restated credit agreement (the “Credit Agreement”), which replaced the amended and restated credit agreement, dated December 9, 2014. Upon the effective date, the Credit Agreement was accounted for as a modification of a syndicated loan arrangement with partial extinguishment to the extent of the decrease in the borrowing capacity. The Credit Agreement matures on May 19, 2022. The Partnership and certain of its subsidiaries
(the “Subsidiary Guarantors”) are guarantors of the obligations under the Credit Agreement. Obligations under the Credit Agreement are secured by substantially all of the assets of the Partnership, the Borrowers and the Subsidiary Guarantors (collectively, the “Loan Parties”).
As of March 31, 2021, the revolving credit facilities under the Credit Agreement contained, among other items, the following:
•A committed U.S. dollar revolving working capital facility of up to $i465.0
million, subject to borrowing base limits, to be used for working capital loans and letters of credit;
•An uncommitted U.S. dollar revolving working capital facility of up to $i200.0 million, subject to borrowing base limits and the sole discretion of the lenders, to be used for working capital loans and letters of credit;
•A multicurrency revolving working capital facility of up to $i85.0
million, subject to borrowing base limits, to be used for working capital loans and letters of credit;
•A revolving acquisition facility of up to $i430.0 million, subject to borrowing base limits, to be used for loans and letters of credit to fund capital expenditures and acquisitions and other general corporate purposes; and
•Subject to certain conditions, including the receipt of additional commitments
from lenders, the ability to increase the U.S. dollar revolving working capital facility to up to $i1.2 billion and the multicurrency revolving working capital facility to up to $i320.0
million, subject to a maximum combined increase in commitments for both facilities of $i470.0 million in the aggregate. Additionally, subject to certain conditions, the revolving acquisition facility may be increased to up to $i750.0
million.
Indebtedness under the Credit Agreement bears interest, at the Borrowers’ option, at a rate per annum equal to either (i) the Eurocurrency Rate (which is the LIBOR Rate for loans denominated in U.S. dollars and CDOR for loans denominated in Canadian dollars, in each case adjusted for certain regulatory costs, and in each case with a floor of i0.50%) for interest periods of one, two, three or six months plus a specified margin or (ii) an alternate rate plus a specified margin.
For
loans denominated in U.S. dollars, the alternate rate is the Base Rate which is the highest of (a) the U.S. Prime Rate as in effect from time to time, (b) the greater of the Federal Funds Effective Rate and the Overnight Bank Funding Rate as in effect from time to time plus i0.50% and (c) the one-month Eurocurrency Rate for U.S. dollars as in effect from time to time plus i1.00%.
For loans denominated in Canadian dollars, the alternate rate is the Prime Rate which is the higher of (a) the Canadian Prime Rate as in effect from time to time and (b) the one-month Eurocurrency Rate for U.S. dollars as in effect from time to time plus i1.00%.
The specified margins for the working capital revolving facilities vary based on the utilization of the working capital facilities as a whole, measured on a quarterly basis.
On or prior to November 19, 2020, the specified margin for (x) the committed U.S. dollar revolving working capital facility ranged from i1.25% to i1.75%
for loans bearing interest at the Base Rate and from i2.25% to i2.75% for loans bearing interest at the Eurocurrency Rate, (y) the uncommitted U.S. dollar revolving
working capital facility ranged from i1.00% to i1.50% for loans bearing interest at the Base Rate and i2.00%
to i2.50% for loans bearing interest at the Eurocurrency Rate and (z) the multicurrency revolving working capital facility ranged from i1.25% to i1.75%
for loans bearing interest at the Base Rate and i2.25% to i2.75% for loans bearing interest at the Eurocurrency Rate. After November
19, 2020, the specified margin for (x) the committed U.S. dollar revolving working capital facility will range from i0.75% to i1.25% for loans bearing interest
at the Base Rate and from i1.75% to i2.25% for loans bearing interest at the Eurocurrency Rate, (y) the uncommitted U.S. dollar revolving working capital facility
will range from i0.50% to i1.00% for loans bearing interest at the Base Rate and i1.50%
to i2.00% for loans bearing interest at the Eurocurrency Rate and (z) the multicurrency revolving working capital facility will range from i0.75% to i1.25%
for loans bearing interest at the Base Rate and i1.75% to i2.25% for loans bearing interest at the Eurocurrency Rate.
The
specified margin for the revolving acquisition facility varies based on the consolidated total leverage of the Loan Parties. The specified margin for the revolving acquisition facility will range from i1.25% to i2.25%
for loans bearing interest at the Base Rate and from i2.25% to i3.25% for loans bearing interest at the Eurocurrency Rate.
In
addition, the Borrowers will incur a commitment fee on the unused portion of (x) the committed U.S. dollar revolving working capital facility and multicurrency revolving working capital facility ranging from i0.375% to i0.500%
per annum and (y) the revolving acquisition facility at a rate ranging from i0.35% to i0.50% per annum. Overdue amounts bear interest at the applicable rates described
above plus an additional margin of i2%.
The working capital facilities are subject to borrowing base reporting and as of March 31, 2021 and December 31, 2020, had a borrowing base of $i436.4
million and $i540.0 million, respectively. As of March 31, 2021 and December 31, 2020, outstanding letters of credit related to the working capital facilities were $i52.6
million and $i77.3 million, respectively. As of March 31, 2021 and December 31, 2020, outstanding letters of credit related to the acquisition facility were $i14.5
million and $i15.4 million, respectively. As of March 31, 2021, excess availability under the working capital facilities was $i92.7
million and excess availability under the acquisition facility was $i28.1 million.
The weighted average interest rate was i3.0%
at both March 31, 2021 and December 31, 2020. No amounts are due under the Credit Agreement until the maturity date. However, the current portion at March 31, 2021 and December 31, 2020 represents the amounts of the working capital facility.
The Credit Agreement contains various covenants and restrictive provisions that, among other things, prohibit the Partnership from making distributions to unitholders if any event of default occurs or would result from the distribution or if the Loan Parties would not be in pro forma compliance with the financial covenants after giving effect to the distribution. In addition, the Credit Agreement contains various covenants that are usual and customary for a financing of this type, size and
purpose, including, but not limited to, covenants that require the Loan Parties to maintain: a minimum consolidated EBITDA-to fixed-charge ratio, a minimum consolidated net working capital amount and a maximum consolidated total leverage-to-EBITDA ratio. The Credit Agreement also limits the Loan Parties ability to incur debt, grant liens, make certain investments or acquisitions, enter into affiliate transactions and dispose of assets. The Partnership was in compliance with the covenants under the Credit Agreement at March 31, 2021.
The Credit Agreement also contains events of default that are usual and customary for a financing of this type, size and purpose including, among others, non-payment of principal, interest or fees, violation of certain covenants, material inaccuracy of representations and warranties, bankruptcy and insolvency events, cross-payment default and cross-acceleration,
material judgments and events constituting a change of control. If an event of default exists under the Credit Agreement, the lenders will be able to terminate the lending commitments, accelerate the maturity of the Credit Agreement and exercise other rights and remedies with respect to the collateral.
The General Partner charges the Partnership for the reimbursements of employee costs and related employee benefits and other overhead costs supporting the Partnership’s operations which amounted to $i26.3 million and $i23.5
million for the three months ended March 31, 2021 and 2020, respectively. Through the General Partner, the Partnership also participates in the Sponsor’s pension and other post-retirement benefits. At March 31, 2021 and December 31, 2020, total amounts due to the General Partner with respect to these benefits and overhead costs were $i10.9 million and $i13.7
million, respectively.
During the three months ended March 31, 2021, the Partnership recorded tank use and storage fee revenue of $i0.5 million from lease agreements entered into with Hartree Partners, LP ("Hartree"), a related party. In connection with these agreements, the Partnership made net inventory purchases from Hartree totaling $i68.0 million
during the three months ended March 31, 2021. Refer to Note 14 Subsequent Events regarding an additional transaction with Hartree.
8. iSegment Reporting
The Partnership has ifour
reportable segments that comprise the structure used by the chief operating decision makers (CEO and CFO) to make key operating decisions and assess performance. When establishing a reporting segment, the Partnership aggregates individual operating units that are in the same line of business and have similar economic characteristics. These reportable segments are refined products, natural gas, materials handling and other operations.
The Partnership's refined products segment purchases a variety of refined products, such as heating oil, diesel fuel, residual fuel oil, kerosene, jet fuel and gasoline (primarily from refining companies, trading organizations and producers), and sells them to its customers. The Partnership has wholesale customers who resell the refined products they purchase from the Partnership and commercial customers who consume the refined products they purchase. The Partnership’s wholesale customers consist
of home heating oil retailers and diesel fuel and gasoline resellers. The Partnership’s commercial customers include federal and state agencies, municipalities, regional transit authorities, drill sites, large industrial companies, real estate management companies, hospitals, educational institutions and asphalt paving companies. The refined products reportable segment consists of itwo operating segments.
The Partnership's natural gas segment purchases natural gas from natural gas producers and trading companies and
sells and manages distribution of natural gas to commercial and industrial customer locations across 13 states in the Northeast and Mid-Atlantic United States and Canada. The natural gas reportable segment consists of ione operating segment.
The Partnership's materials handling segment offloads, stores, and prepares for delivery a variety of customer-owned products, including asphalt, clay slurry, salt, gypsum, crude oil, residual fuel oil, coal, petroleum coke, caustic soda, tallow, pulp and heavy equipment. These
services are generally conducted under multi-year agreements as either fee-based activities or as leasing arrangements when the right to use an identified asset (such as storage tanks or storage locations) has been conveyed in the agreement. The materials handling reportable segment consists of itwo operating segments.
The Partnership's other operations segment primarily consists of the purchase, sale and distribution of coal, and commercial trucking activities unrelated to its refined products segment. Other operations
are not reported separately as they represent less than 10% of consolidated net sales and adjusted gross margin. The other operations reporting segment consists of itwo operating segments.
The Partnership evaluates segment performance based on adjusted gross margin, a non-GAAP measure, which is net sales less cost of products sold (exclusive of depreciation and amortization) increased by unrealized hedging losses and decreased by unrealized hedging gains, in each case with respect to refined products and natural gas
inventory, and natural gas transportation contracts.
Based on the way the business is managed, it is not reasonably possible for the Partnership to allocate the components of operating costs and expenses among the operating segments. There were no significant intersegment sales for any of the years presented below.
The Partnership had no single customer that accounted for more than 10% of total net sales for the three months ended March 31, 2021 and 2020, respectively. The Partnership’s foreign sales, primarily sales of refined products and natural gas to its customers in Canada, were $i66.2
million and $i53.1 million for the three months ended March 31, 2021 and 2020, respectively.
Change
in unrealized value on natural gas transportation contracts (4)
(i21,116)
i13,199
Operating
costs and expenses not allocated to operating segments:
Operating expenses
(i19,232)
(i20,812)
Selling,
general and administrative
(i25,239)
(i20,033)
Depreciation
and amortization
(i8,482)
(i8,598)
Operating
income
i58,399
i60,416
Other
income
i2
i—
Interest
income
i67
i175
Interest
expense
(i8,815)
(i11,286)
Income
tax provision
(i871)
(i2,571)
Net
income
$
i48,782
$
i46,734
(1)The
Partnership trades, purchases, stores and sells energy commodities that experience market value fluctuations. To manage the Partnership’s underlying performance, including its physical and derivative positions, management utilizes adjusted gross margin, which is a non-GAAP financial measure. Adjusted gross margin is also used by external users of the Partnership’s consolidated financial statements to assess the Partnership’s economic results of operations and its commodity market value reporting to lenders. In determining adjusted gross margin, the Partnership adjusts its segment results for the impact of the changes in unrealized gains and losses with regard to refined products and natural gas inventory, and natural gas transportation contracts, which are not marked to market for the purpose of recording unrealized gains or losses in net income. These adjustments align the unrealized
hedging gains and losses to the period in which the revenue from the sale of inventory, prepaid fixed forwards and the utilization of transportation contracts relating to those hedges is realized in net income. Adjusted gross margin has no impact on reported volumes or net sales.
(2)Reconciliation of adjusted gross margin to operating income, the most directly comparable GAAP measure.
(3)Inventory is valued at the lower of cost or net realizable value. The adjustment related to change in the unrealized gain on inventory which is not included in net income, represents the estimated difference between inventory valued at the lower of cost or net realizable value as compared to market values. The fair value of the derivatives the Partnership uses
to economically hedge its inventory declines or appreciates in value as the value of the underlying inventory appreciates or declines, which creates unrealized hedging losses (gains) with respect to the derivatives that are included in net income.
(4)Represents the Partnership’s estimate of the change in fair value of the natural gas transportation contracts which are not recorded in net income until the transportation is utilized in the future (i.e., when natural gas is delivered to the customer), as these contracts are executory contracts that do not qualify as derivatives. As the fair value of the natural gas transportation contracts
decline or appreciate, the offsetting physical or financial derivative will also appreciate or decline creating unmatched unrealized hedging (gains) losses in net income.
Due to the commingled nature and uses of the Partnership’s fixed assets, the Partnership does not
track its fixed assets between its refined products and materials handling operating segments or its other operations. There are ino significant fixed assets attributable to the natural gas reportable segment.
As of March 31, 2021, goodwill recorded for the refined products, natural gas, materials handling and other operations segments amounted to $i71.4
million, $i35.5 million, $i6.9 million and $i1.2
million, respectively.
9. iFinancial Instruments and Off-Balance Sheet Risk
As of March 31, 2021 and December 31, 2020, the carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximated fair value because of the short maturity of these instruments. As of March 31, 2021 and December 31, 2020, the carrying value of the Partnership’s margin deposits with brokers approximates fair value and consists of initial margin with futures transaction brokers, along with variation margin, which is paid or received on a daily basis, and is included in other current assets or other current liabilities. As of March 31, 2021 and December 31, 2020, the carrying value of the Partnership’s debt approximated fair value due to the variable interest nature of these instruments.
i
The
following table presents financial assets and financial liabilities of the Partnership measured at fair value on a recurring basis:
The Partnership utilizes derivative instruments consisting of futures contracts, forward contracts, swaps, options and other derivatives individually or in combination, to mitigate its exposure to fluctuations in prices of refined petroleum products and natural gas. The use of these derivative instruments within the Partnership's risk management policy may, on a limited basis, generate gains or losses from changes in market prices. The Partnership enters into futures and over-the-counter (“OTC”) transactions either on regulated exchanges or in the OTC market. Futures contracts
are exchange-traded contractual commitments to either receive or deliver a standard amount or value of a commodity at a specified future date and price, with some futures contracts based on cash settlement rather than a delivery requirement. Futures exchanges typically require margin deposits as security. OTC contracts, which may or may not require margin deposits as security, involve parties that have agreed either to exchange cash payments or deliver or receive the underlying commodity at a specified future date and price. The Partnership posts initial margin with futures transaction brokers, along with variation margin, which is paid or received on a daily basis, and is included in other current assets or other current liabilities. In addition, the Partnership may either pay or receive
margin based upon exposure with counterparties. Payments made by the Partnership are included in other current assets, whereas payments received by the Partnership are included in accrued liabilities. Substantially of all of the Partnership’s commodity derivative contracts outstanding as of March 31, 2021 will settle prior to September 30, 2022.
The Partnership enters into some master netting arrangements to mitigate credit risk with significant counterparties. Master netting arrangements are standardized contracts that govern all specified transactions with the same counterparty and allow the Partnership to terminate all contracts
upon occurrence of certain events, such as a counterparty’s default. The Partnership has elected not to offset the fair value of its derivatives, even where these arrangements provide the right to do so.
The Partnership’s derivative instruments are recorded at fair value, with changes in fair value recognized in net income each period. The Partnership’s fair value measurements are determined using the market approach and includes non-performance risk and time value of money considerations. Counterparty credit is considered for receivable balances, and the Partnership’s credit is considered for payable balances.
The Partnership determines fair value based on a hierarchy for the inputs used to measure the fair value of financial assets and liabilities based on the source of the input, which generally range from quoted prices for identical instruments in a principal trading market (Level
1) to estimates determined using significant unobservable inputs (Level 3). Multiple inputs may be used to measure fair value; however, the level of fair value is based on the lowest significant input level within this fair value hierarchy.
Details on the methods and assumptions used to determine the fair values are as follows:
Fair value measurements based on Level 1 inputs: Measurements that are most observable and are based on quoted prices of identical instruments obtained from the principal markets in which they are traded. Closing prices are both readily available and representative of fair value. Market transactions occur with sufficient frequency and volume to assure liquidity.
Fair value measurements based on Level 2 inputs: Measurements derived indirectly from observable inputs or from quoted prices from markets that are less liquid
are considered Level 2. Measurements based on Level 2 inputs include OTC derivative instruments that are priced on an exchange traded curve, but have contractual terms that are not identical to exchange traded contracts. The Partnership utilizes fair value measurements based on Level 2 inputs for its fixed forward contracts, over-the-counter commodity price swaps, interest rate swaps and forward currency contracts.
Fair value measurements based on Level 3 inputs: Measurements that are least observable are estimated from significant unobservable inputs determined from sources with little or no market activity for comparable contracts
or for positions with longer durations.
The Partnership does not offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against the fair value of derivative instruments executed with the same counterparty under the same master netting arrangement. The Partnership had no right to reclaim or obligation to return cash collateral as of March 31, 2021 and December 31, 2020.
The Partnership enters into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. The Partnership
presents derivatives at gross fair values in the Condensed Consolidated Balance Sheets. The maximum amount of loss due to credit risk that the Partnership would incur if its counterparties failed completely to perform according to the terms of the contracts, based on the net fair value of these financial instruments, exclusive of cash collateral, was $i58.1 million at March 31,
2021.
Gross Amount of Assets/Liabilities in the Balance Sheet
Financial Instruments
Cash Collateral Posted
Net Amount
Commodity derivative assets
$
i165,978
$
(i102,736)
$
i—
$
i63,242
Fair
value of derivative assets
$
i165,978
$
(i102,736)
$
i—
$
i63,242
Commodity
derivative liabilities
$
(i159,782)
$
i102,736
$
i32,488
$
(i24,558)
Interest
rate swap derivative liabilities
(i14,559)
i—
i—
(i14,559)
Currency
swaps derivative liabilities
(i4)
i—
i—
(i4)
Fair
value of derivative liabilities
$
(i174,345)
$
i102,736
$
i32,488
$
(i39,121)
//
i
The
following table presents total realized and unrealized gains (losses) on derivative instruments utilized for commodity risk management purposes included in cost of products sold (exclusive of depreciation and amortization):
There
were no discretionary trading activities for the three months ended March 31, 2021 and 2020. iThe following table presents gross volume of commodity derivative instruments outstanding for the periods indicated:
The Partnership has entered into interest rate swaps to manage its exposure to changes in interest rates on its Credit Agreement. The Partnership’s interest rate swaps hedge the actual and forecasted LIBOR borrowings and have been designated as cash flow hedges. Counterparties to the Partnership’s interest rate swaps are large multinational banks and the Partnership
does not believe there is a material risk of counterparty non-performance. The Partnership expects to continue to utilize interest rate swaps to hedge cash flow risk and to manage its exposure to LIBOR interest
rates or its replaced equivalent for the foreseeable future.
i
The Partnership's interest rate swap agreements outstanding as of March 31, 2021 were as follows:
Beginning
Ending
Notional
Amount
January 2021
January 2022
$
i300,000
April
2021
April 2022
$
i25,000
January 2022
January 2023
$
i250,000
April
2022
April 2023
$
i25,000
January 2023
January 2024
$
i250,000
January
2024
January 2025
$
i50,000
/
The Partnership records unrealized gains and losses on its interest rate swaps as a component of
accumulated other comprehensive loss, net of tax, which is reclassified to earnings as interest expense when the payments are made. As of March 31, 2021, the amount of unrealized losses, net of tax, expected to be reclassified to earnings during the following twelve-month period was $i5.5 million.
10.
iCommitments and Contingencies
Legal, Environmental and Other Proceedings
The Partnership is subject to a tax on sales made in Quebec from product it imports into the province. During a recent audit by the Quebec Energy Board (QEB) of the annual filings, the Partnership initiated legal action seeking a declaration to limit the applicability of the tax to direct imports, as well as the periods subject to review. Since filing this legal
action in June 2018, the Partnership has been assessed $i7.6 million of tax, including interest and penalties, for the period of 2007 to 2019. Similarly, since the filing, the Partnership has been assessed $i9.9
million, including a i15% penalty and interest, from the Ministry of the Environment, and the Fight Against Climate Change (known as MELCC) under separate regulation that was in effect for the period from 2007 through 2014. The Partnership is disputing this assessment on the same basis as set out in the QEB legal action described above. The Partnership has accrued an amount which it believes to be a reasonable estimate of the low end of a range of loss related to these matters and such amount is not material to the consolidated financial statements.
On
September 14, 2020, a purported class action complaint was filed against Sprague Operating Resources, LLC, one of the Partnership’s subsidiaries, in the U.S. District Court for the District of Rhode Island. The complaint, since amended, alleges causes of action for private nuisance, public nuisance, and negligence, each based on emission impacts to nearby occupants from the Partnership’s oil and natural gas facility located in Providence, Rhode Island. The complaint also alleges that the amount in controversy exceeds $i5.0 million.
At this early stage in the litigation, the Partnership cannot predict whether the plaintiff will succeed in getting the court to certify a class. Based upon the information currently available to it, the Partnership believes that the complaint is without merit and intends to vigorously defend against it.
The Partnership is involved in other various lawsuits, other proceedings and environmental matters, all of which arose in the normal course of business. The Partnership believes, based upon its examination of currently available information, its experience to date, and advice from legal counsel, that the individual and aggregate liabilities resulting from the resolution of these contingent matters will not have a material adverse impact on the Partnership’s consolidated results of operations, financial position or cash flows.
11.
iEquity and Equity-Based Compensation
Equity Awards - Performance-based Phantom Units
Prior to March 5,2021, the board of directors of the General Partner granted performance-based phantom unit awards to key employees that vested at the end of a performance period (generally ithree
years). Phantom unit awards granted since 2016 include a performance criteria that considers Sprague Holdings operating cash flow, as defined ("OCF"), over a three year period. The number of common units that may be received in settlement of each phantom unit award can range between i0 and i200%
of the number of phantom units granted based on the level of OCF achieved during the vesting period. These awards are
equity awards with performance and service conditions which result in compensation cost being recognized over the requisite service period once payment is determined to be probable. Compensation expense is estimated each reporting period by multiplying the number of common units underlying such awards that, based on the Partnership's estimate of OCF, are probable to vest, by the grant-date fair value of the award and is recognized over the requisite service period using the straight-line method. The number of units
that the Partnership estimates are probable to vest could change over the vesting period. Any such change in estimate is recognized as a cumulative adjustment calculated as if the new estimate had been in effect from the grant date. The Partnership's long-term incentive phantom unit awards include tandem distribution equivalent rights ("DERs") which entitle the participant to a cash payment upon vesting that is equal to any cash distribution paid on a common unit between the grant date and the date the phantom units were settled.
Effective March 5, 2021, the board of directors used its discretion to terminate all phantom unit awards granted in 2018, 2019 and 2020. In consideration for this termination, the board of directors paid a higher 2020 cash bonus and issued vested common units to each of the Partnership's Named Executive Officers and certain other employees as
well as cash bonuses to all employees. The 2020 cash bonus amounts were expensed during the year ended December 31, 2020 and accrued for as of December 31, 2020. The Company accounted for the cancellation of the previously outstanding phantom unit awards and the issuance of the vest units during the quarter ended March 31, 2021 as a modification which resulted in a net immaterial impact to unit-based compensation expense during the quarter.
i
The
following table presents a summary of the Partnership’s phantom unit awards that were cancelled during the three months ended March 31, 2021:
Unit-based
compensation expense for the three months ended March 31, 2021 was $i0.2 million as compared to $i0.4 million for the three months ended
March 31, 2020.
Unit-based compensation is included in selling, general and administrative expenses. The Partnership didn't have any unrecognized compensation cost related to performance-based phantom units as of March 31, 2021 as a result of the termination of units.
Equity - Changes in Partnership Units
i
The following table provides information with respect to changes in the Partnership’s units:
On February 11, 2021, Sprague Holdings provided notice to the Partnership that Sprague Holdings had made the IDR Reset Election. Pursuant to the IDR Reset Election, Sprague Holdings relinquished the right to receive incentive distribution payments based on the minimum quarterly and target cash distribution levels set at the time of the Partnership’s initial public offering and the Partnership issued i3,107,248
common units to Sprague Holdings. Pursuant to the IDR Reset Election, the minimum quarterly distribution amount increased from $i0.4125 per common unit per quarter to $i0.6675
per common unit per quarter and the levels at which the incentive distribution rights participate in distributions will be reset at higher amounts based on current common unit distribution rates and a formula in the Partnership Agreement. The IDR Reset Election was effective on March 5, 2021.
12. iEarnings Per Unit
The
Partnership has identified the IDRs as participating securities and uses the two-class method when calculating the net income per unit applicable to limited partners. Earnings per unit applicable to limited partners is computed by dividing limited partners’ interest in net income, after deducting any incentive distributions, by the weighted-average number of outstanding common units. The Partnership’s net income is allocated to the limited partners in accordance with their respective ownership percentages, after giving effect to priority income allocations for incentive distributions, which are declared and paid following the close of each quarter. Earnings in excess of distributions are allocated to the limited partners based on their respective ownership interests. Diluted earnings per unit includes the effects of potentially dilutive units on the Partnership’s common units, consisting of unvested phantom units. Effective March
5, 2021, there is no dilutive effect for 2021 due to the termination of all phantom units as described in Note 11.
Payments made to the Partnership’s unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of earnings per unit.
i
The table below shows the weighted average common units outstanding used to compute net income per common unit for the periods indicated.
Weighted average limited partner common units - basic
i23,893,846
i22,820,983
Dilutive
effect of unvested phantom units
i—
i50,765
Weighted
average limited partner common units - dilutive
i23,893,846
i22,871,748
/
13.
iPartnership Distributions
The Partnership's partnership agreement sets forth the calculation to be used to determine the amount and priority of cash distributions that the common unitholders will receive.
i
Cash
distributions for the periods indicated were as follows:
In
addition, on April 23, 2021, the Partnership declared a cash distribution for the three months ended March 31, 2021, of $i0.6675 per unit, totaling $i17.6
million. Such distributions are to be paid on May 10, 2021, to unitholders of record on May 4, 2021.
14. iSubsequent Events
On April 20, 2021, the Partnership and Hartree announced that Sprague Holdings
has entered into an agreement to sell to Hartree the interest of Sprague Holdings in the General Partner, the incentive distribution rights and all of the limited partner interests that Sprague Holdings owns in Sprague (the “Transaction”). The closing of the Transaction is expected to occur on or before June 15, 2021.
On April 29, 2021, the Partnership sold the Oswego terminal to an unaffiliated buyer. In connection with the sale, the Partnership received consideration of $i10.1 million.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this Quarterly Report on Form 10-Q ("Quarterly Report"), unless the context otherwise requires, references to "Sprague Resources," the "Partnership,""we,""our,""us," or like terms, refer to Sprague Resources LP and its subsidiaries; references to our "General Partner" refer to Sprague
Resources GP LLC; references to "Axel Johnson" or the "Sponsor" refer to Axel Johnson Inc. and its controlled affiliates, collectively, other than Sprague Resources, its subsidiaries and its General Partner; and references to "Sprague Holdings" refer to Sprague Resources Holdings LLC, a wholly owned subsidiary of Axel Johnson and the owner of our General Partner. Our General Partner is a wholly owned subsidiary of Axel Johnson.
This Quarterly Report and any information incorporated by reference, contains statements that we believe are “forward-looking statements”. Forward looking statements are statements that express
our belief, expectations, estimates, or intentions, as well as those statements we make that are not statements of historical fact, including, among other things, statements relating to the proposed Transaction (as defined below), the expected benefits of the Transaction and the timing of the closing thereof. Forward-looking statements provide our current expectations and contain projections of results of operations, or financial condition, and/ or forecasts of future events. Words such as “may”, “assume”, “forecast”, “position”, “seek”, “predict”, “strategy”, “expect”, “intend”, “plan”, “estimate”, “anticipate”, “believe”, “project”, “budget”, “outlook”, “potential”, “will”, “could”, “should”, or “continue”, and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or
by known or unknown risks or uncertainties which could cause our actual results to differ materially from those contained in any forward-looking statement. Consequently, no forward-looking statements can be guaranteed. You are cautioned not to place undue reliance on any forward-looking statements.
Factors that could cause actual results to differ from those in the forward-looking statements include, but are not limited to: (i) changes in federal, state, local, and foreign laws or regulations including those that permit us to be treated as a partnership for federal income tax purposes, those that govern environmental protection and those that regulate the sale of our products to our customers; (ii) changes in the marketplace for our products or services resulting from events such as dramatic changes in commodity prices, increased competition, increased energy conservation, increased
use of alternative fuels and new technologies, changes in local, domestic or international inventory levels, seasonality, changes in supply, weather and logistics disruptions, or general reductions in demand; (iii) security risks including terrorism and cyber-risk, (iv) adverse weather conditions, particularly warmer winter seasons and cooler summer seasons, climate change, environmental releases and natural disasters; (v) adverse local, regional, national, or international economic conditions, including but not limited to, public health crises that reduce economic activity, affect the demand for travel (public and private), as well as impacting costs of operation and availability of supply (including the coronavirus COVID-19 outbreak), unfavorable capital market conditions and detrimental political developments such as the inability to move products between foreign locales and the United States; (vi) nonpayment or nonperformance by our customers or suppliers; (vii)
shutdowns or interruptions at our terminals and storage assets or at the source points for the products we store or sell, disruptions in our labor force, as well as disruptions in our information technology systems; (viii) unanticipated capital expenditures in connection with the construction, repair, or replacement of our assets; (ix) our ability to integrate acquired assets with our existing assets and to realize anticipated cost savings and other efficiencies and benefits; and (x) our ability to successfully complete our organic growth and acquisition projects and/or to realize the anticipated financial and operational benefits. These are not all of the important factors that could cause actual results to differ materially from those expressed in our forward-looking statements. Other known or unpredictable factors could also have material adverse effects on future results. Consequently, all of the forward-looking statements made in this Quarterly Report are qualified
by these cautionary statements, and we cannot assure you that actual results or developments that we anticipate will be realized or, even if realized, will have the expected consequences to or effect on us or our business or operations. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report may not occur.
When considering these forward-looking statements, please note that we provide additional cautionary discussion of risks and uncertainties in our Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 4, 2021 (the “2020 Annual Report”),
in Part I, Item 1A “Risk Factors”, in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk”. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report may not occur.
Forward-looking statements contained in this Quarterly Report speak only as of the date of this Quarterly Report (or other date as specified in this Quarterly Report) or as of the date given if provided in another filing with the SEC. We undertake no obligation, and disclaim any obligation, to publicly update, review or revise any forward-looking statements to reflect events or circumstances after the date of such statements. All forward looking statements attributable to us or any person acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained or referred to in our existing and future periodic reports filed with the SEC.
We are a Delaware limited partnership formed in June 2011 by Sprague Holdings and our General Partner. We engage in the purchase, storage, distribution and sale of refined products and natural gas, and provide storage and handling services for a broad range of materials. In October 2013, we became a publicly traded master
limited partnership ("MLP") and our common units representing limited partner interests are listed on the New York Stock Exchange ("NYSE") under the ticker symbol “SRLP".
Our Predecessor was founded in 1870 as the Charles H. Sprague Company in Boston, Massachusetts; and, in 1905, the company opened the Penobscot Coal and Wharf Company, a tidewater terminal located in Searsport, Maine. By World War II, the company was operating eleven terminals and a fleet of two dozen vessels transporting coal and other products throughout the world. As fuel needs diversified in the United States, the company expanded its product offerings and invested in terminals,
tankers, and product handling activities. In 1959, the company expanded its oil marketing activities via entry into the distillate oil market. In 1970, the company was sold to Royal Dutch Shell’s Asiatic Petroleum subsidiary; and, in 1972, Royal Dutch Shell sold the company to Axel Johnson Inc., a member of the Axel Johnson Group of Stockholm, Sweden.
We are one of the largest independent wholesale distributors of refined products in the Northeast United States based on aggregate terminal capacity. We own, operate and/or control a network of refined products and materials handling terminals and storage facilities predominantly located in the Northeast United States from
New York to Maine and in Quebec, Canada that have a combined storage tank capacity of approximately 14.6 million barrels for refined products and other liquid materials, as well as approximately 2.0 million square feet of materials handling capacity. We also have access to approximately 41 third-party terminals in the Northeast United States through which we sell or distribute refined products pursuant to rack, exchange and throughput agreements.
We operate under four business segments: refined products, natural gas, materials handling and other operations. See Note 8 - Segment Reporting to our Condensed Consolidated Financial Statements for a presentation of financial results by reportable segment and see Part I, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations for a discussion of financial results by segment.
In our
refined products segment we purchase a variety of refined products, such as heating oil, diesel fuel, residual fuel oil, kerosene, jet fuel and gasoline (primarily from refining companies, trading organizations and producers), and sell them to our customers. We have wholesale customers who resell the refined products we sell to them and commercial customers who consume the refined products directly. Our wholesale customers consist of approximately 900 home heating oil retailers and diesel fuel and gasoline resellers. Our commercial customers include federal and state agencies, municipalities, regional transit authorities, drill sites, large industrial companies, real estate management companies, hospitals, educational institutions, and asphalt paving companies. In addition, as a result of our acquisition of Coen Energy in 2017, our customers include businesses engaged in the development of natural gas resources in Pennsylvania and surrounding states.
In
our natural gas segment we purchase natural gas from natural gas producers and trading companies and sell and distribute natural gas to approximately 15,000 commercial and industrial customer locations across 13 states in the Northeast and Mid-Atlantic United States and Canada.
Our materials handling segment is generally conducted under multi-year agreements as either fee-based activities or as leasing arrangements when the right to use an identified asset (such as storage tanks or storage locations) has been conveyed in the agreement. We offload, store and/or prepare for delivery a variety of customer-owned products, including asphalt, clay slurry, salt, gypsum, crude oil, residual fuel oil, coal, petroleum coke, caustic soda, tallow, pulp and heavy equipment. Historically, a majority of our materials handling activity has generated qualified income.
Our other operations segment
primarily includes the marketing and distribution of coal conducted in our Portland, Maine terminal, and commercial trucking activity conducted by our Canadian subsidiary.
We take title to the products we sell in our refined products and natural gas segments. In order to manage our exposure to commodity price fluctuations, we use derivatives and forward contracts to maintain a position that is substantially balanced between product purchases and product sales. We do not take title to any of the products in our materials handling segment.
On February 11, 2021, Sprague Holdings provided notice to Partnership that Sprague Holdings had made an IDR Reset Election, as defined in our partnership agreement. Pursuant to the IDR Reset Election, Sprague Holdings relinquished the right to receive incentive distribution payments based on the minimum quarterly and target cash distribution levels set at the time of the Partnership’s initial public offering and the Partnership issued 3,107,248 common units to Sprague Holdings. Pursuant to the IDR Reset Election, the minimum quarterly distribution amount increased from $0.4125 per common unit per quarter to $0.6675 per common unit per quarter and the levels at which the incentive distribution rights participate in distributions will be
reset at higher amounts based on current common unit distribution rates and a formula in our partnership agreement. The IDR Reset Election was effective on March 5, 2021.
As of March 31, 2021, our Sponsor, through its ownership of Sprague Holdings, owns 16,058,484 common units representing an aggregate of 61.2% of the limited partner interest in the Partnership. Sprague Holdings also owns the General Partner, which in turn owns a non-economic interest in the Partnership. Sprague Holdings currently holds incentive distribution rights (“IDRs”) which entitle it to receive increasing percentages, up to a maximum of 50.0%, of the cash the Partnership distributes from distributable cash flow in excess of $0.7676 per unit per quarter ($0.4744 prior to the consummation of IDR Reset Election). The maximum IDR distribution of 50.0%
does not include any distributions that Sprague Holdings may receive on any limited partner units that it owns.
Hartree Transaction
On April 20, 2021, the Partnership and Hartree Partners, LP (“Hartree”) announced that Sprague Holdings has entered into an agreement to sell to Hartree the interest of Sprague Holdings in the General Partner, the incentive distribution rights and all of the limited partner interests that Sprague Holdings owns in Sprague (the “Transaction”). The closing of the Transaction is expected to occur on or before June 15, 2021.
COVID-19
The global outbreak of the novel coronavirus (COVID-19) was declared
a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets.
Beginning in the quarterly period ended March 31, 2020, a wide array of sectors including but not limited to the energy, transportation, manufacturing and commercial, along with global economic conditions generally, have been significantly disrupted by the pandemic. A growing number of the Partnership’s customers in these industries have experienced substantial reductions in their operations due to travel restrictions as well as the extended shutdown of various
businesses in affected regions. Furthermore, government measures have also led to a precipitous decline in fuel prices in response to concerns about demand for fuel.
The pandemic and associated impacts on economic activity had an adverse effect on the Partnership’s operating results for the quarterly period ended March 31, 2021, specifically, the Partnership has seen a decline in demand and related sales volume as large sectors of the global economy have been adversely impacted by the crisis. In response to these developments, the Partnership took swift action to ensure the safety of employees and other stakeholders, and initiated a number of initiatives relating to cost reduction, liquidity and operating efficiencies.
The Partnership makes estimates and assumptions that
affect the reported amounts on these consolidated financial statements and accompanying notes as of the date of the financial statements. The Partnership assessed accounting estimates that require consideration of forecasted financial information, including, but not limited to, the allowance for credit losses, the carrying value of goodwill, intangible assets, and other long-lived assets. This assessment was conducted in the context of information reasonably available to the Partnership, as well as consideration of the future potential impacts of COVID-19 on the Partnership’s business as of March 31, 2021. At this time, the Partnership is unable to predict with specificity the ultimate impact of the crisis, as it will depend on the magnitude, severity and duration of the pandemic, as well as how quickly, and to what extent, normal economic and operating conditions resume on a sustainable basis globally. Accordingly, if
the impact is more severe or longer in duration than the Partnership has assumed, such impact could potentially result in impairments and increases in credit allowances.
How Management Evaluates Our Results of Operations
Our management uses a variety of financial and operational measurements to analyze our performance. These measurements include: (1) adjusted EBITDA and adjusted gross margin, (2) operating expenses, (3) selling, general and administrative (or SG&A) expenses and (4) heating degree days.
EBITDA,
adjusted EBITDA and adjusted gross margin used in this Quarterly Report are non-GAAP financial measures.
EBITDA and Adjusted EBITDA
Management believes that adjusted EBITDA is an aid in assessing repeatable operating performance that is not distorted by non-recurring items or market volatility and the ability of our assets to generate sufficient revenue, that when rendered to cash, will be available to pay interest on our indebtedness and make distributions to our unitholders.
We define EBITDA as net income before interest, income taxes, depreciation and amortization. We define adjusted EBITDA as EBITDA adjusted for the change in unrealized hedging gains (losses) with respect to refined products and natural gas inventory,
and natural gas transportation contracts, adjusted for changes in the fair value of contingent consideration, and adjusted for the impact of acquisition related expenses.
EBITDA and adjusted EBITDA are used as supplemental financial measures by external users of our financial statements, such as investors, trade suppliers, research analysts and commercial banks to assess:
•The financial performance of our assets, operations and return on capital without regard to financing methods, capital structure or historical cost basis;
•The ability of our assets to generate sufficient revenue, that when rendered to cash, will be available
to pay interest on our indebtedness and make distributions to our equity holders;
•Repeatable operating performance that is not distorted by non-recurring items or market volatility; and
•The viability of acquisitions and capital expenditure projects.
EBITDA and adjusted EBITDA are not prepared in accordance with GAAP and should not be considered alternatives to net income or operating income, or any other measure of financial performance presented in accordance with GAAP. EBITDA and adjusted EBITDA exclude some, but not all, items that affect net income and operating income.
The GAAP measure most directly comparable to EBITDA and adjusted EBITDA is net income. EBITDA
and adjusted EBITDA should not be considered as alternatives to net income or cash provided by (used in) operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and adjusted EBITDA are not presentations made in accordance with GAAP and have important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. Because EBITDA and adjusted EBITDA exclude some, but not all, items that affect net income and are defined differently by different companies, our definitions of EBITDA and adjusted EBITDA may not be comparable to similarly titled measures of other companies.
We recognize that the usefulness of EBITDA and adjusted EBITDA as evaluative tools may have certain limitations, including:
•EBITDA
and adjusted EBITDA do not include interest expense. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and impacts our ability to generate profits and cash flows. Therefore, any measure that excludes interest expense may have material limitations;
•EBITDA and adjusted EBITDA do not include depreciation and amortization expense. Because capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate profits, any measure that excludes depreciation and amortization expense may have material limitations;
•EBITDA and adjusted EBITDA do not include provision for income taxes. Because the payment of income taxes is a necessary element of our costs, any measure that excludes income tax expense may have material limitations;
•EBITDA
and adjusted EBITDA do not reflect capital expenditures or future requirements for capital expenditures or contractual commitments;
•EBITDA and adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs; and
•EBITDA and adjusted EBITDA do not allow us to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss.
Adjusted Gross Margin
Management
purchases, stores and sells energy commodities that experience market value fluctuations. To manage the Partnership’s underlying performance, including its physical and derivative positions, management utilizes adjusted gross margin. In determining adjusted gross margin, management adjusts its segment results for the impact of the changes in unrealized gains and losses with regard to refined products and natural gas inventory, and natural gas transportation contracts, which are not marked to market for the purpose of recording unrealized gains or losses in net income. Adjusted gross margin is also used by external users of our consolidated financial statements to assess our economic results of operations and our commodity market value reporting to lenders.
We define adjusted gross margin as net sales less cost of products sold (exclusive
of depreciation and amortization) adjusted for the impact of the changes in unrealized gains and losses with regard to refined products and natural gas inventory, and natural gas transportation contracts, which are not marked to market for the purpose of recording unrealized gains or losses in net income. Adjusted gross margin has no impact on reported volumes or net sales.
Adjusted gross margin is used as a supplemental financial measure by management to describe our operations and economic performance to investors, trade suppliers, research analysts and commercial banks to assess:
•The economic results of our operations;
•The
market value of our inventory and natural gas transportation contracts for financial reporting to our lenders, as well as for borrowing base purposes; and
•Repeatable operating performance that is not distorted by non-recurring items or market volatility.
Adjusted gross margin is not prepared in accordance with GAAP and should not be considered as an alternative to net income or operating income or any other measure of financial performance presented in accordance with GAAP.
We define adjusted unit gross margin as adjusted gross margin divided by units sold, as expressed in gallons for refined products and in MMBtus for natural gas.
For
a reconciliation of adjusted gross margin and adjusted EBITDA to the GAAP measures most directly comparable, see the reconciliation tables included in "Results of Operations." See Note 8 - Segment Reporting to our Condensed Consolidated Financial Statements for a presentation of our financial results by reportable segment.
Management evaluates our segment performance based on adjusted gross margin. Based on the way we manage our business, it is not reasonably possible for us to allocate the components of operating expenses, selling, general and administrative expenses and depreciation and amortization among the operating segments.
Operating Expenses
Operating expenses are costs associated with the operation of the terminals and truck fleet used in our business. Employee wages, pension and 401(k) plan expenses,
boiler fuel, repairs and maintenance, utilities, insurance, property taxes, services and lease payments comprise the most significant portions of our operating expenses. Employee wages and related employee expenses included in our operating expenses are incurred on our behalf by our General Partner and reimbursed by us. These expenses remain relatively stable independent of the volumes through our system but can fluctuate depending on the activities performed during a specific period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") include employee salaries and benefits, discretionary bonus, marketing costs, corporate overhead, professional fees, information technology and office space expenses. Employee wages, related employee expenses and certain rental costs included
in our SG&A expenses are incurred on our behalf by our General Partner and reimbursed by us.
A “degree day” is an industry measurement of temperature designed to evaluate energy demand and consumption. Degree days are based on how much the average temperature departs from a human comfort level of 65°F. Each degree of temperature above 65°F is counted as one cooling degree day, and each degree of temperature below 65°F is counted as one heating degree day. Degree days are accumulated over the course of a year and can be compared
to a monthly or a long-term average ("normal") to see if a month or a year was warmer or cooler than usual. Degree days are officially observed by the National Weather Service and archived by the National Climate Data Center. In order to incorporate more recent average information and to better reflect the geographic locations of our customer base, we report degree day information for Boston and New York City (weighted equally) with a historical average for the same geographic locations over the previous ten-year period.
Hedging Activities
We hedge our inventory within the guidelines set in our risk management policies. In a rising commodity price environment, the market value of our inventory will generally be higher than the cost of our inventory. For GAAP purposes, we are required to value our inventory at the lower of cost or net realizable value. The hedges on this inventory
will lose value as the value of the underlying commodity rises, creating hedging losses. Because we do not utilize hedge accounting, GAAP requires us to record those hedging losses in our income statements. In contrast, in a declining commodity price market we generally incur hedging gains. GAAP requires us to record those hedging gains in our income statements.
The refined products inventory market valuation is calculated using daily independent bulk market price assessments from major pricing services (either Platts or Argus). These third-party price assessments are primarily based in large, liquid trading hubs including but not limited to, New York Harbor (NYH) or US Gulf Coast (USGC), with our inventory values determined after adjusting these prices to the various inventory locations by adding expected cost differentials (primarily freight) compared to one of these supply sources. Our natural gas inventory is limited,
with the valuation updated monthly based on the volume and prices at the corresponding inventory locations. The prices are based on the most applicable monthly Inside FERC, or IFERC, assessments published by Platts near the beginning of the following month.
Similarly, we can hedge our natural gas transportation assets (i.e., pipeline capacity) within the guidelines set in our risk management policy. Although we do not own any natural gas pipelines, we secure the use of pipeline capacity to support our natural gas requirements by either leasing capacity over a pipeline for a defined time period or by being assigned capacity from a local distribution company for supplying our customers. As the spread between the price of gas between the origin and delivery point widens (assuming the value exceeds the fixed charge of the transportation), the market value of the natural gas transportation contracts
assets will typically increase. If the market value of the transportation asset exceeds costs, we may seek to hedge or “lock in” the value of the transportation asset for future periods using available financial instruments. For GAAP purposes, the increase in value of the natural gas transportation assets is not recorded as income in the income statements until the transportation is utilized in the future (i.e., when natural gas is delivered to our customer). If the value of the natural gas transportation assets increase, the hedges on the natural gas transportation assets lose value, creating hedging losses in our income statements. The natural gas transportation assets market value is calculated daily based on the volume and prices at the corresponding pipeline locations. The daily prices are based on trader assessed quotes which represent observable transactions in the market place, with the end-month valuations primarily based on Platts prices where available
or adding a location differential to the price assessment of a more liquid location.
As described above, pursuant to GAAP, we value our commodity derivative hedges at the end of each reporting period based on current commodity prices and record hedging gains or losses, as appropriate. Also as described above, and pursuant to GAAP, our refined products and natural gas inventory and natural gas transportation contract rights, to which the commodity derivative hedges relate, are not marked to market for the purpose of recording gains or losses. In measuring our operating performance, we rely on our GAAP financial results, but we also find it useful to adjust those numbers to reflect the changes in unrealized gains and losses with regard to refined products and natural gas inventory, and natural gas transportation contracts.
By making such adjustments, as reflected in adjusted gross margin and adjusted EBITDA, we believe that we are able to align more closely hedging gains and losses to the period in which the revenue from the sale of inventory and income from transportation contracts relating to those hedges is realized.
Trends and Factors that Impact our Business
In addition to the other information set forth in this report, please refer to our 2020 Annual Report for a discussion of the trends and factors that impact our business.
Our current and future results of operations may not be comparable to our historical results of operations. Our results of operations may be impacted by, among other things, swings in commodity prices, primarily in refined products and natural gas, and acquisitions or dispositions. We use economic hedges to minimize the impact of changing prices on refined products and natural gas inventory. As a result, commodity price increases at the end of a period can create lower gross margins as the economic hedges, or derivatives, for such inventory may lose value, whereas an increase in the value of such inventory is disregarded for GAAP financial reporting purposes and recorded at the lower of cost or net realizable value. Please read “How Management Evaluates Our Results of Operations.”
The
following tables set forth information regarding our results of operations for the periods presented:
Three Months Ended
March 31,
Increase/(Decrease)
2021
2020
$
%
(in thousands)
Net sales
$
1,036,134
$
959,879
$
76,255
8
%
Cost
of products sold (exclusive of depreciation and amortization)
Reconciliation to Adjusted Gross Margin, EBITDA and Adjusted EBITDA
The following table sets forth a reconciliation of our consolidated operating income to our total adjusted gross margin, a non-GAAP measure, for the periods presented and a reconciliation of our consolidated net income to EBITDA and Adjusted EBITDA, non-GAAP measures, for the periods presented. See above “Management’s Discussion and Analysis of Financial Condition and Results of Operations - How Management Evaluates Our Results of Operations - EBITDA and Adjusted EBITDA” of this report. The table below also presents information on weather conditions for the periods presented.
(1)Inventory is valued at the lower of cost or net realizable value. The adjustment related to change in unrealized gain on inventory which is not included in net income, represents the estimated difference between inventory valued at the lower of cost or net realizable value as compared to market values. The fair value of the derivatives we use to economically hedge our inventory declines or appreciates in value as the value of the underlying inventory appreciates or declines, which creates unrealized hedging losses (gains) with respect to the derivatives that are included in net income.
(2)Represents our estimate of the change in fair value of the natural gas transportation contracts which are
not recorded in net income until the transportation is utilized in the future (i.e., when natural gas is delivered to the customer), as these contracts are executory contracts that do not qualify as derivatives. As the fair value of the natural gas transportation contracts decline or appreciate, the offsetting physical or financial derivative will also appreciate or decline creating unmatched unrealized hedging losses (gains) in net income.
(3)For a discussion of the non-GAAP financial measures EBITDA, adjusted EBITDA and adjusted gross margin, see “How Management Evaluates Our Results of Operations.”
(4)We
incur expenses in connection with acquisitions and given the nature, variability of amounts, and the fact that these expenses would not have otherwise been incurred as part of our continuing operations, adjusted EBITDA excludes the impact of acquisition related expenses.
(5)Represents the change in the fair value of contingent consideration related to the 2017 Coen Energy acquisition and other expenses.
(6)For purposes of evaluating our results of operations, we use heating degree day amounts as reported by the NOAA Regional Climate Center. In order to incorporate recent average information and to reflect the geographic locations of our customer base, we report degree day information for Boston and New York City (weighted equally) with a historical average for the same geographic locations over the previous ten-year period.
Refined products net sales increased $74.3 million, or 9%, compared to the same period last year, due primarily to a 7% increase in volumes. The volume gain was a result of higher distillate volumes, in particular heating oil, driven by more supportive seasonal weather as demonstrated by the 17% increase in heating degree days. Higher marine gas oil sales at Sprague’s Canadian operations was also a contributor to the distillate volume increase. Gasoline volumes increased modestly, with heavy oil requirements lower. Although prices increased steadily during this time period, the average sales prices were only 1% higher than this period last year.
Refined products adjusted gross margin increased $15.2 million, or 43%, compared to the same period last year. Although the higher volume contributed to the better
results, the primary factor was improved near-term performance related to inventory purchasing and storage. In addition to some gains on physical purchases this year, the market structure last year led to some temporary mark-to-market losses that reversed later. Results in our Canadian operations were lower than the same period last year, primarily since the increasing price environment during the quarter led to reduced adjusted unit gross margins on bunker sales sold based on prices from the prior week. This prior week price-timing dynamic also pressured adjusted unit gross margins on sales to some U.S. commercial customers.
Natural Gas
Natural gas net sales increased $6.8 million, or 7%, compared to the same period last year due to a combination of a 4% higher average sales price and 3% increase in volume. The higher volume was
primarily a result of the colder weather compared to the unusually warm conditions in the same period last year.
Natural gas adjusted gross margin increased $11.3 million, or 38%, compared to the same period last year, largely resulting from an increase in adjusted unit gross margins. The improved adjusted unit gross margins were primarily due to enhanced supply and inventory optimization opportunities, in conjunction with the colder temperatures and concomitant higher price volatility.
Materials handling net sales and adjusted gross margin were $3.5 million, or 22% to 23% lower than the same period last year. The majority of the decline was in the U.S. operations, in particular due to reduced road salt handling requirements and lower windmill component activity. The reduction in salt handling was a result of fewer bulk vessel deliveries as a mild winter resulted in lower salt usage and a reduced need to resupply in season. Lower windmill handling revenue resulted since there was essentially no component deliveries compared to the substantial early construction season activity last year. Reduced tank rental income at Kildair was also a contributor to the overall decline.
Other Operations
Net sales from other operations decreased $1.3 million, or 20%, due to a combination of lower coal volumes and prices compared
to the same period last year. Adjusted gross margin was 3% higher than last year, due mainly to additional 3rd-party trucking margin at our Canadian operations and to a lesser extent higher boiler service requirements.
Operating
Expenses. Operating expenses decreased $1.6 million, or 8%, compared to the same period last year, primarily reflecting a decrease of $1.3 million of stockpile and boiler fuel expenses as well as a $0.2 million decrease in repairs and maintenance expense.
Selling, General and Administrative Expenses. SG&A expenses increased $5.2 million, or 26%, compared to the same period last year largely driven by an increase of $5.4 million in incentive compensation expense and a $0.8 million increase in employee-related costs partially offset by a $0.4 million decrease in travel, marketing and other corporate overhead items related to the impact of COVID-19 as well as a $0.4 million reduction in audit and legal expenses.
Depreciation and Amortization. Depreciation and amortization was approximately flat as increased depreciation
expense offset decreased amortization expense.
Interest Expense, net. Interest expense, net decreased $2.4 million, or 21%, compared to the same period last year primarily due to decreased net borrowing rates.
Liquidity
and Capital Resources
Liquidity
Our primary liquidity needs are to fund our working capital requirements, operating expenses, capital expenditures and quarterly distributions. Cash generated from operations, our borrowing capacity under our Credit Agreement (as defined below) and potential future issuances of additional partnership interests or debt securities are our primary sources of liquidity. At March 31, 2021, we had working capital of $27.1 million.
As of March 31, 2021, the undrawn borrowing capacity under the working capital facilities of our Credit Agreement was $92.7 million and the undrawn borrowing capacity under the acquisition facility was $28.1 million. We enter our seasonal peak period during the fourth quarter of each year,
during which inventory, accounts receivable and debt levels increase. As we move out of the winter season at the end of the first quarter of the following year, typically inventory is reduced, accounts receivable are collected and converted into cash and debt is paid down. During the three months ended March 31, 2021, the amount drawn under the working capital facilities of our Credit Agreement fluctuated from a low of $270.3 million to a high of $401.9 million.
We believe that we have sufficient liquid assets, cash flow from operations and borrowing capacity under our Credit Agreement
to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures. However, we are subject to business and operational risks that could adversely affect our cash flow. A material decrease in our cash flow would likely have an adverse effect on our ability to meet our financial commitments and debt service obligations.
Credit Agreement
On May 19, 2020, Sprague Operating Resources LLC (the “U.S. Borrower”) and Kildair Service ULC (the “Canadian Borrower” and, together with the U.S. Borrower, the “Borrowers”), wholly owned subsidiaries of the Partnership, entered into a second amended and restated credit agreement (the “Credit Agreement”), which replaced the amended and
restated credit agreement, dated December 9, 2014. Upon the effective date, the Credit Agreement was accounted for as a modification of a syndicated loan arrangement with partial extinguishment to the extent of the decrease in the borrowing capacity. The Credit Agreement matures on May 19, 2022. The Partnership and certain of its subsidiaries (the “Subsidiary Guarantors”) are guarantors of the obligations under the Credit Agreement. Obligations under the Credit Agreement are secured by substantially all of the assets of the Partnership, the Borrowers and the Subsidiary Guarantors (collectively, the “Loan Parties”).
As of March 31, 2021, the revolving credit facilities under
the Credit Agreement contained, among other items, the following:
•A committed U.S. dollar revolving working capital facility of up to $465.0 million, subject to borrowing base limits, to be used for working capital loans and letters of credit;
•An uncommitted U.S. dollar revolving working capital facility of up to $200.0 million, subject to borrowing base limits and the sole discretion of the lenders, to be used for working capital loans and letters of credit;
•A multicurrency revolving working capital facility of up to $85.0 million, subject to borrowing base limits, to be used for working capital loans and letters of credit;
•A revolving acquisition facility
of up to $430.0 million, subject to borrowing base limits, to be used for loans and letters of credit to fund capital expenditures and acquisitions and other general corporate purposes; and
•Subject to certain conditions, including the receipt of additional commitments from lenders, the ability to increase the U.S. dollar revolving working capital facility to up to $1.2 billion and the multicurrency revolving working capital facility to up to $320.0 million, subject to a maximum combined increase in commitments for both facilities of $470.0 million in the aggregate. Additionally, subject to certain conditions, the revolving acquisition facility may be increased to up to $750.0 million.
Indebtedness under the Credit Agreement bears interest, at the Borrowers' option, at a rate per annum equal to either (i) the Eurocurrency Rate (which is the LIBOR Rate for loans
denominated in U.S. dollars and CDOR for loans denominated in Canadian dollars, in each case adjusted for certain regulatory costs, and in each case with a floor of 0.50%) for interest periods of one, two, three or six months plus a specified margin or (ii) an alternate rate plus a specified margin.
For loans denominated in U.S. dollars, the alternate rate is the Base Rate which is the highest of (a) the U.S. Prime Rate as in effect from time to time, (b) the greater of the Federal Funds Effective Rate and the Overnight Bank Funding Rate as in effect from time to time plus 0.50% and (c) the one-month Eurocurrency Rate for U.S. dollars as in effect from time to time plus 1.00%.
For loans denominated in Canadian dollars, the alternate rate is the Prime Rate which is the higher of (a) the Canadian Prime Rate as in effect from time to time and (b) the one-month Eurocurrency Rate for U.S.
dollars as in effect from time to time plus 1.00%.
The specified margins for the working capital revolving facilities vary based on the utilization of the working capital facilities as a whole, measured on a quarterly basis. On or prior to November 19, 2020, the specified margin for (x) the committed U.S. dollar revolving working capital facility ranged from 1.25% to 1.75% for loans bearing interest at the Base Rate and from 2.25% to 2.75% for loans bearing interest at the Eurocurrency Rate, (y) the uncommitted U.S. dollar revolving working capital facility ranged from 1.00% to 1.50% for loans bearing interest at the Base Rate and 2.00% to 2.50% for loans bearing interest at the Eurocurrency Rate and (z) the multicurrency revolving working capital facility ranged from 1.25% to 1.75% for loans bearing interest at the Base Rate and 2.25% to 2.75% for loans bearing interest at
the Eurocurrency Rate. After November 19, 2020, the specified margin for (x) the committed U.S. dollar revolving working capital facility will range from 0.75% to 1.25% for loans bearing interest at the Base Rate and from 1.75% to 2.25% for loans bearing interest at the Eurocurrency Rate, (y) the uncommitted U.S. dollar revolving working capital facility will range from 0.50% to 1.00% for
loans bearing interest at the Base Rate and 1.50% to 2.00% for loans bearing interest at the Eurocurrency Rate and (z) the multicurrency revolving working capital facility will range from 0.75%
to 1.25% for loans bearing interest at the Base Rate and 1.75% to 2.25% for loans bearing interest at the Eurocurrency Rate.
The specified margin for the revolving acquisition facility varies based on the consolidated total leverage of the Loan Parties. The specified margin for the revolving acquisition facility will range from 1.25% to 2.25% for loans bearing interest at the Base Rate and from 2.25% to 3.25% for loans bearing interest at the Eurocurrency Rate.
In addition, the Borrowers will incur a commitment fee on the unused portion of (x) the committed U.S. dollar revolving working capital facility and multicurrency revolving working capital facility ranging from 0.375% to 0.500% per annum and (y) the revolving acquisition facility at a rate ranging from 0.35% to 0.50% per annum. Overdue amounts bear interest at the applicable rates described above plus an additional margin of
2%.
The Credit Agreement contains various covenants and restrictive provisions that, among other things, prohibit the Partnership from making distributions to unitholders if any event of default occurs or would result from the distribution or if the Loan Parties would not be in pro forma compliance with the financial covenants after giving effect to the distribution. In addition, the Credit Agreement contains various covenants that are usual and customary for a financing of this type, size and purpose, including, but not limited to, covenants that require the Loan Parties to maintain: a minimum consolidated EBITDA-to-fixed charge ratio, a minimum consolidated net working capital amount and a maximum consolidated total leverage-to-EBITDA ratio. The Credit Agreement also limits the Loan Parties ability to incur debt, grant liens, make certain investments or acquisitions, enter into affiliate transactions and dispose of assets.
The Partnership was in compliance with the covenants under the Credit Agreement at March 31, 2021.
The Credit Agreement also contains events of default that are usual and customary for a financing of this type, size and purpose including, among others, non-payment of principal, interest or fees, violation of certain covenants, material inaccuracy of representations and warranties, bankruptcy and insolvency events, cross-payment default and cross-acceleration, material judgments and events constituting a change of control. If an event of default exists under the Credit Agreement, the lenders will be able to terminate the lending commitments, accelerate the maturity of the Credit Agreement and exercise other rights and remedies with respect to the collateral.
Off-Balance Sheet Arrangements
We
have no off-balance sheet arrangements.
Capital Expenditures
Our terminals require investments to maintain, expand, upgrade or enhance existing assets and to comply with environmental and operational regulations. Our capital requirements primarily consist of maintenance capital expenditures and expansion capital expenditures. We define maintenance capital expenditures as capital expenditures made to replace assets, or to maintain the long-term operating capacity of our assets or operating income. Examples of maintenance capital expenditures are expenditures required to maintain equipment reliability, terminal integrity and safety and to address environmental laws and regulations. Costs for repairs and minor renewals to maintain facilities in operating condition and that do not extend the useful life of existing assets will be treated as maintenance expenses as we incur them. We define
expansion capital expenditures as capital expenditures made to increase the long-term operating capacity of our assets or our operating income whether through construction or acquisition of additional assets. Examples of expansion capital expenditures include the acquisition of equipment and the development or acquisition of additional storage capacity, to the extent such capital expenditures are expected to expand our operating capacity or our operating income.
The following table summarizes expansion and maintenance capital expenditures for the periods indicated. This information excludes property, plant and equipment acquired in business combinations:
We anticipate that future maintenance capital expenditures will be funded with cash generated by operations and that future expansion capital requirements will be provided through long-term borrowings or other debt financings and/or equity offerings.
Net cash provided by operating activities for the three months ended March 31, 2021 was $88.5 million. Cash inflows for the period were the result of a decrease of $67.2 million in inventories largely due to a reduction in seasonal inventory requirements, net income of $48.8 million, and a decrease of $20.6 million in other assets driven by changes in collateral. These inflows were offset by cash outflows as a result of an increase of $28.3 million in accounts receivable driven by a combination of higher sales prices and volumes, a reduction of $17.0 million in accounts payable and accrued liabilities primarily relating to the timing of invoice payments for product purchases and $9.6 million representing the net impact in our derivative instruments as a result of contract activity
and changes in commodity prices during the period.
Net cash provided by operating activities for the three months ended March 31, 2020 was $201.1 million. Cash inflows for the period were the result of a decrease of $183.3 million in inventories due to a reduction in seasonal inventory requirements, a decrease of $100.3 million in accounts receivable due to a seasonal reduction in sales volume, $46.7 million in net income and a decrease in other assets of $34.3 million. These inflows were offset by cash outflows as a result of a reduction of $54.3 million in accounts payable and accrued liabilities primarily relating to the timing of invoice payments for product purchases and $118.2 million representing the net impact in our derivative instruments as a result of contract activity and
changes in commodity prices during the period.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2021 was $1.9 million, and primarily resulted from $0.8 million related to expansion capital expenditures and $1.3 million related to maintenance capital expenditure projects across our terminal system.
Net cash used in investing activities for the three months ended March 31, 2020 was $3.0 million, and primarily resulted from $0.7 million related to expansion capital expenditures and $2.3 million related to maintenance capital expenditure projects across our terminal system.
Financing Activities
Net
cash used in financing activities for the three months ended March 31, 2021 was $83.2 million, and primarily resulted from $62.7 million of payments under our Credit Agreement due to reduced financing requirements from accounts receivable levels, the reduction of inventory levels and distributions of $17.4 million.
Net cash used in financing activities for the three months ended March 31, 2020 was $193.8 million, and primarily resulted from $176.7 million of payments under our Credit Agreement due to reduced financing requirements from accounts receivable levels, the reduction of inventory levels and distributions of $15.2 million.
Impact of Inflation
Inflation in the United States and Canada has been relatively low in recent years and did
not have a material impact on our results of operations for the three months ended March 31, 2021 and 2020.
Part I, Item, 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The
preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions.
These estimates are based on our knowledge and understanding of current conditions and actions that we may take in the future. Changes in these estimates will occur as a result of the passage of time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact on our financial condition and results of operations and are recorded in the period in which they become known. We have identified the following estimates that, in our
opinion, are subjective in nature, require the exercise of judgment and involve complex analysis: the fair value of derivative assets and liabilities, goodwill impairment assessment, and revenue recognition and cost of products sold.
The significant accounting policies and estimates that have been adopted and followed in the preparation of our Condensed Consolidated Financial Statements are detailed in Note 1 - Description of Business and Summary of Significant Accounting Policies included in our 2020 Annual Report. There have been no changes in these policies and estimates that had a significant impact on the financial condition and results of operations for the periods covered in this Quarterly Report.
Recent Accounting Pronouncements
For information on recent accounting pronouncements impacting our business, see "Recent Accounting
Pronouncements" included under Note 1 - Description of Business and Summary of Significant Accounting Policies to our Condensed Consolidated Financial Statements.
Quantitative and Qualitative Disclosures about Market Risk
Market
risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risks to which we are exposed are commodity price risk, interest rate risk and market/credit risk. We utilize various derivative instruments to manage exposure to commodity risk and swaps to manage exposure to interest rate risk.
Commodity Price Risk
We use various financial instruments as we seek to hedge our commodity price risk. We sell our refined products and natural gas primarily in the Northeast. We hedge our refined products positions primarily with a combination of futures contracts that trade on the New York Mercantile Exchange, or NYMEX, and fixed-for-floating price swaps in the form of bilateral contracts
that are traded “over-the-counter” or "OTC". Although there are some notable differences between futures and the fixed-for-floating price swaps, both can provide a fixed price while the counterparty receives a price that fluctuates as market prices change.
As indicated in the table below, we primarily use futures contracts to hedge light oil transactions and swaps contracts for hedging residual fuel oils. There are no residual fuel oil futures contracts that actively trade in the United States. Each of the financial instruments trade by month for many months forward, allowing us the ability to hedge future contractual commitments.
New York Harbor 1%
Sulfur Residual Fuel Oil swaps contract
In addition to the financial instruments listed above, we may periodically use the ethanol futures contract that trades on the Chicago Board of Trade, or CBOT, to hedge ethanol that is used for blending into our gasoline. This ethanol contract is based on Chicago delivery. There are also swaps alternatives available in the market to hedge ethanol. In addition, we also use Rotterdam Barge 0.1% Sulfur Gasoil swaps as the primary means to hedge Kildair's marine gas oil positions.
For natural gas, there are no quality differences that need to be considered
when hedging. Our primary hedging requirements relate to fixed price and basis (location) exposure. We largely hedge our natural gas fixed price exposure using fixed-for-floating price swaps that trade on the Intercontinental Exchange ("ICE") with the prices based on the Henry Hub location near Erath, Louisiana. The Henry Hub is the most active natural gas trading location in the United States. Although we typically use swaps, there is also an actively traded NYMEX Henry Hub natural gas futures contract that we can use. We primarily use ICE basis swaps as the key financial instrument type to hedge our natural gas basis risk. Similar to the natural gas futures and ICE Henry Hub swaps, basis swaps for major locations trade actively for many months. These swaps are financially settled, typically using prices quoted by Platts. We also directly hedge our price exposure in oil
and natural gas by using forward purchases or sales that require physical delivery of the product.
The following table presents total realized and unrealized gains (losses) on derivative instruments utilized for commodity risk management purposes. Such amounts are included in cost of products sold (exclusive of depreciation and amortization) for the periods presented.
We enter into interest rate swaps to manage exposures in changing interest rates. We swap the variable LIBOR interest rate payable under our Credit Agreement for fixed LIBOR interest rates. These interest rate swaps meet the criteria to receive cash flow hedge accounting treatment. Counterparties to our interest rate swaps are large multi-national banks and we do not believe there is a material
risk of counterparty nonperformance. Additionally, we may enter into seasonal swaps which are intended to manage our increase in borrowings during the winter, as a result of higher inventory and accounts receivable levels.
Our interest rate swap agreements outstanding as of March 31, 2021 were as follows (in thousands):
Beginning
Ending
Notional
Amount
January 2021
January 2022
$
300,000
April 2021
April 2022
$
25,000
January
2022
January 2023
$
250,000
April 2022
April 2023
$
25,000
January 2023
January 2024
$
250,000
January 2024
January
2025
$
50,000
During the two year period ended March 31, 2021 we hedged approximately 46% of our floating rate debt with fixed-for-floating interest rate swaps. We expect to continue to utilize interest rate swaps to manage our exposure to LIBOR interest rates. Based on a sensitivity analysis for the twelve months ended March 31, 2021, we estimate that if short-term interest rates increase 100 basis points or decrease to zero, our interest expense would have increased approximately $3.6 million and decreased approximately $0.7 million, respectively. These amounts were estimated by considering the effect of the hypothetical short-term interest rates on variable-rate debt outstanding,
adjusted for interest rate hedges.
Derivative Instruments
The following tables present our derivative assets and derivative liabilities measured at fair value on a recurring basis as of March 31, 2021:
The
risk management activities for our refined products and natural gas segments involve managing exposures to the impact of market fluctuations in the price and transportation costs for commodities through the use of derivative instruments. The prices for energy commodities can be significantly influenced by market liquidity and changes in seasonal demand, weather conditions, transportation availability, and federal and state regulations. We monitor and manage our exposure to market risk on a daily basis in accordance with approved policies.
We maintain a control environment under the direction of our Chief Risk Officer through our risk management policy, processes and procedures, which our senior management has approved. Control measures include volumetric, value at risk, and stop loss limits, as well as contract term limits. Our Chief
Risk Officer and Risk Management Committee must approve the use of new instruments or new commodities. Risk limits are monitored and reported daily to senior management. Our risk management department also performs independent verifications of sources of fair values. These controls apply to all of our commodity risk management activities.
We use a value at risk model to monitor commodity price risk within our risk management activities. The value at risk model uses both linear and simulation methodologies based on historical information, with the results representing the potential loss in fair value over one day at a 95% confidence level. Results may vary from time to time as hedging coverage, market pricing levels and volatility change.
We have a number of financial instruments that are potentially at risk including cash and cash equivalents, receivables and derivative contracts.
Our primary exposure is credit risk related to our receivables and counterparty performance risk related to the fair value of derivative assets, which is the loss that may result from a customer’s or counterparty’s non-performance. We use credit policies to control credit risk, including utilizing an established credit approval process, monitoring customer and counterparty limits, employing credit mitigation measures such as analyzing customer financial statements, credit insurance with a third party provider and accepting personal guarantees and forms of collateral. We believe that our counterparties will be able to satisfy their contractual obligations. Credit risk is limited by the large number of customers and counterparties comprising our business and their dispersion across different industries.
Cash is held in demand deposit and other short-term investment accounts placed with
federally insured financial institutions. Such deposit accounts at times may exceed federally insured limits. We have not experienced any losses on such accounts.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the Partnership's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Partnership's reports under the Exchange Act is accumulated and communicated to the Partnership's management, including the President and Chief Executive Officer and the Chief Financial Officer of our General Partner, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As of March 31, 2021, the Partnership carried out an evaluation,
under the supervision and with the participation of management (including the President and Chief Executive Officer and Chief Financial Officer of the General Partner) of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on this evaluation, the General Partner's President and Chief Executive Officer and Chief Financial Officer concluded that the Partnership's disclosure controls and procedures were effective as of March 31, 2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in our system of internal control over financial reporting during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the
Partnership’s internal control over financial reporting.
From time to time, we are a party to various legal proceedings or claims arising in the ordinary course of business. For information related to legal proceedings, see the discussion under the caption Legal, Environmental and Other Proceedings in Note 10 - Commitments and Contingencies to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report, which information is incorporated by reference into this Part II, Item 1.
Item 1A.
Risk
Factors
In addition to other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” included in our 2020 Annual Report, which could materially affect our business, financial condition or future results.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
On February 11, 2021, Sprague Holdings provided notice to Partnership that
Sprague Holdings had made an IDR Reset Election, as defined in our partnership agreement. Pursuant to the IDR Reset Election, Sprague Holdings relinquished the right to receive incentive distribution payments based on the minimum quarterly and target cash distribution levels set at the time of the Partnership’s initial public offering and the Partnership issued 3,107,248 common units to Sprague Holdings. Pursuant to the IDR Reset Election, the minimum quarterly distribution amount increased from $0.4125 per common unit per quarter to $0.6675 per common unit per quarter and the levels at which the incentive distribution rights participate in distributions will be reset at higher amounts based on current common unit distribution rates and a formula in our partnership agreement. The IDR Reset Election was effective on March 5, 2021. The issuance of Common Units has been undertaken in reliance upon an exemption from the
registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof.
Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K.
***
Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules to the Asset Purchase Agreements have been omitted. The registrant hereby agrees to furnish supplementally to the SEC, upon its request, any or all omitted schedules.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
