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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“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. 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, 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 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 Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 10, 2017 (the “2016 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.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Partnership’s financial statements and related notes thereto as of and for the
three and nine
months ended
September 30, 2017
contained elsewhere in this Quarterly Report and the audited financial statements and related notes included in our 2016 Annual Report.
Overview
We are a Delaware limited partnership formed in June 2011 by Sprague Holdings and our General Partner to engage in the purchase, storage, distribution and sale of refined products and natural gas, and to provide storage and handling services for a broad range of materials. Our limited partnership units representing limited partner interests are listed on the New York Stock Exchange ("NYSE") under the ticker symbol “SRLP". As used in this Quarterly Report, unless otherwise indicated, “we,” “us,” “our” mean Sprague Resources LP and, where the context requires, includes our subsidiaries.
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 strategically located throughout the Northeast United States and in Quebec, Canada that have a combined storage capacity of
14.8 million
barrels for refined products and other liquid materials, as well as
2.0 million
square feet of materials handling capacity. We also have an aggregate of
1.9 million
barrels of additional storage capacity attributable to
49
storage tanks not currently in service. These tanks are not necessary for the operation of our business at current levels. In the event that such additional capacity were desired, additional time and capital would be required to bring any of such storage tanks into service. Furthermore, we have access to more than
50
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 “Segment Reporting” included under Note 7 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 Operation—Results of Operation” 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, gasoline and asphalt (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 more than
900
home heating oil retailers and diesel fuel and gasoline resellers. Our commercial customers include federal and state agencies, municipalities, regional transit authorities, large industrial companies, real estate management companies, hospitals, educational institutions and asphalt paving companies. For the three months ended
September 30, 2017
and
2016
, we sold
251.5 million
and
237.5 million
gallons of refined products and for the
nine
months ended
September 30, 2017
and
2016
, we sold
1.0 billion
and
1.0 billion
gallons, respectively.
In our natural gas segment we purchase, sell and distribute natural gas to approximately
16,000
commercial and industrial customer locations across 13 states in the Northeast and Mid-Atlantic United States. We purchase the natural gas from natural gas producers and trading companies. For the three months ended
September 30, 2017
and
2016
we sold
11.0 million
Bcf and
11.8 million
Bcf of natural gas and for the
nine
months ended
September 30, 2017
and
2016
, we sold
44.7 million
and
44.8 million
Bcf, respectively.
Our materials handling segment is a fee-based business and is generally conducted under multi-year agreements. We offload, store and/or prepare for delivery a variety of customer-owned products, including asphalt, crude oil, residual fuel, clay slurry, salt, gypsum, coal, petroleum coke, caustic soda, tallow, pulp and heavy equipment. For the three months ended
September 30, 2017
we offloaded, stored and/or prepared for delivery
0.6 million
short tons of products and
74.2 million
gallons of liquid materials. For the three months ended
September 30, 2016
, we offloaded, stored and/or prepared for delivery
0.8 million
short tons of products and
78.3 million
gallons of liquid materials. For the
nine
months ended
September 30, 2017
we offloaded, stored and/or prepared for delivery
1.9 million
short tons of products and
301.9 million
gallons of liquid materials. For the
nine
months ended
September 30, 2016
, we offloaded, stored and/or prepared for delivery
2.0 million
short tons of products and
234.7 million
gallons of liquid materials.
Our other operations segment includes the marketing and distribution of coal conducted in our Portland, Maine terminal, commercial trucking activity conducted by our Canadian subsidiary and our heating equipment service business.
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.
As of
September 30, 2017
, our Sponsor, through its ownership of Sprague Holdings, owns
12,106,348
common units representing an aggregate of
54%
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 $0.474375 per unit per quarter. 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.
Recent Developments
Coen Energy Acquisition
On October 1, 2017 we purchased the membership interests of Coen Energy, LLC and Coen Transport, LLC as well as assets consisting of four bulk plants and underlying real estate (collectively, “Coen Energy”). Coen Energy, located in Washington, PA, provides energy products and complimentary energy field services to over 7,000 Energy Field Services, Commercial, and Residential customers located in Pennsylvania, Ohio and West Virginia. The Energy Field Services segment provides fuel sales, delivery, management and related services supporting the Marcellus and the Utica shale drilling activity. The Coen Energy business is supported by four in-land bulk plants, two throughput locations, approximately 100 delivery vehicles and approximately 250 employees.
Initial consideration paid was $35.3 million in cash, not including the purchase of inventory and other adjustments, which was financed with borrowings under our credit facility. Contingent consideration of up to $12 million is payable based on achieving certain economic performance measures during the three year period ending September 30, 2020.
Carbo Terminals Acquisition
On April 18, 2017, we acquired substantially all of the assets of Carbo Industries, Inc. and certain of its affiliates (together “Carbo”) by purchasing Carbo's Inwood and Lawrence, New York refined product terminal assets and its associated wholesale distribution business. The fair value of the consideration totaled $72.0 million and consisted of $13.3 million in cash that was financed through borrowings under our credit facility, an obligation to pay $38.2 million over a ten year period (estimated net present value of $27.3 million) and $31.4 million in unregistered common units. The Carbo terminals have a combined gasoline, ethanol and distillate storage capacity of 174,000 barrels and are supplied primarily by pipeline with the ability to also accept product deliveries by barge and truck.
Capital Terminal Acquisition
On February 10, 2017, we acquired the East Providence, Rhode Island refined product terminal of Capital Terminal Company (the “Capital Terminal”). Consideration paid was $22.0 million and was financed with borrowings under our credit facility. The terminal’s combined distillate storage capacity of just over 1.0 million barrels had been leased by us since April 2014 and was previously included in our total storage capacity.
In conjunction with this acquisition, we undertook an expansion capital project to convert half of the terminal’s storage capacity to gasoline and ethanol service to support a new ten year fee-for-service gasoline storage and handling agreement with a major East Coast gasoline marketer and another project to optimize distillate storage between this newly acquired terminal and our existing terminal facility in Providence to allow for expanded materials handling capability. Both projects are expected to be completed prior to December 31, 2017 at a total cost of approximately $16 million.
Global Natural Gas & Power Acquisition
On February 1, 2017, we purchased the natural gas marketing and electricity brokering business of Global Partners LP ("Global Natural Gas & Power") for $17.3 million, not including the purchase of natural gas inventory, assumption of derivative liabilities and other adjustments. Consideration paid was $16.3 million and was financed with borrowings under our credit facility. The business serves approximately 4,000 commercial, industrial, municipal and institutional customer locations in the Northeast United States with approximately 8 billion cubic feet of natural gas and 1 billion kWh of electricity annually.
L.E. Belcher Terminal Acquisition
On February 1, 2017, we purchased the Springfield, Massachusetts refined product terminal assets of Leonard E. Belcher, Incorporated (“L.E. Belcher”) for approximately $20.0 million in cash, not including the purchase of inventory and other adjustments. Consideration paid was $20.7 million and was financed with borrowings under our credit facility. The purchase consists of two pipeline-supplied distillate terminals and one distillate storage facility with a combined capacity of 283,000 barrels, as well as L.E. Belcher’s associated wholesale and commercial fuels businesses.
Amendment to Credit Agreement
On April 27, 2017, we entered into an agreement to amend the Credit Agreement to extend the maturity through April 27, 2021, reduce the U.S. dollar working capital facility from $1.0 billion to $950.0 million, reduce the multicurrency working capital facility from $120 million to $100 million, reduce interest rates under certain leverage ratio scenarios and make other modifications. See Part I, Item 2 "Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Credit Agreement.”
Conversion of Subordinated Units
Pursuant to the terms of our partnership agreement, upon payment of the cash distribution on February 14, 2017, and meeting certain distribution and performance tests, the subordination period for our subordinated units expired on February 16, 2017. At the expiration of the subordination period, all 10,071,970 subordinated units converted into common units on a one-for-one basis.
Non-GAAP Financial Measures
We present the non-GAAP financial measures EBITDA, adjusted EBITDA and adjusted gross margin in this Quarterly Report as described below.
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 (described below), (2) operating expenses, (3) selling, general and administrative (or SG&A) expenses and (4) heating degree days.
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, the viability of acquisitions and capital expenditure projects and 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 unit holders.
We define EBITDA as net income (loss) before interest, income taxes, depreciation and amortization. We define adjusted EBITDA as EBITDA increased by unrealized hedging losses and decreased by unrealized hedging gains, in each case with respect to refined products and natural gas inventory, prepaid forward contracts and natural gas transportation contracts.
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:
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•
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The financial performance of our assets, operations and return on capital without regard to financing methods, capital structure or historical cost basis;
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•
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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;
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•
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Repeatable operating performance that is not distorted by non-recurring items or market volatility; and
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•
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The viability of acquisitions and capital expenditure projects.
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EBITDA and adjusted EBITDA are not prepared in accordance with GAAP and should not be considered alternatives to net income (loss) 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 (loss) and operating income (loss).
The GAAP measure most directly comparable to EBITDA and adjusted EBITDA is net income (loss). EBITDA and adjusted EBITDA should not be considered as an alternative to net income (loss) 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 (loss) and is 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 an evaluative tool may have certain limitations, including:
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•
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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;
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•
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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;
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•
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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;
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•
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EBITDA and adjusted EBITDA do not reflect capital expenditures or future requirements for capital expenditures or contractual commitments;
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•
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EBITDA and adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs; and
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•
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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.
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Adjusted Gross Margin
Management 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. In determining adjusted gross margin, management adjusts its segment results for the impact of unrealized hedging gains and losses with regard to refined products and natural gas inventory, prepaid forward contracts and natural gas transportation contracts, which are not marked to market for the purpose of recording unrealized gains or losses in net income (loss). 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 (loss). Adjusted gross margin is also used by external users of our consolidated financial statements to assess our economic results of operations and its commodity market value reporting to lenders.
We define adjusted gross margin as net sales less cost of products sold (exclusive of depreciation and amortization) and decreased by total commodity derivative gains and losses included in net income (loss) and increased by realized commodity derivative gains and losses included in net income (loss), in each case with respect to refined products and natural gas inventory, prepaid forward contracts and natural gas transportation contracts. Adjusted gross margin has no impact on reported volumes or net sales.
Adjusted gross margin is used as supplemental financial measures by management to describe our operations and economic performance to investors, trade suppliers, research analysts and commercial banks to assess:
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•
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The economic results of our operations;
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•
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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
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•
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Repeatable operating performance that is not distorted by non-recurring items or market volatility.
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Adjusted gross margin is not prepared in accordance with GAAP and should not be considered as alternatives to net income (loss) or operating income (loss) 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 "Segment Reporting" included under Note 7 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.
Heating Degree Days
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 Climatic Data Center. For purposes of evaluating our results of operations, we use the normal heating degree day amount as reported by the NOAA/National Weather Service for the New England oil home heating region over the period of 1981-2010.
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 statement of operations. In contrast, in a declining commodity price market we generally incur hedging gains. GAAP requires us to record those hedging gains in our statement of operations. The refined products inventory market valuation is calculated daily using 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 statement of operations 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 statement of operations. 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 show only the impact of hedging gains and losses actually realized in the period being reviewed. 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 2016 Annual Report for a discussion of the trends and factors that impact our business.
Results of Operations
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 year 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.” For a description of acquisition activity during the periods presented, please read "Business Combinations" included under Note 2 to our Condensed Consolidated Financial Statements.
The following tables set forth information regarding our results of operations for the periods presented:
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Three Months Ended September 30,
|
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Increase/(Decrease)
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
|
(in thousands)
|
|
Net sales
|
$
|
491,393
|
|
|
$
|
422,779
|
|
|
$
|
68,614
|
|
|
16
|
%
|
|
Cost of products sold (exclusive of depreciation and amortization)
|
456,656
|
|
|
383,211
|
|
|
73,445
|
|
|
19
|
%
|
|
Operating expenses
|
16,891
|
|
|
15,725
|
|
|
1,166
|
|
|
7
|
%
|
|
Selling, general and administrative
|
17,559
|
|
|
19,735
|
|
|
(2,176
|
)
|
|
(11
|
)%
|
|
Depreciation and amortization
|
6,655
|
|
|
5,329
|
|
|
1,326
|
|
|
25
|
%
|
|
Total operating costs and expenses
|
497,761
|
|
|
424,000
|
|
|
73,761
|
|
|
17
|
%
|
|
Operating income (loss)
|
(6,368
|
)
|
|
(1,221
|
)
|
|
(5,147
|
)
|
|
422
|
%
|
|
Other income
|
—
|
|
|
(19
|
)
|
|
19
|
|
|
(100
|
)%
|
|
Interest income
|
75
|
|
|
40
|
|
|
35
|
|
|
88
|
%
|
|
Interest expense
|
(7,170
|
)
|
|
(6,685
|
)
|
|
(485
|
)
|
|
7
|
%
|
|
Loss before income taxes
|
(13,463
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)
|
|
(7,885
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)
|
|
(5,578
|
)
|
|
71
|
%
|
|
Income tax (provision) benefit
|
(853
|
)
|
|
(909
|
)
|
|
56
|
|
|
(6
|
)%
|
|
Net loss
|
$
|
(14,316
|
)
|
|
$
|
(8,794
|
)
|
|
$
|
(5,522
|
)
|
|
63
|
%
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
Nine Months Ended September 30,
|
|
Increase/(Decrease)
|
|
|
2017
|
|
2016
|
|
$
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|
%
|
|
|
(in thousands)
|
|
Net sales
|
$
|
1,922,826
|
|
|
$
|
1,623,173
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|
|
$
|
299,653
|
|
|
18
|
%
|
|
Cost of products sold (exclusive of depreciation and amortization)
|
1,720,860
|
|
|
1,463,938
|
|
|
256,922
|
|
|
18
|
%
|
|
Operating expenses
|
50,624
|
|
|
49,078
|
|
|
1,546
|
|
|
3
|
%
|
|
Selling, general and administrative
|
63,472
|
|
|
62,099
|
|
|
1,373
|
|
|
2
|
%
|
|
Depreciation and amortization
|
19,537
|
|
|
16,001
|
|
|
3,536
|
|
|
22
|
%
|
|
Total operating costs and expenses
|
1,854,493
|
|
|
1,591,116
|
|
|
263,377
|
|
|
17
|
%
|
|
Operating income
|
68,333
|
|
|
32,057
|
|
|
36,276
|
|
|
113
|
%
|
|
Other income (expense)
|
183
|
|
|
(114
|
)
|
|
297
|
|
|
(261
|
)%
|
|
Interest income
|
247
|
|
|
379
|
|
|
(132
|
)
|
|
(35
|
)%
|
|
Interest expense
|
(22,604
|
)
|
|
(20,179
|
)
|
|
(2,425
|
)
|
|
12
|
%
|
|
Income before income taxes
|
46,159
|
|
|
12,143
|
|
|
34,016
|
|
|
280
|
%
|
|
Income tax (provision) benefit
|
(3,768
|
)
|
|
(861
|
)
|
|
(2,907
|
)
|
|
338
|
%
|
|
Net income
|
$
|
42,391
|
|
|
$
|
11,282
|
|
|
$
|
31,109
|
|
|
276
|
%
|
Analysis of Consolidated Operating Results
Net loss was
$14.3 million
and
$8.8 million
for the three months ended
September 30, 2017
and
2016
, respectively and operating loss was
$6.4 million
and
$1.2 million
for the three months ended
September 30, 2017
and
2016
, respectively. Operating results for the three months ended
September 30, 2017
and
2016
include unrealized commodity derivative gains and losses with respect to refined products and natural gas inventory, prepaid forward contracts and natural gas transportation contracts of
$(13.8) million
and
$(15.2) million
, respectively. Excluding these unrealized items, operating income for the three months ended
September 30, 2017
decreased
$6.6 million
, or
47%
, as compared to the three months ended
September 30, 2016
.
Net income was
$42.4 million
and
$11.3 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively and operating income was
$68.3 million
and
$32.1 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. Operating results for the
nine
months ended
September 30, 2017
and
2016
include unrealized commodity derivative gains and losses with respect to refined products and natural gas inventory, prepaid forward contracts and natural gas transportation contracts of
$22.4 million
and
$(30.7) million
, respectively. Excluding these unrealized items, operating income for the
nine
months ended
September 30, 2017
decreased
$16.9 million
, or
27%
, as compared to the
nine
months ended
September 30, 2016
.
See "Analysis of Operating Segments", "Operating Costs and Expenses" and "Liquidity and Capital Resources" below for additional details on our operating results.
Reconciliation to Adjusted Gross Margin, EBITDA and Adjusted EBITDA
The following table sets forth a reconciliation of our consolidated operating income (loss) 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-Non-GAAP Financial Measures” and “How Management Evaluates Our Results of Operations” of this report. The table below also presents information on weather conditions for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
|
Reconciliation of Operating Income to Adjusted Gross Margin:
|
|
|
|
|
|
|
|
Operating income (loss)
|
$
|
(6,368
|
)
|
|
$
|
(1,221
|
)
|
|
$
|
68,333
|
|
|
$
|
32,057
|
|
|
Operating costs and expenses not allocated to operating segments:
|
|
|
|
|
|
|
|
|
Operating expenses
|
16,891
|
|
|
15,725
|
|
|
50,624
|
|
|
49,078
|
|
|
Selling, general and administrative
|
17,559
|
|
|
19,735
|
|
|
63,472
|
|
|
62,099
|
|
|
Depreciation and amortization
|
6,655
|
|
|
5,329
|
|
|
19,537
|
|
|
16,001
|
|
|
Add: unrealized (gain) loss on inventory derivatives (1)
|
13,673
|
|
|
14,636
|
|
|
(15,374
|
)
|
|
26,592
|
|
|
Add: unrealized (gain) on prepaid forward contract derivatives (2)
|
(667
|
)
|
|
(120
|
)
|
|
(907
|
)
|
|
(1,161
|
)
|
|
Add: unrealized loss (gain) on natural gas transportation contracts (3)
|
760
|
|
|
672
|
|
|
(6,105
|
)
|
|
5,221
|
|
|
Total adjusted gross margin (4):
|
$
|
48,503
|
|
|
$
|
54,756
|
|
|
$
|
179,580
|
|
|
$
|
189,887
|
|
|
Adjusted Gross Margin by Segment:
|
|
|
|
|
|
|
|
|
Refined products
|
$
|
32,014
|
|
|
$
|
38,693
|
|
|
$
|
95,307
|
|
|
$
|
104,070
|
|
|
Natural gas
|
3,197
|
|
|
2,773
|
|
|
44,355
|
|
|
43,734
|
|
|
Materials handling
|
11,395
|
|
|
11,305
|
|
|
34,118
|
|
|
35,826
|
|
|
Other operations
|
1,897
|
|
|
1,985
|
|
|
5,800
|
|
|
6,257
|
|
|
Total adjusted gross margin
|
$
|
48,503
|
|
|
$
|
54,756
|
|
|
$
|
179,580
|
|
|
$
|
189,887
|
|
|
Reconciliation of Net (Loss) Income to Adjusted EBITDA
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(14,316
|
)
|
|
$
|
(8,794
|
)
|
|
$
|
42,391
|
|
|
$
|
11,282
|
|
|
Add/(deduct):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
7,095
|
|
|
6,645
|
|
|
22,357
|
|
|
19,800
|
|
|
Tax provision (benefit)
|
853
|
|
|
909
|
|
|
3,768
|
|
|
861
|
|
|
Depreciation and amortization
|
6,655
|
|
|
5,329
|
|
|
19,537
|
|
|
16,001
|
|
|
EBITDA (4):
|
$
|
287
|
|
|
$
|
4,089
|
|
|
$
|
88,053
|
|
|
$
|
47,944
|
|
|
Add: unrealized (gain) loss on inventory derivatives (1)
|
13,673
|
|
|
14,636
|
|
|
(15,374
|
)
|
|
26,592
|
|
|
Add: unrealized gain on prepaid forward contract derivatives (2)
|
(667
|
)
|
|
(120
|
)
|
|
(907
|
)
|
|
(1,161
|
)
|
|
Add: unrealized loss (gain) on natural gas transportation contracts (3)
|
760
|
|
|
672
|
|
|
(6,105
|
)
|
|
5,221
|
|
|
Adjusted EBITDA (4):
|
$
|
14,053
|
|
|
$
|
19,277
|
|
|
$
|
65,667
|
|
|
$
|
78,596
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
Normal heating degree days (5)
|
204
|
|
|
204
|
|
|
4,432
|
|
|
4,468
|
|
|
Actual heating degree days
|
146
|
|
|
72
|
|
|
4,019
|
|
|
3,938
|
|
|
Variance from normal heating degree days
|
(28
|
)%
|
|
(65
|
)%
|
|
(9
|
)%
|
|
(12
|
)%
|
|
Variance from prior period actual heating degree days
|
103
|
%
|
|
(28
|
)%
|
|
2
|
%
|
|
(19
|
)%
|
|
|
|
|
(1)
|
Inventory is valued at the lower of cost or net realizable value. 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)
|
The unrealized hedging gain (loss) on prepaid forward contract derivatives represents our estimate of the change in fair value of the prepaid forward contracts which are not recorded in net income until the forward contract is settled in the future (i.e., when the commodity is delivered to the customer). As these contracts are prepaid, they do not qualify as derivatives and changes in the fair value are therefore not included in net income. The fair value of the derivatives we use to economically hedge our prepaid forward contracts declines or appreciates in value as the value of the underlying prepaid forward contract appreciates or declines, which creates unrealized hedging gains (losses) that are included in net income.
|
|
|
|
|
(3)
|
The unrealized (gain) loss on natural gas transportation contracts 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.
|
|
|
|
|
(4)
|
For a discussion of the non-GAAP financial measures EBITDA, adjusted EBITDA and adjusted gross margin, see “How Management Evaluates Our Results of Operations.”
|
|
|
|
|
(5)
|
As reported by the NOAA/National Weather Service for the New England oil home heating region over the period of 1981-2011.
|
Analysis of Operating Segments
Three Months Ended September 30, 2017
compared to
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase/(Decrease)
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
|
(in thousands, except adjusted unit gross margin)
|
|
Volumes:
|
|
|
|
|
|
|
|
|
Refined products (gallons)
|
251,496
|
|
|
237,510
|
|
|
13,986
|
|
|
6
|
%
|
|
Natural gas (MMBtus)
|
10,963
|
|
|
11,810
|
|
|
(847
|
)
|
|
(7
|
)%
|
|
Materials handling (short tons)
|
603
|
|
|
764
|
|
|
(161
|
)
|
|
(21
|
)%
|
|
Materials handling (gallons)
|
74,214
|
|
|
78,330
|
|
|
(4,116
|
)
|
|
(5
|
)%
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
Refined products
|
$
|
425,492
|
|
|
$
|
350,528
|
|
|
$
|
74,964
|
|
|
21
|
%
|
|
Natural gas
|
49,694
|
|
|
55,868
|
|
|
(6,174
|
)
|
|
(11
|
)%
|
|
Materials handling
|
11,395
|
|
|
11,304
|
|
|
91
|
|
|
1
|
%
|
|
Other operations
|
4,812
|
|
|
5,079
|
|
|
(267
|
)
|
|
(5
|
)%
|
|
Total net sales
|
$
|
491,393
|
|
|
$
|
422,779
|
|
|
$
|
68,614
|
|
|
16
|
%
|
|
Adjusted Gross Margin:
|
|
|
|
|
|
|
|
|
Refined products
|
$
|
32,014
|
|
|
$
|
38,693
|
|
|
$
|
(6,679
|
)
|
|
(17
|
)%
|
|
Natural gas
|
3,197
|
|
|
2,773
|
|
|
424
|
|
|
15
|
%
|
|
Materials handling
|
11,395
|
|
|
11,305
|
|
|
90
|
|
|
1
|
%
|
|
Other operations
|
1,897
|
|
|
1,985
|
|
|
(88
|
)
|
|
(4
|
)%
|
|
Total adjusted gross margin
|
$
|
48,503
|
|
|
$
|
54,756
|
|
|
$
|
(6,253
|
)
|
|
(11
|
)%
|
|
Adjusted Unit Gross Margin:
|
|
|
|
|
|
|
|
|
Refined products
|
$
|
0.127
|
|
|
$
|
0.163
|
|
|
$
|
(0.036
|
)
|
|
(22
|
)%
|
|
Natural gas
|
$
|
0.292
|
|
|
$
|
0.235
|
|
|
$
|
0.057
|
|
|
24
|
%
|
Refined Products
Refined products net sales increased
$75.0 million
, or
21%
, compared to the same period last year, primarily due to
15%
increase in the average sales price given a higher energy price environment. A 6% gain in volumes also contributed to the overall sales increase.
Refined products adjusted gross margin decreased
$6.7 million
, or
17%
, compared to the third quarter of 2016. This reduction was due to the 22% decline in average adjusted unit gross margin, more than offsetting the 6% gain in volumes. The key factors contributing to the lower adjusted unit gross margins were less favorable market conditions to supply and carry inventory and a well-supplied market leading to strong competitive intensity.
The higher volume was primarily due to the contributions from Kildair along with the L.E. Belcher and Carbo acquisitions completed earlier this year. Increased volumes were obtained in both distillates and heavy oil, with a decrease in gasoline. The distillate volume gains were a combination of heating oil and diesel with significant contributions from L.E. Belcher and Carbo, as well as Kildair. The higher heavy oils volumes were due to increased activity at Kildair, including both local sales as well as marine bunker volumes. The reduction in gasoline volume was primarily a result of the high competitive intensity for discretionary sales in a well-supplied market.
Natural Gas
Natural gas net sales decreased
$6.2 million
, or
11%
, as compared to the same period last year due to a
7%
reduction in volumes and a 4% reduction in average sales price. The volume decrease was primarily a result of the loss of a few higher volume, lower adjusted unit gross margin customers.
Natural gas adjusted gross margin increased by
$0.4 million
, or
15%
, compared to the same period last year, due primarily to higher adjusted unit gross margins, which more than offset the lower volumes. The improved adjusted unit gross margins were primarily a result of increases in the valuation of forward contracts, partially offset by decreased optimization opportunities for transportation assets.
Materials Handling
Materials handling net sales and adjusted gross margin both increased by
$0.1 million
, each representing
1%
gains as compared to the same period last year. These gains were primarily due to enhanced refined products storage and handling revenues at Kildair, with the other materials handling activity down slightly, in particular as a result of lower salt handling requirements due to re-supply timing differences.
Other Operations
Net sales from other operations declined by
$0.3 million
compared to the same period last year, with adjusted gross margin decreasing by
$0.1 million
. The net sales and adjusted gross margin reductions were primarily a result of decreased coal volumes.
Nine Months Ended
September 30, 2017
compared to
Nine Months Ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Increase/(Decrease)
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
|
(in thousands, except adjusted unit gross margin)
|
|
Volumes:
|
|
|
|
|
|
|
|
|
Refined products (gallons)
|
994,518
|
|
|
978,264
|
|
|
16,254
|
|
|
2
|
%
|
|
Natural gas (MMBtus)
|
44,677
|
|
|
44,799
|
|
|
(122
|
)
|
|
0
|
%
|
|
Materials handling (short tons)
|
1,879
|
|
|
2,016
|
|
|
(137
|
)
|
|
(7
|
)%
|
|
Materials handling (gallons)
|
301,896
|
|
|
234,738
|
|
|
67,158
|
|
|
29
|
%
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
Refined products
|
$
|
1,638,066
|
|
|
$
|
1,331,197
|
|
|
$
|
306,869
|
|
|
23
|
%
|
|
Natural gas
|
235,068
|
|
|
240,256
|
|
|
(5,188
|
)
|
|
(2
|
)%
|
|
Materials handling
|
34,118
|
|
|
35,848
|
|
|
(1,730
|
)
|
|
(5
|
)%
|
|
Other operations
|
15,574
|
|
|
15,872
|
|
|
(298
|
)
|
|
(2
|
)%
|
|
Total net sales
|
$
|
1,922,826
|
|
|
$
|
1,623,173
|
|
|
$
|
299,653
|
|
|
18
|
%
|
|
Adjusted Gross Margin:
|
|
|
|
|
|
|
|
|
Refined products
|
$
|
95,307
|
|
|
$
|
104,070
|
|
|
$
|
(8,763
|
)
|
|
(8
|
)%
|
|
Natural gas
|
44,355
|
|
|
43,734
|
|
|
621
|
|
|
1
|
%
|
|
Materials handling
|
34,118
|
|
|
35,826
|
|
|
(1,708
|
)
|
|
(5
|
)%
|
|
Other operations
|
5,800
|
|
|
6,257
|
|
|
(457
|
)
|
|
(7
|
)%
|
|
Total adjusted gross margin
|
$
|
179,580
|
|
|
$
|
189,887
|
|
|
$
|
(10,307
|
)
|
|
(5
|
)%
|
|
Adjusted Unit Gross Margin:
|
|
|
|
|
|
|
|
|
Refined products
|
$
|
0.096
|
|
|
$
|
0.106
|
|
|
$
|
(0.010
|
)
|
|
(9
|
)%
|
|
Natural gas
|
$
|
0.993
|
|
|
$
|
0.976
|
|
|
$
|
0.017
|
|
|
2
|
%
|
Refined Products
Refined products net sales increased
$306.9 million
, or
23%
, compared to the same period last year, primarily due to
21%
increase in the average sales price with the higher refined products price environment. A 2% increase in volumes was a lesser contributor to the higher sales.
Refined products adjusted gross margin decreased
$8.8 million
, or
8%
, compared to the same period last year, driven by lower adjusted unit gross margins. The 9% decline in average adjusted unit gross margins was primarily a result of less attractive market conditions to supply and carry inventory as well as high competitive intensity for discretionary sales. Volumes were modestly higher than the same period last year, with significant contributions from Kildair and recent acquisitions, in particular L.E. Belcher. These volume gains in both distillates and heavy oils more than offset a decline in the remainder of Sprague's refined products business. The reduction in gasoline volume was primarily a result of the high competitive intensity for discretionary sales in a well-supplied market.
Natural Gas
Natural gas net sales decreased
$5.2 million
, or
2%
, compared to the same period last year as a result of a 2% reduction in the average sales price. Volumes were flat as the reduction from the loss of certain higher volume, lower adjusted unit gross margin accounts essentially offset the contribution from the Global natural gas acquisition beginning in February 2017.
Natural gas adjusted gross margin increased by
$0.6 million
, compared to the same period last year, driven by
2%
gain in adjusted unit gross margin. The increased adjusted unit gross margins were due to a continuing shift in customer mix, partially offset by fewer pipeline capacity optimization opportunities and a lower fair value derivative valuation.
Materials Handling
Materials handling net sales and adjusted gross margin both decreased by
$1.7 million
, or
5%
, compared to the same period last year. The decrease was primarily due to reduced windmill component handling. Other contributors to the reduction included lower gypsum and slag activity due to timing differences, as well as a modest decrease in refined products storage requirements at Kildair. Partially offsetting these declines were higher asphalt requirements including the expansion of a key contract, increased salt activity due to the higher incidence of storm events, and advanced timing of petroleum coke handling requirements.
Other Operations
Net sales from other operations declined by $0.3 million with adjusted gross margin decreasing by $0.5 million. The decline in adjusted gross margin was a combination of reductions in fuel burner service, trucking at Kildair and lower coal volumes.
Operating Costs and Expenses
Three Months Ended September 30, 2017
compared to
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase/(Decrease)
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
|
(in thousands)
|
|
|
|
|
|
Operating expenses
|
$
|
16,891
|
|
|
$
|
15,725
|
|
|
$
|
1,166
|
|
|
7%
|
|
Selling, general and administrative
|
$
|
17,559
|
|
|
$
|
19,735
|
|
|
$
|
(2,176
|
)
|
|
(11)%
|
|
Depreciation and amortization
|
$
|
6,655
|
|
|
$
|
5,329
|
|
|
$
|
1,326
|
|
|
25%
|
|
Interest expense, net
|
$
|
7,095
|
|
|
$
|
6,645
|
|
|
$
|
450
|
|
|
7%
|
Operating Expenses
. Operating expenses increased by $1.2 million, or 7%, compared to the same period last year, reflecting $1.2 million of operating expenses at our terminals acquired during the first half of 2017 and increased maintenance and utility expenses at our existing terminals, partially offset by lower stockpile expenses.
Selling, General and Administrative Expenses
. Selling, general and administrative expenses decreased
$2.2 million
, or
11%
, compared to the same period last year. The predominant driver of this decrease was lower incentive compensation, partially offset by expenses connected to our Global Natural Gas & Power acquisition.
Depreciation and Amortization.
Depreciation and amortization increased
$1.3 million
, or
25%
, compared to the same period last year, primarily as a result of the acquisitions completed during the first half of 2017.
Interest Expense, net.
Interest expense, net increased
$0.5 million
, or
7%
, compared to the same period last year primarily relating to the financing of the four acquisitions which were completed in the first half of 2017.
Nine Months Ended
September 30, 2017
compared to
Nine Months Ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Increase/(Decrease)
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
|
(in thousands)
|
|
|
|
|
|
Operating expenses
|
$
|
50,624
|
|
|
$
|
49,078
|
|
|
$
|
1,546
|
|
|
3%
|
|
Selling, general and administrative
|
$
|
63,472
|
|
|
$
|
62,099
|
|
|
$
|
1,373
|
|
|
2%
|
|
Depreciation and amortization
|
$
|
19,537
|
|
|
$
|
16,001
|
|
|
$
|
3,536
|
|
|
22%
|
|
Interest expense, net
|
$
|
22,357
|
|
|
$
|
19,800
|
|
|
$
|
2,557
|
|
|
13%
|
Operating Expenses
. Operating expenses increased by $1.5 million, or 3% as compared to the same period last year, reflecting $2.4 million of operating expenses at our terminals acquired during the first half of 2017, offset by a $0.9 million decrease in stockpile expenses at our other terminals.
Selling, General and Administrative Expenses
. Selling, general and administrative expenses increased
$1.4 million
, or
2%
, compared to the same period last year, primarily as a result of a $1.8 million increase of selling and administrative expenses related to the recent Global Natural Gas & Power acquisition. Decreased employee related expenses of $1.6 million driven by lower incentive compensation were more than offset by increased merger and acquisition expenses and systems costs in support of continued growth.
Depreciation and Amortization.
Depreciation and amortization increased
$3.5 million
, or
22%
, compared to the same period last year, primarily as a result of the acquisitions completed during the first half of 2017.
Interest Expense, net.
Interest expense, net increased
$2.6 million
, or
13%
, compared to the same period last year primarily related to a one-time charge attributable to the refinancing and extension of our Credit Agreement and increased borrowings for the four acquisitions completed during the first half of 2017.
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
September 30, 2017
, we had working capital of
$282.3 million
.
As of
September 30, 2017
, the undrawn borrowing capacity under the working capital facilities was
$92.5 million
and the undrawn borrowing capacity under the acquisition facility was
$233.6 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
nine
months ended
September 30, 2017
, the amount drawn under the working capital facilities of our Credit Agreement fluctuated from a low of
$115.0 million
to a high of
$310.3 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
April 27, 2017
, Sprague Operating Resources LLC and Kildair Service ULC ("Kildair") entered into an agreement that amended and restated the revolving credit agreement to extend the maturity through April 27, 2021, reduce the U.S. dollar working capital facility from $1.0 billion to $950.0 million, reduce the multicurrency working capital facility from $120.0 million to $100.0 million, reduce interest rates under certain leverage ratio scenarios, as well as make other modifications, the “Credit Agreement”. Obligations under the Credit Agreement are secured by substantially all of the assets of the Partnership and its subsidiaries.
As of September 30, 2017, the revolving credit facilities under the Credit Agreement contained, among other items, the following:
|
|
|
|
•
|
U.S. dollar revolving working capital facility of up to $950.0 million, subject to the Partnership's borrowing base limits, to be used for working capital loans and letters of credit;
|
|
|
|
|
•
|
Multicurrency revolving working capital facility of up to $100.0 million, subject to the Partnership's borrowing base limits, to be used by Kildair for working capital loans and letters of credit;
|
|
|
|
|
•
|
Revolving acquisition facility of up to $550.0 million to be used for loans and letters of credit to fund capital expenditures and acquisitions and other general corporate purposes related to the Partnership’s current businesses; and
|
|
|
|
|
•
|
Subject to certain conditions, the U.S. dollar revolving working capital facilities may be increased by $250.0 million and the multicurrency revolving working capital facility may be increased by $220.0 million, subject to a maximum increase for both facilities of $270.0 million in the aggregate. Additionally, subject to certain conditions, the revolving acquisition facility may be increased by $200.0 million.
|
Indebtedness under the Credit Agreement will bear interest, at the borrowers' option, at a rate per annum equal to either 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) for interest periods of one, two, three or six months plus a specified margin or an alternate rate plus a specified margin.
For the U.S. dollar working capital facility and the acquisition facility, the alternate rate is the Base Rate which is the higher of (a) the U.S. Prime Rate as in effect from time to time, (b) the Federal Funds 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 the Canadian dollar working capital facility, 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 margin for the working capital facilities will range, based upon the percentage utilization of this facility, from 1.00% to 1.50% for loans bearing interest at the alternative Base Rate and from 2.00% to 2.50% for loans bearing interest at the Eurocurrency Rate and for letters of credit issued under the U.S. dollar working capital facility or the multicurrency working capital facility. The specified margin for the acquisition facility will range, based on the Partnership’s consolidated total leverage ratio, from 1.25% to 2.25% for loans bearing interest at the alternate Base Rate and from 2.25% to 3.25% for loans bearing interest at the Eurocurrency Rate and for letters of credit issued under the acquisition facility. In addition, the Partnership will incur a commitment fee on the unused portion of the facilities at a rate ranging from 0.375% to 0.50% per annum.
The working capital facilities are subject to borrowing base reporting and as of
September 30, 2017
and
December 31, 2016
, had a borrowing base of
$398.4 million
and
$525.4 million
, respectively. As of
September 30, 2017
and
December 31, 2016
, outstanding letters of credit were
$31.2 million
and
$31.6 million
, respectively. As of
September 30, 2017
, excess availability under the working capital facilities was
$92.5 million
and excess availability under the acquisition facilities was
$233.6 million
.
The weighted average interest rate was
3.7%
and
3.4%
at
September 30, 2017
and
December 31, 2016
, respectively. No amounts are due under the Credit Agreement until the maturity date, however, the current portion of the Credit Agreement at
September 30, 2017
and
December 31, 2016
represents the amounts of the working capital facility intended to be repaid during the following twelve month period.
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 Partnership would not be in pro forma compliance with its 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, among others: to maintain a minimum consolidated EBITDA-to-fixed charge ratio, a minimum consolidated Net Working Capital amount, a maximum consolidated total leverage-to-EBITDA ratio, a maximum consolidated senior secured leverage-to-EBITDA ratio. The Credit Agreement also limits our ability to incur debt, grant liens, make certain investments or acquisitions, dispose of assets, and incur additional indebtedness. The Partnership was in compliance with the covenants under the Credit Agreement at
September 30, 2017
.
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-accelerations, 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. Maintenance capital expenditures represent 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. Expansion capital expenditures are 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 acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
Expansion
|
|
Maintenance
|
|
Total
|
|
|
(in thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
2017
(1)
|
$
|
23,422
|
|
|
$
|
7,884
|
|
|
$
|
31,306
|
|
|
2016
|
$
|
5,083
|
|
|
$
|
6,353
|
|
|
$
|
11,436
|
|
|
|
|
|
(1)
|
Excludes approximately $8.5 million of assets acquired in 2017 that were previously leased by the Partnership.
|
We anticipate that future maintenance capital expenditures and future expansion capital requirements will be funded with cash generated by operations or provided through long-term borrowings or other debt financings and/or equity offerings.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
$
|
126,891
|
|
|
$
|
107,095
|
|
|
Net cash used in investing activities
|
$
|
(111,047
|
)
|
|
$
|
(40,354
|
)
|
|
Net cash used in financing activities
|
$
|
(15,453
|
)
|
|
$
|
(94,263
|
)
|
Operating Activities
Net cash provided by operating activities for the
nine
months ended
September 30, 2017
was $
126.9 million
and was primarily driven by cash inflows as a result of a decrease of
$73.9 million
in inventories due to a seasonal reduction in inventory requirements, a decrease of
$77.7 million
in accounts receivable due to seasonal reduction in sales volume, and
$42.4 million
in net income. These inflows were offset by cash outflows as a result of a reduction of $
80.5 million
in accounts payable and accrued liabilities primarily relating to the timing of invoice payments for product purchases and an increase of $
19.8 million
in our derivative fixed forward contracts as a result of changes in commodity prices during the period.
Net cash provided by operating activities for the
nine
months ended
September 30, 2016
was $
107.1 million
and was primarily driven by a decrease of $
95.1 million
in derivative instruments relating to the ratable liquidation of our fixed forward contracts as we come out of the peak season, a decrease of
$27.1 million
in accounts receivable relating to lower commodity prices and volumes and
$11.3 million
in net income. These inflows were offset by cash outflows as a result of a reduction of $
30.2 million
in accounts payable and accrued liabilities primarily relating to the timing of invoice payments for product purchases and an increase of $
25.1 million
in inventories due to higher volume levels.
Investing Activities
Net cash used in investing activities for the
nine
months ended
September 30, 2017
was $
111.0 million
of which $
72.2 million
related to the purchase of four business acquisitions, $23.4 million related to expansion capital expenditures,
$7.9 million
related to maintenance capital expenditure projects across our terminal system and $8.5 million related to a purchase of real estate previously leased by us at our Portland Merrill terminal.
Net cash used in investing activities for the
nine
months ended
September 30, 2016
was $
40.4 million
of which
$29.1 million
related to financing our acquisitions,
$5.1 million
related to expansion capital expenditures and
$6.4 million
related to maintenance capital expenditure projects across our terminal system.
Financing Activities
Net cash used in financing activities for the
nine
months ended
September 30, 2017
was $
15.5 million
, and primarily resulted from distributions of
$42.4 million
partially offset by
$35.0 million
of borrowings under our Credit Agreement acquisition line to fund the acquisitions.
Net cash used in financing activities for the
nine
months ended
September 30, 2016
was $
94.3 million
and primarily resulted from $
51.9 million
of net payments under our Credit Agreement due to reduced financing requirements from lower commodity prices and accounts receivable levels and distributions of $
34.8 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
nine
months ended
September 30, 2017
and
2016
.
Critical Accounting Policies and Estimates
“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: asset valuations, the fair value of derivative assets and liabilities, environmental and legal obligations.
The significant accounting policies and estimates that have been adopted and followed in the preparation of our consolidated financial statements are detailed in Note 1—“Description of Business and Summary of Significant Accounting Policies” included in our 2016 Annual Report. There have been no subsequent 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 to our Condensed Consolidated Financial Statements.