SPRAGUE RESOURCES LP
As used in this Quarterly Report on Form 10-Q ("Quarterly Report"), unless the
context otherwise requires, prior to May 28, 2021 , 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 . Prior to May
28, 2021 , our General Partner was a wholly owned subsidiary of Axel Johnson.
As used in this Quarterly Report on Form 10-Q ("Quarterly Report"), unless the
context otherwise requires, effective May 28, 2021 , 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 "Hartree" or the "Sponsor"
refer to Hartree Partners, LP , other than Sprague Resources , its subsidiaries
and its General Partner ; and references to "Sprague Holdings " refer to Sprague
HP Holdings, LLC , a wholly owned subsidiary of Hartree and the owner of our
General Partner . Effective May 28, 2021 , our General Partner is a wholly owned
subsidiary of Hartree.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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
Transaction (as defined below) and the expected benefits 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 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.
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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 theSEC . 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 theSEC . 22
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Overview
We are aDelaware limited partnership formed inJune 2011 bySprague Holdings and ourGeneral 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. InOctober 2013 , we became a publicly traded master limited partnership ("MLP") and our common units representing limited partner interests are listed on theNew York Stock Exchange ("NYSE") under the ticker symbol "SRLP". Our Predecessor was founded in 1870 as theCharles H. Sprague Company inBoston, Massachusetts ; and, in 1905, the company opened thePenobscot Coal and Wharf Company , a tidewater terminal located inSearsport, 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 inthe 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 toAxel Johnson Inc. , a member of theAxel Johnson Group of Stockholm, Sweden . We are one of the largest independent wholesale distributors of refined products in theNortheast 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 theNortheast United States fromNew York toMaine and inQuebec, Canada that have a combined storage tank capacity of approximately 14.3 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 theNortheast 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 customerswho resell the refined products we sell to them and commercial customerswho consume the refined products directly. Our wholesale customers consist of approximately 800 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. Our customers also include businesses engaged in the development of natural gas resources inPennsylvania 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 andCanada . 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 ourPortland, 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. 23
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Hartree Transaction OnApril 20, 2021 , the Partnership and Hartree Partner, LP ("Hartree") announced thatSprague Holdings entered into an agreement to sell toSprague HP Holdings, LLC (a wholly-owned subsidiary of Hartree) the interest ofSprague Holdings in the General Partner, the incentive distribution rights and all of the common units representing limited partner interests thatSprague Holdings owned in the Partnership (the "Transaction"). The Transaction was completed and effective onMay 28, 2021 . IDR Reset Election OnFebruary 11, 2021 ,Sprague Holdings provided notice to Partnership thatSprague 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 toSprague Holdings . Pursuant to the IDR Reset Election, the levels at which the incentive distribution rights participate in distributions were reset at higher amounts based on then-current common unit distribution rates and a formula in our partnership agreement. The IDR Reset Election was effective onMarch 5, 2021 . As ofSeptember 30, 2021 , our Sponsor, through its ownership ofSprague Holdings , owns 18,173,849 common units (consisting of the 16,058,484 common units purchased as part of the Transaction and 2,115,365 common units beneficially owned by Hartree prior to the consummation of the Transaction) representing an aggregate of 69.3% of the limited partner interest in the Partnership. As ofJune 30, 2021 ,Hartree Bulk Storage, LLC and HP Bulk Storage Manager, LLC, (uncontrolled affiliates ofHartree Partners LP ) beneficially own an additional 1,375,000 common units which are included in the public units outstanding.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 thatSprague Holdings may receive on any limited partner units that it owns. COVID-19 The global outbreak of the novel coronavirus (COVID-19) was declared a pandemic by theWorld Health Organization and a national emergency by theU.S. Government inMarch 2020 and has negatively affected theU.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 endedMarch 31, 2020 , a wide array of sectors including but not limited to the energy, transportation, manufacturing and commercial, along with global economic conditions generally, were significantly disrupted by the pandemic. A number of our customers in these industries also 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 initially led to a precipitous decline in fuel prices in response to concerns about demand for fuel. ThroughDecember 31, 2020 , the pandemic and associated impacts on economic activity had an adverse effect on our operating results, specifically, the we had seen a decline in demand and related sales volume as large sectors of the global economy were adversely impacted by the crisis. However, the easing of restrictions, health advancements and other ongoing measures to alleviate the pandemic, have led to a subsequent recovery of demand with fuel prices now at higher levels than pre-pandemic. In order to continue to mitigate the effects of the pandemic, even as market conditions have improved, we continue to focus on the safety of employees and other stakeholders as well as a number of initiatives relating to cost reduction, liquidity and operating efficiencies. We make 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. We 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 us, as well as consideration of the future potential impacts of COVID-19 on our business as ofSeptember 30, 2021 . While market conditions for our products and services have improved when compared to a year ago, the pandemic remains fluid, indicating that the full impact may not have been realized across our business and operations. The economic and operational landscape has been altered, and it is difficult to determine whether such changes are temporary or permanent, with challenges related to staffing, supply chain, and transportation globally. We continue to monitor the evolving impacts of COVID-19 and variants closely and respond to changing conditions. 24
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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
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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. 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 ourGeneral 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 ourGeneral Partner and reimbursed by us. 26
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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 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.
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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 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 September 30, Increase/(Decrease)
2021 2020 $ %
(in thousands)
Net sales $ 665,466 $ 390,458 $ 275,008 70 %
Cost of products sold (exclusive of depreciation and amortization)
727,402 324,681 402,721 124 %
Operating expenses 20,107 18,504 1,603 9 %
Selling, general and administrative 19,397 18,045 1,352 7 %
Depreciation and amortization 8,277 8,470 (193) (2) %
Total operating costs and expenses 775,183 369,700 405,483 110 %
Other operating income (25) - (25) N/A
Operating (loss) income (109,742) 20,758 (130,500) (629) %
Interest income 30 34 (4) (12) %
Interest expense (7,859) (9,552) (1,693) (18) %
(Loss) income before income taxes (117,571) 11,240 (128,811) (1,146) %
Income tax benefit (provision) 1,814 (1,567) (3,381) (216) %
Net (loss) income $ (115,757) $ 9,673 $ (125,430) (1,297) %
Nine Months Ended September 30, Increase/(Decrease)
2021 2020 $ %
(in thousands)
Net sales $ 2,359,272 $ 1,708,551 $ 650,721 38 %
Cost of products sold (exclusive of depreciation
and amortization) 2,311,987 1,499,934 812,053 54 %
Operating expenses 58,486 57,787 699 1 %
Selling, general and administrative 61,355 57,002 4,353 8 %
Depreciation and amortization 25,018 25,585 (567) (2) %
Total operating costs and expenses 2,456,846 1,640,308 816,538 50 %
Other operating income 9,699 - 9,699 N/A
Operating (loss) income (87,875) 68,243 (156,118) (229) %
Other income 2 64 (62) (97) %
Interest income 173 282 (109) (39) %
Interest expense (25,261) (31,626) (6,365) (20) %
(Loss) income before income taxes (112,961) 36,963 (149,924) (406) %
Income tax benefit (provision) 381 (5,680) (6,061) (107) %
Net (loss) income $ (112,580) $ 31,283 $ (143,863) (460) %
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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.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands) Reconciliation of Operating Income to Adjusted Gross Margin: Operating (loss) income
$ (109,742) $ 20,758 $ (87,875) $ 68,243 Operating costs and expenses not allocated to operating segments: Operating expenses 20,107 18,504 58,486 57,787 Selling, general and administrative 19,397 18,045 61,355 57,002 Depreciation and amortization 8,277 8,470 25,018 25,585 Other operating loss (income) (7) 25 - (9,699) -
Add/(deduct):
Change in unrealized loss (gain) on inventory (1) 16,619 (17,680) (4,269) 1,097 Change in unrealized value on natural gas transportation contracts (2) 103,233 8,498 159,941 (4,824) Total adjusted gross margin (3):$ 57,916 $ 56,595 $ 202,957 $ 204,890 Adjusted Gross Margin by Segment: Refined products$ 33,299 $ 40,449 $ 111,497 $ 129,099 Natural gas 10,741 588 49,105 28,130 Materials handling 12,067 13,811 36,837 42,287 Other operations 1,809 1,747 5,518 5,374 Total adjusted gross margin$ 57,916 $ 56,595 $ 202,957 $ 204,890 Reconciliation of Net Income to Adjusted EBITDA Net (loss) income$ (115,757) $ 9,673 $ (112,580) $ 31,283 Add/(deduct): Interest expense, net 7,829 9,518 25,088 31,344 Tax provision (1,814) 1,567 (381) 5,680 Depreciation and amortization 8,277 8,470 25,018 25,585 EBITDA (3):$ (101,465) $ 29,228 $ (62,855) $ 93,892 Add/(deduct): Change in unrealized loss (gain) on inventory (1) 16,619 (17,680) (4,269) 1,097 Change in unrealized value on natural gas transportation contracts (2) 103,233 8,498 159,941 (4,824) Gain on sale of fixed assets not in the ordinary course of business including gain on insurance recoveries (7) 25 - (9,702) - Acquisition related expenses (4) - - - 1 Other adjustments (5) 34 162 104 484 Adjusted EBITDA$ 18,446 $ 20,208 $ 83,219$ 90,650 Other Data: Ten Year Average Heating Degree Days (6) 37 34 3,254 3,248 Heating Degree Days (6) 17 54 3,076 3,004 Variance from average heating degree days (54) % 59 % (5) % (8) % Variance from prior period heating degree days (69) % 200 % 2 % (5) % 29
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(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 forBoston andNew York City (weighted equally) with a historical average for the same geographic locations over the previous ten-year period. (7)OnApril 29, 2021 , we sold theOswego terminal to an unaffiliated buyer. In connection with the sale, we recorded a net gain on the sale of$9.0 million during the quarter endedJune 30, 2021 which is included within other operating income in the consolidated statements of income for the nine months endedSeptember 30, 2021 . The remaining$0.7 million of other operating income for the nine months endedSeptember 30, 2021 relates to a gain associated with a parcel of land sold at theBronx terminal during the quarter endedJune 30, 2021 . 30
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Analysis of Operating Segments
Three Months EndedSeptember 30, 2021 compared to Three Months EndedSeptember 30, 2020 Three Months Ended September 30, Increase/(Decrease) 2021 2020 $ % (in thousands, except adjusted unit gross margin) Volumes: Refined products (gallons) 272,960 245,460 27,500 11 % Natural gas (MMBtus) 10,217 10,381 (164) (2) % Materials handling (short tons) 467 449 18 4 % Materials handling (gallons) 128,452 108,020 20,432 19 % Net Sales: Refined products $ 600,625$ 331,536 $ 269,089 81 % Natural gas 47,274 40,592 6,682 16 % Materials handling 12,198 13,880 (1,682) (12) % Other operations 5,369 4,450 919 21 % Total net sales $ 665,466$ 390,458 $ 275,008 70 % Adjusted Gross Margin: Refined products $ 33,299$ 40,449 $ (7,150) (18) % Natural gas 10,741 588 10,153 1,727 % Materials handling 12,067 13,811 (1,744) (13) % Other operations 1,809 1,747 62 4 % Total adjusted gross margin $ 57,916$ 56,595 $ 1,321 2 % Adjusted Unit Gross Margin: Refined products $ 0.122$ 0.165 $ (0.043) (26) % Natural gas $ 1.051$ 0.057 $ 0.994 1,744 % Refined Products Refined products net sales increased$269.1 million , or 81%, compared to the same period last year, with the 63% higher average sales price the key factor. Volumes were 11% higher, also contributing to the higher net sales. Higher demand along with supply concerns over oil inventory levels led to the escalating price environment. The demand gains were a result of the ongoing global recovery from the pandemic along with further fuel substitution as natural gas and coal prices increased sharply. The higher volume was a result of gains in gasoline, with less significant contributions from distillates and heavy oil. The increase in gasoline volumes was due to the ongoing recovery in transportation demand, with Sprague benefiting from higher demand from certain key customers. Refined products adjusted gross margin decreased$7.2 million , or 18%, compared to the same period last year as reduced gross adjusted unit margins more than offset the higher volumes. The lower gross adjusted unit margins were primarily a result of substantially less attractive market conditions to purchase, store and hedge oil inventory compared to the market conditions last year in conjunction with a surplus supply and weaker demand environment. This factor was the key one leading to the lower adjusted unit gross margins in both theU.S. and Canadian operations. Natural Gas
Natural gas net sales increased
Natural gas adjusted gross margin increased$10.2 million , or 1,727%, compared to the same period last year due to an increase in adjusted unit gross margins. The increase in adjusted unit gross margins reflects the higher market prices and volatility leading to further supply and inventory optimization opportunities along with basis changes contributing to gains in the mark-to-market valuation of forward positions. 31
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Materials Handling Materials handling net sales and adjusted gross margin were$1.7 million , or 13% lower than the same period last year. The Canadian operations contributed about$1.0 million of this decline due to a reduction in tank rental requirements. Margins were also lower in theU.S. operations, with the$0.7 million decrease primarily resulting from lower wind handling and asphalt activity, as well as deferral of some bulk deliveries. Increased pulp handling provided a modest offset to the other reductions. Other Operations Net sales from other operations increased$0.9 million , or 21%, driven by higher coal volumes and prices compared to the same period last year. Adjusted gross margin was 4% higher than last year, due to increased coal margins and to a lesser extent higher boiler service, more than offsetting a decline at our Canadian trucking operations. Nine Months EndedSeptember 30, 2021 compared to Nine Months EndedSeptember 30, 2020 Nine Months Ended September 30, Increase/(Decrease) 2021 2020 $ % (in thousands, except adjusted unit gross margin) Volumes: Refined products (gallons) 1,078,263 990,273 87,990 9 % Natural gas (MMBtus) 40,744 39,850 894 2 % Materials handling (short tons) 1,440 1,726 (286) (17) % Materials handling (gallons) 310,755 335,339 (24,584) (7) % Net Sales: Refined products$ 2,105,968 $ 1,466,367 $ 639,601 44 % Natural gas 201,209 184,358 16,851 9 % Materials handling 36,969 42,411 (5,442) (13) % Other operations 15,126 15,415 (289) (2) % Total net sales$ 2,359,272 $ 1,708,551 $ 650,721 38 % Adjusted Gross Margin: Refined products $ 111,497$ 129,099 $ (17,602) (14) % Natural gas 49,105 28,130 20,975 75 % Materials handling 36,837 42,287 (5,450) (13) % Other operations 5,518 5,374 144 3 % Total adjusted gross margin $ 202,957$ 204,890 $ (1,933) (1) % Adjusted Unit Gross Margin: Refined products $ 0.103$ 0.130 $ (0.027) (21) % Natural gas $ 1.205$ 0.706 $ 0.499 71 % Refined Products Refined products net sales increased$639.6 million , or 44%, due primarily to the substantially higher oil price environment compared to the same period last year as well as a 9% increase in volumes. The increased volumes were primarily a combination of distillates and gasoline, with heavy oil modestly higher. The increase in distillates was a combination of higher diesel volumes with gains from regional transit authorities, on-site fueling operations, and marine fueling requirements. The gain in heating oil volumes was partly a result of the colder weather conditions this year, with heating degree days in our market area up over 2%. The gain in gasoline volumes was due to a recovery in transportation demand, with the higher heavy oil volumes a result of additional on-land demand at our Canadian operations. Refined products adjusted gross margin decreased$17.6 million , or 14%, compared to the same period last year as reduced gross adjusted unit margins more than offset the higher volumes. The lower gross adjusted unit margins were primarily a result of substantially less attractive market conditions to purchase, store and hedge oil inventory compared to the market conditions last year which was characterized by a surplus supply and weaker demand environment. Both theU.S. and Canadian operations contributed to the decline in the adjusted gross unit margins. 32
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Natural Gas
Natural gas net sales increased
Natural gas adjusted gross margin increased by$21.0 million , or 75%, compared to the same period last year, largely as a result of a 71% gain in adjusted unit gross margins. The increase in adjusted unit gross margins was due to enhanced supply and inventory optimization opportunities as well as basis changes contributing to gains in the mark-to-market valuation of forward positions. The enhanced supply and optimization opportunities included were a combination of the early part of the year, in conjunction with colder temperatures and concomitant higher price volatility, as well as in the summer as both market prices and volatility increased.
Materials Handling
Materials handling net sales and adjusted gross margin decreased$5.5 million or by 13% each, compared to the same period last year. This decline was a result of comparable reductions in ourU.S. and Canadian operations. The decrease in theU.S. was mostly due to lower road salt and windmill component handling activity, with a decline in asphalt margin also a factor. The reduction in salt was due to fewer bulk vessel deliveries, as a mild winter resulted in lower salt usage and less resupply requirements. Reduced windmill handling revenue resulted since there were lower component deliveries compared to the substantial activity early last year. The lower margins in the Canadian operations were a result of reduced tank rental demand from third parties.
Other Operations
Net sales from other operations decreased by$0.3 million , or 2%, due primarily to reduced coal volumes compared to the same period last year. Adjusted gross margin was$0.1 million , or 3% higher than last year, due to a combination of an increase in boiler service activity and higher coal adjusted gross unit margins. Operating Costs and Expenses Three Months EndedSeptember 30, 2021 compared to Three Months EndedSeptember 30, 2020 Three Months Ended September 30, Increase/(Decrease) 2021 2020 $ % (in thousands) Operating expenses $ 20,107$ 18,504 $ 1,603 9% Selling, general and administrative $ 19,397$ 18,045 $ 1,352 7% Depreciation and amortization $ 8,277$ 8,470 $ (193) (2)% Interest expense, net $ 7,829$ 9,518 $ (1,689) (18)% Operating Expenses. Operating expenses increased$1.6 million , or 9%, compared to the same period last year, primarily reflecting an increase of$0.6 million of employee related costs,$0.4 million of insurance costs,$0.3 million of utilities and$0.3 million of stockpile and boiler fuel expenses. Selling, General and Administrative Expenses. SG&A expenses increased$1.4 million , or 7%, compared to the same period last year largely driven by an increase of$0.8 million in incentive compensation expense,$0.4 million in insurance costs,$0.2 million in marketing activities and a$0.2 million in legal costs partially offset by a decrease of$0.4 million in employee related costs. Depreciation and Amortization. Depreciation and amortization was approximately flat as increased depreciation expense was offset by decreased amortization expense. Interest Expense, net. Interest expense, net decreased$1.7 million , or 18%, compared to the same period last year primarily due to decreased net borrowing rates. 33
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Nine Months EndedSeptember 30, 2021 compared to Nine Months EndedSeptember 30, 2020 Nine Months Ended September 30, Increase/(Decrease) 2021 2020 $ % (in thousands) Operating expenses $ 58,486$ 57,787 $ 699 1% Selling, general and administrative $ 61,355$ 57,002 $ 4,353 8% Depreciation and amortization $ 25,018$ 25,585 $ (567) (2)% Interest expense, net $ 25,088$ 31,344 $ (6,256) (20)% Operating Expenses. Operating expenses increased$0.7 million , or 1%, compared to the same period last year, reflecting an increase of$1.0 million in employee related costs and$0.7 million in insurance costs partially offset by a decrease of$0.7 million in boiler fuel expenses and$0.3 million in consulting costs. Selling, General and Administrative Expenses. SG&A expenses increased$4.4 million or 8%, compared to the same period last year. This increase was primarily driven by an increase of$4.2 million in higher incentive compensation,$0.5 million in insurance costs and$0.3 million in employee related costs partially offset by a decrease of$0.7 million in audit and legal costs and$0.4 million in accretion expense. Depreciation and Amortization. Depreciation and amortization was approximately flat as increased depreciation expense was offset by decreased amortization expense. Interest Expense, net. Interest expense, net decreased$6.3 million , or 20%, 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. AtSeptember 30, 2021 , we had a working capital deficit of$139.0 million . As ofSeptember 30, 2021 , the undrawn borrowing capacity under the working capital facilities of our Credit Agreement was$326.0 million and the undrawn borrowing capacity under the acquisition facility was$56.8 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 endedSeptember 30, 2021 , the amount drawn under the working capital facilities of our Credit Agreement fluctuated from a low of$148.7 million to a high of$402 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 OnMay 11, 2021 ,Sprague Operating Resources LLC (the "U.S. Borrower") andKildair Service ULC (the "Canadian Borrower" and, together with theU.S. Borrower, the "Borrowers"), wholly owned subsidiaries of the Partnership, entered into a first amendment (the "First Amendment") to the second amended and restated credit agreement dated as ofMay 19, 2020 (the "Original Credit Agreement"; the Original Credit Agreement as amended by the First Amendment, the "Credit Agreement"). Upon the effective date, the First Amendment increased the acquisition facility from$430 million to$450 million was accounted for as a modification of a syndicated loan arrangement with partial extinguishment to the extent there was a decrease in the borrowing capacity on a creditor by creditor basis. The Credit Agreement matures onMay 19, 2023 . 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"). 34
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As of
•A committedU.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 uncommittedU.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$450.0 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 theU.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 . 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 inU.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 0.25%) for interest periods of one, two (solely with respect to Eurocurrency Rate loans denominated in Canadian dollars), three or six (solely with respect to Eurocurrency Rate loans denominated inU.S. dollars) months plus a specified margin or (ii) an alternate rate plus a specified margin. For loans denominated inU.S. dollars, the alternate rate is the Base Rate which is the highest of (a) theU.S. Prime Rate as in effect from time to time, (b) the greater of the Federal Funds Effective Rate and theOvernight Bank Funding Rate as in effect from time to time plus 0.50% and (c) the one-month Eurocurrency Rate forU.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 forU.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. The specified margin for (x) the committedU.S. dollar revolving working capital facility range from 1.00% to 1.50% for loans bearing interest at the Base Rate and from 2.00% to 2.50% for loans bearing interest at the Eurocurrency Rate, (y) the uncommittedU.S. dollar revolving working capital facility 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 and (z) the multicurrency revolving working capital facility range 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. 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 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 committedU.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%. 35
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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 atSeptember 30, 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: Capital Expenditures Expansion Maintenance Total (in thousands) Nine Months Ended September 30, 2021$ 2,559 $ 6,633 $ 9,192 2020$ 3,105 $ 4,684 $ 7,789 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. Cash Flows Nine Months Ended September 30, 2021 2020 (in thousands) Net cash provided by operating activities$ 246,833 $ 223,944 Net cash provided by (used in) investing activities $ 1,912$ (7,368) Net cash used in financing activities $
(243,649)
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Operating Activities Net cash provided by operating activities for the nine months endedSeptember 30, 2021 was$246.8 million . Cash inflows for the period were the result of an increase of$111.4 million in accounts payable and accrued liabilities primarily relating to the timing of invoice payments for product purchases, a decrease of$27.2 million in inventories primarily due to less attractive market conditions to purchase, store and hedge oil compared to last year, a decrease of$32.4 million in other assets driven by changes in collateral, a decrease of$23.1 million in accounts receivable and$152.9 million representing the net impact in our derivative instruments as a result of contract activity and changes in commodity prices during the period. These inflows were partially offset by cash outflows as a result of a net loss of$112.6 million . Net cash provided by operating activities for the nine months endedSeptember 30, 2020 was$223.9 million . Cash inflows for the period were the result of a decrease of$68.4 million in inventories largely due to reductions in the cost of inventory purchases, a decrease of$168.5 million in accounts receivable driven by combination of lower sales prices and volumes, net income of$31.3 million , and a decrease of$52.7 million in other assets driven by changes in collateral. These inflows were offset by cash outflows as a result of a reduction of$87.0 million in accounts payable and accrued liabilities primarily relating to the timing of invoice payments for product purchases and$40.7 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 provided by investing activities for the nine months endedSeptember 30, 2021 was$1.9 million , and primarily resulted from the sale ofOswego terminal generating$11.1 million in proceeds partially offset by$2.6 million related to expansion capital expenditures and$6.6 million related to maintenance capital expenditure projects across our terminal system. Net cash used in investing activities for the nine months endedSeptember 30, 2020 was$7.4 million , and primarily resulted from$3.1 million related to expansion capital expenditures and$4.7 million related to maintenance capital expenditure projects across our terminal system. Financing Activities Net cash used in financing activities for the nine months endedSeptember 30, 2021 was$243.6 million , and primarily resulted from$179.5 million of payments under our Credit Agreement due to financing requirements and distributions of$52.4 million . Net cash used in financing activities for the nine months endedSeptember 30, 2020 was$210.5 million , and primarily resulted from$150.1 million of payments under our Credit Agreement due to reduced financing requirements from accounts receivable levels, the reduction of inventory levels and distributions of$49.9 million . Impact of Inflation Inflation inthe United States andCanada has been relatively low in recent years and did not have a material impact on our results of operations for the nine months endedSeptember 30, 2021 and 2020. 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: the fair value of derivative assets and liabilities, goodwill impairment assessment, and revenue recognition and cost of products sold. 37
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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.
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