Sprague Resources LP

Thank you, Sara. Good afternoon, everyone, and welcome to Sprague Resources’ fourth quarter 2020 conference call.

Joining me today are David Long, our Chief Financial Officer; and Paul Scoff, our Vice President and General Counsel. I'd like to remind listeners that some of today’s call will include forward-looking statements.

These statements are based on our current expectations, which we believe to be reasonable as of today’s date, and Sprague does not undertake any obligation to update any forward-looking statements to reflect new information or future events. Actual results may differ significantly because of risks and uncertainties that are difficult to predict.

Please refer to our 10-K for a list of risk factors, which could cause our actual results to differ from anticipated results and review our 10-K, 10-Q, current reports, and other filings with the SEC. We also describe our business using certain non-GAAP financial measures.

Reconciliations of these measures to comparable GAAP measures are available in our non-GAAP quarterly supplement and our earnings press release, both of which can be found in the Investor Relations section of our website. I'd like to start today's call by recognizing the outstanding efforts by co-workers throughout the company and maintaining a safe and healthy environment, while providing essential fuel and services to our customers.

While we have seen isolated COVID-19 cases in various locations, we have avoided any transmission among employees due to stringent health and safety protocols. This increased attention to safety has yielded improvements on virtually all traditional HSE metrics as well with performance above industry standards.

I'm confident that our commitment to one another's well-being will enable us to maintain our impressive safety track record, while delivering strong results. Before David provides a detailed review of our results, I'd like to offer some commentary on developments in 2020 and remind listeners of the core tenets of our business model.

Our base business has generated a consistent distribution margin on the sale or handling of essential products to commercial and industrial customers in the Northeast. On top of the baseline margin, we often capture significant margin uplift when environmental or market factors leverage our advantage assets and logistical capabilities.

In Refined Products, this materializes when cold weather-related demand stress translates to higher-margin realization or a contango market structure enables us to capture the value of our expensive storage assets. In natural gas, colder weather and cash market volatility generate logistical optimization opportunities, given our extensive customer franchise.

Our Materials Handling business, on the other hand, has been extremely ratable, underpinned by long-term contracts and healthy minimums. Our 2020 results highlight the potential for an outsized contribution from just one of these factors as our storage assets generated considerable gains, with the contango structure in place for most of 2020.

This more than offset the much warmer conditions that persisted throughout 2020 as well as the substantial COVID-related demand weakness in transportation fuels and natural gas, as commercial activity in the northeast was curtailed in an effort to limit community spread. Our supply and logistics teams did an outstanding job of capitalizing on opportunities, while responding to shifting demand patterns caused by the virus.

Our focus in 2020 also turned to opportunities to rationalize our asset base, as demand patterns evolve and some locations exhibit better alternatives for the real estate. At the end of 2020, we closed on the sale of our Mount Vernon, New York terminal for conversion to a renewable natural gas facility.

The sale was consummated at an attractive price, and also offers potential for marketing the output of the facility once it's operational, complementing our expanding portfolio of renewable energy offerings. We see additional opportunities for asset sale in repurposing in 2021.

Throughout our 150-year history, Sprague has successfully served the evolving energy needs of commercial customers across business conditions, political and social climates and commodity markets. And I'm confident that our team will successfully navigate the current dynamics.

Clearly, there's increased attention and pressure on the carbon intensity of fuels at both the Federal and State level, and we expect those trends to continue. Sprague has long been a leader in the introduction of clean fuels into the Northeast markets.

And we're committed to expanding that position in the coming years whether it comes in the form of embedded carbon offsets, higher biodiesel blends, renewable diesel, or our recently signed agreement with Biofine to exclusively distribute their negative carbon liquid fuel as they ramp up production. We believe that renewable liquid fuels offer far greater efficacy as a heat source versus electric heat pumps, given the dramatically lower capital costs for consumers from the drop-in functionality.

We continue to innovate with our solar tank program and expect to go live this quarter on an installation at our Albany facility, which is expected to provide 100% of our power needs at that terminal. Finally, at our Searsport, Maine facility, our strong position in handling windmill components is expanding in order to keep up with the demand associated with the promise of Northeastern offshore wind projects.

While these exciting clean fuel development initiatives, each offer compelling prospects for Sprague and our customers, it's a steady investment in innovation in our core business that will drive the return profile in 2021 through productivity growth and new margin opportunities. Our Natural Gas team, excuse me, continues to win new accounts and our Refined Products team was the successful bidder on 25 new accounts in 2020, representing over 30 million incremental gallons.

We recently completed the expansion into heating oil sales at our Searsport terminal, leveraging the return of storage in that facility funded by the contango opportunity in 2020. At Kildair, the exploration of a major crude handling contract was mostly offset in 2020 by growth in other third-party storage business.

Finally, we completed the conversion of storage tanks in the Bronx to long-term asphalt contracts and started handling valve plastics at Searsport in our Materials Handling business. In January, the Board of our general partner declared the distribution of $0.6675 per unit for the fourth quarter of 2020, which is flat to the previous quarter.

Now, I'd like to turn the call over to Dave Long for a detailed review of our fourth quarter and full-year results. Dave?

Thank you, Dave, and good afternoon, everyone. I'm pleased to report Sprague's financial and operating results for 2020.

As Dave mentioned, Sprague was able to deliver strong results, despite warmer than average weather conditions and headwinds associated with the COVID-19 pandemic. Additionally, we made progress in 2020, driving higher process efficiencies in our business through targeted cost management initiatives.

Now, let me review our 2020 fourth quarter and full-year results. Sprague's quarterly adjusted gross margin decreased by 4%, or $2.6 million to $69.9 million as compared to the fourth quarter of 2019, while adjusted gross margin for the full-year increased by 3% or $6.8 million to $274.8 million.

The increase in our year-over-year result was attributable to supportive storage dynamics in our Refined Products business, which was partially offset by declines in our natural gas and Material Handling businesses. I'll provide more detail on the underlying results of each of these businesses shortly.

Sprague's fourth quarter adjusted EBITDA at $26.1 million decreased by $5 million, or 16% below the prior year. While adjusted EBITDA for the full-year of $116.7 million increased by $11.2 million, or 11%.

Operating expenses for the fourth quarter decreased by 2% or $0.3 million to $19.3 million and for the full-year decreased 9% or $7.9 million to $77.1 million. The year-over-year annual decline was primarily driven by a decrease in employee-related expenses, utilities, and boiler fuel expenses.

SG&A expenses increased for the quarter and full-year by 12% or $2.7 million and 4% or $3.4 million, respectively, primarily due to higher incentive compensation, which was partially offset by corporate overhead items related to the impact of COVID-19, reduction in our accretion expense, and a decrease in other employee-related expenses. Below the EBITDA line, Sprague's net cash interest expense declined on a quarterly and annual basis by 21% to $7.7 million and 9% to $33.9 million, respectively, principally due to lower net borrowing rates.

Sprague's cash tax of $1.4 million for the quarter and $7.8 million for the year were higher by $33,000 or 2% and higher by $3 million or 61%, respectively. Maintenance CapEx for the fourth quarter and the full-year decreased by $0.1 million or 5% to $2.1 million and by $1 million or 11% to $8.3 million, respectively, and included projects to upgrade storage tanks, docks, and IT applications.

Expansion CapEx decreased year-over-year by $2.7 million to $3.8 million. Distributable cash flow for the fourth quarter decreased by 15% to $17 million, while full-year results were higher by 27% to $71.4 million.

Sprague's distribution coverage ratio was one times to the fourth quarter and one times for the trailing 12 months at December 31. At the end of the fourth quarter, Sprague's permanent leverage was slightly below 3.5 times, while our borrowing capacity under our working capital and acquisition lines were $104 million and $32.2 million, respectively, which we believe provides ample borrowing capacity to finance our near-term operating and growth needs.

In terms of 2021 guidance, Sprague is targeting a full-year adjusted EBITDA of $105 million to $120 million. Now, for discussion of our business segments.

In Refined Products, Sprague's fourth quarter adjusted gross margin of $42.5 million decreased by 4% or $1.8 million. For our full-year results of $171.6 million increased year-over-year by 14% or $21.5 million.

Sales volumes decreased by 15% or $65.7 million, some -- $55.7 [ph] million or $374.2 million for the fourth quarter, while the full-year decreased 11% $165.9 million to $1.4 billion. The primary driver for the higher year-over-year adjusted gross margin was improved market structure to purchase, store, and hedge inventory to present itself in early 2020 given a surplus supply and a weakened demand environment, which more than offset the decline in volume associated with the warmer weather conditions and the COVID-19 economic slowdown.

In natural gas, our adjusted gross margin decreased by 8% or $1 million to $12.6 million for the fourth quarter, while for the full-year, it decreased by 25% or $13.5 million to $40.7 million. Volumes for both the quarter and the year were down by 8% and 10%, respectively.

The declines reflect several market dynamics, including the economic slowdown due to the COVID-19 pandemic, particularly in the hospitality sector, warmer weather, and limited supply optimization opportunities, given a weak and low volatile price environment. Despite these business challenges in 2020, we believe that natural gas business is well-positioned as market conditions improve, which is further supported by continued growth in its customer base.

In Material Handling, Sprague's fourth quarter adjusted gross margin of $13.9 million was 9% or $1.2 million higher than the same period a year ago, while full-year results of $56.2 million decreased by 1% or $0.4 million. This minus year-over-year decrease was primarily attributable to a decline in Kildair given the expiration of the crude by rail handling agreement at the end of May 2019, which was partially offset by additional through productivity with our customers.

Sprague's U.S. base operation was up modestly given additional handling activity from the windmill components in Maine, while business associated with a paper and pulp industry declined in 2020.

At this point, I'd like to open the call for questions.

Hi. Just a couple of quick questions.

The - what was your inventory at the end of the Q in dollars?

One second, just one moment. Inventories at the end of December 31, 2020 were $255.5 million.

Okay. And the heating degree days in the Q, in Q4?

Not sure we have that exactly in front of us right now. But Q4 was warmer than normal modestly.

Again, we'd have to get back to you on the specific degree day calculation, but it was warmer than the normal and slightly warmer than last year when we had a cold November in the previous year.

Sure. And just a question about the Searsport, the windmill Material Handling, is that the loan -- sort of, what call it, large import Materials Handling facility in New England or are there other places?

That's the only current location where windmill components are being offloaded and stored. There are a number of initiatives in Massachusetts to -- they're aiming to support the offshore wind efforts there, but there aren't any current active terminals providing those services today.

So, if you were to build an offshore windmill facility, for instance, off of Cape Cod, kind of right now, you'd have to -- would you reimport it in Maine and drive it down 95, for lack of a better word, or put it on train? How would that work?

No, you wouldn't. So, you -- the ones that are expected to be built up in the Massachusetts Waters.

I think it's certainly Massachusetts hopes that those services will be provided by facilities in Massachusetts. So we would participate in any Gulf of Maine activities that are constructed.

So, our efforts today have been oriented around supporting the efforts in the Gulf of Maine, not necessarily the Massachusetts wind initiatives.

Okay. And one last question.

You mentioned in your remarks, the embedded carbon offsets in your business; I don't quite understand what…?-

Yes, so just in the latter part of 2020, we just started offering the ability for our customers to purchase embedded carbon offsets as part of either their Refined Product purchase or their Natural Gas purchase. So, just making a one-step transaction for customers who wish to utilize carbon offsets.

So, if I were a customer and bought offsets, would that mean, you in turn would be, I don’t know, supporting trees being planted somewhere? So, is that…

Yes, we -- exactly. What we go through an established industry standard program, where you know they're certified offsets.

But we'd be essentially handling the transaction for you to make it seamless to you, if you were wishing to offset the emissions of the product you purchase. We could do that as part of the transaction.

But we'd go to -- go ahead.

No, that's fine. So, you go to the third-party.

Yes.

And just the guidance -- the EBITDA guidance as I don't have the correct terminology, you typically say, if assuming normal weather and normal market patterns, but the curve -- the heat -- the forward curve is backward dated now, I believe and historically, the contango curve is better for you all. When you say your guidance is consistent, that range is with a normal market pattern, is that flat curve or slightly backward dated or slightly contango?

Yes, it obviously varies considerably. And usually within the period of a year, you get periods of slight backwardation or slight contango.

We certainly do not expect a repeat of the 2020 contango opportunity that emerged earlier in that year. But what we see in front of us today is a -- what I'd characterize as a normal curve.

It's got a few months in which there's very mild backwardation and a few months in which there's very mild contango. So, in the aggregate, it's a pretty flat forward curve today.

Okay. Sorry, one last question comes to mind.

The repurposing of some assets you sold in Q4 and that that unusual gain, I think was around $8 million, was that solely due to that? So, what was the book value of those assets?

The book value of the assets was about $1 million or so. So -- and then we had some expenses associated with cleanup and some remediation obligations that we needed to complete as part of a sale.

And you think there are other opportunities out there not dissimilar to that one?

Yes, we're in -- we've got several things we're working on currently, and expect to complete at least one in the near-term.

All right. Thanks.

Thanks for your time.

You're welcome.