Sprague Resources LP

Good afternoon, everyone, and welcome to the Q3 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require any assistance during the conference, you may press star zero on your touchtone telephone. And as a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. David Glendon, President and Chief Executive Officer.

Thank you, Kirby. Good afternoon, everyone, and welcome to Sprague Resources' third quarter 2021 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 SPRG 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'm very pleased with our strong third quarter results. While David will review the details in a few minutes, the overall theme is one I've discussed several times on past calls. our business's ability to deliver a solid baseline while periodically benefiting from our proprietary asset base, customer franchise, and logistical capabilities. The upside can be driven by weather, market structure, specifically a contango in distillates, as we saw in 2020, or volatility in natural gas. In the third quarter of 2021, the global tightness in natural gas inventories and attendant price escalation led to optimization opportunities that our team was able to capture. We anticipate that this structural tightness will persist as we approach winter, which may also present opportunities with gas to oil switching among our customers with those capabilities. These strong results, coupled with the recent change to our distribution policy, better position Sprague to capture the plethora of opportunities we're seeing in the current market. These take the form of both consolidation in our core markets, as well as reconfiguration of our asset base to serve new energy markets and realize our vision, the energy partner every business needs to prosper in tomorrow's markets. While most MLPs have made cuts to distributions for defensive purposes, ours is driven by a desire to go on offense in a market ripe with potential. We see great prospects to invest cash from operations in accretive growth projects while still delivering positive operating cash flow. The recently announced change provides an incremental $25 million annually to invest in growth, and we also have ample room in our credit facility to finance larger opportunities, as our current permanent leverage of 3.7 times is well below the covenant level of 4.5 times. We also expect to consider additional sales of assets exhibiting limited growth prospects to provide further liquidity for growth projects. Our exposure to the Hartree team and their broad network continues to surface exciting new opportunities for the evolution of our business. We also expect to realize benefits of consolidation in our existing businesses as tighter regulations and shifting demand patterns lead to asset closures and or sales. For example, ExxonMobil recently announced plans to sell their large terminal in Everett, Mass., for alternative use. which we believe will significantly shift the Boston fuel market dynamics. And we're seeing a more active acquisition market as sellers confront the changes in the energy landscape. Even more substantial are the emerging opportunities in the energy transition. Whether it's liquid renewable fuels like biodiesel and renewable diesel, or increased reliance upon solar or wind sources, we believe that Sprague is very well positioned to capitalize on these trends. just as we have in every energy transition over the last 150 years. Notably, we've long believed that the existing liquid fuels infrastructure offers the greatest immediate potential for realizing greenhouse gas emission reductions versus often misguided efforts at conversion to alternative sources. And more stakeholders are now embracing this view. While some states continue to incent electrification, of residential and commercial heating systems, we believe that the exorbitant capital costs and limited greenhouse gas benefits do not compare to the drop in nature of higher biofuel blends with materially larger reductions in GHG emissions. We're now seeing several northeastern states recognize this dynamic in passing legislation mandating higher use of renewables, which rakes extensive infrastructure and experience is well suited to serve. We're making capital investments across our extensive distribution system to provide higher bio blends and other lower carbon fuels to capture this demand. In solar, we're looking to expand our first in the world solar tank experience to evolve from merely displacing our own energy use to constructing larger scale generation systems that can support customer energy transitions. We have two pending applications for these community solar installations that leverage the real estate of our extensive tank tops in high-cost power markets, where solar offers both an environmental and economic benefit. We expect to see continued growth in projects deploying these innovative thin-film solar panels going forward. In wind energy, our Searsport terminal is positioned to be a critical part of the infrastructure, serving the burgeoning offshore market. and we've been pleased to see the recent advancements in the Bureau of Ocean Energy Management permitting process for Gulf of Maine installations. Finally, we're actively investigating the use of tankage at selected terminal locations for conversion to digesters for renewable natural gas production. Based on our initial analysis, we believe that several of our facilities are well suited, proximate to feedstock sources, and with existing connections to natural gas pipeline infrastructure to present intriguing conversion prospects. Obviously, the existing tanks and our natural gas marketing capabilities round out the unique infrastructure advantages that Sprague possesses in entering this nascent market. While all of these development efforts and renewables present exciting growth opportunities to leverage Sprague's inherent advantages, We shouldn't lose sight of the continued prospects and long tail of our existing core business, with added benefits from Hartree's support, expertise, and extensive network. Now I'd like to turn the call over to Dave Long for a detailed review of our third quarter results.

Dave? Thank you, Dave, and good afternoon, everyone. Echoing Dave's comments, SPREG's solid financial results in Q3, coupled with a change to our distribution policy, positions the company well to realize future growth opportunities in existing and newly emerging energy and materials handling markets. And now a discussion of our financial results. Sprite's quarterly adjusted gross margin increased by 2%, or $1.3 million, to $57.9 million as compared to the third quarter of 2020. while third-quarter adjusted EBITDA of $18.4 million decreased by $1.8 million, or 9%, as compared to the prior year. Operating expenses increased by 9% or $1.6 million in the third quarter, primarily due to an increase in employee-related insurance, utilities, and boiler fuel costs. SG&A expenses increased by $1.4 million, or 7%, primarily as a result of an increase in incentive compensation insurance, and marketing expenses. Below the EBITDA line, third quarter cash interest expense of $6.5 million decreased by $1.6 million, or 20% below the prior year, which was primarily due to lower net borrowing rates. Spring recorded $0.6 million for cash taxes in the third quarter, which was down by $1.1 million, or 65% year over year. Quarterly maintenance capex was higher by $1.1 million to $3.2 million, which was higher principally due to incremental investments in tank repairs at several Sprague terminals. Since the decrease in adjusted EBITDA and increase in maintenance capex were more than offset by decreases in cash interests and taxes, Sprague's distributable cash flow for the third quarter increased by $0.3 million year-over-year to $9.3 million. generating a quarterly distribution coverage ratio of 0.8 times. Trailing 12-month distribution coverage at the end of the third quarter was 1.1 times. Turning to our balance sheet, as Dave mentioned previously, SPREG's permanent leverage was 3.7 times at the end of the third quarter. We continue to have ample excess capacity in our credit facility. As of September 30th, 2021, Our borrowing capacity under our working capital and acquisition lines was $383 million. In terms of forward guidance, Sprague's full-year adjusted EBITDA target remains unchanged at $105 million to $120 million. And now a discussion of our business segments. In refined products, sales volumes increased by 11% for the quarter as demand, particularly in gasoline, increased due to the ongoing economic recovery from the pandemic along with new accounts. Adjusted gross margin decreased by $7.2 million, or 18%, to $33.3 million, which was primarily due to weaker year-over-year market structure to purchase, store, and hedge inventory. We'd like to remind listeners again that there was a strong Cotango market structure in 2020, which afforded Spray considerable value in carrying higher inventory levels in Q3 of last year. In natural gas, sales volumes for the quarter decreased by 2% year-over-year, with a rising commodity price environment being a contributing factor, while adjusted gross margin was $10.7 million, which was an increase of $10.2 million compared to the same period a year ago, as higher market prices and volatility led to considerable supply optimization opportunities and basis improvements in the mark-to-market valuation of forward positions. Materials handling, the third quarter adjusted gross margin was $12.1 million, 13% or $1.7 million lower than the same period a year ago. The decrease was principally due to lower tank rental demand for third parties at Sprague's Canadian operations and lower wind handling asphalt activity, as well as a deferral of some bulk deliveries at Sprague's U.S. operation. At this point, I'd like to open the call for questions.

If you have a question at this time, please press star, then the number 1 on your touchtone telephone. And if your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Again, if you have any questions at this time, please press star 1 on your telephone. There are no questions at this time. Presenters, you may continue.

Thank you, Kirby, and thanks, everyone, for joining today.

We appreciate your interest, and we look forward to updating you at the next quarterly call. Thank you so much to our presenters and to everyone who participated. This concludes today's conference call.

You may now disconnect. Have a great day.