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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 001-36137
Sprague Resources LP
(Exact name of registrant as specified in its charter)
Delaware 45-2637964
(State of incorporation) (I.R.S. Employer Identification No.)
185 International Drive
Portsmouth, New Hampshire 03801
(Address of principal executive offices)
Registrant’s telephone number, including area code: (800225-1560
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Units Representing Limited Partner InterestsSRLPNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   No  
The registrant had 22,938,366 common units outstanding as of November 5, 2020.


Table of Contents

Table of Contents
 
  Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



Table of Contents

Part I – FINANCIAL INFORMATION
Item 1 — Condensed Consolidated Financial Statements
Sprague Resources LP
Condensed Consolidated Balance Sheets
(in thousands except unit amounts)
September 30,
2020
December 31,
2019
 (Unaudited)
Assets
Current assets:
Cash and cash equivalents$11,367 $5,386 
Accounts receivable, net112,708 281,527 
Inventories224,813 293,224 
Fair value of derivative assets160,352 77,871 
Other current assets14,762 63,705 
Total current assets524,002 721,713 
Fair value of derivative assets, long-term23,174 16,807 
Property, plant and equipment, net337,948 348,039 
Intangibles, net43,121 49,764 
Other assets, net22,574 24,183 
Goodwill115,037 115,037 
Total assets$1,065,856 $1,275,543 
Liabilities and unitholders’ equity
Current liabilities:
Accounts payable$60,580 $147,577 
Accrued liabilities46,176 43,386 
Fair value of derivative liabilities120,288 74,154 
Due to General Partner4,651 5,653 
Current portion of working capital facilities276,400 437,184 
Current portion of other obligations14,613 13,858 
Total current liabilities522,708 721,812 
Commitments and contingencies
Acquisition facility385,200 374,600 
Fair value of derivative liabilities, long-term22,985 13,439 
Other obligations, less current portion38,678 41,413 
Operating lease liabilities, less current portion 8,097 11,850 
Due to General Partner2,675 2,445 
Deferred income taxes15,465 16,202 
Total liabilities995,808 1,181,761 
Unitholders’ equity:
Common unitholders - public (9,971,666 and 10,641,561 units issued and outstanding as of September 30, 2020 and December 31, 2019, respectively)159,819 180,302 
Common unitholders - affiliated (12,951,236 and 12,106,348 units issued and outstanding as of September 30, 2020 and December 31, 2019, respectively)(62,503)(66,832)
Accumulated other comprehensive loss, net of tax(27,268)(19,688)
Total unitholders’ equity70,048 93,782 
Total liabilities and unitholders’ equity$1,065,856 $1,275,543 


The accompanying notes are an integral part of these financial statements.
1

Table of Contents

Sprague Resources LP
Unaudited Condensed Consolidated Income Statements
(in thousands except unit and per unit amounts)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net sales$390,458 $582,590 $1,708,551 $2,502,916 
Cost of products sold (exclusive of depreciation and amortization)324,681 534,420 1,499,934 2,302,192 
Operating expenses18,504 20,461 57,787 65,325 
Selling, general and administrative18,045 17,570 57,002 56,309 
Depreciation and amortization8,470 8,466 25,585 25,263 
Total operating costs and expenses369,700 580,917 1,640,308 2,449,089 
Operating income20,758 1,673 68,243 53,827 
Other income   64 128 
Interest income34 121 282 447 
Interest expense(9,552)(9,918)(31,626)(31,915)
Income (loss) before income taxes11,240 (8,124)36,963 22,487 
Income tax provision(1,567)(1,610)(5,680)(3,078)
Net income (loss)9,673 (9,734)31,283 19,409 
Incentive distributions declared(2,074) (6,218)(4,110)
Limited partners' interest in net income (loss)$7,599 $(9,734)$25,065 $15,299 
Net income (loss) per limited partner unit:
Common - basic$0.33 $(0.43)$1.10 $0.67 
Common - diluted$0.33 $(0.43)$1.09 $0.67 
Units used to compute net income per limited partner unit:
Common - basic22,922,902 22,733,977 22,889,053 22,733,977 
Common - diluted23,031,916 22,733,977 22,970,943 22,757,779 
Distribution declared per unit$0.6675 $0.6675 $2.0025 $2.0025 










The accompanying notes are an integral part of these financial statements.
2

Table of Contents

Sprague Resources LP
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net income (loss)$9,673 $(9,734)$31,283 $19,409 
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on interest rate swaps
Net loss arising in the period(1,485)(1,832)(11,270)(9,776)
Reclassification adjustment related to loss (gain) realized in income1,699 (11)3,755 (398)
Net change in unrealized gain (loss) on interest rate swaps214 (1,843)(7,515)(10,174)
Tax effect(2)14 59 79 
212 (1,829)(7,456)(10,095)
Foreign currency translation adjustment68 (40)(124)92 
Other comprehensive income (loss)280 (1,869)(7,580)(10,003)
Comprehensive income (loss)$9,953 $(11,603)$23,703 $9,406 

















The accompanying notes are an integral part of these financial statements.
3

Table of Contents

Sprague Resources LP
Unaudited Condensed Consolidated Statements of Unitholders’ Equity
(in thousands)
Common-
Public
Common-
Sprague
Holdings
Incentive Distribution RightsAccumulated
Other
Comprehensive
Loss
Total
Three Months Ended September 30, 2019 and 2020
Balance at June 30, 2019$194,167 $(51,044)$ $(19,656)$123,467 
Net loss(5,511)(6,278)2,055 — (9,734)
Other comprehensive loss— — — (1,869)(1,869)
Unit-based compensation59 67 — — 126 
Distributions paid in cash(7,094)(8,081)(2,055)— (17,230)
Balance at September 30, 2019$181,621 $(65,336)$ $(21,525)$94,760 
Balance at June 30, 2020$163,075 $(58,679)$ $(27,548)$76,848 
Net income3,135 4,466 2,072 — 9,673 
        Other comprehensive income— — — 280 280 
Unit-based compensation265 356 — — 621 
Distributions paid in cash(6,656)(8,646)(2,072)— (17,374)
Balance at September 30, 2020$159,819 $(62,503)$ $(27,268)$70,048 
Nine Months Ended September 30, 2019 and 2020
Balance at December 31, 2018$196,680 $(48,182)$ $(11,522)$136,976 
Net income6,192 7,052 6,165 — 19,409 
Other comprehensive loss— — — (10,003)(10,003)
Unit-based compensation32 37 — — 69 
Distributions paid in cash(21,283)(24,243)(6,165)— (51,691)
Balance at September 30, 2019$181,621 $(65,336)$ $(21,525)$94,760 
Balance at December 31, 2019$180,302 $(66,832)$ $(19,688)$93,782 
Net income11,363 13,723 6,197 — 31,283 
Other comprehensive loss— — — (7,580)(7,580)
Unit-based compensation854 1,030 — — 1,884 
Distributions paid in cash(20,898)(24,889)(4,144)— (49,931)
Distribution paid in units— 2,053 (2,053)—  
Units purchased by Sprague Holdings in private transaction(12,086)12,086 — —  
Common units issued in connection with annual bonus
423 484 — — 907 
Units withheld for employee tax obligations(139)(158)— — (297)
Balance at September 30, 2020$159,819 $(62,503)$ $(27,268)$70,048 
The accompanying notes are an integral part of these financial statements.
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Sprague Resources LP
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 Nine Months Ended September 30,
 20202019
Cash flows from operating activities
Net income$31,283 $19,409 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (includes amortization of deferred debt issuance costs)29,594 27,955 
Loss on sale of assets(12)(153)
Changes in fair value of contingent consideration368 450 
Provision for doubtful accounts343 471 
Non-cash unit-based compensation1,884 69 
Other  72 
Deferred income taxes(678)(367)
Changes in assets and liabilities:
Accounts receivable168,477 110,692 
Inventories68,411 103,489 
Other assets52,687 (17,364)
Fair value of commodity derivative instruments(40,683)36,253 
Due to General Partner and affiliates(772)(2,705)
Accounts payable, accrued liabilities and other(86,958)(147,577)
Net cash provided by operating activities223,944 130,694 
Cash flows from investing activities
Purchases of property, plant and equipment(7,789)(10,398)
Proceeds from sale of assets421 236 
Net cash used in investing activities(7,368)(10,162)
Cash flows from financing activities
Net payments under credit agreements(150,081)(65,967)
Payments on finance leases, term debt, and other obligations(4,047)(3,470)
Debt issue costs(6,146) 
Distributions to unitholders(49,931)(51,691)
Repurchased units withheld for employee tax obligations(297) 
Net cash used in financing activities(210,502)(121,128)
Effect of exchange rate changes on cash balances held in foreign currencies(93)12 
Net change in cash and cash equivalents5,981 (584)
Cash and cash equivalents, beginning of period5,386 7,530 
Cash and cash equivalents, end of period$11,367 $6,946 
Supplemental disclosure of cash flow information
Cash paid for interest$29,031 $29,274 
Cash paid for taxes$4,343 $6,933 
Assets acquired under finance lease obligations$1,564 $1,722 
ROU assets obtained in exchange for new lease liabilities $ $4,057 
Cash paid for operating leases$4,297 $3,705 
Distribution paid in units$2,053 $ 




The accompanying notes are an integral part of these financial statements.
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Sprague Resources LP
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands unless otherwise stated)
1. Description of Business and Summary of Significant Accounting Policies
Partnership Businesses
Sprague Resources LP (the “Partnership”) is a Delaware limited partnership formed on June 23, 2011 by Sprague Holdings and its General Partner and engages in the purchase, storage, distribution and sale of refined products and natural gas, and provides storage and handling services for a broad range of materials.
Unless the context otherwise requires, references to “Sprague Resources,” and the “Partnership,” refer to Sprague Resources LP and its subsidiaries; references to the "General Partner" refer to Sprague Resources GP LLC; references to “Axel Johnson” or the "Sponsor" refer to Axel Johnson Inc. and its controlled affiliates, collectively, other than Sprague Resources, its subsidiaries and its General Partner; references to “Sprague Holdings” refer to Sprague Resources Holdings LLC, a wholly owned subsidiary of Axel Johnson and the owner of the General Partner.
The Partnership owns, operates and/or controls a network of refined products and materials handling terminals located in the Northeast United States and in Quebec, Canada. The Partnership also utilizes third-party terminals in the Northeast United States through which it sells or distributes refined products pursuant to rack, exchange and throughput agreements. The Partnership has four reportable segments: refined products, natural gas, materials handling and other operations.
The refined products segment purchases a variety of refined products, such as heating oil, diesel fuel, residual fuel oil, kerosene, jet fuel and gasoline - primarily from refining companies, trading organizations and producers - and sells them to wholesale and commercial customers.
The natural gas segment purchases natural gas from natural gas producers and trading companies and sells and distributes natural gas to commercial and industrial customers.
The materials handling segment offloads, stores and prepares for delivery a variety of customer-owned products, including asphalt, clay slurry, salt, gypsum, crude oil, residual fuel oil, coal, petroleum coke, caustic soda, tallow, pulp, and heavy equipment.
The other operations segment primarily includes the marketing and distribution of coal and certain commercial trucking activities.
See Note 2 - Revenue for a description of the Partnership's revenue activities within these business segments.
As of September 30, 2020, the Sponsor, through its ownership of Sprague Holdings, owned 12,951,236 common units representing 56.5% of the limited partner interest in the Partnership. Sprague Holdings also owns the General Partner, which in turn owns a non-economic interest in the Partnership. Sprague Holdings currently holds incentive distribution rights (“IDRs”) that entitle it to receive increasing percentages, up to a maximum of 50.0%, of the cash the Partnership distributes from distributable cash flow in excess of $0.474375 per unit per quarter. The maximum distribution of 50% does not include any distributions that Sprague Holdings may receive on any limited partner units that it owns. See Note 12 - Earnings Per Unit and Note 13 - Partnership Distributions.
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of the Partnership and its wholly-owned subsidiaries. Intercompany transactions between the Partnership and its subsidiaries have been eliminated. The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim financial information. As permitted under those rules, certain notes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) to be included in annual financial statements have been condensed or omitted from these interim financial statements. These interim financial statements should be read in conjunction with the consolidated financial statements and related notes of the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on March 5, 2020 (the “2019 Annual Report”).
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The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and the reported net sales and expenses in the income statement. Actual results could differ from those estimates. Among the estimates made by management are the fair value of derivative assets and liabilities, valuation of contingent consideration, valuation of reporting units within the goodwill impairment assessment, and if necessary long-lived asset impairments and environmental and legal obligations.
The Condensed Consolidated Financial Statements included herein reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the Partnership’s consolidated financial position at September 30, 2020 and December 31, 2019, the consolidated results of operations for the three and nine months ended September 30, 2020 and 2019, consolidated statement of changes in unitholders' equity for the three and nine months ended September 30, 2020 and 2019, and the consolidated cash flows for the nine months ended September 30, 2020 and 2019. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year. Demand for some of the Partnership’s refined petroleum products, specifically heating oil and residual oil for space heating purposes, and to a lesser extent natural gas, are generally higher during the first and fourth quarters of the calendar year which may result in significant fluctuations in the Partnership’s quarterly operating results.
COVID-19

The global outbreak of the novel coronavirus (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets.

Beginning in the quarterly period ended March 31, 2020, a wide array of sectors including but not limited to the energy, transportation, manufacturing and commercial, along with global economic conditions generally, have been significantly disrupted by the pandemic. A growing number of the Partnership’s customers in these industries have experienced substantial reductions in their operations due to travel restrictions as well as the extended shutdown of various businesses in affected regions. Furthermore, government measures have also led to a precipitous decline in fuel prices in response to concerns about demand for fuel.
The pandemic and associated impacts on economic activity had an adverse effect on the Partnership’s operating results for the three and nine months ended September 30, 2020, specifically, the Partnership has seen a decline in demand and related sales volume as large sectors of the global economy have been adversely impacted by the crisis. In response to these developments, the Partnership took swift action to ensure the safety of employees and other stakeholders, and initiated a number of initiatives relating to cost reduction, liquidity and operating efficiencies.

The Partnership makes estimates and assumptions that affect the reported amounts on these condensed consolidated financial statements and accompanying notes as of the date of the financial statements. The Partnership assessed accounting estimates that require consideration of forecasted financial information, including, but not limited to, the allowance for credit losses, the carrying value of goodwill, intangible assets, and other long-lived assets. This assessment was conducted in the context of information reasonably available to the Partnership, as well as consideration of the future potential impacts of COVID-19 on the Partnership’s business as of September 30, 2020. At this time, the Partnership is unable to predict with specificity the ultimate impact of the crisis, as it will depend on the magnitude, severity and duration of the pandemic, as well as how quickly, and to what extent, normal economic and operating conditions resume on a sustainable basis globally. Accordingly, if the impact is more severe or longer in duration than the Partnership has assumed, such impact could potentially result in impairments and increases in credit allowances.
Significant Accounting Policies
The Partnership's significant accounting policies are described in Note 1 - Description of Business and Summary of Significant Accounting Policies in the Partnership’s audited consolidated financial statements included in the 2019 Annual Report and are the same as are used in preparing these unaudited interim Condensed Consolidated Financial Statements, except with respect to the Partnership’s policy on credit losses noted within the “Recent Accounting Pronouncements” section below.


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Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard requires entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The guidance is effective for interim and annual periods for fiscal years beginning after December 15, 2019, with early adoption permitted. As part of the Partnership’s assessment of the adequacy of its allowances for credit losses, the Partnership consider a number of factors including, but not limited to, history or defaults, age of receivables, and expected loss rates. The adoption of this guidance did not have a material impact to the Partnership's Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard will be applied prospectively, and is effective for fiscal years beginning after December 15, 2019. The adoption of this guidance did not have a material impact to the Partnership's Condensed Consolidated Financial Statements.
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848) which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform, if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Partnership has not currently adopted the optional expedients and exceptions provided in this guidance but continues to monitor and evaluate the impact of reference rate reform on relevant transactions.
2. Revenue

Disaggregated Revenue

    In general, the Partnership's business segmentation is aligned according to the nature and economic characteristics of its products and customer relationships which provides meaningful disaggregation of each business segment's results of operations. The Partnership operates its businesses in the Northeast and Mid-Atlantic United States and Eastern Canada.
    
    The refined products segment purchases a variety of refined products, such as heating oil, diesel fuel, residual fuel oil, kerosene, jet fuel and gasoline (primarily from refining companies, trading organizations and producers), and sells them to wholesale and commercial customers. Refined products revenue-producing activities are direct sales to customers, including throughput transactions. Revenue is recognized when the product is delivered. Revenue is not recognized on exchange agreements, which are entered into primarily to acquire refined products by taking delivery of products closer to the Partnership’s end markets. Rather, net differentials or fees for exchange agreements are recorded within cost of products sold (exclusive of depreciation and amortization).

    The natural gas segment purchases natural gas from natural gas producers and trading companies and sells and distributes natural gas to commercial and industrial customers. Natural gas revenue-producing activities are sales to customers at various points on natural gas pipelines or at local distribution companies (i.e., utilities). Natural gas sales not billed by month-end are accrued based upon gas volumes delivered.
    
    The materials handling segment offloads, stores and prepares for delivery a variety of customer-owned products. A majority of the materials handling segment revenue is generated under leasing arrangements with revenue recorded over the lease term generally on a straight-line basis. Contingent rentals are recorded as revenue only when billable under the arrangement. For materials handling contracts that are not leases, the Partnership recognizes revenue either at a point in time after services are performed or over a period of time if the services are performed in a continuous fashion over the period of the contract.
    The other operations segment primarily includes the marketing and distribution of coal and certain commercial trucking activities. Revenue from other operations is recognized when the product is delivered or the services are rendered.

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Further disaggregation of net sales by business segment and geographic destination is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net sales:
Refined products
Distillates$234,383 $378,535 $1,149,810 $1,795,264 
Gasoline66,503 81,777 186,468 214,933 
Heavy fuel oil and asphalt30,650 54,709 130,089 209,260 
Total refined products$331,536 $515,021 $1,466,367 $2,219,457 
Natural gas40,592 48,987 184,358 221,262 
Materials handling13,880 13,119 42,411 43,913 
Other operations4,450 5,463 15,415 18,284 
Net sales$390,458 $582,590 $1,708,551 $2,502,916 
Net sales by country:
    United States$347,473 $519,340 $1,578,340 $2,322,763 
    Canada42,985 63,250 $130,211 180,153 
Net sales$390,458 $582,590 $1,708,551 $2,502,916 

Contract Balances

    Contract liabilities primarily relate to advances or deposits received from the Partnership's customers before revenue is recognized. These amounts are included in accrued liabilities and amounted to $8.1 million and $7.5 million as of September 30, 2020 and December 31, 2019, respectively. A substantial portion of the contract liabilities as of December 31, 2019 remains outstanding as of September 30, 2020 as they are primarily deposits. The Partnership does not have any material contract assets as of September 30, 2020 or December 31, 2019.
3. Leases

    From a lessor perspective, the Partnership has entered into various throughput and materials handling arrangements with customers. These arrangements are accounted for as operating leases as determined by the use terms and rights outlined in the underlying agreements. The throughput contracts are agreements with refined products wholesalers that use the Partnership’s terminal facilities for a fee. The materials handling contracts are arrangements involving rentals of dedicated tanks, pads, land and small office locations for the purposes of storage, parking and other related uses. Income related to the operating leases with the Partnership as the lessor, as described above, totaled $11.9 million and $9.7 million for the three months ended September 30, 2020 and 2019, respectively, and $32.1 million and $31.2 million for the nine months ended September 30, 2020 and 2019, respectively.

4. Accumulated Other Comprehensive Loss, Net of Tax
Amounts included in accumulated other comprehensive loss, net of tax, consisted of the following:
September 30,
2020
December 31, 2019
Fair value of interest rate swaps, net of tax$(15,606)$(8,150)
Cumulative foreign currency translation adjustment(11,662)(11,538)
Accumulated other comprehensive loss, net of tax$(27,268)$(19,688)
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5. Inventories
September 30,
2020
December 31,
2019
Petroleum and related products$219,845 $285,539 
Coal2,269 4,374 
Natural gas2,699 3,311 
Inventories$224,813 $293,224 
6. Credit Agreement
September 30,
2020
December 31, 2019
Working capital facilities$276,400 $437,184 
Acquisition facility385,200 374,600 
Total credit agreement661,600 811,784 
Less: current portion of working capital facilities(276,400)(437,184)
Long-term portion$385,200 $374,600 
On May 19, 2020, Sprague Operating Resources LLC (the “U.S. Borrower”) and Kildair Service ULC (the “Canadian Borrower” and, together with the U.S. Borrower, the “Borrowers”), wholly owned subsidiaries of the Partnership, entered into a second amended and restated credit agreement (the “Credit Agreement”), which replaced the amended and restated credit agreement, dated December 9, 2014 (the “Previous Credit Agreement”). Upon the effective date, the Credit Agreement was accounted for as a modification of a syndicated loan arrangement with partial extinguishment to the extent of the decrease in the borrowing capacity. The Credit Agreement matures on May 19, 2022. The Partnership and certain of its subsidiaries (the “Subsidiary Guarantors”) are guarantors of the obligations under the Credit Agreement. Obligations under the Credit Agreement are secured by substantially all of the assets of the Partnership, the Borrowers and the Subsidiary Guarantors (collectively, the “Loan Parties”).
As of September 30, 2020, the revolving credit facilities under the Credit Agreement contained, among other items, the following:
 
A committed U.S. dollar revolving working capital facility of up to $465.0 million, subject to borrowing base limits, to be used for working capital loans and letters of credit;
An uncommitted U.S. dollar revolving working capital facility of up to $200.0 million, subject to borrowing base limits and the sole discretion of the lenders, to be used for working capital loans and letters of credit;
A multicurrency revolving working capital facility of up to $85.0 million, subject to borrowing base limits, to be used for working capital loans and letters of credit;
A revolving acquisition facility of up to $430.0 million, subject to borrowing base limits, to be used for loans and letters of credit to fund capital expenditures and acquisitions and other general corporate purposes; and
Subject to certain conditions, including the receipt of additional commitments from lenders, the ability to increase the U.S. dollar revolving working capital facility to up to $1.2 billion and the multicurrency revolving working capital facility to up to $320.0 million, subject to a maximum combined increase in commitments for both facilities of $470.0 million in the aggregate. Additionally, subject to certain conditions, the revolving acquisition facility may be increased to up to $750.0 million.
Indebtedness under the Credit Agreement bears interest, at the Borrowers’ option, at a rate per annum equal to either (i) the Eurocurrency Rate (which is the LIBOR Rate for loans denominated in U.S. dollars and CDOR for loans denominated in Canadian dollars, in each case adjusted for certain regulatory costs, and in each case with a floor of 0.50%) for interest periods of one, two, three or six months plus a specified margin or (ii) an alternate rate plus a specified margin.
For loans denominated in U.S. dollars, the alternate rate is the Base Rate which is the highest of (a) the U.S. Prime Rate as in effect from time to time, (b) the greater of the Federal Funds Effective Rate and the Overnight Bank Funding Rate as in effect from time to time plus 0.50% and (c) the one-month Eurocurrency Rate for U.S. dollars as in effect from time to time plus 1.00%.
For loans denominated in Canadian dollars, the alternate rate is the Prime Rate which is the higher of (a) the Canadian Prime Rate as in effect from time to time and (b) the one-month Eurocurrency Rate for U.S. dollars as in effect from time to time plus 1.00%.
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The specified margins for the working capital revolving facilities vary based on the utilization of the working capital facilities as a whole, measured on a quarterly basis. On or prior to November 19, 2020, the specified margin for (x) the committed U.S. dollar revolving working capital facility will range from 1.25% to 1.75% for loans bearing interest at the Base Rate and from 2.25% to 2.75% for loans bearing interest at the Eurocurrency Rate, (y) the uncommitted U.S. dollar revolving working capital facility will 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 and (z) the multicurrency revolving working capital facility will range from 1.25% to 1.75% for loans bearing interest at the Base Rate and 2.25% to 2.75% for loans bearing interest at the Eurocurrency Rate. After November 19, 2020, the specified margin for (x) the committed U.S. dollar revolving working capital facility will range from 0.75% to 1.25% for loans bearing interest at the Base Rate and from 1.75% to 2.25% for loans bearing interest at the Eurocurrency Rate, (y) the uncommitted U.S. dollar revolving working capital facility will range from 0.50% to 1.00% for loans bearing interest at the Base Rate and 1.50% to 2.00% for loans bearing interest at the Eurocurrency Rate and (z) the multicurrency revolving working capital facility will range from 0.75% to 1.25% for loans bearing interest at the Base Rate and 1.75% to 2.25% for loans bearing interest at the Eurocurrency Rate.
The specified margin for the revolving acquisition facility varies based on the consolidated total leverage of the Loan Parties. The specified margin for the revolving acquisition facility will range from 1.25% to 2.25% for loans bearing interest at the Base Rate and from 2.25% to 3.25% for loans bearing interest at the Eurocurrency Rate.
In addition, the Borrowers will incur a commitment fee on the unused portion of (x) the committed U.S. dollar revolving working capital facility and multicurrency revolving working capital facility ranging from 0.375% to 0.500% per annum and (y) the revolving acquisition facility at a rate ranging from 0.35% to 0.50% per annum. Overdue amounts bear interest at the applicable rates described above plus an additional margin of 2%.
The working capital facilities are subject to borrowing base reporting and as of September 30, 2020 and December 31, 2019, the Credit Agreement had a borrowing base of $402.3 million and the Previous Credit Agreement had a borrowing base of $594.5 million, respectively. As of September 30, 2020 and December 31, 2019, outstanding letters of credit were $28.6 million under the Credit Agreement and $63.6 million under the Previous Credit Agreement, respectively. As of September 30, 2020, excess availability under the working capital facilities was $97.3 million and excess availability under the acquisition facility was $44.8 million.
The weighted average interest rate was 3.3% under the Credit Agreement and 4.5% under the Previous Credit Agreement at September 30, 2020 and December 31, 2019, respectively. No amounts are due under the Credit Agreement until the maturity date. However, the current portion of the Credit Agreement at September 30, 2020 and the current portion of the Previous Credit Agreement at December 31, 2019 represents the amounts of the working capital facility.
The Credit Agreement contains various covenants and restrictive provisions that, among other things, prohibit the Partnership from making distributions to unitholders if any event of default occurs or would result from the distribution or if the Loan Parties would not be in pro forma compliance with the financial covenants after giving effect to the distribution. In addition, the Credit Agreement contains various covenants that are usual and customary for a financing of this type, size and purpose, including, but not limited to, covenants that require the Loan Parties to maintain: a minimum consolidated EBITDA-to fixed-charge ratio, a minimum consolidated net working capital amount and a maximum consolidated total leverage-to-EBITDA ratio. The Credit Agreement also limits the Loan Parties ability to incur debt, grant liens, make certain investments or acquisitions, enter into affiliate transactions and dispose of assets. The Partnership was in compliance with the covenants under the Credit Agreement at September 30, 2020.
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.     
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7. Related Party Transactions
The General Partner charges the Partnership for the reimbursements of employee costs and related employee benefits and other overhead costs supporting the Partnership’s operations which amounted to $21.2 million and $23.8 million for the three months ended September 30, 2020 and 2019, respectively, and $65.7 million and $75.6 million for the nine months ended September 30, 2020 and 2019, respectively. Through the General Partner, the Partnership also participates in the Sponsor’s pension and other post-retirement benefits. At September 30, 2020 and December 31, 2019, total amounts due to the General Partner with respect to these benefits and overhead costs were $7.3 million and $8.1 million, respectively.
8. Segment Reporting
The Partnership has four reportable segments that comprise the structure used by the chief operating decision makers (CEO and CFO) to make key operating decisions and assess performance. When establishing a reporting segment, the Partnership aggregates individual operating units that are in the same line of business and have similar economic characteristics. These reportable segments are refined products, natural gas, materials handling and other operations.
The Partnership's refined products segment purchases a variety of refined products, such as heating oil, diesel fuel, residual fuel oil, kerosene, jet fuel and gasoline (primarily from refining companies, trading organizations and producers), and sells them to its customers. The Partnership has wholesale customers who resell the refined products they purchase from the Partnership and commercial customers who consume the refined products they purchase. The Partnership’s wholesale customers consist of home heating oil retailers and diesel fuel and gasoline resellers. The Partnership’s commercial customers include federal and state agencies, municipalities, regional transit authorities, drill sites, large industrial companies, real estate management companies, hospitals and educational institutions. The refined products reportable segment consists of two operating segments.
The Partnership's natural gas segment purchases natural gas from natural gas producers and trading companies and sells and distributes natural gas to commercial and industrial customers primarily in the Northeast and Mid-Atlantic United States. The natural gas reportable segment consists of one operating segment.
The Partnership's materials handling segment offloads, stores, and prepares for delivery a variety of customer-owned products, including asphalt, clay slurry, salt, gypsum, crude oil, residual fuel oil, coal, petroleum coke, caustic soda, tallow, pulp and heavy equipment. These services are generally provided under multi-year agreements as either fee-based activities or as leasing arrangements when the right to use an identified asset (such as storage tanks or storage locations) has been conveyed in the agreement. The materials handling reportable segment consists of two operating segments.
The Partnership's other operations segment primarily consists of marketing and distribution of coal, and commercial trucking activities unrelated to its refined products segment. Other operations are not reported separately as they represent less than 10% of consolidated net sales and adjusted gross margin. The other operations reporting segment consists of two operating segments.
The Partnership evaluates segment performance based on adjusted gross margin, a non-GAAP measure, which is net sales less cost of products sold (exclusive of depreciation and amortization) increased by unrealized hedging losses and decreased by unrealized hedging gains, in each case with respect to refined products and natural gas inventory, and natural gas transportation contracts.
Based on the way the business is managed, it is not reasonably possible for the Partnership to allocate the components of operating costs and expenses among the operating segments. There were no significant intersegment sales for any of the years presented below.
The Partnership had no single customer that accounted for more than 10% of total net sales for the three and nine months ended September 30, 2020 and 2019, respectively. The Partnership’s foreign sales, primarily sales of refined products and natural gas to its customers in Canada, were $43.0 million and $63.3 million for the three months ended September 30, 2020 and 2019, respectively, and $130.2 million and $180.2 million for the nine months ended September 30, 2020 and 2019, respectively.



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Summarized financial information for the Partnership's reportable segments is presented in the table below:
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net sales:
Refined products$331,536 $515,021 $1,466,367 $2,219,457 
Natural gas40,592 48,987 184,358 221,262 
Materials handling13,880 13,119 42,411 43,913 
Other operations4,450 5,463 15,415 18,284 
Net sales$390,458 $582,590 $1,708,551 $2,502,916 
Adjusted gross margin (1):
Refined products$40,449 $33,400 $129,099 $105,783 
Natural gas588 3,681 28,130 40,649 
Materials handling13,811 13,101 42,287 43,886 
Other operations1,747 1,565 5,374 5,146 
Adjusted gross margin56,595 51,747 204,890 195,464 
Reconciliation to operating income (2):
Add/(deduct):
Change in unrealized gain (loss) on inventory (3)
17,680 3,428 (1,097)(1,169)
Change in unrealized value on natural gas transportation contracts (4)
(8,498)(7,005)4,824 6,429 
Operating costs and expenses not allocated to operating segments:
Operating expenses(18,504)(20,461)(57,787)(65,325)
Selling, general and administrative(18,045)(17,570)(57,002)(56,309)
Depreciation and amortization(8,470)(8,466)(25,585)(25,263)
Operating income20,758 1,673 68,243 53,827 
Other income  64 128 
Interest income34 121 282 447 
Interest expense(9,552)(9,918)(31,626)(31,915)
Income tax provision(1,567)(1,610)(5,680)(3,078)
Net income (loss)$9,673 $(9,734)$31,283 $19,409 

(1)The Partnership trades, purchases, stores and sells energy commodities that experience market value fluctuations. To manage the Partnership’s underlying performance, including its physical and derivative positions, management utilizes adjusted gross margin, which is a non-GAAP financial measure. Adjusted gross margin is also used by external users of the Partnership’s consolidated financial statements to assess the Partnership’s economic results of operations and its commodity market value reporting to lenders. In determining adjusted gross margin, the Partnership adjusts its segment results for the impact of 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.
(2)Reconciliation of adjusted gross margin to operating income, the most directly comparable GAAP measure.
(3)Inventory is valued at the lower of cost or net realizable value. The adjustment related to change in unrealized gain on inventory which is not included in net income, represents the estimated difference between inventory valued at the lower of cost or net realizable value as compared to market values. The fair value of the derivatives the Partnership uses to economically hedge its inventory declines or appreciates in value as the value of the underlying inventory appreciates or declines, which creates unrealized hedging losses (gains) with respect to the derivatives that are included in net income.
(4)Represents the Partnership’s estimate of the change in fair value of the natural gas transportation contracts which are not recorded in net income until the transportation is utilized in the future (i.e., when natural gas is delivered to the customer), as these contracts are executory contracts that do not qualify as derivatives. As the fair value of the natural gas transportation contracts decline or appreciate, the offsetting physical or financial derivative will also appreciate or decline creating unmatched unrealized hedging (gains) losses in net income (loss).
Segment Assets
Due to the commingled nature and uses of the Partnership’s fixed assets, the Partnership does not track its fixed assets between its refined products and materials handling operating segments or its other operations. There are no significant fixed assets attributable to the natural gas reportable segment.
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As of September 30, 2020, goodwill recorded for the refined products, natural gas, materials handling and other operations segments amounted to $71.4 million, $35.5 million, $6.9 million and $1.2 million, respectively.
9. Financial Instruments and Off-Balance Sheet Risk
As of September 30, 2020 and December 31, 2019, the carrying amounts of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated fair value because of the short maturity of these instruments. As of September 30, 2020 and December 31, 2019, the carrying value of the Partnership’s margin deposits with brokers approximates fair value and consists of initial margin with futures transaction brokers, along with variation margin, which is paid or received on a daily basis, and is included in other current assets or other current liabilities. As of September 30, 2020 and December 31, 2019, the carrying value of the Partnership’s debt approximated fair value due to the variable interest nature of these instruments.
The Partnership’s deferred consideration was recorded in connection with an acquisition on April 18, 2017 using an estimated fair value discount at the time of the transaction. As of September 30, 2020, the carrying value of the deferred consideration approximated fair value because there has been no significant subsequent change in the estimated fair value discount rate or probability of outcome.
The following table presents financial assets and financial liabilities of the Partnership measured at fair value on a recurring basis:
 As of September 30, 2020
Fair Value
Measurement
Quoted
Prices in
Active
Markets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Derivative assets:
Commodity fixed forwards$66,038 $ $66,038 $ 
Futures, swaps and options117,488 117,476 12  
Commodity derivatives183,526 117,476 66,050  
Total derivative assets$183,526 $117,476 $66,050 $ 
Derivative liabilities:
Commodity exchange contracts$5 $5 $ $ 
Commodity fixed forwards18,888  18,888  
Futures, swaps and options108,638 108,621 17  
Commodity derivatives127,531 108,626 18,905  
Interest rate swaps15,729  15,729  
Currency swaps13  13  
Total derivative liabilities$143,273 $108,626 $34,647 $ 
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 As of December 31, 2019
 Fair Value
Measurement
Quoted
Prices in
Active
Markets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Derivative assets:
Commodity fixed forwards$62,580 $ $62,580 $ 
Futures, swaps and options32,083 32,057 26  
Commodity derivatives94,663 32,057 62,606  
Currency swaps15  15  
Total derivative assets$94,678 $32,057 $62,621