S-1/A 1 d604735ds1a.htm AMENDMENT NO.9 TO FORM S-1 Amendment No.9 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on October 15, 2013

Registration No. 333-175826

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549            

 

 

Amendment No. 9

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Sprague Resources LP

(Exact name of Registrant as Specified in Its Charter)

 

Delaware   5171   45-2637964
(State or Other Jurisdiction of Incorporation or Organization)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Two International Drive

Suite 200

Portsmouth, NH 03801

(800) 225-1560

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Paul A. Scoff

Two International Drive

Suite 200

Portsmouth, NH 03801

(800) 225-1560

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Adorys Velazquez

Vinson & Elkins L.L.P.

666 Fifth Avenue, 26th Floor

New York, NY 10103

(212) 237-0000

 

Joshua Davidson

Douglass M. Rayburn

Baker Botts L.L.P.

910 Louisiana St., Suite 3200

Houston, Texas 77002

(713) 229-1234

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

   Accelerated filer  ¨    Non-accelerated filer  þ   Smaller reporting company  ¨
      (Do not check if a smaller reporting company)

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

Subject to Completion, dated October 15, 2013

PROSPECTUS

 

 

 

LOGO

Sprague Resources LP

8,500,000 Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of our common units. We are selling 8,500,000 common units in this offering. We currently estimate that the offering price will be between $19.00 and $21.00 per common unit. Prior to this offering, there has been no public market for our common units.

We have been approved to list our common units on the New York Stock Exchange under the symbol “SRLP,” subject to official notice of issuance.

Investing in our common units involves risks. See “Risk Factors” beginning on page 25.

These risks include the following:

 

   

We may not have sufficient distributable cash flow following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

 

   

On a pro forma basis, we would not have had sufficient distributable cash flow to pay the full minimum quarterly distribution on our common units or any distribution on our subordinated units for the quarter ended June 30, 2013 or to pay the full minimum quarterly distribution on our subordinated units for the quarter ended September 30, 2012 and for the year ended December 31, 2012.

 

   

Our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders are influenced by changes in demand for, and therefore indirectly by changes in the prices of, refined products and natural gas, which could adversely affect our profit margins, our customers’ and suppliers’ financial condition, contract performance, trade credit requirements and the amount and cost of our borrowing under our new credit agreement.

 

   

Our risk management policies, processes and procedures cannot eliminate all commodity price risk or basis risk, which could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders. In addition, any noncompliance with our risk management policies, processes and procedures could result in significant financial losses.

 

   

Unitholders have limited voting rights and, even if they are dissatisfied, they cannot initially remove our general partner without its consent.

 

   

Axel Johnson Inc., or Axel Johnson, currently controls, and after this offering will indirectly control, our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including Axel Johnson, have conflicts of interest with us and limited fiduciary duties, and they may favor their own interests to the detriment of our common unitholders.

 

   

You will experience immediate and substantial dilution in pro forma net tangible book value of $20.02 per common unit.

 

   

Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes, our distributable cash flow would be substantially reduced.

 

   

Our unitholders will be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.

 

     Per Common Unit    Total  

Price to the public

   $                                $                                

Underwriting discounts(1)

   $                                $     

Proceeds to us (before expenses)

   $                                $     

 

(1) Excludes a structuring fee of an aggregate 0.75% of the gross offering proceeds payable to Barclays Capital Inc. Please read “Underwriting” beginning on page 223.

We have granted the underwriters a 30-day option to purchase up to an additional 1,275,000 common units from us on the same terms and conditions as set forth above if the underwriters sell more than 8,500,000 common units in this offering. To the extent the underwriters exercise their option to purchase additional common units, all of the net proceeds from the issuance and sale of those common units (after deducting underwriting discounts and the structuring fee) will be distributed to Sprague Resources Holdings LLC, the sole member of our general partner. Sprague Resources Holdings LLC and Axel Johnson are deemed under federal securities laws to be underwriters with respect to any common units that may be sold pursuant to the underwriters’ option to purchase additional common units.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common units on or about                     , 2013.

 

 

 

Barclays 

 

J.P. Morgan

 

BofA Merrill Lynch

 

 

BMO Capital Markets

 

Raymond James

  Janney Montgomery Scott
BNP PARIBAS   Natixis
RBS   SOCIETE GENERALE

Prospectus dated                     , 2013


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     25   

Risks Related to Our Business

     25   

Risks Inherent in an Investment in Us

     36   

Tax Risks to Common Unitholders

     45   

USE OF PROCEEDS

     49   

CAPITALIZATION

     50   

DILUTION

     51   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     52   

General

     52   

Minimum Quarterly Distribution

     53   

Unaudited Pro Forma Distributable Cash Flow

     54   

Estimated Distributable Cash Flow

     59   

Assumptions and Considerations

     61   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     66   

Distributions of Distributable Cash Flow

     66   

Distributable Cash Flow and Capital Surplus

     66   

Subordination Period

     68   

Distributions of Cash From Distributable Cash Flow During the Subordination Period

     69   

Distributions of Cash From Distributable Cash Flow After the Subordination Period

     69   

General Partner Interest

     69   

Incentive Distribution Rights

     70   

Percentage Allocations of Cash Distributions From Distributable Cash Flow

     70   

Sprague Holdings’ Right to Reset Incentive Distribution Levels

     71   

Distributions From Capital Surplus

     73   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     74   

Distributions of Cash Upon Liquidation

     74   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

     77   

Non-GAAP Financial Measures

     80   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     82   

Overview

     82   

How Management Evaluates Our Results of Operations

     83   

Recent Trends and Outlook

     85   

Factors that Impact our Business

     86   

Comparability of our Financial Statements

     87   

Results of Operations

     88   

Liquidity and Capital Resources

     102   

Impact of Inflation

     109   

Critical Accounting Policies

     109   

Recent Accounting Pronouncements

     110   

Quantitative and Qualitative Disclosures About Market Risk

     111   

INDUSTRY

     115   

Refined Products

     115   

Natural Gas Industry

     121   

Materials Handling

     124   

 

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BUSINESS

     127   

Our Partnership

     127   

Recent Developments

    
128
  

Refined Products

     130   

Natural Gas Sales

     132   

Materials Handling

     133   

Other Operations

     134   

Commodity Risk Management

     134   

Storage and Distribution Services

     136   

Our Terminals

     136   

Competition

     144   

Seasonality

     144   

Environmental

     145   

Security Regulation

     148   

Employee Safety

     149   

Title to Properties, Permits and Licenses

     149   

Facilities

     149   

Employees

     149   

Legal Proceedings

     150   

MANAGEMENT

     151   

Management of Sprague Resources LP

     151   

Board Committees

     151   

Director Compensation

     152   

Directors and Executive Officers

     153   

Reimbursement of Expenses of Our General Partner

     157   

Compensation Discussion and Analysis

     157   

2013 Long-Term Incentive Plan

     163   

Severance and Change in Control Benefits

     165   

Other Benefits

     166   

Risk Assessment

     167   

Summary Compensation Table for Years Ended December 31, 2012

     169   

Pension Benefits

     170   

Potential Payments Upon Termination or a Change in Control

     171   

Director Compensation

     172   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     173   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     175   

Distributions and Payments to Sprague Holdings and Its Affiliates

     175   

Agreements Governing the Transactions

     177   

Omnibus Agreement

     177   

Services Agreement

     178   

Contribution Agreement

     179   

Terminal Operating Agreement

     180   

Procedures for Review, Approval and Ratification of Related Person Transactions

     180   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     181   

Conflicts of Interest

     181   

Fiduciary Duties

     186   

DESCRIPTION OF THE COMMON UNITS

     189   

The Units

     189   

Transfer Agent and Registrar

     189   

Transfer of Common Units

     189   

 

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THE PARTNERSHIP AGREEMENT

     191   

Organization and Duration

     191   

Purpose

     191   

Capital Contributions

     191   

Votes Required For Certain Matters

     191   

Applicable Law; Forum, Venue and Jurisdiction

     193   

Limited Liability

     193   

Issuance of Additional Partnership Interests

     194   

Amendment of Our Partnership Agreement

     195   

No Unitholder Approval

     195   

Merger, Sale or Other Disposition of Assets

     197   

Dissolution

     197   

Liquidation and Distribution of Proceeds

     198   

Withdrawal or Removal of Our General Partner

     198   

Transfer of General Partner Interest

     199   

Transfer of Ownership Interests in Our General Partner

     200   

Transfer of Subordinated Units and Incentive Distribution Rights

     200   

Change of Management Provisions

     200   

Limited Call Right

     200   

Meetings; Voting

     201   

Voting Rights of Incentive Distribution Rights

     202   

Status as Limited Partner

     202   

Non-Citizen Assignees; Redemption

     202   

Non-Taxpaying Assignees; Redemption

     202   

Indemnification

     203   

Reimbursement of Expenses

     203   

Books and Reports

     204   

Right to Inspect Our Books and Records

     204   

Registration Rights

     204   

UNITS ELIGIBLE FOR FUTURE SALE

     205   

Rule 144

     205   

Our Partnership Agreement and Registration Rights

     205   

Lock-Up Agreements

     206   

Registration Statement on Form S-8

     206   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     207   

Taxation of the Partnership

     207   

Tax Consequences of Unit Ownership

     209   

Tax Treatment of Operations

     214   

Disposition of Units

     214   

Uniformity of Units

     216   

Tax-Exempt Organizations and Other Investors

     217   

Administrative Matters

     218   

State, Local and Other Tax Considerations

     220   

INVESTMENT BY EMPLOYEE BENEFIT PLANS

     221   

General Fiduciary Matters

     221   

Prohibited Transaction Issues

     221   

Plan Asset Issues

     222   

UNDERWRITING

     223   

Underwriting Discounts and Expenses

     223   

Option to Purchase Additional Common Units

     224   

 

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Lock-Up Agreements

     224   

Offering Price Determination

     225   

Indemnification

     225   

Stabilization, Short Positions and Penalty Bids

     225   

Electronic Distribution

     226   

New York Stock Exchange

     226   

Discretionary Sales

     227   

Stamp Taxes

     227   

Certain Relationships

     227   

FINRA

     227   

Selling Restrictions

     227   

VALIDITY OF THE COMMON UNITS

     231   

EXPERTS

     231   

WHERE YOU CAN FIND MORE INFORMATION

     231   

FORWARD-LOOKING STATEMENTS

     232   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A

  FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF SPRAGUE RESOURCES LP      A-1   

APPENDIX B

 

GLOSSARY

     B-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. No other person has been authorized to provide you with additional or different information. We and the underwriters are offering to sell, and seeking offers to buy, our common units only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common units.

Industry and Market Data

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. Some data are also based on our good faith estimates.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before investing in the common units. You should read the entire prospectus carefully, including “Risk Factors” beginning on page 25 and the historical and pro forma financial statements and the notes to those financial statements included elsewhere in this prospectus. Unless indicated otherwise, the information presented in this prospectus assumes (1) an initial public offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover of this prospectus) and (2) that the underwriters do not exercise their option to purchase additional common units.

Unless the context otherwise requires, references in this prospectus to “Sprague Resources,” “our partnership,” “we,” “our,” “us,” or like terms, when used in a historical context, refer to Sprague Operating Resources LLC, our predecessor for accounting purposes and the successor to Sprague Energy Corp., also referenced as “our predecessor,” and when used in the present tense or prospectively, refer to Sprague Resources LP and its subsidiaries. Unless the context otherwise requires, references in this prospectus to “Axel Johnson” refer collectively to Axel Johnson Inc. and its controlled affiliates, 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 our general partner. References to our “general partner” refer to Sprague Resources GP LLC. We include a glossary of certain terms used in this prospectus as Appendix B.

Sprague Resources LP

Overview

We are a Delaware limited partnership engaged in the purchase, storage, distribution and sale of refined petroleum products, which we refer to as refined products, and natural gas, and we also provide storage and handling services for a broad range of materials. Our predecessor was founded in 1870 and has stored, distributed and marketed petroleum-based products for over 50 years.

We are one of the largest independent wholesale distributors of refined products in the Northeast United States based on aggregate terminal capacity. We own and/or operate a network of 15 refined products and materials handling terminals strategically located throughout the Northeast that have a combined storage capacity of approximately 9.1 million barrels (which excludes approximately 1.5 million barrels of storage capacity in tanks not currently in service) for refined products and other liquid materials, as well as approximately 1.5 million square feet of materials handling capacity. We also have access to approximately 50 third-party terminals in the Northeast through which we sell or distribute refined products pursuant to rack, exchange and throughput agreements.

 

 

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Table of Contents

The following tables set forth information with respect to our 15 owned and/or operated terminals.

 

Liquids Storage Terminal

   Number of
Storage
Tanks(1)
     Storage  Tank
Capacity
(Bbls)(1)
    

Principal Products

South Portland, ME

     31         1,525,700       refined products; asphalt; clay slurry

Searsport, ME

     18         1,254,400       refined products; caustic soda; asphalt

Newington, NH: River Road

     29         1,157,100       refined products; tallow

Bridgeport, CT(2)

     11         1,132,700       refined products

Albany, NY

     9         889,800       refined products

Newington, NH: Avery Lane

     12         722,000       refined products; asphalt

Quincy, MA

     9         657,000       refined products

Providence, RI(3)

     5         619,800       refined products; asphalt

Oswego, NY

     4         339,200      

refined products; asphalt

Everett, MA

     4         319,100      

asphalt

Quincy, MA: TRT(4)

     4         304,200       refined products

New Bedford, MA(5)

     2         85,900       refined products

Mount Vernon, NY

     7         72,100       refined products

Stamford, CT

     3         46,600       refined products
  

 

 

    

 

 

    

Total

     148         9,125,600      
  

 

 

    

 

 

    

 

Dry Storage Terminal

   Number of
Storage Pads
and
Warehouses
     Storage
Capacity

(Square  Feet)
    

Principal Products and
Materials

Newington, NH: River Road(6)

     3 pads         431,000       salt; gypsum

Searsport, ME

    

 

3 warehouses;

7 pads

  

  

    

 

101,000

310,000

  

  

   break bulk; salt; petroleum coke; heavy lift

Portland, ME(7)

    

 

7 warehouses;

4 pads

  

  

    

 

215,000

180,000

  

  

   break bulk; coal

South Portland, ME

     3 pads         230,000       salt; coal

Providence, RI

     1 pad         75,000       salt
  

 

 

    

 

 

    

Total

    
 
10 warehouses;
18 pads
 
  
     1,542,000      
  

 

 

    

 

 

    

 

(1) We also have an aggregate of approximately 1.5 million barrels of additional storage capacity attributable to 43 storage tanks not currently in service. Please read “Business—Our Terminals” beginning on page 136. These tanks are not necessary for the operation of our business at current levels. In the event that such additional storage capacity were desired, additional time and capital would be required to bring any of such storage tanks back into service.
(2) We acquired the Bridgeport terminal on July 31, 2013. See “—Recent Developments.”
(3) One tank with storage capacity of approximately 136,000 barrels is leased from a subsidiary of Dominion Resources, Inc., an unaffiliated third party.
(4) Operating assets and real estate are leased from Twin Rivers Technology L.P., an unaffiliated third party.
(5)

Operating assets and real estate are leased from Sprague Massachusetts Properties LLC, which will be a wholly owned subsidiary of Sprague Holdings upon the closing of this offering. The New Bedford terminal is subject to a purchase and sale agreement pursuant to which a third party has agreed to acquire the terminal from Sprague Massachusetts Properties LLC. The acquisition is subject to certain conditions that are beyond the control of Sprague Massachusetts Properties LLC. Subject to those conditions, the acquisition may be consummated on or before January 5, 2016. In the event that such sale is consummated,

 

 

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  our terminal operating agreement with Sprague Holdings and Sprague Massachusetts Properties LLC will automatically terminate. Please read “Certain Relationships and Related Party Transactions—Terminal Operating Agreement” beginning on page 180. We have been advised by Sprague Massachusetts Properties LLC that it does not believe that the sale will be consummated prior to September 30, 2014.
(6) The terminal also has two silos capable of storing a total of approximately 26,000 tons of cement.
(7) Real estate and two storage buildings are leased from Merrill Industries Inc., an unaffiliated third party, and the balance of the assets are owned by us.

We operate under four business segments: refined products, natural gas, materials handling and other operations. We evaluate the performance of our segments using adjusted gross margin, which is a non-GAAP financial measure used by management and external users of our consolidated financial statements to assess the economic results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How Management Evaluates our Results of Operations—Adjusted Gross Margin and Adjusted EBITDA” beginning on page 84 and “—Non-GAAP Financial Measures” beginning on page 23. On October 1, 2012, our predecessor acquired control of Kildair Services Ltd., a Canadian distributor of residual fuel oil and asphalt and a commercial trucking business (“Kildair”), by purchasing the remaining 50% equity interest. Kildair is now a wholly-owned subsidiary of our predecessor and will not be part of our initial assets following this offering.

Our 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 our customers. We have wholesale customers who resell the refined products we sell to them and commercial customers who consume the refined products we sell to them. Our wholesale customers consist of more than 1,000 home heating oil retailers and diesel fuel and gasoline resellers. Our commercial customers include federal and state agencies, municipalities, regional transit authorities, large industrial companies, hospitals and educational institutions. For the year ended December 31, 2012 and the six months ended June 30, 2013, we sold approximately 1.3 billion and 765.0 million gallons of refined products, respectively. For the year ended December 31, 2012 and the six months ended June 30, 2013, our refined products segment accounted for 56% and 57% of our adjusted gross margin, respectively.

We also purchase, sell and distribute natural gas to more than 5,000 commercial and industrial customer locations across 10 states in the Northeast and Mid-Atlantic. We purchase the natural gas we sell from natural gas producers and trading companies. For the year ended December 31, 2012 and the six months ended June 30, 2013, we sold 49.4 Bcf and 28.3 Bcf of natural gas, respectively. For the year ended December 31, 2012 and the six months ended June 30, 2013, our natural gas segment accounted for 19% and 26% of our adjusted gross margin, respectively.

Our materials handling business is a fee-based business and is generally conducted under multi-year agreements. We offload, store and/or prepare for delivery a variety of customer-owned products, including asphalt, clay slurry, salt, gypsum, coal, petroleum coke, caustic soda, tallow, pulp and heavy equipment. For the year ended December 31, 2012, we offloaded, stored and/or prepared for delivery 2.6 million short tons of products and 248.5 million gallons of liquid materials. For the six months ended June 30, 2013, we offloaded, stored and/or prepared for delivery 1.1 million short tons of product and 122.6 million gallons of liquid materials. For the year ended December 31, 2012 and the six months ended June 30, 2013, our materials handling segment accounted for 23% and 15% of our adjusted gross margin, respectively.

Our other operations consist primarily of coal marketing and distribution and commercial trucking, and for the year ended December 31, 2012 and the six months ended June 30, 2013, these activities accounted for approximately 2% of our adjusted gross margin for such periods.

We take title to the products we sell in our refined products, natural gas and other operations segments. We do not take title to any of the products in our materials handling segment. 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.

 

 

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Recent Developments

On July 31, 2013, we purchased an oil terminal in Bridgeport, Connecticut for $20.7 million. This deep water facility includes 13 storage tanks with 1.3 million barrels of storage capacity for gasoline and distillate products, with 1.1 million barrels currently in service. The terminal will provide throughput services to third-parties for branded gasoline sales, while also expanding our marketing of refined products, both gasoline and distillate, in the Connecticut market.

The acquisition was financed with a $10.0 million equity investment made by Axel Johnson and $10.7 million of borrowings under the acquisition line of our existing credit facility. In addition, we will purchase approximately $3.5 million of inventory that was stored at the terminal.

On September 16, 2013, our predecessor declared a dividend of $17.5 million, which was paid to Axel Johnson on September 18, 2013.

Our results of operations for the three months ending September 30, 2013 are not yet available. Based on preliminary information to date, we expect lower pro forma adjusted gross margin for the three months ending September 30, 2013, as compared to the three months ended September 30, 2012. We believe that the pro forma distributable cash flow for the twelve months ending September 30, 2013 will be lower than the pro forma distributable cash flow for the twelve months ended June 30, 2013. However, we do not expect our results of operations for the quarter ending September 30, 2013 to have a material impact on our forecasted distributable cash flow necessary for us to pay the minimum quarterly distribution on all units for the twelve months ending September 30, 2014.

Business Strategies

Our plan is to generate cash flows sufficient to enable us to pay the minimum quarterly distribution on each unit and to increase distributable cash flow per unit by executing the following strategies:

 

   

Acquire additional terminals and marketing and distribution businesses. We intend to grow our asset and customer base by acquiring additional marine and inland terminals (both refined products and materials handling) within and adjacent to the geographic markets we serve. We also intend to acquire additional refined products and natural gas marketing businesses that have demonstrated an ability to generate free cash flow and that will enable us to leverage our existing investment in our business and customer service systems to further increase the profitability and stability of such cash flow. For example, in July 2013, we completed the acquisition of our Bridgeport, Connecticut terminal, which will provide fee-based revenues from gasoline throughputs, while also expanding our refined product marketing opportunities in the Connecticut market.

 

   

Increase our business with existing customers. We intend to increase the net sales and margin we realize from customers we currently serve by expanding the range of products and services we provide and by developing additional ways to address our customers’ needs for certainty of supply, reduced commodity price risk and high-quality customer service.

 

   

Limit our exposure to commodity price volatility and credit risk. We will continue to manage commodity price risk by seeking to maintain a balanced position in our purchases and sales through the use of derivatives and forward contracts and to manage counterparty risk by maintaining conservative credit management processes. Furthermore, our materials handling segment generates ratable and stable cash flows and leverages our terminal asset base and strategic port locations.

 

 

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Maintain our operational excellence. We intend to maintain our long history of safe, cost-effective operations and environmental stewardship by applying new technologies, investing in the maintenance of our assets and providing training programs for our employees.

Competitive Strengths

We believe we are well-positioned to execute our business strategies successfully using the following competitive strengths:

 

   

We own and/or operate a large portfolio of strategically located assets in the Northeast. We own and/or operate 15 terminals in the Northeast with aggregate storage capacity of approximately 9.1 million barrels, many of which have access to waterborne trade and have rail connectivity and blending capabilities. We also have access to approximately 50 third-party terminals in the Northeast. We believe that the quantity, quality and location of the assets we own or to which we have access provide us the opportunity to offer our customers both certainty of supply and a diversity of products and services to a degree that our competitors with fewer assets cannot offer. In addition, our owned and/or operated terminals and our supply relationships afford us opportunities to acquire physical volumes of refined products at prices lower than expected future prices and either hedge or enter into forward contracts with respect to those volumes.

 

   

Our experienced management team has demonstrated its ability to effectively manage and grow our business. The members of our senior management team have an average of over 20 years of experience in the energy industry and have been operating and growing the assets of our predecessor as a team for approximately nine years. During that time, our predecessor has grown in part through the strategic acquisitions of various refined products and materials handling terminals, a natural gas marketing business and an asphalt and residual fuel oil marketing and storage company referred to as Kildair that will not initially be contributed to us. Since 2000, we have acquired approximately $198.7 million of assets in eleven transactions (including Kildair), including the acquisition of our Bridgeport, Connecticut terminal in July 2013. Our management team has also expanded our product offerings, implemented our risk management systems, significantly enhanced our employee safety and environmental compliance policies and overseen the design and implementation of numerous business and customer service programs designed to assist our customers in managing commodity risk.

 

   

Diversity of product offerings, services and customer base. We sell a variety of products, including our four core products (distillates, gasoline, residual fuel oil and natural gas), and provide materials handling services to a large and diverse group of customers. We believe that the diversity of the products and services that we offer provides us with the opportunity to attract a broad range of new customers and to expand the products and services we can offer to our existing customers. In addition, the diversity of our products helps provide us with more stable cash flows by mitigating the impact of seasonality and commodity price sensitivity. For the year ended December 31, 2012, our refined products, natural gas, materials handling and other operations segments accounted for 56%, 19%, 23% and 2% of our adjusted gross margin, respectively. For the six months ended June 30, 2013, our refined products, natural gas and materials handling and other operations segments accounted for 57%, 26%, 15% and 2% of our adjusted gross margin, respectively.

 

   

Reputation for reliability and superior customer service. We have been a supplier of refined products in the Northeast for more than 50 years and believe that we have developed an excellent reputation for reliability and superior customer service. We have high customer retention rates, which we believe reflect our dependability and our continuous innovation and implementation of new product and service options for our customers. Over the last three fiscal years, our average annual customer retention rate has been over 90% across all of our business segments.

 

   

Financial flexibility to manage our business and pursue strategic growth opportunities. Immediately following the completion of this offering, we expect to have available undrawn borrowing capacity of

 

 

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approximately $221.6 million under a new credit agreement we expect to enter into in connection with this offering, as well as access to both the public and private equity and debt capital markets. We believe our borrowing capacity and our broader access to the capital markets will provide us with flexibility to pursue strategic growth opportunities while allowing us to manage the working capital requirements associated with our business.

Summary of Risk Factors

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. Those risks are described under the caption “Risk Factors” beginning on page 25 and are summarized as follows:

Risks Related to Our Business

 

   

We may not have sufficient distributable cash flow following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

 

   

On a pro forma basis, we would not have had sufficient distributable cash flow to pay the full minimum quarterly distribution on our common units or any distribution on our subordinated units for the quarter ended June 30, 2013 or to pay the full minimum quarterly distribution on our subordinated units for the quarter ended September 30, 2012 and for the year ended December 31, 2012.

 

   

The assumptions underlying the forecast of distributable cash flow that we include in “Our Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause our actual distributable cash flow to differ materially from our forecast. Furthermore, we did not use quarter-by-quarter estimates in concluding that there would be sufficient distributable cash flow to pay the minimum quarterly distribution on all of our common and subordinated units during the forecast period.

 

   

Our distributable cash flow depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income.

 

   

Our business is seasonal and generally our financial results are lower in the second and third quarters of the calendar year, which may result in our need to borrow money in order to make quarterly distributions to our unitholders during these quarters.

 

   

A significant decrease in demand for refined products, natural gas or our materials handling services in the areas we serve would adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

   

Our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders are influenced by changes in demand for, and therefore indirectly by changes in the prices of, refined products and natural gas, which could adversely affect our profit margins, our customers’ and suppliers’ financial condition, contract performance, trade credit and the amount and cost of our borrowing under our new credit agreement.

 

   

Restrictions in our new credit agreement could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders as well as the value of our common units.

 

   

Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.

 

   

Warmer weather conditions during winter could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

 

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Derivatives legislation could have an adverse impact on our ability to use derivatives to reduce the effect of commodity price risk, interest rate risk, and other risks associated with our business and could have an adverse impact on the cost of our hedging activities.

 

   

Our risk management policies, processes and procedures cannot eliminate all commodity price risk or basis risk, which could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders. In addition, any noncompliance with our risk management policies, processes and procedures could result in significant financial losses.

 

   

We are exposed to risks of loss in the event of nonperformance by our customers, suppliers and counterparties.

 

   

We are exposed to performance risk in our supply chain.

 

   

Some of our competitors have capital resources many times greater than ours and control greater supplies of refined products and natural gas. Competitors able to supply our customers with those products and services at a lower price could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

   

Some of our home heating oil and residual fuel oil volumes are subject to customers switching or converting to natural gas, which could result in loss of customers and, in turn, could have an adverse effect on our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

   

Energy efficiency, new technology and alternative energy sources could reduce demand for our products and adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

   

A principal focus of our business strategy is to grow and expand our business through acquisitions. If we do not make acquisitions on economically acceptable terms, our future growth may be limited and any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis.

 

   

A portion of our net sales is generated under contracts that must be renegotiated or replaced periodically. If we are unable to successfully renegotiate or replace these contracts, our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders could be adversely affected.

 

   

Due to our lack of geographic diversification, adverse developments in the terminals we use or in our operating areas would adversely affect our results of operations and distributable cash flow.

 

   

Our operations are subject to operational hazards and unforeseen interruptions for which we may not be able to maintain adequate insurance coverage.

 

   

Our terminalling and materials handling operations are subject to federal, state and local laws and regulations relating to environmental protection and operational safety that require us to incur substantial costs and that may become more stringent over time.

 

   

The risks of spills and releases and the associated liabilities for investigation, remediation and third-party claims, if any, are inherent in terminalling operations, and the liabilities that we incur may be substantial.

 

   

Increased regulation of greenhouse gas emissions could result in increased operating costs and reduced demand for refined products as a fuel source, which could in turn reduce demand for our products and adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

   

We are subject to federal, state and local laws and regulations that govern the product quality specifications of the refined products we purchase, store, transport and sell.

 

 

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We depend on unionized labor for our operations in Mt. Vernon and Albany, New York and in Providence, Rhode Island. Work stoppages or labor disturbances at these facilities could disrupt our business.

 

   

We rely on our information technology systems to manage numerous aspects of our business, and a disruption of these systems could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

   

If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Risks Inherent in an Investment in Us

 

   

It is our business strategy to distribute most of our distributable cash flow, which could limit our ability to grow and make acquisitions.

 

   

Axel Johnson currently controls, and after this offering will indirectly control, our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including Axel Johnson, may have conflicts of interest with us and have limited duties to us and our common unitholders, and they may favor their own interests to the detriment of us and our common unitholders.

 

   

Our general partner intends to limit its liability regarding our obligations.

 

   

Our partnership agreement limits our general partner’s duties to our unitholders.

 

   

Our partnership agreement restricts the remedies available to our unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

   

Cost reimbursements and fees due to our general partner and its affiliates for services provided to us or on our behalf, which may be determined in our general partner’s sole discretion, may be substantial and will reduce our distributable cash flow.

 

   

Unitholders have limited voting rights and, even if they are dissatisfied, cannot initially remove our general partner without its consent.

 

   

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

 

   

The incentive distribution rights held by Sprague Holdings may be transferred to a third party without unitholder consent.

 

   

You will experience immediate and substantial dilution in pro forma net tangible book value of $20.02 per common unit.

 

   

We may issue additional units without unitholder approval, which would dilute unitholder interests.

 

   

Sprague Holdings may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

 

   

An increase in interest rates may cause the market price of our common units to decline.

 

   

Our general partner’s discretion in establishing cash reserves may reduce the amount of distributable cash flow.

 

   

Our general partner may cause us to borrow funds in order to make cash distributions, even where the purpose or effect of the borrowing benefits the general partner or its affiliates.

 

 

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Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

 

   

Your liability may not be limited if a court finds that unitholder action constitutes control of our business.

 

   

A restatement of net income or a reversal or change of estimates affecting net income made after the end of the subordination period but affecting net income during the subordination period will not retroactively affect the conversion of the subordinated units even if we would not have had sufficient distributable cash flow based on such restated or adjusted net income to permit conversion.

 

   

Unitholders may have liability to repay distributions that were wrongfully distributed to them.

 

   

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.

 

   

Sprague Holdings, or any transferee holding a majority of the incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of the board of directors of our general partner or the holders of our common units. This could result in lower distributions to our unitholders.

 

   

The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.

 

   

We will incur increased costs as a result of being a publicly traded partnership.

Tax Risks to Common Unitholders

 

   

Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes. If the Internal Revenue Service, or the IRS, were to treat us as a corporation for federal income tax purposes, our distributable cash flow would be substantially reduced.

 

   

If we were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our distributable cash flow.

 

   

The tax treatment of publicly traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

 

   

Our unitholders will be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.

 

   

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

 

   

Tax gain or loss on the disposition of our common units could be more or less than expected.

 

   

Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.

 

   

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely affected and the cost of any IRS contest will reduce our distributable cash flow.

 

   

We will treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

 

 

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We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

 

   

A unitholder whose common units are the subject of a securities loan (i.e., a loan to a “short seller” to cover a short sale of common units) may be considered as having disposed of those common units. If so, such unitholder would no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and may be required to recognize gain or loss from the disposition.

 

   

Unitholders may be subject to state and local taxes and return filing requirements in jurisdictions where they do not live as a result of investing in our common units.

The Formation Transactions

We were formed in June 2011 by Sprague Holdings and Sprague Resources GP LLC, our general partner and a wholly-owned subsidiary of Sprague Holdings, to own and operate the business that has historically been conducted by Sprague Energy Corp., our predecessor. In connection with this offering, the following transactions, which we refer to collectively as the Formation Transactions, have occurred or will occur:

 

   

Sprague Energy Corp. was converted into a limited liability company and renamed Sprague Operating Resources LLC;

 

   

Axel Johnson will contribute to Sprague Holdings all of the ownership interests in Sprague Operating Resources LLC;

 

   

Sprague Operating Resources LLC will distribute to Sprague Holdings or a wholly owned subsidiary of Sprague Holdings certain assets and liabilities that will not be a part of our initial assets, including:

 

  an aggregate of $155.8 million (which could consist entirely of accounts receivable or a combination of accounts receivable and a cash amount, such cash amount, if any, not expected to exceed $25 million);

 

  our predecessor’s 100% equity interest in Sprague Energy Canada Ltd., which owns an asphalt and residual fuel oil marketing and storage company with 3.2 million barrels of storage capacity located in Quebec, Canada, referred to herein as Kildair;

 

  the terminal assets and liabilities associated with our predecessor’s terminals located in New Bedford, Massachusetts; Portsmouth, New Hampshire and Bucksport, Maine, property located in Oceanside, New York, and certain corporate assets; and

 

  other long-term debt of $42.4 million.

 

   

Sprague Holdings will contribute to us all of the membership interests in Sprague Operating Resources LLC, our operating company, in exchange for 1,571,970 common units(1), 10,071,970 subordinated units, the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 50.0%, of the cash we distribute in excess of $0.474375 per unit per quarter as described under “Our Cash Distribution Policy and Restrictions on Distributions” beginning on page 52;

 

   

We will issue and sell 8,500,000 common units(1) to the public in this offering, representing an aggregate 42.2% limited partner interest in us;

 

 

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We will grant the underwriters a 30-day option to purchase up to 1,275,000 additional common units from us if the underwriters sell more than 8,500,000 common units in this offering;

 

   

We will enter into a new credit agreement, consisting of a working capital facility of up to $750.0 million and an acquisition facility of up to $250.0 million, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Credit Agreement” beginning on page 106;

 

   

We will apply the net proceeds from our issuance and sale of 8,500,000 common units as described in “Use of Proceeds” on page 49; and

 

   

We will enter into an omnibus agreement, a services agreement and a terminal operating agreement with respect to the New Bedford, Massachusetts terminal with Sprague Holdings and/or certain of its affiliates, each as described in “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions” beginning on page 177.

Please read “Certain Relationships and Related Party Transactions” beginning on page 175 for additional information.

 

(1) Includes 1,275,000 common units that will be issued to Sprague Holdings at the expiration of the underwriters’ option to purchase additional common units, assuming that the underwriters do not exercise their option. Any exercise of the underwriters’ option to purchase additional common units would reduce the common units shown as issued to Sprague Holdings by the number to be purchased by the underwriters in connection with such exercise. If and to the extent the underwriters exercise their option to purchase additional common units, the number of units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to Sprague Holdings at the expiration of the option period. All of the net proceeds from any exercise of the underwriters’ option to purchase additional common units (approximately $23.7 million based on an assumed initial public offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover of this prospectus), if exercised in full, after deducting the estimated underwriting discounts and the structuring fee) will be distributed to Sprague Holdings as reimbursement for certain capital expenditures made by Sprague Holdings with respect to the assets contributed to us.

Our Relationship with Axel Johnson

Founded in 1920, Axel Johnson is a private company that has invested in a diverse collection of businesses. Axel Johnson purchased our predecessor in 1972 and has made substantial investments in its business. After this offering, through its 100% ownership of Sprague Holdings, Axel Johnson will own our general partner, approximately 7.8% of our outstanding common units, all of our subordinated units and all of our incentive distribution rights. Given its significant ownership in us, we believe Axel Johnson will be motivated to promote and support the successful execution of our business plan and to pursue projects and/or acquisitions that enhance the value of our business. Under the terms of the omnibus agreement that we will enter into in connection with the closing of this offering, we will have a right of first refusal if Axel Johnson or any of its controlled affiliates has the opportunity to acquire a controlling interest in assets or businesses primarily engaged in the businesses in which we are engaged as of the closing of this offering and that operate primarily in the United States or Quebec, Ontario or the Maritime provinces of Canada, subject to certain exceptions. In addition, pursuant to the terms of the omnibus agreement, we will have a 60-day exclusive right of negotiation if Axel Johnson or any of its controlled affiliates decide to attempt to sell any assets or businesses that are primarily engaged in the businesses in which we are engaged as of the closing of this offering and that operate primarily in the United States or Quebec, Ontario or the Maritimes, Canada, including its equity interests in Kildair and any successor entities thereof and its interests in any assets or equity interests in any business that, at the time of the closing of this offering, it is actively seeking to invest in or acquire or has the right to invest in or acquire.

 

 

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Kildair is a residual fuel oil and asphalt marketing and storage company with 3.2 million barrels of storage capacity located in Quebec, Canada. We will not own any equity interests in Kildair immediately following the closing of this offering. Additionally, pursuant to the omnibus agreement, Axel Johnson will continue to provide trade credit support to us, consistent with past practices, through December 31, 2016. See “Certain Relationships and Related Party Transactions—Omnibus Agreement” beginning on page 177.

Management

Our general partner has sole responsibility for conducting our business and for managing our operations. The board of directors of our general partner will direct the management of our business. As a result of owning our general partner, Sprague Holdings will have the right to appoint all members of the board of directors of our general partner, including the independent directors. Our unitholders will not be entitled to elect our general partner or the members of its board of directors or otherwise directly participate in our management or operations. Upon the closing of this offering, the board of directors of our general partner will have six members. Sprague Holdings intends to increase the size of the board of directors of our general partner to seven members following the closing of this offering. Sprague Holdings will appoint all members to our general partner’s board of directors and we expect that, when the size of the board increases to seven directors, at least three of those directors will be independent as defined under the independence standards established by the New York Stock Exchange, or the NYSE. For more information about the directors and officers of our general partner, see “Management—Directors and Executive Officers” beginning on page 153.

Ownership and Organizational Structure

The following diagram depicts our simplified organizational and ownership structure after giving effect to the Formation Transactions, including the offering of common units hereby:

 

     Percentage Interest  

Public Common Units

     42.2% (1) 

Interests of Sprague Holdings and Affiliates:

  

Common Units

     7.8% (1) 

Subordinated Units

     50.0%   

Non-Economic General Partner Interest

     —   (2) 

Incentive Distribution Rights

     —   (3) 
  

 

 

 

Total

     100.0%   
  

 

 

 

 

(1) Assumes no exercise of the underwriters’ option to purchase additional common units. Please read “—The Formation Transactions” beginning on page 10 for a description of the impact of an exercise of this option on common unit ownership percentages.
(2) Our general partner owns a non-economic general partner interest in us. Please read “Provisions of Our Partnership Agreement Related to Cash Distributions—General Partner Interest” on page 69.
(3) Incentive distribution rights represent a variable interest in distributions and thus are not expressed as a fixed percentage. See “Provisions of Our Partnership Agreement Relating to Cash Distributions—Incentive Distribution Rights” on page 70. Distributions with respect to the incentive distribution rights will be classified as distributions with respect to equity interests.

 

 

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LOGO

 

 

 

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Principal Executive Offices and Internet Address

Our principal executive offices are located at Two International Drive, Suite 200, Portsmouth, New Hampshire 03801, and our telephone number is (800) 225-1560. Our website is located at www.spragueenergy.com. We will make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, or the SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with, or furnished to, the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Summary of Conflicts of Interest and Fiduciary Duties

Our general partner has a legal duty to manage us in good faith. However, because our general partner is wholly owned by Sprague Holdings, a wholly-owned subsidiary of Axel Johnson, the officers and directors of our general partner have fiduciary duties to manage the business of our general partner in a manner beneficial to Sprague Holdings. As a result, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, including Axel Johnson, on the other hand. For a more detailed description of the conflicts of interest and duties of our general partner and its board, see “Risk Factors—Risks Inherent in an Investment in Us” beginning on page 36 and “Conflicts of Interest and Fiduciary Duties—Conflicts of Interest” beginning on page 181.

Our partnership agreement limits the liability and duties of our general partner to unitholders. Our partnership agreement also restricts the remedies available to unitholders for actions that might otherwise constitute breaches of our general partner’s fiduciary duties. Except as provided in our partnership agreement and the omnibus agreement, affiliates of our general partner, including Axel Johnson and its affiliates other than us, are not restricted from competing with us. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement and, pursuant to the terms of our partnership agreement, each holder of common units consents to various actions and potential conflicts of interest contemplated in the partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law.

For a description of our other relationships with our affiliates, see “Certain Relationships and Related Party Transactions” beginning on page 175.

 

 

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The Offering

 

Common units offered by us

8,500,000 common units, or 9,775,000 common units if the underwriters exercise their option to purchase additional common units in full.

 

Units outstanding after this offering

10,071,970 common units and 10,071,970 subordinated units, each representing a 50.0% limited partner interest in us, respectively. If the underwriters do not exercise their option to purchase additional common units, we will issue 1,275,000 common units to Sprague Holdings at the expiration of the option. If and to the extent the underwriters exercise their option to purchase additional common units, the number of units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to Sprague Holdings at the expiration of the option period. Accordingly, the exercise of the underwriters’ option will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Our general partner will own a non-economic general partner interest in us.

 

Use of proceeds

We expect that the net proceeds from our sale of 8,500,000 common units in this offering, after deducting underwriting discounts, the structuring fee and estimated offering expenses, will be $155.8 million, based on an assumed initial public offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover of this prospectus). We intend to use the net proceeds to reduce amounts outstanding under the working capital facility of our new credit agreement. Affiliates of certain of the underwriters will be lenders under our new credit agreement and, accordingly, will receive a portion of the proceeds from this offering. In addition, affiliates of certain of the underwriters are lenders under our existing credit agreement and may receive payments in connection with the repayment of our existing credit agreement. Please read “Underwriting—Certain Relationships” on page 227.

To the extent the underwriters exercise their option to purchase additional common units, all of the net proceeds from the issuance and sale of those common units (approximately $23.7 million, after deducting underwriting discounts and the structuring fee) will be distributed to Sprague Holdings as reimbursement for certain capital expenditures made by Sprague Holdings with respect to the assets contributed to us. Sprague Holdings has informed us that it intends to distribute the net proceeds received by it from the sale of those common units to Axel Johnson. Sprague Holdings and Axel Johnson are deemed under federal securities laws to be underwriters with respect to any common units that may be sold pursuant to the underwriters’ option to purchase additional common units.

 

  Please read “Use of Proceeds” on page 49.

 

Cash distributions

We intend to pay the minimum quarterly distribution of $0.4125 per unit ($1.65 per unit on an annualized basis) to the extent we have

 

 

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sufficient distributable cash flow after the establishment of cash reserves by our general partner and the payment of our expenses. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions” beginning on page 52.

 

  We will pay a prorated distribution for the first quarter during which we are a publicly traded partnership. Assuming that we become a publicly traded partnership before December 31, 2013, we anticipate that such distribution will cover the period from the closing date of this offering to and including December 31, 2013. We expect to pay this cash distribution before February 15, 2014.

 

  Our partnership agreement generally provides that we distribute cash each quarter in the following manner:

 

   

first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $0.4125 plus any arrearages from prior quarters;

 

   

second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of 0.4125; and

 

   

third, to all unitholders, pro rata, until each unit has received a distribution of $0.474375.

 

  If cash distributions to our unitholders exceed $0.474375 per unit in any quarter, the holders of our incentive distribution rights will receive increasing percentages, up to 50.0%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions” beginning on page 66.

 

  We believe that, based on the assumptions and considerations included in “Our Cash Distribution Policy and Restrictions on Distributions—Assumptions and Considerations” beginning on page 61, we will have sufficient distributable cash flow to pay the full minimum quarterly distribution on all of our common and subordinated units for the twelve months ending September 30, 2014. However, we do not have a legal obligation to pay quarterly distributions at our minimum quarterly distribution rate or at any other rate. There is no guarantee that we will distribute quarterly cash distributions to our unitholders in any quarter. We did not use quarter-by-quarter estimates in concluding that there would be sufficient distributable cash flow to pay the minimum quarterly distribution on all of our common and subordinated units during the twelve months ending September 30, 2014. Please read “Our Cash Distribution Policy and Restrictions on Distributions” beginning on page 52.

 

 

If we assume that we completed the transactions described under “—The Formation Transactions” beginning on page 10 on January 1, 2012 and

 

 

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July 1, 2012, respectively, our pro forma distributable cash flow for the year ended December 31, 2012 and the twelve months ended June 30, 2013 would have been approximately $29.9 million and $35.8 million, respectively. For the year ended December 31, 2012, these amounts would have been sufficient to pay the full minimum quarterly distribution on all of our common units but would not have been sufficient to pay the full minimum quarterly distribution on our subordinated units. For the twelve months ended June 30, 2013, these amounts would have been sufficient to pay the full minimum quarterly distribution on all of our common and subordinated units. See “Our Cash Distribution Policy and Restrictions on Distributions” beginning on page 52.

 

Subordinated units

Axel Johnson, through its ownership of Sprague Holdings, will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are entitled to receive the minimum quarterly distribution of $0.4125 per unit only after the common units have received the minimum quarterly distribution plus any arrearages from prior quarters. If we do not pay distributions on our subordinated units, our subordinated units will not accrue arrearages for those unpaid distributions.

 

Subordination period

If we meet three requirements set forth in our partnership agreement, the subordination period will expire and all subordinated units will convert into common units on a one-for-one basis. The three requirements are:

 

   

We must make quarterly distributions from distributable cash flow of at least the annualized minimum quarterly distribution on each outstanding common and subordinated unit in respect of each of the prior three consecutive, non-overlapping four quarter periods;

 

   

Distributable cash flow generated in respect of such three consecutive, non-overlapping four quarter periods (excluding the $25.0 million basket contained in the definition of distributable cash flow) must equal or exceed the annualized minimum quarterly distribution on all outstanding common and subordinated units (on a fully diluted basis) in respect of such quarters; and

 

   

There are no arrearages in payment of the minimum quarterly distribution on the common units.

 

  Our partnership agreement provides that the requirements could first be satisfied in connection with a distribution of cash with respect to the quarter ending December 31, 2016 and, if not satisfied in respect of that quarter, could be satisfied on any date thereafter.

 

  The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of subordinated units or their affiliates are voted in favor of that removal.

 

 

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  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and the common units will no longer be entitled to arrearages. See “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordination Period” beginning on page 68.

 

Right to reset the target distribution levels

The holder or holders of a majority of our incentive distribution rights (initially Sprague Holdings) have the right, at any time when there are no subordinated units outstanding and they have received incentive distributions at the highest level to which they are entitled (50.0%) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. Any election to reset the minimum quarterly distribution amount and the target distribution levels shall be subject to the prior written concurrence of our general partner that the conditions described in the immediately preceding sentence have been satisfied. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution.

 

  In the event of a reset of target distribution levels, the holders of the incentive distribution rights will be entitled to receive an aggregate number of common units equal to the number of common units which would have entitled the holders to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to the holders on the incentive distribution rights in the prior two quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Sprague Holdings’ Right to Reset Incentive Distribution Levels” beginning on page 71.

 

Issuance of additional units

We can issue an unlimited number of units, including units senior to the common units, without the consent of our unitholders. See “Units Eligible for Future Sale” beginning on page 205 and “The Partnership Agreement—Issuance of Additional Partnership Interests” beginning on page 194.

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of our outstanding common and subordinated units, including any common or subordinated units owned by our general partner and its affiliates (including Sprague Holdings), voting together as a single class. Upon completion of this offering, Sprague Holdings will own an aggregate of approximately 57.8% of our common and subordinated units. This will initially give Sprague Holdings the

 

 

18


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ability to prevent the involuntary removal of our general partner. See “The Partnership Agreement—Withdrawal or Removal of Our General Partner” beginning on page 198.

 

Limited call right

If at any time our general partner and its affiliates own more than 80% of the then outstanding common units, our general partner will have the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. See “The Partnership Agreement—Limited Call Right” beginning on page 200.

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2016, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be approximately 25% of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $1.65 per common unit, we estimate that your average allocable taxable income per year will be approximately $0.4125 per common unit. See “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions” beginning on page 209.

 

Material tax consequences

For a discussion of certain material tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, see “Material U.S. Federal Income Tax Consequences” beginning on page 207.

 

Exchange listing

We have been approved to list our common units on the NYSE under the symbol “SRLP,” subject to official notice of issuance.

 

 

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Summary Historical and Pro Forma Financial and Operating Data

The following table presents summary historical consolidated financial and operating data of our predecessor, Sprague Operating Resources LLC, as of the dates and for the periods indicated. The summary historical consolidated financial data presented as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 are derived from the audited historical consolidated financial statements of Sprague Operating Resources LLC that are included elsewhere in this prospectus. The summary historical consolidated financial data presented as of December 31, 2010 are derived from the audited historical consolidated balance sheet of Sprague Operating Resources LLC that is not included in this prospectus. The summary historical consolidated financial data presented as of June 30, 2013 and for the six months ended June 30, 2013 and 2012 are derived from the unaudited historical condensed consolidated financial statements of Sprague Operating Resources LLC that are included elsewhere in this prospectus. The summary historical consolidated financial data presented as of June 30, 2012 are derived from the unaudited historical condensed consolidated financial statements of Sprague Operating Resources LLC that are not included in this prospectus.

The summary pro forma consolidated financial data presented for the year ended December 31, 2012 and as of and for the six months ended June 30, 2013 are derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus. Our unaudited pro forma consolidated financial statements give pro forma effect to, among other things:

 

   

The contribution to Sprague Holdings by Axel Johnson of all of the ownership interests in Sprague Operating Resources LLC;

 

   

The distribution to Sprague Holdings or a wholly owned subsidiary of Sprague Holdings, by Sprague Operating Resources LLC of certain of its assets and liabilities that will not be a part of our initial assets, including:

 

   

$155.8 million of accounts receivable;

 

   

our predecessor’s 100% equity interest in Kildair;

 

   

the terminal assets and liabilities associated with our predecessor’s terminals located in New Bedford, Massachusetts; Portsmouth, New Hampshire; and Bucksport, Maine; property located in Oceanside, New York, and certain corporate assets; and

 

   

other long-term debt of $42.4 million;

 

   

The contribution to us by Sprague Holdings of all of the membership interests in Sprague Operating Resources LLC in exchange for the issuance to Sprague Holdings of 1,571,970 common units, 10,071,970 subordinated units, the incentive distribution rights;

 

   

Our issuance and sale of 8,500,000 common units to the public, representing an aggregate 42.2% limited partner interest in us;

 

   

Our entry into a new credit agreement as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Credit Agreement” beginning on page 106; and

 

   

The application of the net proceeds from our issuance and sale of 8,500,000 common units as described in “Use of Proceeds” on page 49.

The unaudited pro forma consolidated balance sheet assumes the items listed above occurred as of June 30, 2013. The unaudited pro forma consolidated income statements for the year ended December 31, 2012 and for the six months ended June 30, 2013 assume the items listed above occurred as of January 1, 2012.

 

 

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For a detailed discussion of the summary historical consolidated financial information contained in the following table, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 82. The following table should also be read in conjunction with “Use of Proceeds” on page 49, “—The Formation Transactions” beginning on page 10, the audited and unaudited historical consolidated financial statements of Sprague Operating Resources LLC and the accompanying notes included elsewhere in this prospectus, and our unaudited pro forma consolidated financial statements and the accompanying notes included elsewhere in this prospectus. Among other things, the historical consolidated and unaudited pro forma consolidated financial statements include more detailed information regarding the basis of presentation for the information in the following table.

The following table presents the non-GAAP financial measure adjusted EBITDA, which we use in our business as an important supplemental measure of our performance. We define and explain this measure under “—Non-GAAP Financial Measures” beginning on page 23 and reconcile it to net income, its most directly comparable financial measure calculated and presented in accordance with GAAP.

 

    Predecessor Historical     Partnership
Pro Forma(1)(2)(4)
 
    Six Months
Ended June 30,
    Year Ended December 31,     Six
Months
Ended
June 30,
2013
    Year
Ended
December 31,

2012
 
    2013     2012     2012     2011     2010      
   

(unaudited)

          (audited)          

(unaudited)

 
   

(in thousands, except per unit data and operating data)

 

Statement of Operations Data:

             

Net sales

  $ 2,466,773      $ 2,037,606      $ 4,043,907      $ 3,797,427      $ 2,817,191      $ 2,205,188      $ 3,876,795   

Cost of products sold

    2,367,864       
1,967,777
  
    3,922,352        3,638,717        2,676,301        2,115,613        3,756,394   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    98,909        69,829        121,555        158,710        140,890        89,575        120,401   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Costs and Expenses:

             

Operating expenses

    27,600        22,106        47,054        42,414        41,102        22,014        43,762   

Selling, general and administrative

    27,056        22,500        46,449        46,292        40,625        24,409        46,212   

Write-off of deferred offering costs(3)

    —          —          8,931        —          —          —          8,931   

Depreciation and amortization

    8,437        4,965        11,665        10,140        10,531        4,670        9,900   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    63,093        49,571        114,099        98,846        92,258        51,093        108,805   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    35,816        20,258        7,456        59,864        48,632        38,482        11,596   

Gain on acquisition of business

    —          (529     1,512        6,016        —          —          —     

Other (expense) income

    816        —          (160     —          894        907        (160

Interest income

    260        308        534        755        503        260        507   

Interest expense

    (14,639     (11,418     (23,960     (24,049     (21,897     (11,380     (21,775
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in net (loss) income of foreign affiliate

    22,253        8,619        (14,618     42,586        28,132        28,269        (9,832

Income tax (provision) benefits(5)

    (10,638     (3,705     2,796        (16,636     (10,288     (1,873     651   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in net (loss) income of foreign affiliate

    11,615        4,914        (11,822     25,950        17,844        26,396        (9,181

Equity in net (loss) income of foreign affiliate

    —          2,352        (1,009     3,622        (2,123     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 11,615      $ 7,266      $ (12,831   $ 29,572      $ 15,721      $ 26,396      $ (9,181
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (unaudited)(6)

  $ 35,159      $ 28,563      $ 49,781      $ 64,398      $ 53,286      $ 34,149      $ 53,165   

Pro forma net income (loss) per limited
partner unit

            $ 1.21      $ (0.42

Weighted average limited partner units outstanding

              21,745        21,745   

Cash Flow Data:

             

Net cash provided by (used in):

             

Operating activities

  $ 118,348      $ 228,460      $ 163,129      $ (43,861   $ 24,997       

Investing activities

    (6,106     (3,682     (79,693     (17,004     (9,387    

Financing activities

    (115,435     (255,664     (111,560     88,882        (17,162    

 

 

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    Predecessor Historical     Partnership
Pro Forma(1)
 
    Six Months
Ended  June 30,
    Year Ended December 31,     Six
Months
Ended
June 30,
2013
 
    2013     2012     2012     2011     2010    
   

(unaudited)

          (audited)          

(unaudited)

 
   

(in thousands, except per unit data and operating data)

 

Other Financial and Operating Data (unaudited):

           

Capital expenditures(7)

  $ 8,117      $ 3,702      $ 7,293      $ 7,255      $ 9,587     

Total refined products volumes sold (barrels)

    18,215        14,377        29,806        29,684        29,797     

Total natural gas volumes sold (MMBtus)

    28,329        25,504        49,417        50,741        52,012     

Balance Sheet Data (at period end):

           

Cash and cash equivalents

  $ 434      $ 951      $ 3,691      $ 31,829      $ 3,854      $ 164   

Property, plant and equipment net

    174,010        109,092        177,080        110,743        103,461        95,280   

Total assets

    834,145        623,032        1,054,247        970,050        867,995        414,034   

Total debt

    449,967        295,957        555,619        524,377        408,304        186,395   

Total liabilities

    700,647        463,412        913,041        791,649        697,811        362,500   

Total stockholder’s/member’/partners’ equity

    133,498        159,620        141,206        178,401        170,184        51,534   

 

(1) Pro forma amounts reflect incremental deferred debt issuance costs of $10.4 million anticipated to be incurred in connection with entering into our new credit agreement and a decrease in interest expense of $1.7 million and $1.0 million for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively.
(2) Pro forma amounts reflect adjustments to reduce selling, general and administrative expenses to eliminate Axel Johnson corporate overhead charges, by $0.7 million and $1.3 million for the six months ended June 30, 2013 and for the year ended December 31, 2012, respectively, and to increase selling, general and administrative expenses as a result of increases to incentive compensation, by $0.6 million and $2.3 million for the six months ended June 30, 2013 and for the year ended December 31, 2012, respectively.
(3) During the year ended December 31, 2012, we delayed the timing of this public offering and, as a result, deferred offering costs of $8.9 million were charged against earnings.
(4) Pro forma selling, general and administrative expenses do not give effect to annual incremental selling, general and administrative expenses of approximately $2.1 million that we expect to incur as a result of being a publicly traded partnership.
(5) Prior to the consummation of this offering, Sprague Energy Corp., which was converted into a limited liability company and renamed Sprague Operating Resources LLC on November 7, 2011, prepared its income tax provision as if it filed a consolidated federal income tax return and state tax returns as required. Commencing with the closing of this offering, all of our subsidiaries will be treated as pass through entities for federal income tax purposes. For these pass through entities, all income, expenses, gains, losses and tax credits generated flow through to their owners and, accordingly, do not result in a provision for income taxes in our financial statements.
(6) For a discussion of the non-GAAP financial measure adjusted EBITDA, please read “—Non-GAAP Financial Measures” beginning on page 23.
(7) Includes approximately $2.1 million, $3.2 million, $6.0 million, $5.7 million and $8.1 million of maintenance capital expenditures for the six months ended June 30, 2013 and 2012, and for the years ended December 31, 2012, 2011 and 2010, respectively. Maintenance capital expenditures are capital expenditures made to replace assets or to maintain the long-term operating capacity of our assets or operating income.

 

 

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Non-GAAP Financial Measures

We present the non-GAAP financial measures EBITDA and adjusted EBITDA in this prospectus. We define EBITDA as net income before interest, income taxes, depreciation and amortization. We define adjusted EBITDA as EBITDA decreased by total commodity derivative gains and losses included in net income (loss) and increased by realized commodity derivative gains and losses included in net income (loss), in each case with respect to refined products and natural gas inventory and natural gas transportation contracts, decreased by gains on acquisition of business, increased by the write-off of deferred offering costs and adjusted for the net impact of bio-fuel excise tax credits. Adjusted EBITDA is used as a supplemental financial measure by our management to describe our operations and economic performance to commercial banks, trade suppliers and other credit providers, and 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 cash sufficient 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.

Please read “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures” beginning on page 80. For a discussion of how our management uses adjusted EBITDA, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How Management Evaluates Our Results of Operations—Adjusted Gross Margin and Adjusted EBITDA.”

The following table presents a reconciliation of EBITDA and adjusted EBITDA to net income, the most directly comparable GAAP financial measure, on a historical basis and pro forma basis, as applicable, for each of the periods indicated:

 

    Predecessor Historical     Partnership Pro Forma  
    Six Months
Ended June 30,
    Year Ended December 31,     Six  Months
Ended June 30,
2013
    Year Ended
December 31,

2012
 
    2013     2012     2012     2011     2010      
   

(in thousands)

       

Reconciliation of EBITDA to net income:

             

Net income (loss)

  $ 11,615      $ 7,266      $ (12,831   $ 29,572      $ 15,721      $ 26,396      $ (9,181

Add/(deduct):

             

Interest expense, net

    14,379        11,110        23,426        23,294        21,394        11,120        21,268   

Tax expense (benefit)

    10,638        3,705        (2,796     16,636        10,288        1,873        (651

Depreciation and amortization

    8,437        4,965        11,665        10,140        10,531        4,670        9,900   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 45,069      $ 27,046      $ 19,464      $ 79,642      $ 57,934      $ 44,059      $ 21,336   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deduct: total commodity derivative (gains) losses included in net income (loss)(1)

    (1,851     (4,327     26,818        34,848        38,975        686        29,257   

Add: realized commodity derivative gains (losses ) included in net income (loss)(1)

 

 

(3,038

   
2,752
  
    (8,941     (44,076  

 

(43,623

    (5,575     (11,380

Add/(deduct):

             

Gain on acquisition of business(2)

    —          —          (1,512     (6,016     —          —          —     

Write-off of deferred offering costs(3)

    —          —          8,931        —          —         
—  
  
    8,931   

Bio-fuel excise tax credits(4)

    (5,021     3,092        5,021        —          —          (5,021     5,021   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 35,159      $ 28,563      $ 49,781      $ 64,398      $ 53,286      $ 34,149      $ 53,165   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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(1) Both total commodity derivative gains and losses and realized commodity derivative gains and losses include amounts paid to enter into the settled contracts.
(2) Represents non-cash gains associated with (i) the re-measurement to fair value of our predecessor’s 50% interest in Kildair in connection with its acquisition of the remaining 50% interest therein and (ii) the acquisition of an oil terminal at below fair value. Please see Notes 2 and 18 to our predecessor’s historical consolidated financial statements.
(3) During the year ended December 31, 2012, we delayed the timing of this public offering and, as a result, deferred offering costs of $8.9 million were charged against earnings. Please see Note 19 to our predecessor’s historical consolidated financial statements.
(4) On January 2, 2013, the federal government enacted legislation that reinstated an excise tax credit program available for certain of our bio-fuel blending activities. This program had previously expired on December 31, 2011 and was reinstated retroactively to January 1, 2012. During the six months ended June 30, 2013, we recorded federal excise tax credits of $5.0 million related to our bio-fuel blending activities that had occurred during the year ended December 31, 2012. These credits have been recorded as a reduction of cost of products sold and, therefore, resulted in an increase in adjusted gross margin for the six months ended June 30, 2013. This adjustment reflects the effect on our adjusted EBITDA had these credits been recorded in the period in which the blending activity took place.

 

 

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RISK FACTORS

Investing in our common units involves substantial risks. Common units are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

If any of the following risks were actually to occur, our business, financial condition, results of operations and ability to pay distributions to our unitholders could be materially adversely affected. Additional risks and uncertainties not currently known to us or that we currently consider to be immaterial may also materially adversely affect our business, financial condition, results of operations and ability to pay distributions to our unitholders. In either case, we might not be able to make distributions on our common units, the trading price of our common units could decline and you could lose all or part of your investment in our common units.

Risks Related to Our Business

We may not have sufficient distributable cash flow following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

In order to pay the minimum quarterly distribution of $0.4125 per unit per quarter, or $1.65 per unit on an annualized basis, we will require distributable cash flow of approximately $8.3 million per quarter, or approximately $33.2 million per year, based on the number of common and subordinated units to be outstanding immediately after completion of this offering. We may not have sufficient distributable cash flow each quarter to enable us to pay the minimum quarterly distribution. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

   

Competition from other companies that sell refined products, natural gas and/or renewable fuels in the Northeast;

 

   

Competition from other companies in the materials handling business;

 

   

Demand for refined products, natural gas and our materials handling services in the markets we serve;

 

   

Absolute price levels, as well as the volatility of prices, of refined products and natural gas in both the spot and futures markets;

 

   

Seasonal variation in temperatures, which affects demand for natural gas and refined products such as home heating oil and residual fuel oil to the extent that it is used for space heating; and

 

   

Prevailing economic conditions.

In addition, the actual amount of distributable cash flow that we distribute will depend on other factors such as:

 

   

The level of capital expenditures we make;

 

   

The level of our operating and general and administrative expenses, including reimbursements to our general partner and certain of its affiliates for services provided to us;

 

   

The restrictions contained in our new credit agreement, including borrowing base limitations and limitations on distributions;

 

   

Our debt service requirements;

 

   

The cost of acquisitions we make, if any;

 

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Fluctuations in our working capital needs;

 

   

Our ability to access capital markets and to borrow under our new credit agreement to make distributions to our unitholders; and

 

   

The amount of cash reserves established by our general partner, if any.

For a description of additional restrictions and factors that may affect our ability to pay cash distributions, see “Our Cash Distribution Policy and Restrictions on Distributions.”

On a pro forma basis, we would not have had sufficient distributable cash flow to pay the full minimum quarterly distribution on our common units or any distribution on our subordinated units for the quarter ended June 30, 2013 or to pay the full minimum quarterly distribution on our subordinated units for the quarter ended September 30, 2012 and for the year ended December 31, 2012.

The amount of pro forma distributable cash flow generated during the quarter ended June 30, 2013 would have been sufficient to allow us to pay a cash distribution of 21% of the minimum quarterly distribution on our common units but no distribution on our subordinated units for such quarter. In addition, the amount of pro forma distributable cash flow generated during the quarter ended September 30, 2012 and for the year ended December 31, 2012 would have been sufficient to allow us to pay the full minimum quarterly distribution on all of our common units for each such period, but only a cash distribution of approximately 39% and 80%, respectively, of the minimum quarterly distribution on all of our subordinated units for such period. For a calculation of our distributable cash flow based on our pro forma results for the year ended December 31, 2012 and for the twelve months ended June 30, 2013, please read “Our Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Distributable Cash Flow.”

The assumptions underlying the forecast of distributable cash flow that we include in “Our Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause our actual distributable cash flow to differ materially from our forecast. Furthermore, we did not use quarter-by-quarter estimates in concluding that there would be sufficient distributable cash flow to pay the minimum quarterly distribution on all of our common and subordinated units during the forecast period.

The forecast of distributable cash flow set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations, EBITDA, adjusted EBITDA and distributable cash flow for the twelve months ending September 30, 2014. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct and that are discussed in “Our Cash Distribution Policy and Restrictions on Distributions.” Our financial forecast has been prepared by management and we have neither received nor requested an opinion or report on it from our or any other independent auditor. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties, including those discussed in this prospectus, which could cause our results to be materially less than the amount forecasted. Furthermore, we did not use quarter-by-quarter estimates in concluding that there would be sufficient distributable cash flow to pay the minimum quarterly distribution on all of our common and subordinated units during the forecast period. If we do not achieve the forecasted results, we may not be able to make the minimum quarterly distribution or pay any amount on our common units, and the market price of our common units may decline materially.

Our distributable cash flow depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income.

Our distributable cash flow depends primarily on our cash flow, and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record losses and may not make cash distributions during periods when we record net income.

 

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Our business is seasonal and generally our financial results are lower in the second and third quarters of the calendar year, which may result in our need to borrow money in order to make quarterly distributions to our unitholders during these quarters.

Demand for natural gas and some refined products, specifically home heating oil and residual fuel oil for space heating purposes, is generally higher during the period of November through March than during the period of April through October. Therefore, our results of operations for the first and fourth calendar quarters are generally better than for the second and third calendar quarters. For example, over the 36-month period ended June 30, 2013, we generated an average of approximately 70% of our total home heating oil and residual fuel oil net sales during the months of November through March. With reduced cash flow during the second and third calendar quarters, we may be required to borrow money in order to pay the minimum quarterly distribution to our unitholders. Any restrictions on our ability to borrow money could restrict our ability to make quarterly distributions to our unitholders.

A significant decrease in demand for refined products, natural gas or our materials handling services in the areas we serve would adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

A significant decrease in demand for refined products, natural gas or our materials handling services in the areas that we serve would significantly reduce our net sales and, therefore, adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders. Factors that could lead to a decrease in market demand for refined products or natural gas include:

 

   

Recession or other adverse economic conditions;

 

   

High prices caused by an increase in the market price of refined products, higher fuel taxes or other governmental or regulatory actions that increase, directly or indirectly, the cost of gasoline or other refined products or natural gas;

 

   

Increased conservation, technological advances and the availability of alternative energy, whether as a result of industry changes, governmental or regulatory actions or otherwise; and

 

   

Conversion from consumption of home heating oil or residual fuel oil to natural gas.

Factors that could lead to a decrease in demand for our materials handling services include weakness in the housing and construction industries and the economy generally.

Certain of our operating costs and expenses are fixed and do not vary with the volumes we store, distribute and sell. These costs and expenses may not decrease ratably, or at all, should we experience a reduction in our volumes stored, distributed and sold. As a result, we may experience declines in our operating margin if our volumes decrease.

Our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders are influenced by changes in demand for, and therefore indirectly by changes in the prices of, refined products and natural gas, which could adversely affect our profit margins, our customers’ and suppliers’ financial condition, contract performance, trade credit and the amount and cost of our borrowing under our new credit agreement.

Financial and operating results from our purchasing, storing, terminalling and selling operations are influenced by price volatility in the markets for refined products and natural gas. When prices for refined products and natural gas rise, some of our customers may have insufficient credit to purchase supply from us at their historical purchase volumes, and their customers, in turn, may adopt conservation measures which reduce consumption, thereby reducing demand for product. Furthermore, when prices increase rapidly and dramatically, we may be unable to promptly pass our additional costs to our customers, resulting in lower margins for a period of time before margins expand to cover the incremental costs. Significant increases in the costs of refined products can materially increase our costs to carry inventory. We use the working capital facility in our credit

 

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agreement, which limits the amounts that we can borrow, as our primary source of financing our working capital requirements. Lastly, higher prices for refined products or natural gas may (1) diminish our access to trade credit support or cause it to become more expensive and (2) decrease the amount of borrowings available for working capital as a result of total available commitments, borrowing base limitations and advance rates thereunder.

In addition, when prices for refined products or natural gas decline, the likelihood of nonperformance by our customers on forward contracts may be increased as they and/or their customers may choose not to honor their contracts and instead purchase refined products or natural gas at the then lower spot or retail market price.

Restrictions in our new credit agreement could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders as well as the value of our common units.

We will be dependent upon the earnings and cash flow generated by our operations in order to meet our debt service obligations and to allow us to make cash distributions to our unitholders. The operating and financial restrictions and covenants in our new credit agreement and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business, which may, in turn, adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders. For example, our new credit agreement will restrict our ability to, among other things:

 

   

Make cash distributions;

 

   

Incur indebtedness;

 

   

Create liens;

 

   

Make investments;

 

   

Engage in transactions with affiliates;

 

   

Make any material change to the nature of our business;

 

   

Dispose of assets; and

 

   

Merge with another company or sell all or substantially all of our assets.

Furthermore, our new credit agreement will contain covenants requiring us to maintain certain financial ratios. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Credit Agreement” for additional information about our new credit agreement.

The provisions of our new credit agreement may affect our ability to obtain future financing for and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our new credit agreement could result in an event of default which could enable our lenders, subject to the terms and conditions of our new credit agreement, to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If we were unable to repay the accelerated amounts, our lenders could proceed against the collateral granted to them to secure such debt. If the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered and our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.

Our future level of debt could have important consequences to us, including the following:

 

   

Our ability to obtain additional financing, if necessary, for working capital, capital expenditures or other purposes may be impaired, or such financing may not be available on favorable terms;

 

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Our funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of our cash flow required to make interest payments on our debt;

 

   

We may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and

 

   

Our flexibility in responding to changing business and economic conditions may be limited.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to maintain our indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business, acquisitions, investments or capital expenditures, selling assets or issuing equity. We may not be able to effect any of these actions on satisfactory terms or at all.

Warmer weather conditions during winter could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Weather conditions during winter have an impact on the demand for both home heating oil and residual fuel oil. Because we supply distributors whose customers depend on home heating oil and residual fuel oil during the winter, warmer-than-normal temperatures during the first and fourth calendar quarters in one or more regions in which we operate can decrease the total volume we sell and the gross margin realized on those sales and, consequently, our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Derivatives legislation could have an adverse impact on our ability to use derivatives to reduce the effect of commodity price risk, interest rate risk, and other risks associated with our business and could have an adverse impact on the cost of our hedging activities.

We use over-the-counter (OTC) derivatives products to hedge commodity risks and interest rate risks.

On July 21, 2010 comprehensive financial reform legislation, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), was enacted that changes federal oversight and regulation of the over-the-counter derivatives market and entities, including us, that participate in that market. The Dodd-Frank Act requires the Commodity Futures Trading Commission (“CFTC”), the SEC and other regulators to promulgate rules and regulations implementing the new legislation.

In its rulemaking under the Dodd-Frank Act the CFTC has issued final regulations to set position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents. Certain bona fide hedging transactions would be exempt from these position limits. The position limits rule was vacated by the United States District Court for the District of Colombia in September of 2012 although the CFTC appealed the District Court’s decision.

The CFTC also has finalized other regulations, including critical rulemakings on the definition of “swap”, “security-based swap”, “swap dealer” and “major swap participant”. The Dodd-Frank Act and CFTC rules also may require us in connection with certain derivatives activities to comply with clearing and trade-execution requirements (or take steps to qualify for an exemption to such requirements). In addition new regulations may require us to comply with margin requirements although these regulations are not finalized and their application to us is uncertain at this time. Other regulations also remain to be finalized, and the CFTC has delayed the compliance dates for various regulations already finalized. As a result it is not possible at this time to predict with certainty the full effects of the Dodd-Frank Act and CFTC rules on us and the timing of such effects. The Dodd-Frank Act also may require the counterparties to our derivative instruments to spin off some of their derivatives activities to a separate entity, which may not be as creditworthy as the current counterparty.

 

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The Dodd-Frank Act and any new regulations could significantly increase the cost of derivative contracts (including from swap recordkeeping and reporting requirements and through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivative contracts, and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the Dodd-Frank Act and regulations, our results of operations may become more volatile and our cash flows may be less predictable.

Our risk management policies, processes and procedures cannot eliminate all commodity price risk or basis risk, which could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders. In addition, any noncompliance with our risk management policies, processes and procedures could result in significant financial losses.

While our risk management policies, processes and procedures are designed to limit commodity price risk, some degree of exposure to unforeseen fluctuations in market conditions remains. For example, we change our hedged position daily in response to movements in our inventory. If we overestimate or underestimate our sales from inventory, we may be unhedged for the amount of the overestimate or underestimate.

In general, basis risk describes the inherent market price risk created when a commodity of certain grade or location is purchased, sold or exchanged as compared to a purchase, sale or exchange of a like commodity at a different time or place. Basis may reflect price differentiation associated with different time periods, qualities or grades, or locations and is typically calculated based on the price difference between the cash or spot price of a commodity and the prompt month futures or swaps contract price of the most comparable commodity. For example, if NYMEX heating oil, which is based on New York Harbor delivery, was used to hedge our commodity risk for heating oil purchases, we could have location basis risk if the deliveries were made in a different location such as in Boston. An example of quality or grade basis risk would be the use of heating oil contracts to hedge diesel fuel. The potential exposure from basis risk is in addition to any impact that market pricing structure may have on our results. Basis risk cannot be entirely eliminated and basis exposure can adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

We monitor policies, processes and procedures designed to prevent unauthorized trading and to maintain substantial balance between purchases and sales or future delivery obligations. We can provide no assurance, however, that these steps will detect and/or prevent all violations of such risk management policies, processes and procedures, particularly if deception or other intentional misconduct is involved.

We are exposed to risks of loss in the event of nonperformance by our customers, suppliers and counterparties.

Some of our customers, suppliers and counterparties may be highly leveraged and subject to their own operating and regulatory risks. A tightening of credit in the financial markets or an increase in interest rates may make it more difficult for our customers, suppliers and counterparties to obtain financing and, depending on the degree to which it occurs, there may be a material increase in the nonpayment or other nonperformance by our customers, suppliers and counterparties. Even if our credit review and analysis mechanisms work properly, we may experience financial losses in our dealings with these third parties. A material increase in the nonpayment or other nonperformance by our customers, suppliers and/or counterparties could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Additionally, our access to trade credit support could diminish or become more expensive. Our ability to continue to receive sufficient trade credit on commercially acceptable terms could be adversely affected by, among other things, fluctuations in refined product, natural gas and renewable fuel prices or disruptions in the credit markets.

 

 

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We are exposed to performance risk in our supply chain.

We rely upon our suppliers to timely produce the volumes and types of refined products for which they contract with us. In the event one or more of our suppliers does not perform in accordance with its contractual obligations, we may be required to purchase product on the open market to satisfy forward contracts we have entered into with our customers in reliance upon such supply arrangements. We purchase refined products from a variety of suppliers under term contracts and on the spot market. In times of extreme market demand, we may be unable to satisfy our supply requirements. Furthermore, a portion of our supply comes from other countries, which could be disrupted by political events. In the event such supply becomes scarce, whether as a result of political events, natural disaster, logistical issues associated with delivery schedules or otherwise, we may not be able to satisfy our supply requirements. If any of these events were to occur, we may be required to pay more for product that we purchase on the open market, which could result in financial losses and adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Some of our competitors have capital resources many times greater than ours and control greater supplies of refined products and natural gas. Competitors able to supply our customers with those products and services at a lower price could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Our competitors include terminal companies, major integrated oil companies and their marketing affiliates and independent marketers of varying size, financial resources and experience. Some of our competitors are substantially larger than us, have capital resources many times greater than ours, control greater supplies of refined products and natural gas than us and/or control substantially greater storage capacity than us. If we are unable to compete effectively, we may lose existing customers or fail to acquire new customers, which could have a material adverse effect on our business, financial condition, results of operations and distributable cash flow. For example, if a competitor attempts to increase market share by reducing prices or offering alternative energy sources, our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders could be adversely affected. We may not be able to compete successfully with these companies.

Some of our home heating oil and residual fuel oil volumes are subject to customers switching or converting to natural gas, which could result in loss of customers and, in turn, could have an adverse effect on our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Our home heating oil and residual fuel oil businesses compete for customers with suppliers of natural gas. During a period of increasing home heating oil prices relative to natural gas prices, home heating oil users may convert to natural gas. Similarly, during a period of increasing residual fuel oil prices relative to natural gas prices, customers who have the ability to switch from residual fuel oil to natural gas (dual-fuel using customers), may switch and other end users may convert to natural gas.

Such switching and conversions could reduce our sales of home heating oil and residual fuel oil and could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Energy efficiency, new technology and alternative energy sources could reduce demand for our products and adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Increased conservation, technological advances, including installation of improved insulation and the development of more efficient furnaces and other heating devices, and the availability of alternative energy sources have adversely affected the demand for some of our products, particularly home heating oil and residual fuel oil. Future conservation measures, technological advances in heating, conservation, energy generation or

 

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other devices, and increased availability and use of alternative energy sources, including as a result of government regulation, might reduce demand and adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

A principal focus of our business strategy is to grow and expand our business through acquisitions. If we do not make acquisitions on economically acceptable terms, our future growth may be limited and any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis.

A principal focus of our business strategy is to grow and expand our business through acquisitions. Our ability to grow depends, in part, on our ability to make acquisitions that result in an increase in the cash generated per unit from operations. If we are unable to make accretive acquisitions, either because we are (1) unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them, (2) unable to obtain financing for these acquisitions on economically acceptable terms or (3) outbid by competitors, then our future growth and ability to increase distributions will be limited. Furthermore, even if we do make acquisitions that we believe will be accretive, such acquisitions may nevertheless result in a decrease in the cash generated from operations per unit.

Any acquisition involves potential risks, including, among other things:

 

   

Mistaken assumptions about volumes, cash flows, net sales and costs, including synergies;

 

   

An inability to successfully integrate the businesses we acquire;

 

   

An inability to hire, train or retain qualified personnel to manage and operate our newly acquired assets;

 

   

The assumption of unknown liabilities;

 

   

Limitations on rights to indemnity from the seller;

 

   

Mistaken assumptions about the overall costs of equity or debt used to finance an acquisition;

 

   

The diversion of management’s and employees’ attention from other business concerns;

 

   

Unforeseen difficulties operating in new product areas or new geographic areas; and

 

   

Customer or key employee losses at the acquired businesses.

A portion of our net sales is generated under contracts that must be renegotiated or replaced periodically. If we are unable to successfully renegotiate or replace these contracts, our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders could be adversely affected.

Most of our contracts with our refined products customers are for a single season or on a spot basis, while most of our contracts with our natural gas customers are for a term of one year or less. As these contracts and our materials handling contracts expire from time to time, they must be renegotiated or replaced. We may be unable to renegotiate or replace these contracts when they expire, and the terms of any renegotiated contracts may not be as favorable as the contracts they replace. Whether these contracts are successfully renegotiated or replaced is often subject to factors beyond our control. Such factors include fluctuations in refined product and natural gas prices, counterparty ability to pay for or accept the contracted volumes and a competitive marketplace for the services we offer. While our materials handling contracts are generally long-term, they are also subject to periodic renegotiation or replacement. If we cannot successfully renegotiate or replace any of our contracts, or if we renegotiate or replace them on less favorable terms, net sales and margins from these contracts could decline and our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders could be adversely affected.

 

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Due to our lack of geographic diversification, adverse developments in the terminals we use or in our operating areas would adversely affect our results of operations and distributable cash flow.

We rely primarily on sales generated from products distributed from the terminals we own or control or to which we have access. Furthermore, substantially all of our operations are located in the Northeast. Due to our lack of geographic diversification, an adverse development in the businesses or areas in which we operate, including adverse developments due to catastrophic events or weather and decreases in demand for refined products, could have a significantly greater impact on our results of operations and distributable cash flow than if we operated in more diverse locations.

Our operations are subject to operational hazards and unforeseen interruptions for which we may not be able to maintain adequate insurance coverage.

We are not fully insured against all risks incident to our business. Our operations are subject to many operational hazards and unforeseen interruptions inherent in our business, including:

 

   

Damage to storage facilities and other assets caused by tornadoes, hurricanes, floods, earthquakes, fires, explosions, extreme weather conditions and other natural disasters;

 

   

Acts or threats of terrorism;

 

   

Unanticipated equipment and mechanical failures at our facilities;

 

   

Disruptions in supply infrastructure or logistics and other events beyond our control;

 

   

Operator error; and

 

   

Environmental pollution or other environmental issues.

If any of these events were to occur, we could incur substantial losses because of personal injury or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage resulting in curtailment or suspension of our related operations.

We may be unable to maintain or obtain insurance of the type and amount we believe to be appropriate for our business at reasonable rates or at all. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased over the past four years and could escalate further. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. Certain types of risks, such as fines and penalties, or remediation or damages claims from environmental pollution, are either not covered by insurance or applicable insurance may be unavailable for particular claims based on exclusions or limitations in the policies. If we were to incur a significant liability for which we were not fully insured, it could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Our terminalling and materials handling operations are subject to federal, state and local laws and regulations relating to environmental protection and operational safety that require us to incur substantial costs and that may become more stringent over time.

The risk of substantial environmental costs and liabilities is inherent in terminalling and materials handling operations, and we may incur substantial environmental costs and liabilities. In particular, our terminalling operations involve the receipt, storage and redelivery of refined products and are subject to stringent federal, state and local laws and regulations regulating product quality specifications and other environmental matters including the discharge of materials into the environment, or otherwise relating to the protection of the environment, operational safety and related matters. Compliance with these laws and regulations increases our overall cost of business, including our capital costs to maintain and upgrade equipment and facilities. Further, we may incur increased costs because of stricter pollution control requirements or liabilities resulting from

 

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noncompliance with required operating or other regulatory permits. We utilize a number of terminals that are owned and operated by third parties who are also subject to these stringent federal, state and local environmental laws in their operations. Compliance with these requirements could increase the cost of doing business with these facilities and there can be no assurances as to the timing and type of such changes or what the ultimate costs might be. Moreover, the failure to comply with these requirements can expose our operations to fines, penalties and injunctive relief.

The risks of spills and releases and the associated liabilities for investigation, remediation and third-party claims, if any, are inherent in terminalling operations, and the liabilities that we incur may be substantial.

Our operation of refined products terminals and storage facilities is inherently subject to the risks of spills, discharges or other inadvertent releases of petroleum or other hazardous substances. If any of these events have previously occurred or occur in the future, whether in connection with any of our storage facilities or terminals, any other facility to which we send or have sent wastes or by-products for treatment or disposal or on any property which we own or have owned, we could be liable for all costs, jointly and severally, and administrative, civil and criminal penalties associated with the investigation and remediation of such facilities under federal, state and local environmental laws or the common law. We may also be held liable for damages to natural resources, personal injury or property damage claims from third parties, including the owners of properties located near our terminals and those with whom we do business, alleging contamination from spills or releases from our facilities or operations. Even if we are insured against certain or all of such risks, we may be responsible for all such costs to the extent our insurers or indemnitors do not fulfill their obligations to us. The payment of such costs or penalties could be significant and have a material adverse effect on our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Increased regulation of greenhouse gas emissions could result in increased operating costs and reduced demand for refined products as a fuel source, which could in turn reduce demand for our products and adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Combustion of fossil fuels, such as the refined products we sell, results in the emission of carbon dioxide into the atmosphere. On December 15, 2009, the Environmental Protection Agency, or the EPA, published its findings that emissions of carbon dioxide and other greenhouse gases present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes, and the EPA has begun to regulate greenhouse gases, or GHG, emissions pursuant to the Clean Air Act. Many states and regions have adopted GHG initiatives and it is possible that federal legislation could be adopted in the future to restrict GHG emissions. Please read “Business—Environmental—Climate Change.”

There are many regulatory approaches currently in effect or being considered to address greenhouse gases, including possible future U.S. treaty commitments, new federal or state legislation that may impose a carbon emissions tax or establish a cap-and-trade program and regulation by the EPA. Future international, federal and state initiatives to control carbon dioxide emissions could result in increased costs associated with refined products consumption, such as costs to install additional controls to reduce carbon dioxide emissions or costs to purchase emissions reduction credits to comply with future emissions trading programs. Such increased costs could result in reduced demand for refined products and some customers switching to alternative sources of fuel which could have a material adverse effect on our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

We are subject to federal, state and local laws and regulations that govern the product quality specifications of the refined products we purchase, store, transport and sell.

Various federal, state and local government agencies have the authority to prescribe specific product quality specifications to the sale of commodities. Changes in product quality specifications, such as reduced sulfur

 

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content in refined products, or other more stringent requirements for fuels, could reduce our ability to procure product and require us to incur additional handling costs and capital expenditures. If we are unable to procure product or recover these costs through increased sales, we may not be able to meet our financial obligations.

We depend on unionized labor for our operations in Mt. Vernon and Albany, New York and in Providence, Rhode Island. Work stoppages or labor disturbances at these facilities could disrupt our business.

Work stoppages or labor disturbances by our unionized labor force could have an adverse effect on our financial condition, results of operations and distributable cash flow. In addition, employees who are not currently represented by labor unions may seek representation in the future, and renegotiation of collective bargaining agreements may result in agreements with terms that are less favorable to us than our current agreements.

We rely on our information technology systems to manage numerous aspects of our business, and a disruption of these systems could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

We depend on our information technology, or IT, systems to manage numerous aspects of our business and to provide analytical information to management. Our IT systems are an essential component of our business and growth strategies, and a serious disruption to our IT systems could limit our ability to manage and operate our business efficiently. These systems are vulnerable to, among other things, damage and interruption from power loss or natural disasters, computer system and network failures, loss of telecommunication services, physical and electronic loss of data, security breaches and computer viruses. We employ back-up IT facilities and have disaster recovery plans; however, these safeguards may not entirely prevent delays or other complications that could arise from an IT systems failure, a natural disaster or a security breach. Significant failure or interruption in our IT systems could cause our business and competitive position to suffer and damage our reputation, which would adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

Prior to this offering, we have not been required to file reports with the SEC. Upon the completion of this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We prepare our consolidated financial statements in accordance with GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. For example, Section 404 will require us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting.

We must comply with Section 404 for our fiscal year ending December 31, 2014. Any failure to develop, implement or maintain effective internal controls, or to improve our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s, conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

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Risks Inherent in an Investment in Us

It is our business strategy to distribute most of our distributable cash flow, which could limit our ability to grow and make acquisitions.

We expect that we will distribute most of our distributable cash flow to our unitholders and will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we distribute most of our distributable cash flow, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement or our credit agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the cash that we have available to distribute to our unitholders.

Axel Johnson currently controls, and after this offering will indirectly control, our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including Axel Johnson, may have conflicts of interest with us and have limited duties to us and our common unitholders, and they may favor their own interests to the detriment of us and our common unitholders.

Following the offering, Axel Johnson, through its ownership of Sprague Holdings, will indirectly own a 57.8% limited partner interest in us and will indirectly own and control our general partner. Although our general partner has a fiduciary duty to manage us in good faith, the directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner that is beneficial to its owner, Sprague Holdings, which is a wholly owned subsidiary of Axel Johnson. Furthermore, certain directors and officers of our general partner are directors and/or officers of affiliates of our general partner. Conflicts of interest may arise between our general partner and its affiliates, including Axel Johnson, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, our general partner may favor its own interests and the interests of its affiliates, including Axel Johnson, over the interests of our common unitholders. These conflicts include, among others, the following situations:

 

   

Our general partner is allowed to take into account the interests of parties other than us, such as its affiliates, including Axel Johnson, in resolving conflicts of interest, which has the effect of limiting its duty to our unitholders.

 

   

Affiliates of our general partner, including Axel Johnson and Sprague Holdings, may engage in competition with us.

 

   

Neither our partnership agreement nor any other agreement requires Axel Johnson or Sprague Holdings to pursue a business strategy that favors us, and Axel Johnson’s directors and officers have a fiduciary duty to make decisions in the best interests of the stockholders of Axel Johnson.

 

   

Some officers of our general partner who provide services to us devote time to affiliates of our general partner.

 

   

Our partnership agreement limits the liability of and reduces the duties owed by our general partner to us and our common unitholders, and also restricts the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty.

 

   

Except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval.

 

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Our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership securities and the creation, reductions or increases of cash reserves, each of which can affect the amount of cash that is available for distribution to our unitholders, including distributions on our subordinated units, and to the holders of the incentive distribution rights, as well as the ability of the subordinated units to convert to common units.

 

   

Our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces distributable cash flow. Such determination can affect the amount of distributable cash flow, including distributions on our subordinated units, and to the holders of the incentive distribution rights, as well as the ability of the subordinated units to convert to common units. Our partnership agreement does not limit the amount of maintenance capital expenditures that our general partner can cause us to make.

 

   

Our partnership agreement and the services agreement that we will enter into at the closing of this offering allow our general partner to determine, in good faith, the expenses that are allocable to us. Please read “The Partnership Agreement—Reimbursement of Expenses” and “Certain Relationships and Related Party Transactions—Services Agreement.” Our partnership agreement and the services agreement do not limit the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons, including affiliates of our general partner, who perform services for us or on our behalf.

 

   

Our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period.

 

   

Our partnership agreement permits us to distribute up to $25.0 million as distributable cash flow, even if it is generated from sources that would otherwise constitute capital surplus, and this cash may be used to fund distributions on our subordinated units or the incentive distribution rights.

 

   

Our partnership agreement does not restrict our general partner from entering into additional contractual arrangements with any of its affiliates on our behalf.

 

   

Our general partner intends to limit its liability regarding our contractual and other obligations.

 

   

Our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if it and its affiliates own more than 80% of all outstanding common units.

 

   

Our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates.

 

   

Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

 

   

Sprague Holdings, or any transferee holding a majority of the incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to the incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including their executive officers, directors and owners. Other than as provided in our omnibus agreement, any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not

 

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communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Certain Relationships and Related Party Transactions—Omnibus Agreement” and “Conflicts of Interest and Fiduciary Duties.”

Our general partner intends to limit its liability regarding our obligations.

Other than under our new credit agreement, our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s duty to act in good faith, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of distributable cash flow otherwise available for distribution to our unitholders.

Our partnership agreement limits our general partner’s duties to our unitholders.

Our partnership agreement contains provisions that modify and reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, or otherwise free of fiduciary duties to us and our unitholders. This entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

 

   

How to allocate business opportunities among us and its other affiliates;

 

   

Whether to exercise its limited call right;

 

   

How to exercise its voting rights with respect to any units it owns;

 

   

Whether to exercise its registration rights with respect to any units it owns; and

 

   

Whether to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.

By purchasing a common unit, a unitholder is treated as having consented to the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

Our partnership agreement restricts the remedies available to our unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to our unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:

 

   

Provides that whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith and will not be subject to any other or different standard imposed by our partnership agreement, Delaware law or any other law, rule or regulation, or at equity;

 

   

Provides that a determination, other action or failure to act by our general partner, the board of directors of our general partner or any committee thereof (including the conflicts committee) will be deemed to

 

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be in good faith unless our general partner, the board of directors of our general partner or any committee thereof believed such determination, other action or failure to act was adverse to the interests of the partnership;

 

   

Provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith;

 

   

Provides that our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and

 

   

Provides that our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is:

 

  (1) Approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval; or

 

  (2) Approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee then it will be presumed that, in making its decision, taking any action or failing to act, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Fiduciary Duties.”

Cost reimbursements and fees due to our general partner and its affiliates for services provided to us or on our behalf, which may be determined in our general partner’s sole discretion, may be substantial and will reduce our distributable cash flow.

Under our partnership agreement, prior to making any distribution on the common units, our general partner and its affiliates shall be reimbursed for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Pursuant to the terms of the services agreement, our general partner will agree to provide certain general and administrative services and operational services to us, and we will agree to reimburse our general partner and its affiliates for all costs and expenses incurred in connection with providing such services to us, including salary, bonus, incentive compensation, insurance premiums and other amounts allocable to the employees and directors of our general partner or its affiliates that perform services on our behalf. Our general partner and its affiliates also may provide us other services for which we may be charged fees as determined by our general partner. Our partnership agreement and the services agreement do not limit the amount of expenses for which our general partner and its affiliates may be reimbursed. Payments to our general partner and its affiliates may be substantial and will reduce the amount of distributable cash flow.

Unitholders have limited voting rights and, even if they are dissatisfied, cannot initially remove our general partner without its consent.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by Sprague Holdings, a wholly-owned subsidiary of Axel Johnson and the sole member of our general partner. Furthermore, if the unitholders are dissatisfied with

 

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the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of this offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding common units and subordinated units voting together as a single class is required to remove our general partner. At closing, Sprague Holdings will own 57.8% of the common units and subordinated units. If our general partner is removed without cause during the subordination period and no units held by the holders of our subordinated units or their affiliates are voted in favor of that removal, all remaining subordinated units will automatically convert into common units and any existing arrearages on the common units will be extinguished. A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests, and by eliminating existing arrangements, if any.

Cause is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding the general partner liable for actual fraud or willful misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of our business.

Furthermore, unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units resulting in ownership of at or in excess of such levels with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in the partnership agreement on the ability of Sprague Holdings to transfer its membership interest in our general partner to a third party. The new members of our general partner would then be in a position to replace the board of directors and officers of our general partner with their own choices and to control the decisions taken by the board of directors and officers.

The incentive distribution rights held by Sprague Holdings may be transferred to a third party without unitholder consent.

Sprague Holdings may transfer the incentive distribution rights to a third party at any time without the consent of our unitholders. If Sprague Holdings transfers the incentive distribution rights to a third party but retains its ownership interest in our general partner, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if Sprague Holdings had retained ownership of the incentive distribution rights. For example, a transfer of incentive distribution rights by Sprague Holdings could reduce the likelihood of Axel Johnson accepting offers made by us relating to assets owned by it, as Axel Johnson would have less of an economic incentive to grow our business, which in turn may impact our ability to grow our asset base.

 

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You will experience immediate and substantial dilution in pro forma net tangible book value of $20.02 per common unit.

The assumed initial public offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover of this prospectus) exceeds our pro forma net tangible book value of $(13.41) per unit. Based on the assumed initial public offering price of $20.00 per common unit, you will incur immediate and substantial dilution of $20.02 per common unit. This dilution results primarily because our assets are recorded in accordance with GAAP at their historical cost and not their fair value. Please read “Dilution.”

We may issue additional units without unitholder approval, which would dilute unitholder interests.

At any time, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders. Further, neither our partnership agreement nor our new credit agreement prohibits the issuance of equity securities that may effectively rank senior to our common units. The issuance by us of additional common units or other equity interests of equal or senior rank will have the following effects:

 

   

Our unitholders’ proportionate ownership interest in us will decrease;

 

   

The amount of distributable cash flow on each unit may decrease;

 

   

Because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution borne by our common unitholders will increase;

 

   

The ratio of taxable income to distributions may increase;

 

   

The relative voting strength of each previously outstanding unit may be diminished; and

 

   

The market price of our common units may decline.

Sprague Holdings may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

After the sale of the common units offered by this prospectus, Sprague Holdings will hold 1,571,970 common units and 10,071,970 subordinated units. All of the subordinated units will convert into common units at the end of the subordination period (which could occur as early as December 31, 2016) and may convert earlier under certain circumstances. Additionally, we have agreed to provide Sprague Holdings with certain registration rights (which may facilitate the sale by Sprague Holdings of its common and subordinated units into the public markets). Please read “The Partnership Agreement—Registration Rights” and “Units Eligible for Future Sale—Our Partnership Agreement and Registration Rights.” The sale of these units in the public or private markets, or the perception that such sales might occur, could have an adverse impact on the price of the common units or on any trading market that may develop.

An increase in interest rates may cause the market price of our common units to decline.

Like all equity investments, an investment in our common units is subject to certain risks. In exchange for accepting these risks, investors may expect to receive a higher rate of return than would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as publicly traded limited partnership interests. Reduced demand for our common units resulting from investors seeking other more favorable investment opportunities may cause the trading price of our common units to decline.

Our general partner’s discretion in establishing cash reserves may reduce the amount of distributable cash flow that we distribute.

The partnership agreement permits the general partner to reduce the amount of distributable cash flow distributed to our unitholders by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party or to provide funds for future distributions to partners.

 

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Our general partner may cause us to borrow funds in order to make cash distributions, even where the purpose or effect of the borrowing benefits the general partner or its affiliates.

In some instances, our general partner may cause us to borrow funds from its affiliates, including Axel Johnson, or from third parties in order to permit the payment of cash distributions. These borrowings are permitted even if the purpose and effect of the borrowing is to enable us to make a distribution on the subordinated units, to make incentive distributions or to hasten the expiration of the subordination period.

Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of our common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons. As a result, you may be required to sell your common units at an undesirable time or price, including at a price below the then-current market price, and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering and assuming no exercise of the underwriters’ option to purchase additional common units, our general partner and its affiliates will own approximately 15.6% of our common units. At the end of the subordination period (which could occur as early as December 31, 2016), assuming no additional issuances of common units (other than upon the conversion of the subordinated units) and no exercise of the underwriters option to purchase additional common units, our general partner and its affiliates will own approximately 57.8% of our common units. For additional information about the call right, please read “The Partnership Agreement—Limited Call Right.”

Your liability may not be limited if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some jurisdictions. You could be liable for our obligations as if you were a general partner if a court or government agency were to determine that:

 

   

We were conducting business in a state but had not complied with that particular state’s partnership statute; or

 

   

Your right to act with other unitholders to remove or replace the general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.

Please read “The Partnership Agreement—Limited Liability” for a discussion of the implications of the limitations of liability on a unitholder.

A restatement of net income or a reversal or change of estimates affecting net income made after the end of the subordination period but affecting net income during the subordination period will not retroactively affect the conversion of the subordinated units even if we would not have had sufficient distributable cash flow based on such restated or adjusted net income to permit conversion.

Our subordinated units will convert into common units upon the satisfaction of certain tests involving the calculation of distributable cash flow on a historical basis. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.” Distributable cash flow is calculated based on net income, which is a GAAP measure. If net income for a period during the subordination period is restated after the end of the subordination period or if estimates affecting net income made during the subordination period are reversed or changed after the end of the subordination period, it will not retroactively affect the conversion of subordinated units even if we would not have had sufficient distributable cash flow during the subordination period based on such restated or adjusted net income to permit conversion.

 

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Unitholders may have liability to repay distributions that were wrongfully distributed to them.

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for our common units. After this offering, there will be only 8,500,000 publicly traded common units, assuming no exercise of the underwriters’ option to purchase additional common units. In addition, Sprague Holdings will own 1,571,970 common units and 10,071,970 subordinated units, representing an aggregate 57.8% limited partner interest in us. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for the common units offered hereby will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

   

Our quarterly distributions;

 

   

Our quarterly or annual earnings or those of other companies in our industry;

 

   

Announcements by us or our competitors of significant contracts or acquisitions;

 

   

Changes in accounting standards, policies, guidance, interpretations or principles;

 

   

General economic conditions;

 

   

The failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

   

Future sales of our common units; and

 

   

Other factors described in these “Risk Factors.”

Sprague Holdings, or any transferee holding a majority of the incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of the board of directors of our general partner or the holders of our common units. This could result in lower distributions to our unitholders.

The holder or holders of a majority of the incentive distribution rights (initially Sprague Holdings) have the right, in their discretion and without the approval of the conflicts committee of the board of directors of our general partner or the holders of our common units, at any time when there are no subordinated units outstanding and the holders received distributions on their incentive distribution rights at the highest level to which they are entitled (50.0%) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels

 

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at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution. Sprague Holdings has the right to transfer the incentive distribution rights at any time, in whole or in part, and any transferee holding a majority of the incentive distribution rights shall have the same rights as Sprague Holdings relative to resetting target distributions.

In the event of a reset of target distribution levels, the holders of the incentive distribution rights will be entitled to receive a number of common units equal to the number of common units that would have entitled the holders to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions on the incentive distribution rights in the prior two quarters. We anticipate that Sprague Holdings would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that Sprague Holdings or a transferee could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that they would have otherwise received had we not issued new common units in connection with resetting the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Percentage Allocations of Cash Distributions from Distributable Cash Flow.”

The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.

We have been approved to list our common units on the NYSE, subject to official notice of issuance. As a limited partnership, we will not be required to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee, as is required for other NYSE-listed entities. Accordingly, unitholders will not have the same protections afforded to certain entities, including most corporations, that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of Sprague Resources LP.”

We will incur increased costs as a result of being a publicly traded partnership.

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, require publicly traded entities to adopt various governance practices that will further increase our costs. Before we are able to make distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be affected by the costs associated with being a publicly traded partnership.

Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly traded partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our SEC reporting requirements.

We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult to attract and retain qualified persons to serve on the board of directors of our general partner or as executive officers of our general partner.

 

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We estimate that we will incur approximately $2.1 million of annual incremental selling, general and administrative expenses as a result of being a publicly traded partnership; however, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate.

Tax Risks to Common Unitholders

In addition to reading the following risk factors, you should read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of our common units.

Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes. If the IRS were to treat us as a corporation for federal income tax purposes, our distributable cash flow would be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for U.S. federal income tax purposes.

Despite the fact that we are organized as a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe, based upon our current operations, that we will be so treated, a change in our business (or a change in current law) could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay additional state income tax at varying rates. Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, our distributable cash flow would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

If we were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our distributable cash flow.

We are currently subject to entity level taxes and fees in a number of states, and such taxes and fees will reduce the distributable cash flow. Changes in current state laws may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of such additional taxes on us by other states in which we do business will further reduce the distributable cash flow available for distribution to unitholders.

The tax treatment of publicly traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, members of Congress have recently considered substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Any modification to the U.S. federal income tax laws and interpretations thereof may be applied retroactively and could make it more difficult or impossible to meet the exception for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes. We are unable to predict whether any of these changes, or other proposals, will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

 

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Our unitholders will be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.

Because our unitholders will be treated as partners to whom we will allocate taxable income that could be different in amount than the cash we distribute, our unitholders will be required to pay any federal income taxes and, in some cases, state and local income taxes on their share of our taxable income whether or not they receive cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Immediately following this offering, Sprague Holdings will directly and indirectly own more than 50% of the total interests in our capital and profits interests. Therefore, a transfer by Sprague Holdings of all or a portion of its interests in us could result in a termination of our partnership for federal income tax purposes. Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If our unitholders sell their common units, they will recognize a gain or loss equal to the difference between the amount realized and our unitholders’ tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in common units, the amount, if any, of such prior excess distributions with respect to the units our unitholders sell will, in effect, become taxable income to our unitholders if they sell such units at a price greater than their tax basis in those units, even if the price they receive is less than their original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if our unitholders sell their units, they may incur a tax liability in excess of the amount of cash they receive from the sale. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts, or IRAs, and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

 

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If the IRS contests the federal income tax positions we take, the market for our common units may be adversely affected and the cost of any IRS contest will reduce our distributable cash flow.

The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest with the IRS may materially and adversely affect the market for our common units and the price at which they trade. Our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our distributable cash flow.

We will treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to our unitholders’ tax returns. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we adopt.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We generally prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. Nonetheless, we allocate certain deductions for depreciation of capital additions based upon the date the underlying property is placed in service. The use of this proration method may not be permitted under existing Treasury Regulations, and, although the U.S. Treasury Department issued proposed Treasury Regulations allowing a similar monthly simplifying convention, such regulations are not final and do not specifically authorize the use of the proration method we have adopted. Accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to successfully challenge our proration method, we may be required to change the allocation of items of income, gain, loss, and deduction among our unitholders.

A unitholder whose common units are the subject of a securities loan (e.g. a loan to a “short seller” to cover a short sale of common units) may be considered as having disposed of those common units. If so, such unitholder would no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and may be required to recognize gain or loss from the disposition.

Because there are no specific rules governing the federal income tax consequences of loaning a partnership interest, a unitholder whose common units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, such unitholder may no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and the unitholder may be required to recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a securities loan should modify any applicable brokerage account agreements to prohibit their brokers from borrowing their common units.

 

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Unitholders may be subject to state and local taxes and return filing requirements in jurisdictions where they do not live as a result of investing in our common units.

In addition to federal income taxes, unitholders will likely be subject to other taxes, including state and local and non-U.S. taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if they do not live in any of those jurisdictions. Although an analysis of the various taxes is not presented herein, each prospective unitholder should consider the potential impact on an investment in common units. Unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. We will initially conduct business or own property in numerous states, most of which impose a personal income tax as well as an income tax on corporations and other entities. We may own property or conduct business in other states or non-U.S. countries in the future. In some jurisdictions, tax losses may not produce a tax benefit in the year incurred and may not be available to offset income in subsequent taxable years. It is the unitholder’s responsibility to file all U.S. federal, state, local and non-U.S. tax returns.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 8,500,000 common units to the public, after deducting underwriting discounts, the structuring fee and estimated offering expenses, will be approximately $155.8 million. Our estimate assumes an initial public offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover of this prospectus). An increase or decrease of $1.00 in the assumed initial public offering price per common unit would cause the net proceeds from this offering, after deducting underwriting discounts, the structuring fee and estimated offering expenses, to increase or decrease, respectively, by approximately $7.9 million. We intend to use the net proceeds from this offering to reduce amounts outstanding under the working capital facility of our new credit agreement. We anticipate that we will borrow under our working capital facility during the 60 days following the closing of this offering in an amount at least equal to the net proceeds from our sale of common units in this offering to finance our working capital requirements. We expect amounts drawn under the working capital facility will be used to finance inventory and accounts receivable (up to $750.0 million). Immediately following the completion of this offering, we expect to have available undrawn borrowing capacity of approximately $71.6 million under the working capital facility of our new credit agreement. Together with cash flow from operations, we expect our working capital facility will be sufficient to cover our working capital needs until inventory is sold for cash and debt is paid down.

As of August 31, 2013, we had approximately $211.2 million outstanding under the working capital facility of our current credit agreement with a year-to-date annualized interest rate of 5.8% and approximately $132.7 million outstanding under the acquisition facility of our current credit agreement with a year-to-date annualized interest rate of 6.2%. Borrowings under the working capital facility have been primarily used for the purchase, storage and sale of refined products, natural gas and coal, as well as other energy products, and for hedging, capital expenditures and working capital requirements. Our new credit agreement is expected to mature in 2018 on or about the fifth anniversary of the completion of this offering. Affiliates of certain of the underwriters will be lenders under our new credit agreement and, accordingly, will receive a portion of the proceeds from this offering. In addition, affiliates of certain of the underwriters are lenders under our existing credit agreement and may receive payments in connection with the repayment of our existing credit agreement. Please read “Underwriting.”

We have granted the underwriters a 30-day option to purchase up to 1,275,000 additional common units if the underwriters sell more than the 8,500,000 common units offered hereby. All of the net proceeds from the issuance and sale of common units pursuant to any exercise of the underwriters’ option to purchase additional common units (approximately $23.7 million based on an assumed initial public offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover of this prospectus), if exercised in full, after deducting underwriting discounts and the structuring fee) will be distributed to Sprague Holdings as reimbursement for certain capital expenditures made by Sprague Holdings with respect to the assets contributed to us. If the underwriters do not exercise their option to purchase additional common units, we will issue 1,275,000 common units to Sprague Holdings at the expiration of the option. If and to the extent the underwriters exercise their option to purchase additional common units, the number of units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to Sprague Holdings at the expiration of the option period. The exercise of the underwriters’ option will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Sprague Holdings has informed us that it intends to distribute any net proceeds received by it attributable to an exercise of the underwriters’ option to purchase additional common units to Axel Johnson. Sprague Holdings and Axel Johnson are deemed under federal securities laws to be underwriters with respect to any common units that may be sold pursuant to the underwriters’ option to purchase additional common units.

 

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CAPITALIZATION

The following table shows our capitalization as of June 30, 2013:

 

   

For our predecessor, Sprague Operating Resources LLC; and

 

   

On a pro forma basis to give effect to the pro forma adjustments described in our unaudited pro forma consolidated financial statements included elsewhere in this prospectus, including, among other things, this offering and the application of the net proceeds received by us as well as the other Formation Transactions described under “Prospectus Summary—The Formation Transactions.”

This table is derived from, should be read in conjunction with, and is qualified in its entirety by reference to, our historical and pro forma consolidated financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Prospectus Summary—The Formation Transactions,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2013  
     Predecessor
Historical
    Partnership
Pro Forma
 
     (in thousands)  

Long-term debt (including current maturities):

    

Credit facilities(1)

   $ 328,400      $ 183,040   

Kildair credit facility and term debt

     89,794        —   (3) 

Unsecured debt

     25,000        —   (3) 

Capital leases

     5,921        3,355   (3) 

Other

     852        —   (3) 
  

 

 

   

 

 

 

Total long-term debt

     449,967        186,395   
  

 

 

   

 

 

 

Member’s/partners’ equity:

    

Sprague Operating Resources LLC(2)(3)

     144,130        —     

Sprague Resources LP:

    

Held by public:

    

Common units

     —          155,648 (4) 

Held by general partner and its affiliates:

    

Common units

     —          (13,665 )(4) 

Subordinated units

     —          (87,604

Non-economic general partner interest

     —          —     

Accumulated other comprehensive loss, net of tax

     (10,632     (2,845
  

 

 

   

 

 

 

Total member’s/partners’ equity

     133,498        51,534   
  

 

 

   

 

 

 

Total long-term debt and member’s/partners’ equity

   $ 583,465      $ 237,929   
  

 

 

   

 

 

 

 

(1) In connection with the closing of this offering, we will enter into a new credit agreement in the aggregate principal amount of up to $1.0 billion (consisting of a working capital facility of up to $750.0 million and an acquisition facility of up to $250.0 million). As of June 30, 2013, we had approximately $211.0 million and approximately $117.4 million of borrowings outstanding under our existing working capital facility and our acquisition facility, respectively. As of August 31, 2013, we had approximately $211.2 million and approximately $132.7 million of borrowings outstanding under our existing working capital facility and our acquisition facility, respectively. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Credit Agreement.”

 

(2) On September 16, 2013, our predecessor declared a dividend of $17.5 million, which was paid to Axel Johnson on September 18, 2013.

 

(3) Sprague Energy Canada Ltd., a wholly-owned subsidiary of our predecessor and the indirect owner of Kildair, will, together with its associated indebtedness, capital leases and other obligations, be distributed to a wholly-owned subsidiary of Sprague Holdings in connection with the closing of this offering, and will not be part of us immediately following the closing of the offering.

 

(4) Each $1.00 increase (or decrease) in the assumed public offering price to $20.00 per common unit (the midpoint of the price range set forth on the cover of this prospectus) would decrease (or increase) total long-term debt, on a pro forma basis, by approximately $7.9 million, and increase (or decrease) total stockholder’s/partners’ equity, on a pro forma basis, by $7.9 million, in each case after deducting the underwriting discounts, the structuring fee and estimated offering expenses. The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of June 30, 2013, our net tangible book value was $(156.2) million, or $(13.41) per unit. Pro forma net tangible book value per unit represents the amount of our total tangible assets, less our total liabilities, divided by the number of units outstanding as of June 30, 2013, after giving effect to the Formation Transactions other than the sale of common units offered hereby.

Net tangible book value dilution per unit to new investors represents the difference between the amount per unit paid by purchasers of common units in this offering and the pro forma net tangible book value per unit immediately after the completion of this offering. After giving effect to the sale of common units in this offering at an assumed initial public offering price of $20.00 per common unit (the midpoint of the price range set forth on the cover of this prospectus), our pro forma as adjusted net tangible book value as of June 30, 2013 would have been $(0.4) million, or $(0.02) per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in pro forma net tangible book value per unit for financial accounting purposes, as illustrated in the following table:

 

Assumed initial public offering price per common unit

     $ 20.00   

Pro forma net tangible book value per unit before the offering(1)

   $ (13.41  

Increase in pro forma net tangible book value attributable to purchasers in this offering

     13.39     
  

 

 

   

Less: Pro forma adjusted net tangible book value per unit after the offering(2)

       (0.02
    

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering

     $ 20.02   
    

 

 

 

 

(1) Determined by dividing the total number of units (1,571,970 common units and 10,071,970 subordinated units, assuming no exercise of the underwriters’ option to purchase additional common units) to be issued to Sprague Holdings for its contribution of assets and liabilities to us into the pro forma net tangible book value of the contributed assets and liabilities.
(2) Determined by dividing the total number of units (10,071,970 common units and 10,071,970 subordinated units, assuming no exercise of the underwriters’ option to purchase additional common units) to be outstanding after the offering into the pro forma net tangible book value, as adjusted to give effect to the sale of common units in this offering at an assumed initial public offering price of $20.00 per common unit.

A $1.00 increase (decrease) in the assumed initial public offering price of $20.00 per common unit, would increase (decrease) our pro forma as adjusted net tangible book value per unit by $7.9 million.

The following table sets forth the number of units that we will issue and the total consideration contributed to us by Sprague Holdings in respect of its units and by the purchasers of common units in this offering upon consummation of the Formation Transactions contemplated by this prospectus:

 

     Units Acquired     Total Consideration  
     Number      Percent     Amount     Percent  
                  (in thousands)        

Sprague Holdings(1)(2)

     11,643,940         57.8   $ (103,871     (157.1 )% 

Purchasers in this offering

     8,500,000         42.2     170,000        257.1
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

     20,143,940         100.0   $ 66,129        100.0
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Upon the consummation of the Formation Transactions, including the offering of common units hereby, Sprague Holdings will own 1,571,970 common units and 10,071,970 subordinated units, assuming no exercise of the underwriters’ option to purchase additional common units.

 

(2) The assets contributed by Sprague Holdings were recorded at historical cost in accordance with GAAP.

 

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy in conjunction with the specific assumptions included in this section. For more detailed information regarding the factors and assumptions upon which our cash distribution policy is based, see “—Assumptions and Considerations” below. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks related to our business or inherent in an investment in us.

For additional information regarding our historical and pro forma operating results, you should refer to our historical and unaudited pro forma financial statements and the notes to such financial statements included elsewhere in this prospectus.

General

Our Cash Distribution Policy

It is our intent to distribute the minimum quarterly distribution of $0.4125 per unit on all our units ($1.65 per unit on an annualized basis) to the extent we have sufficient cash from our operations after the establishment of cash reserves and payment of our expenses. Furthermore, we expect that if we are successful in executing our business strategy, we will grow our business and distribute to our unitholders most of any increases in our distributable cash flow. The board of directors of our general partner will determine the amount of our quarterly distributions and may change our distribution policy at any time. The board of directors of our general partner may determine to reserve or reinvest excess cash in order to permit gradual or consistent increases in quarterly distributions and may borrow to fund distributions in quarters when we generate less distributable cash flow than necessary to sustain or grow our cash distributions per unit.

Limitations on Cash Distributions; Ability to Change Our Cash Distribution Policy

There is no guarantee that unitholders will receive quarterly cash distributions from us. We do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate. Uncertainties regarding future cash distributions to our unitholders include, among other things, the following factors:

 

   

Our cash distribution policy may be affected by restrictions on distributions under our new credit agreement as well as by restrictions in future debt agreements that we enter into. Specifically, our new credit agreement will contain financial tests and covenants that we must satisfy. Should we be unable to satisfy these restrictions or if we are otherwise in default under our new credit agreement, we may be prohibited from making cash distributions to you notwithstanding our stated cash distribution policy. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Credit Agreement.”

 

   

Our general partner will have the authority to establish cash reserves for the prudent conduct of our business and for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy.

 

   

Under Section 17-607 of the Delaware Act we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to make distributions to our unitholders due to a number of operational, commercial and other factors or increases in our operating costs, general and administrative expenses, principal and interest payments on our outstanding debt and working capital requirements.

 

   

If we make distributions out of capital surplus, as opposed to distributable cash flow, any such distributions would constitute a return of capital and would result in a reduction in the minimum

 

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quarterly distribution and the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributable Cash Flow and Capital Surplus.” We do not anticipate that we will make any distributions from capital surplus.

 

   

Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state partnership, limited liability company and corporate laws and other laws and regulations.

See “Risk Factors—Risks Related to Our Business.”

Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital

We intend to distribute most of our distributable cash flow on a quarterly basis. As a result, we expect that we will rely primarily upon external financing sources, including borrowings under our new credit agreement and the issuance of debt and equity securities, to fund any future acquisitions and other expansion capital expenditures. To the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute most of our distributable cash flow, our growth may not be as fast as businesses that reinvest all their cash to expand ongoing operations. Our new credit agreement will restrict our ability to incur additional debt, including through the issuance of debt securities. Please read “Risk Factors—Risks Related to Our Business—Restrictions in our new credit agreement could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders as well as the value of our common units.” To the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement or our credit agreement on our ability to issue additional units, including units ranking senior to our common units. If we incur additional debt (under our new credit agreement or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn may impact the cash that we have available to distribute to our unitholders. Please read “Risk Factors—Risks Related to Our Business—Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.”

Minimum Quarterly Distribution

Pursuant to our distribution policy, we intend upon completion of this offering to declare a minimum quarterly distribution of $0.4125 per unit per complete quarter, or $1.65 per unit per year, to be paid no later than 45 days after the end of each fiscal quarter. This equates to an aggregate cash distribution of approximately $8.3 million per quarter or $33.2 million per year, in each case based on the number of common units and subordinated units to be outstanding immediately after completion of this offering. The exercise of the underwriters’ option to purchase additional units will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. See “Underwriting.”

The table below sets forth the common and subordinated units to be outstanding upon the closing of this offering and the aggregate distribution amounts payable on such interests based on our minimum quarterly distribution of $0.4125 per unit per quarter (or $1.65 per unit on an annualized basis).

 

     Number of Units    Minimum Quarterly
Distributions
        One Quarter    Annualized

Publicly held common units(1)

       8,500,000        $ 3,506,250        $ 14,025,000  

Common units held by Sprague Holdings and its affiliates(1)

       1,571,970          648,438          2,593,750  

Subordinated units held by Sprague Holdings and its affiliates

       10,071,970          4,154,688          16,618,750  

Non-economic general partner interest(2)

       —            —            —    
    

 

 

      

 

 

      

 

 

 

Total

       20,143,940        $ 8,309,376        $ 33,237,500  
    

 

 

      

 

 

      

 

 

 

 

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(1) Assumes the underwriters do not exercise their option to purchase 1,275,000 additional common units from us and that 1,275,000 common units will be issued to Sprague Holdings upon the expiration of the underwriters’ 30-day option period. Regardless of whether the underwriters exercise their option to purchase additional common units, the total number of common units to be outstanding upon the completion of this offering and the expiration of the option period will not be impacted. Does not include common units that may be issued under the compensation policies that we will adopt following the closing of this offering. Please read “Management—Long-Term Incentive Plan.”
(2) Our general partner owns a non-economic general partner interest.

If the minimum quarterly distribution on our common units is not paid with respect to any quarter, the common unitholders will not be entitled to receive such payments in the future except that, during the subordination period, to the extent we distribute cash from distributable cash flow in any future quarter in excess of the amount necessary to make cash distributions to holders of our common units at the minimum quarterly distribution, we will use this excess cash to pay these arrearages related to prior quarters before any cash distribution is made to holders of subordinated units. See “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordination Period.”

The actual amount of our cash distributions for any quarter is subject to fluctuations based on, among other things, the amount of cash we generate from our business and the amount of reserves our general partner establishes.

We expect to pay our quarterly distributions on or about the 15th day of each February, May, August and November to holders of record on or about the first day of each such month. We will adjust the quarterly distribution for the period from the closing of this offering through December 31, 2013 based on the actual length of the period.

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our minimum quarterly distribution of $0.4125 per unit each quarter for the four quarters of the twelve months ending September 30, 2014. In those sections, we present the following two tables:

 

   

“Unaudited Pro Forma Distributable Cash Flow,” in which we present our estimate of the amount of distributable cash flow we would have had for the fiscal year ended December 31, 2012 and the twelve months ended June 30, 2013 based on our unaudited pro forma financial statements that are included in this prospectus.

 

   

“Estimated Distributable Cash Flow,” in which we demonstrate our anticipated ability to generate the distributable cash flow necessary for us to pay the minimum quarterly distribution on all units for the twelve months ending September 30, 2014.

Unaudited Pro Forma Distributable Cash Flow

The following tables illustrate, on a pro forma basis for the year ended December 31, 2012, the twelve months ended June 30, 2013 and for each of the four quarters in the twelve months ended June 30, 2013, our distributable cash flow, assuming that the Formation Transactions had occurred as of January 1, 2012, and July 1, 2012, respectively. Our presentations of pro forma distributable cash flows for the year ended December 31, 2012 and the twelve months ended June 30, 2013 do not give effect to our recent acquisition of the Bridgeport terminal.

If we assume that we completed the transactions described under “Prospectus Summary—The Formation Transactions” on January 1, 2012 and July 1, 2012, our pro forma distributable cash flow for the year ended December 31, 2012 and the twelve months ended June 30, 2013 would have been approximately $29.9 million and $35.8 million, respectively. For the year ended December 31, 2012, these amounts would have been sufficient to pay the full minimum quarterly distributions on all of our common units but not on all of our subordinated units. For the twelve months ended June 30, 2013, these amounts would have been sufficient to pay the full minimum quarterly distribution on all of our common and subordinated units. On a pro forma basis, we

 

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would not have had sufficient distributable cash flow to pay the full minimum quarterly distribution on our common units or any distribution on our subordinated units for the quarter ended June 30, 2013 or to pay the full minimum quarterly distribution on our subordinated units for the quarter ended September 30, 2012 and for the year ended December 31, 2012. See “Our Cash Distribution Policy and Restrictions on Distributions.”

The pro forma financial statements, from which pro forma distributable cash flow is derived, do not purport to present our results of operations had the transactions contemplated in this prospectus, including the Formation Transactions, actually been completed as of January 1, 2012 or July 1, 2012, as applicable. Furthermore, distributable cash flow is primarily a cash accounting concept, while our unaudited pro forma combined financial statements have been prepared on an accrual basis. We derived the amounts of pro forma distributable cash flow stated above in the manner described in the table below. As a result, the amount of pro forma distributable cash flow should only be viewed as a general indication of the amount of distributable cash flow that we might have generated had we been formed and completed the transactions contemplated in this prospectus in earlier periods.

 

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The footnotes to the table below provide additional information about the pro forma adjustments and should be read along with the table.

Sprague Resources LP

Unaudited Pro Forma Distributable Cash Flow

 

     Year Ended
December 31, 2012
    Twelve Months Ended
June 30, 2013
 
     (in thousands)  

Pro forma net (loss) income

   $ (9,181   $ 7,976   

Add/(deduct):

    

Interest expense, net

     21,268        21,345   

Tax expense (benefit)

     (651     566   

Depreciation and amortization

     9,900        9,605   
  

 

 

   

 

 

 

Pro forma EBITDA(1)

   $ 21,336      $ 39,492   

Deduct: total commodity derivative (gains) losses included in net income (loss)(2)

     29,257        34,270   

Add: commodity realized derivative gains (losses) included in net income (loss)(2)

     (11,380     (19,707

Add/(deduct):

    

Write-off of deferred offering costs(3)

     8,931        8,931   

Bio-fuel excise tax credits(4)

     5,021        (3,092
  

 

 

   

 

 

 

Pro forma Adjusted EBITDA(1)

   $ 53,165      $ 59,894   

Add/(deduct):

    

Cash interest expense, net(5)

   $ (17,856   $ (18,209

Cash taxes

     651        (566

Maintenance capital expenditures

     (5,897     (4,835

Estimated incremental selling, general and administrative expense of being a publicly traded partnership, net(6)

     (2,058    
(2,058

Loss (gain) on fixed assets and gain on insurance recoveries

     58        (1,232

Elimination of expense relating to cash incentive payments and directors fees that would have been paid in common units(7)

     1,881        2,841   
  

 

 

   

 

 

 

Unaudited Pro Forma Distributable Cash Flow

   $ 29,944      $ 35,835   
  

 

 

   

 

 

 

Pro Forma Cash Distributions:

    

Minimum annual distribution per unit (based on a minimum quarterly distribution of $0.4125 per unit)

   $ 1.65      $ 1.65   

Annual distributions to:

    

Public common unitholders(8)

   $ 14,025      $ 14,025   

Sprague Holdings and affiliates:

    

Common units

     2,594        2,594   

Subordinated units

     16,619        16,619   

Non-economic general partner interest

     —          —     
  

 

 

   

 

 

 

Total distributions

   $ 33,238      $ 33,238   
  

 

 

   

 

 

 

Excess (Shortfall)

   $ (3,294   $ 2,597   
  

 

 

   

 

 

 

Percent of minimum quarterly distributions payable to common unitholders

     100     100

Percent of minimum quarterly distributions payable to subordinated unitholders

     80     100

 

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(1) EBITDA and adjusted EBITDA are defined in “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”
(2) Both total commodity derivative gains and losses and realized commodity derivative gains and losses include amounts paid to enter into the settled contracts.
(3) During the year ended December 31, 2012, we delayed the timing of this offering and, as a result, deferred offering costs of $8.9 million were charged against earnings.
(4) On January 2, 2013, the federal government enacted legislation that reinstated an excise tax credit program available for certain of our bio-fuel blending activities. This program had previously expired on December 31, 2011 and was reinstated retroactively to January 1, 2012. During the six months ended June 30, 2013, we recorded federal excise tax credits of $5.0 million related to our bio-fuel blending activities that had occurred during the year ended December 31, 2012. These credits have been recorded as a reduction of cost of products sold and, therefore, resulted in an increase in adjusted gross margin for the six months ended June 30, 2013. This adjustment reflects the effect on our pro forma adjusted EBITDA had these credits been recorded in the period in which the blending activity took place, which would have resulted in an increase of $5.0 million for the year ended December 31, 2012 and a decrease of $3.1 million for the twelve months ended June 30, 2013.
(5) Our pro forma presentations of cash interest expense, net for the year ended December 31, 2012 and the twelve months ended June 30, 2013 exclude non-cash amortization of debt issuance costs incurred in connection with borrowings under our credit agreement of approximately $3.4 million and $3.1 million, respectively.
(6) Reflects estimated incremental selling, general and administrative expenses of being a publicly traded partnership of $2.1 million for each of the year ended December 31, 2012 and twelve months ended June 30, 2013.
(7) Reflects the deemed substitution of compensation in the form of common units for cash compensation. See note (8) below.
(8) Does not include distributions of approximately $58,000 and $88,000 with respect to a weighted average of 35,000 and 53,000 common units that we assume we would have issued during each of the year ended December 31, 2012, and the twelve months ended June 30, 2013, respectively, as compensation under the compensation policies that we will adopt following the closing of this offering. Please read “Management—Long-Term Incentive Plan.”

 

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Sprague Resources LP

Unaudited Pro Forma Distributable Cash Flow

(on a Quarterly Basis)

 

    Three Months Ended   Total
Twelve Months
Ended
    September 30,
2012
  December 31,
2012
  March 31,
2013
  June 30,
2013
  June 30,
2013
   

($ in thousands)

                     

Pro forma net income (loss)

    $ (14,186 )     $ (4,234 )     $ 28,437       $ (2,041 )     $ 7,976  

Add/(deduct):

                   

Interest expense, net

      4,721         5,504         5,946         5,174         21,345  

Tax expense (benefit)

      (1,007 )       (300 )       2,018         (145 )       566  

Depreciation and amortization

      2,493         2,442         2,353         2,317         9,605  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Pro forma EBITDA

     

 

(7,979

 

)

 

     

 

3,412

 

 

 

      38,754         5,305        

 

39,492

 

 

 

Deduct: total commodity derivative (gains) losses included in net income (loss)(1)

      46,079         (12,495 )       10,993         (10,307 )       34,270  

Add: realized commodity derivative gains (losses) included in net income (loss)(1)

      (28,789 )       14,657         (18,646 )       13,071         (19,707 )

Add/(deduct):

                   

Write-off of deferred offering costs(2)

      —           8,931         —           —           8,931  

Bio-fuel excise tax credits(3)

      601         1,328         (5,021 )       —           (3,092 )
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Pro forma Adjusted EBITDA

     

 

9,912

 

 

 

     

 

15,833

 

 

 

      26,080         8,069        

 

59,894

 

 

 

Add/(deduct):

                   

Cash interest expense, net

      (3,937 )       (4,720 )       (5,162 )       (4,390 )       (18,209 )

Cash taxes

      1,007         300         (2,018 )       145         (566 )

Maintenance capital expenditures

      (1,062 )       (1,632 )       (392 )       (1,749 )       (4,835 )

Estimated incremental selling, general and administrative expense of being a publicly traded partnership, net

      (515 )       (514 )       (515 )       (514 )       (2,058 )

Loss (gain) on fixed assets

      (5 )       (446 )       —           (781 )       (1,232 )

Elimination of expense relating to cash incentive payment and director fees that would have been paid in common units

      371         1,256         1,138         76         2,841  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Unaudited pro forma distributable cash flow

    $ 5,771       $ 10,077       $ 19,131       $ 856       $ 35,835  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Pro forma total cash distributions (based on a minimum quarterly distribution of
$0.4125 per unit
)

    $ 8,309       $ 8,310       $ 8,310       $ 8,309       $ 33,238  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Excess (shortfall)

    $ (2,538 )     $ 1,767       $ 10,821       $ (7,453 )     $ 2,597  

Percent of minimum quarterly distributions payable to common unitholders

      100%         100%         100%         21%         100%  

Percent of minimum quarterly distributions payable to subordinated unitholders

      39%         100%         100%         —  %         100%  

 

(1) Both total commodity derivative gains and losses and realized commodity derivative gains and losses include amounts paid to enter into the settled contracts.

 

(2) During the year ended December 31, 2012, we delayed the timing of this offering and, as a result, deferred offering costs of $8.9 million were charged against earnings.

 

(3) On January 2, 2013, the federal government enacted legislation that reinstated an excise tax credit program available for certain of our bio-fuel blending activities. This program had previously expired on December 31, 2011 and was reinstated retroactively to January 1, 2012. During the three months ended March 31, 2013, we recorded federal excise tax credits of $5.0 million related to our bio-fuel blending activities that had occurred during the year ended December 31, 2012. These credits have been recorded as a reduction of cost of products sold and therefore resulted in an increase in adjusted gross margin for the three months ended March 31, 2013. This adjustment reflects the effect on our pro forma adjusted EBITDA had these credits been recorded in the period in which the blending activity took place.

 

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Estimated Distributable Cash Flow

We estimate we will generate distributable cash flow of $39.9 million for the twelve months ending September 30, 2014 and will be able to pay the minimum quarterly distribution on all of our common units and subordinated units for each quarter in that period. In “—Assumptions and Considerations” below, we discuss the material assumptions underlying this belief, which reflect our judgment of conditions we expect to exist and the course of action we expect to take.

When considering our ability to generate distributable cash flow of $39.9 million and how we calculate estimated distributable cash flow, you should keep in mind the risk factors and other cautionary statements under the headings “Risk Factors” and “Forward-Looking Statements,” which discuss factors that could cause our results of operations and distributable cash flow to vary significantly from our estimates.

Our forecast is based on assumptions that we believe to be reasonable with respect to the forecast period as a whole. We did not use quarter-by-quarter estimates in concluding that there would be sufficient distributable cash flow to pay the minimum quarterly distribution on all of our common and subordinated units and the general partner interest during the forecast period. Historically, our results of operations have varied quarter-by-quarter as a result of seasonal changes, market structure and other factors. For more information regarding these factors, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That Impact Our Business.” As a result of the quarterly variations in our operations and the inherent difficulty in projecting the precise timing of each revenue and expense item in the forecast, we believe that any estimate of our results of operations on a quarterly basis would involve a high degree of risk of inaccuracy. To the extent that there is a shortfall during any quarter in the forecast period, we believe we would have sufficient borrowing capacity under the credit agreement we will enter into in connection with this offering, and, therefore, would be able to make borrowings to pay distributions in such quarter. We believe we would likely be able to repay such borrowings in a subsequent quarter, because we believe the total distributable cash flow for the forecast period will be more than sufficient to pay the aggregate minimum quarterly distribution to all unitholders.

We do not, as a matter of course, make public projections as to future operations, earnings or other results. However, we have prepared the prospective financial information and related assumptions and conditions set forth below to present the estimated distributable cash flow for the twelve months ending September 30, 2014. The accompanying prospective financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information but, in our view, was prepared on a reasonable basis and reflects the best currently available estimates and judgments and presents, to the best of our knowledge and belief, the expected course of action and our expected future financial performance. However, this information is not fact and should not be considered as indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

Neither our auditor, Ernst & Young LLP, nor any other independent public accounting firm has examined, compiled or performed any procedures with respect to the accompanying prospective financial information and accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto. The Ernst & Young LLP reports included in this prospectus relates to the historical information of our predecessor and our historical financial statements. These reports do not extend to the prospective financial information presented below and should not be read to do so. As such, neither Ernst & Young LLP nor any other public accounting firm has expressed an opinion or any other form of assurance in respect of information or its achievability and Ernst & Young LLP assumes no responsibility for and disclaims any association with, the prospective financial information.

We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update this financial forecast or the assumptions used to prepare the forecast to reflect events or circumstances after the completion of this offering. In light of this, the statement that we believe that we will have sufficient distributable cash flow to allow us to make the full minimum quarterly distribution on all of our outstanding common and subordinated units for each quarter through and including the quarter ending September 30, 2014, should not be regarded as a representation by us, Sprague Holdings, the underwriters or any other person that we will make such distribution. Therefore, you are cautioned not to place undue reliance on this information.

 

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Sprague Resources LP

Estimated Distributable Cash Flow

 

     Twelve Months
Ending
September 30, 2014
 
     (in thousands)  

Net sales

   $ 4,118,585   

Cost of products sold

     3,958,733   
  

 

 

 

Gross margin

     159,852   

Operating costs and expenses

  

Operating expenses

     47,490   

Selling, general and administrative(1)

     50,692   

Depreciation and amortization

     10,506   
  

 

 

 

Total operating costs and expenses

     108,688   
  

 

 

 

Operating income

     51,164   

Interest expense, net

     20,070   
  

 

 

 

Income before income tax

     31,094   
  

 

 

 

Income tax

     1,180   
  

 

 

 

Net income

     29,914   
  

 

 

 

Adjustments to reconcile net income to adjusted EBITDA:

  

Add:

  

Interest expense, net

     20,070   

Income tax

     1,180   

Depreciation and amortization expense

     10,506   
  

 

 

 

Adjusted EBITDA(2)

     61,670   
  

 

 

 

Less:

  

Cash interest expense, net(3)

     (17,397

Cash taxes

     (1,180

Maintenance capital expenditures

     (5,912

Add:

  

Elimination of non-cash expense relating to incentive payments that are anticipated to be paid in common units(4)

     2,704   
  

 

 

 

Estimated distributable cash flow

   $ 39,885   
  

 

 

 

Minimum annual distribution per unit (based on a minimum quarterly distribution of $0.4125 per unit)

   $ 1.65   

Annual distributions to:

  

Public common unitholders(5)

   $ 14,025   

Sprague Holdings and affiliates:

  

Common units

     2,594   

Subordinated units

     16,619   

Non-economic general partner interest

      
  

 

 

 

Total distributions to Sprague Holdings

     19,213   
  

 

 

 

Total distributions to our unitholders and Sprague Holdings (based on an annualized distribution of $1.65 per unit per year)

   $ 33,238   
  

 

 

 

Excess of distributable cash flow over aggregate annualized minimum quarterly distributions

   $ 6,647   

 

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(1) Includes $2.1 million of incremental annual selling, general and administrative expenses we expect to incur as a result of our being a publicly traded partnership, as well as approximately $2.7 million of non-cash expense related to incentive payments that we anticipate will be paid in common units.
(2) EBITDA and adjusted EBITDA are defined in “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.” Because it is not reasonably possible to forecast the difference between total commodity derivative gains or losses and realized commodity derivative gains and losses for future periods, we have not projected any such amounts for the forecast period. Accordingly, EBITDA is projected to be equal to adjusted EBITDA for the forecast period.
(3) Cash interest expense, net excludes approximately $2.7 million in non-cash amortization of debt issuance costs anticipated to be incurred in connection with borrowings under our credit agreement. A decrease of $1.00 in the assumed initial public offering price per common unit would cause the net proceeds from our issuance and sale of common units to the public to decrease by approximately $7.9 million, which will result in us having an additional approximately $7.9 million in borrowings outstanding under our new credit agreement following the completion of this offering and an additional approximately $0.2 million of estimated cash interest expense, net for the twelve months ending September 30, 2014. A decrease of 1.0 million in the number of common units offered hereby, together with a concomitant $1.00 decrease in the assumed initial public offering price per common unit, would cause the net proceeds from our issuance and sale of common units to the public to decrease by approximately $25.6 million, which would result in us having an additional approximately $25.6 million in borrowings outstanding under our new credit agreement following completion of this offering and an additional approximately $0.6 million of estimated cash interest expense, net for the twelve months ending September 30, 2014.
(4) Eliminates a non-cash charge associated with compensation that is expected to be paid in common units. See note (1) above and note (5) below.
(5) Does not include distributions of approximately $84,000 with respect to a weighted average of 51,000 common units that we assume we will issue as compensation during the forecast period under the compensation policies that we will adopt following the closing of this offering. Please read “Management— Long-Term Incentive Plan”. See note (4) above. We have assumed that the common units will be issued in an equal number per quarter, at the end of each quarter in the forecast period, and that distributions in respect of such issued common units would not be payable until after the completion of the first quarter following the quarter in which such common units were issued.

Assumptions and Considerations

While we believe that the assumptions below are reasonable, the assumptions are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If our assumptions are not realized, the actual distributable cash flow that we could generate could be substantially less than currently expected and could, therefore, be insufficient to permit us to make the full minimum quarterly distribution on all units, in which case the market price of the common units may decline materially. When reading this section, you should keep in mind the risk factors and other cautionary statements under the headings “Risk Factors” and “Forward Looking Statements.” We do not undertake any obligation to release publicly the results of any future revisions we make to the foregoing or to update the foregoing to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this information.

We believe that, following the completion of the offering, we will have sufficient distributable cash flow to allow us to make the full minimum quarterly distribution on all the outstanding units for each quarter through September 30, 2014. Our belief is based on a number of specific assumptions, including the assumptions that:

 

   

Net sales. Net sales are projected to be approximately $4.1 billion for the twelve months ending September 30, 2014, as compared to $3.9 billion and $4.0 billion for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. We believe

 

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net sales for the forecast period will increase primarily as a result of the recent acquisition of the Bridgeport terminal.

 

   

Refined Products. Our refined products net sales for the twelve months ending September 30, 2014 is projected to be approximately $3.8 billion, as compared to approximately $3.6 billion and $3.7 billion for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. The projected $198.3 million increase in refined products net sales as compared to the year ended December 31, 2012, and the projected increase of $78.1 million over the twelve months ended June 30, 2013, in each case on a pro forma basis, is driven primarily by the recent acquisition of the Bridgeport terminal, which has a projected $245.6 million impact to the revenue increases. We use the published NYMEX forward price curves for heating oil and Reformulated Blendstock for Oxygenate Blending, or RBOB, along with residual fuel oil forward swaps prices as of August 9, 2013, as the underlying basis to forecast the anticipated prices at which we will sell our refined products. These base prices are adjusted for gross margin plus other costs associated with our anticipated points of sale, which are applied on a consistent basis. See “—Commodity Prices.”

 

   

Natural Gas. Our natural gas net sales for the twelve months ending September 30, 2014 is projected to be approximately $286.8 million, as compared to approximately $242.0 million and $290.4 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. The projected increase of $44.8 million over the year ended December 31, 2012, on a pro forma basis, is comprised of an increase of $39.5 million attributable to an increase in unit sales price in addition to an increase in volumes contributing $5.3 million to net sales. The projected decrease of $3.6 million over the year ended June 30, 2013, on a pro forma basis, is comprised of an increase of $6.1 million attributable to an increase in unit sales price offset by a decrease in volumes contributing a decrease of $9.7 million to net sales. Natural gas sales volume for the twelve months ending September 30, 2014 is projected to be 50,500 MMBtus, as compared to 49,417 MMBtus and 52,242 MMBtus for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. We use the published NYMEX forward price curve, as of August 9, 2013, as the underlying basis to forecast the anticipated prices at which we will sell our natural gas, with adjustments for gross margin and other costs associated with our anticipated points of sale, which are applied on a consistent basis. See “—Commodity Prices.”

 

   

Materials Handling. Our materials handling net sales for the twelve months ending September 30, 2014 is projected to be approximately $30.0 million, as compared to approximately $32.5 million and $31.1 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. The reduction in materials handling net sales in the year ending September 30, 2014 compared to the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis, is primarily due to a projected decline in salt, petcoke and gypsum volumes. Our existing contracts were used as the basis to estimate our net sales for fee-based materials handling services.

 

   

Other Operations. Our coal net sales for the twelve months ending September 30, 2014 is projected to be approximately $10.1 million, as compared to approximately $8.9 million and $9.3 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. The increase in coal net sales in the year ending September 30, 2014 compared to the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis, is primarily due to higher commodity prices during the forecast period.

 

   

Adjusted Gross Margin. Because it is not reasonably possible to forecast the difference between total commodity derivative gains or losses and realized commodity derivative gains or losses for future periods, gross margin is projected to be the same as adjusted gross margin for the twelve months ending September 30, 2014. Adjusted gross margin is projected to be approximately $159.9 million for the

 

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twelve months ending September 30, 2014. Our adjusted gross margin for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis was approximately $138.3 million and $154.7 million, respectively.

 

   

Refined Products. Our refined products adjusted gross margin for the twelve months ending September 30, 2014 is projected to be approximately $100.6 million, as compared to approximately $77.1 million and $86.3 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. The projected increase of $23.6 million over the year ended December 31, 2012, on a pro forma basis, is comprised of an increase of $9.0 million attributable to the Bridgeport terminal acquisition, an increase of $12.0 million attributable to an increase in adjusted unit gross margin and an increase of $2.6 million attributable to an increase in refined products volume. The projected increase of $14.4 million over the twelve months ended June 30, 2013, on a pro forma basis, is comprised of an increase of $9.0 million attributable to the Bridgeport terminal acquisition, an increase of $6.4 million attributable to an increase in adjusted unit gross margin and a decrease of $1.0 million attributable to a decrease in refined products volume. The projected increase in adjusted unit margin for the period ending September 30, 2014 compared to year ended December 31, 2012 is based on the anticipated return of typical weather conditions in the Northeast United States rather than the mild conditions experienced in 2012. In addition, results for the year ended December 31, 2012 were lower because bio-diesel credits earned during that time were not recognized until 2013. Unit gross margin for the twelve months ending September 30, 2014 is projected to increase compared to the twelve months ended June 30, 2013 primarily due to projected improved hedging and trading performance.

 

   

Natural Gas. Our natural gas adjusted gross margin for the twelve months ending September 30, 2014 is projected to be approximately $27.5 million, as compared to approximately $26.8 million and $35.2 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. The decrease of $7.7 million over the twelve months ended June 30, 2013, on a pro forma basis, is largely due to the unusually strong results for the three months ended March 31, 2013 primarily due to periods of cold weather which led to high cash prices and incremental margin from balancing of incremental customer demand and managing of utility resources such as storage assets. Natural gas results for the twelve months ended June 30, 2013 were unusually high, driven by a number of favorable conditions. The twelve months ending September 30, 2014 do not assume a repeat of these unusually favorable conditions.

 

   

Materials Handling. Our materials handling gross margin for the twelve months ending September 30, 2014 is projected to be approximately $30.0 million, as compared to approximately $32.3 million and $31.0 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. The forecasted decrease of $2.3 million over the year ended December 31, 2012 and the forecasted decrease of $1.0 million compared to the twelve months ended June 30, 2013, in each case on a pro forma basis, are each due to an expected decline in salt, petcoke and gypsum volumes. Our existing contracts were used as the basis to estimate gross margin for fee-based materials handling services.

 

   

Other Operations. Our coal gross margin for the twelve months ending September 30, 2014 is projected to be approximately $1.8 million, as compared to approximately $2.1 million and $2.2 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. The forecasted decrease of $0.3 million and $0.4 million over the year ended December 31, 2012 and the twelve months ended June 30, 2013 is due to lower unit gross margins in the forecast period.

 

   

Cost of Products Sold. Cost of products sold is a function of the forecasted net sales and the forecasted adjusted gross margin as determined above. Our cost of products sold is projected to be approximately $4.0 billion for the twelve months ending September 30, 2014, as compared to approximately $3.8 billion and $3.9 billion for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis.

 

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Operating Expenses. Operating expenses for the twelve months ending September 30, 2013 are projected to be approximately $47.5 million, as compared to approximately $43.8 million and $43.7 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. The increase in operating expenses for the twelve months ending September 30, 2014 as compared to the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis, is primarily due to the acquisition of the Bridgeport terminal.

 

   

Selling, General and Administrative Expenses. Our selling, general and administrative expenses for the twelve months ending September 30, 2014 are projected to be approximately $50.7 million. Our selling, general and administrative expenses for the year ended December 31, 2012 and the twelve months ended June 30, 2013, in each case on a pro forma basis, were approximately $46.2 million and $49.3 million, respectively. The increase of selling, general and administrative expenses for the twelve months ending September 30, 2014 is primarily due to the anticipated incremental annual selling, general and administrative expenses as a result of being a publicly traded partnership and inflation-related period-over-period expense increases.

 

   

Depreciation and Amortization. Depreciation and amortization expenses for the twelve months ending September 30, 2014 is projected to be approximately $10.5 million, as compared to approximately $9.9 million and $9.6 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis.

 

   

Interest Expense, Net. Interest expense, net for the twelve months ending September 30, 2014 is projected to be approximately $20.1 million. Interest expense, net for the year ended December 31, 2012 and the twelve months ended June 30, 2013, in each case on a pro forma basis, was approximately $21.3 million and $21.3 million, respectively. Interest expense, net for the twelve months ending September 30, 2014 is based on anticipated borrowings under the proposed credit agreement and the expected financing of working capital requirements.

 

   

Cash Interest Expense, Net. Cash interest expense, net excludes approximately $2.7 million, $3.4 million and $3.1 million in non-cash amortization of debt issuance costs incurred in connection with borrowings under our credit agreement for the twelve months ending September 30, 2014, the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis.

 

   

Expansion Capital Expenditures. Our expansion capital expenditures are projected to be approximately $2.2 million for the twelve months ending September 30, 2014. Our expansion capital expenditures in the year ended December 31, 2012 and the twelve months ended June 30, 2013, in each case on a pro forma basis, were approximately $2.5 million and $2.1 million, respectively. We intend to fund expansion capital expenditures during the forecast period with borrowings under the $250.0 million acquisition facility in our credit agreement.

 

   

Maintenance Capital Expenditures. Our maintenance capital expenditures for the twelve months ending September 30, 2014 are projected to be approximately $5.9 million, as compared to maintenance capital expenditures of $5.9 million and $4.8 million for the year ended December 31, 2012 and the twelve months ended June 30, 2013, respectively, in each case on a pro forma basis. The forecasted maintenance capital expenditures for the twelve months ending September 30, 2014 are primarily to fund planned capital expenditures at our terminals and on our truck fleet.

 

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Commodity Prices. The following table sets forth the published NYMEX forward prices as of September 26, 2013 used in the forecast assumptions for the commodities presented below from October 2013 through September 2014.

 

Price

   No. 2 Fuel Oil
(per gallon)
   Gasoline
(RBOB)
(per gallon)
     Heavy
Oil
(1.0%)
(per Bbl)
     Natural Gas
(per MMBtu)
 

October 2013

   $3.004    $ 2.705       $ 95.820       $ 3.498   

November 2013

   $2.999    $ 2.689       $ 95.120       $ 3.567   

December 2013

   $2.993    $ 2.665       $ 94.780       $ 3.751   

January 2014

   $2.989    $ 2.656       $ 95.080       $ 3.853   

February 2014

   $2.982    $ 2.658       $ 94.830       $ 3.859   

March 2014

   $2.969    $ 2.668       $ 94.550       $ 3.834   

April 2014

   $2.953    $ 2.818       $ 94.300       $ 3.793   

May 2014

   $2.937    $ 2.803       $ 94.030       $ 3.816   

June 2014

   $2.920    $ 2.769       $ 93.750       $ 3.845   

July 2014

   $2.909    $ 2.732       $ 93.480       $ 3.877   

August 2014

   $2.901    $ 2.696       $ 93.130       $ 3.892   

September 2014

   $2.895    $ 2.659       $ 92.780       $ 3.888   

 

   

New Bedford Terminal. Our projection assumes that the sale of the New Bedford terminal by Sprague Massachusetts Properties LLC to a third party will not be consummated during the forecast period. The New Bedford terminal is subject to a purchase and sale agreement pursuant to which a third party may acquire the terminal from Sprague Massachusetts Properties LLC. The acquisition is subject to certain conditions that are beyond the control of Sprague Massachusetts Properties LLC. Subject to those conditions, the acquisition may be consummated on or before January 5, 2016. In the event that such sale is consummated, our terminal operating agreement with Sprague Holdings and Sprague Massachusetts Properties LLC will automatically terminate. We will not receive any proceeds from a sale of the New Bedford Terminal. We have been advised by Sprague Massachusetts Properties LLC that it does not believe that the sale will be consummated prior to September 30, 2014. Please read “Certain Relationships and Related Party Transactions—Terminal Operating Agreement.” In light of its relatively small capacity and our ability to shift business to other terminals, we do not believe a termination of our operating lease would adversely impact our business, financial position, results of operations or ability to make quarterly distributions to our unitholders.

 

   

General. Our projections assume that actual heating degree days will equal normal heating degree days for such period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How Management Evaluates Our Results of Operations—Heating Degree Days.” Additionally, we assume that no material accidents, releases or similar unanticipated material events occur during the twelve months ending September 30, 2014. Furthermore, we assume that there are no major adverse changes in the oil or natural gas markets and that the market, regulatory and overall economic conditions do not change substantially.

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions. This summary assumes that we do not issue additional classes of equity interests. Statements of percentages of cash and allocations of gain and loss paid or allocated to Sprague Holdings assume that Sprague Holdings does not transfer the incentive distribution rights.

Distributions of Distributable Cash Flow

General

Within approximately 45 days after the end of each quarter, beginning with the quarter ending December 31, 2013, we intend to make cash distributions to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the closing of the offering through December 31, 2013 based on the actual length of the period.

Intent to Distribute the Minimum Quarterly Distribution

We will distribute to the holders of common units and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.4125 per unit, or $1.65 per unit per year, to the extent we have sufficient distributable cash flow. Our partnership agreement permits us to borrow to make distributions, but we are not required to do so. Accordingly, there is no guarantee that we will pay the minimum quarterly distribution on the units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is ultimately determined by the board of directors of our general partner. We may be prohibited from making any distributions to unitholders by agreements governing the indebtedness we expect to have immediately following the closing of this offering and any future indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Credit Agreement” for a discussion of the restrictions included in our new credit agreement that may restrict our ability to make distributions.

General Partner Interest

Our general partner will not be entitled to distributions on its non-economic general partner interest.

Incentive Distribution Rights

Sprague Holdings currently holds all of the incentive distribution rights, which entitle it to receive increasing percentages, up to a maximum of 50.0%, of the cash we distribute from distributable cash flow (as defined below) in excess of $0.474375 per unit per quarter. The maximum distribution of 50.0% does not include any distributions that Sprague Holdings may receive on common units or subordinated units that it owns. See “—Incentive Distribution Rights” below for additional information.

Distributable Cash Flow and Capital Surplus

General

All cash distributed will be characterized as either “distributable cash flow” or “capital surplus.” We distribute cash from distributable cash flow differently than we would distribute cash from capital surplus. Distributable cash flow distributions will be made to our unitholders and, if we make quarterly distributions above the first target distribution level described above, the holder of our incentive distribution rights. We do not anticipate that we will make any distributions from capital surplus, but any capital surplus distribution would be made pro rata to all unitholders, but the holder of the incentive distribution rights would generally not participate in any capital surplus distributions with respect to those rights.

 

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Distributable Cash Flow

Distributable cash flow for any period will be determined by our general partner and is defined to mean, on a cumulative basis since the completion of this offering:

(a)     $25.0 million;

(b)     plus our net income, as determined in accordance with GAAP;

(c)     plus or minus, as applicable, any amounts necessary to offset the impact of any items included in our net income in accordance with GAAP that do not impact the amount of our cash or cash equivalents (including any amounts necessary to offset the impact of any items included in our share of the net income of entities accounted for under the equity method that do not impact the amount of the cash or cash equivalents of such entities);

(d)     plus any carrying costs (debt or equity related), which have not been capitalized, incurred by us during construction of a capital improvement which capital improvement is not included in expansion capital expenditures;

(e)     plus any acquisition-related expenses deducted from net income and associated with (i) successful acquisitions or (ii) any other potential acquisitions that have not been abandoned;

(f)     minus any acquisition related expenses covered by clause (e)(ii) immediately preceding that relate to (i) potential acquisitions that have since been abandoned or (ii) potential acquisitions that have not been consummated within one year following the date such expense was incurred (except that if the potential acquisition is the subject of a pending purchase and sale agreement as of such one-year date, such one-year period of time shall be extended until the first to occur of the termination of such purchase and sale agreement or the first day following the closing of the acquisition contemplated by such purchase and sale agreement); and

(g)     minus maintenance capital expenditures.

The types of items covered by clause (c) above include, without limitation, (i) depreciation, depletion and amortization expense, (ii) any gain or loss from the sale of assets not in the ordinary course of business, (iii) any non-cash gains or items of income and any non-cash losses or expenses, including non-cash compensation expense, asset impairments, amortization of debt discounts, premiums or issue costs, mark-to-market activity associated with hedging and with non-cash revaluation and/or fair valuation of assets or liabilities and (iv) any gain or loss as a result of a change in accounting policy or principle, provided that the application of any such change that is not required by law, GAAP or the Public Company Accounting Oversight Board or similar regulatory body to be adopted by us is approved by the audit committee of the board of directors of our general partner prior to its adoption. Our share of the net income of entities accounted for under the equity method, as adjusted in clause (c) above, shall be limited to the distributions we receive from such entities. To the extent that our net income includes any losses with respect to the termination of any derivative contracts hedging our interest rate or currency risk with an original term of more than one year prior to their respective stipulated termination or settlement date, such losses shall be included in distributable cash flow in equal installments over what would have been the remaining scheduled life of such derivative contracts had they not been so terminated.

If net income or other items affecting the calculation of distributable cash flow are restated with respect to any quarter, then any subsequent determination of net income or such other items for such quarter or with respect to a period including such quarter will reflect such restatement. Any restatement after the end of the subordination period will not retroactively affect the conversion of subordinated units.

 

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Maintenance capital expenditures reduce distributable cash flow, but expansion capital expenditures do not. Maintenance capital expenditures represent capital expenditures made to replace assets, to maintain the long-term operating capacity of our assets or other capital expenditures that are incurred in maintaining long-term operating capacity of our assets or our operating income. Costs for repairs and minor renewals to maintain facilities in operating condition that do not extend the useful life of existing assets will be treated as maintenance expenses as we incur them. Examples of maintenance capital expenditures are expenditures required to maintain equipment reliability, terminal integrity and safety and to address environmental laws and regulations.

Expansion capital expenditures are capital expenditures made to increase the long-term operating capacity of our assets or our operating income whether through construction or acquisition. 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. For the purpose of calculating distributable cash flow, expansion capital expenditures will also include the carrying cost of debt incurred and equity issued to finance all or any portion of the construction of such a capital improvement in respect of the period that commences when we enter into a binding obligation to commence construction of a capital improvement and ending on the date such capital improvement commences commercial service or the date that it is abandoned or disposed of. Where capital expenditures are made in part for maintenance or expansion purposes and in part for other purposes, the board of directors of our general partner shall determine the allocation between the amounts paid for each. The officers and directors of our general partner will determine how to allocate a capital expenditure for the acquisition or expansion of our assets between maintenance capital expenditures and expansion capital expenditures.

Characterization of Cash Distributions

We treat all cash distributed as coming from distributable cash flow until the sum of all distributions from the closing of this offering equals the distributable cash flow for the most recent date of determination. Our partnership agreement requires that we treat any amount distributed in excess of distributable cash flow, regardless of its source, as capital surplus. The characterization of cash distributions as distributable cash flow versus capital surplus does not result in a different impact to unitholders for U.S. federal tax purposes. See “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Treatment of Distributions” for a discussion of the tax treatment of cash distributions.

Subordination Period

General

During the subordination period (which we describe below), the common units will have the right to receive distributions of cash from distributable cash flow each quarter in an amount equal to $0.4125 per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of cash from distributable cash flow may be made on the subordinated units. Furthermore, no arrearages will accrue or be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be sufficient cash from distributable cash flow to pay the minimum quarterly distribution on the common units.

Definition of Subordination Period

Except as described below, the subordination period will begin on the closing date of this offering and expire the second business day after the distribution to unitholders in respect of any quarter (referred to as the reference quarter), beginning with the quarter ending December 31, 2016, if each of the following has occurred:

 

   

Quarterly distributions from distributable cash flow on each outstanding common and subordinated unit equaled or exceeded the annualized minimum quarterly distribution in respect of each of the prior three consecutive, non-overlapping four quarter periods (including the reference quarter); and

 

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Distributable cash flow generated in respect of such three consecutive, non-overlapping four quarter periods equaled or exceeded the annualized amount of the minimum quarterly distribution on all outstanding common units and subordinated units (on a fully diluted basis) in respect of such periods; and

 

   

There are no arrearages in payment of the minimum quarterly distribution on the common units.

With respect to compensatory grants of equity, fully diluted shall include only those units that will vest during the succeeding twelve months.

Our partnership agreement provides that the requirements could first be satisfied in connection with a distribution of cash in respect of the quarter ending December 31, 2016 and, if not satisfied in respect of that quarter, could be satisfied on any date thereafter. In addition, the subordination period will expire upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of subordinated units or their affiliates are voted in favor of that removal.

Effect of End of the Subordination Period

Upon expiration of the subordination period, any outstanding arrearages in payment of the minimum quarterly distribution on the common units will be extinguished (not paid), each outstanding subordinated unit will immediately convert into one common unit and will thereafter participate pro rata with the other common units in distributions.

Distributions of Cash From Distributable Cash Flow During the Subordination Period

Distributions from distributable cash flow with respect to any quarter during the subordination period will be made in the following manner:

 

   

First, to the common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter and any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters;

 

   

Second, to the subordinated unitholders, pro rata, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

Thereafter, in the manner described in “—Incentive Distribution Rights” below.

Distributions of Cash From Distributable Cash Flow After the Subordination Period

Distributions from distributable cash flow in respect of any quarter after the subordination period will be made in the following manner:

 

   

First, to all unitholders, pro rata, until we distribute for each unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

Thereafter, in the manner described in “—Incentive Distribution Rights” below.

General Partner Interest

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity securities in us and will be entitled to receive distributions on any such interests.

 

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Incentive Distribution Rights

Incentive distribution rights represent the right to receive an increasing percentage (15.0%, 25.0% and 50.0%) of quarterly distributions of cash from distributable cash flow after the minimum quarterly distribution and the target distribution levels have been achieved. Sprague Holdings will initially hold the incentive distribution rights but may transfer these rights, subject to restrictions in our partnership agreement.

If for any quarter:

 

   

We have distributed cash from distributable cash flow to the common unitholders and subordinated unitholders (if any) in an amount equal to the minimum quarterly distribution; and

 

   

We have distributed cash from distributable cash flow to the common unitholders in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then additional distributions from distributable cash flow for that quarter will be made in the following manner:

 

   

First, to all unitholders, pro rata, until each unitholder receives a total of $0.474375 per unit for that quarter (the “first target distribution”);

 

   

Second, 85.0% to all unitholders, pro rata, and 15.0% to the holders of incentive distribution rights, pro rata, until each unitholder receives a total of $0.515625 per unit for that quarter (the “second target distribution”);

 

   

Third, 75.0% to all unitholders, pro rata, and 25.0% to the holders of incentive distribution rights, pro rata, until each unitholder receives a total of $0.61875 per unit for that quarter (the “third target distribution”); and

 

   

Thereafter, 50.0% to all unitholders, pro rata, and 50.0% to the holders of incentive distribution rights, pro rata.

In each case, the amount of the target distribution set forth above is exclusive of any distributions to common unitholders to eliminate any cumulative arrearages in payment of the minimum quarterly distribution.

Percentage Allocations of Cash Distributions From Distributable Cash Flow

The following table illustrates the percentage allocations of cash distributions from distributable cash flow between the unitholders and the holders of the incentive distribution rights, based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Cash Distributions” are the percentage interests of the incentive distribution right holders and the unitholders in any cash distributions from distributable cash flow we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution per Unit Target Amount.” The percentage interests shown for the unitholders for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution.

 

     Total Quarterly  Distribution
per Unit Target Amount
   Marginal Percentage
Interest in Cash Distributions
 
      Unitholders     Incentive
Distribution
Rights Holders
 

Minimum Quarterly Distribution

   $0.4125      100.0     —     

First Target Distribution

   above $0.4125 up to $0.474375      100.0     —     

Second Target Distribution

   above $0.474375 up to $0.515625      85.0     15.0

Third Target Distribution

   above $0.515625 up to $0.61875      75.0     25.0

Thereafter

   above $0.61875      50.0     50.0

 

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Sprague Holdings’ Right to Reset Incentive Distribution Levels

The holder or holders of a majority of our incentive distribution rights (initially Sprague Holdings) have the right under our partnership agreement, subject to certain conditions, to elect to relinquish the right of the holders of our incentive distribution rights to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and cash target distribution levels upon which the incentive distribution payments to such holders would be set. Such incentive distribution rights may be transferred at any time. The right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable are based may be exercised, without approval of our unitholders or the conflicts committee, at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the prior four consecutive fiscal quarters. Any election to reset the minimum quarterly distribution amount and the target distribution levels shall be subject to the prior written concurrence of our general partner that the conditions described in the immediately preceding sentence have been satisfied. We anticipate that Sprague Holdings would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to it.

In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by holders of our incentive distribution rights of incentive distribution payments based on the target cash distributions prior to the reset, the holder of incentive distribution rights will be entitled to receive an aggregate number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by such holders for the two quarters prior to the reset event, as compared to the average cash distributions per common unit during this period.

The number of common units that the holders of incentive distribution rights would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to (x) the average amount of cash distributions received by such holders in respect of their incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election divided by (y) the average of the amount of cash distributed per common unit during each of these two quarters. The issuance of the additional common units will be conditioned upon approval of the listing or admission for trading of such common units by the national securities exchange on which the common units are then listed or admitted for trading.

Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of distributable cash flow for each quarter thereafter as follows:

 

   

First, to all unitholders, pro rata, until each unitholder receives an amount equal to 115.0% of the reset minimum quarterly distribution for that quarter;

 

   

Second, 85.0% to all unitholders, pro rata, and 15.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;

 

   

Third, 75.0% to all unitholders, pro rata, and 25.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and

 

   

Thereafter, 50.0% to all unitholders, pro rata, and 50.0% to the holders of the incentive distribution rights, pro rata.

 

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The following table illustrates the percentage allocation of distributable cash flow between the unitholders and the holders of the incentive distribution rights at various cash distribution levels pursuant to the cash distribution provision of our partnership agreement in effect at the closing of this offering, as well as following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $0.70.

 

     Quarterly
Distribution per Unit
Prior to Reset
  Marginal Percentage
Interest in Cash
Distributions
    Quarterly
Distribution  per
Unit following
Hypothetical Reset
     Unitholders     Incentive
Distribution
Rights
Holders
   

Minimum Quarterly Distribution

   $0.4125     100.0     —        $0.70

First Target Distribution

   above $0.4125 up to

$0.474375

    100.0     —        up to $0.805(1)

Second Target Distribution

   above $0.474375 up to

$0.515625

    85.0     15.0   above $0.805 up to

$0.875(2)

Third Target Distribution

   above $0.515625 up to

$0.61875

    75.0     25.0   above $0.875 up to

$1.05(3)

Thereafter

   above $0.61875     50.0     50.0   above $1.05(3)

 

(1) This amount is 115% of the hypothetical reset minimum quarterly distribution.
(2) This amount is 125% of the hypothetical reset minimum quarterly distribution.
(3) This amount is 150% of the hypothetical reset minimum quarterly distribution.

The following table illustrates the total amount of distributable cash flow that would be distributed to the unitholders and the holders of the incentive distribution rights based on an average of the amounts distributed per quarter for the two quarters immediately prior to the reset. The table assumes that, immediately prior to the reset, there would be 20,143,940 common units outstanding and the average distribution to each common unit is $0.70 for the two quarters prior to the reset. The assumed number of outstanding units assumes the conversion of all subordinated units into common units and no additional unit issuances.

 

    Prior to Reset  
    Quarterly
Distribution
per Unit 
  Public
Common
Unitholders

Cash
Distributions
    Cash Distributions to Sprague Holdings     Total
Distributions
 
      Common
Units
    Incentive
Distribution

Rights 
    Total    

Minimum Quarterly Distribution

  $0.4125   $ 3,506,250      $ 4,803,125      $               0      $   4,803,125      $   8,309,375  

First Target
Distribution

  above $0.4125 up to

$0.474375

    525,937        720,469        0        720,469        1,246,406   

Second Target Distribution

  above $0.474375 up to

$0.515625

    350,625        480,313        146,636        626,949        977,574   

Third Target Distribution

  above $0.515625 up to

$0.61875

    876,563        1,200,781        692,448        1,893,229        2,769,792   

Thereafter

  above $0.61875     690,625        946,070        1,636,695        2,582,765        3,273,390   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 5,950,000      $ 8,150,758      $ 2,475,779      $ 10,626,537      $ 16,576,537   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table illustrates the total amount of distributable cash flow that would be distributed to the unitholders and the holders of the incentive distribution rights with respect to the quarter in which the reset occurs, assuming that the distribution per unit in respect of such quarter equals the average distribution per unit for the two quarters immediately prior to the reset. The table reflects that as a result of the reset there would be an additional 3,536,827 common units outstanding and the average distribution to each common unit is $0.70. The number of additional common units was calculated by dividing (x) $2,475,779 as the average of the amounts received by the incentive distribution

 

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rights holders in respect of their incentive distribution rights, for the two quarters prior to the reset as shown in the table above by (y) the $0.70 of distributable cash flow distributed to each common unit as the average distributed per common unit for the two quarters prior to the reset.

 

    After Reset  
    Quarterly
Distribution
per Unit
  Public Common
Unitholders Cash
Distributions
    Cash Distributions to Sprague Holdings     Total
Distributions
 
      Common Units     Incentive
Distribution Rights 
    Total    

Minimum Quarterly Distribution

  $0.700   $ 5,950,000      $ 10,626,537      $ 0     $ 10,626,537      $ 16,576,537  

First Target Distribution

  above $0.700 up to

$0.805

    —          —          —       

 

—  

  

    —     

Second Target Distribution

  above $0.805 up to

$0.875

    —          —          —       

 

—  

  

    —     

Third Target Distribution

  above $0.875 up to

$1.050

    —          —          —       

 

—  

  

    —     

Thereafter

  above $1.050     —          —          —          —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 5,950,000      $ 10,626,537      $                 0      $ 10,626,537      $ 16,576,537   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The holders of a majority of our incentive distribution rights will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when the holders of the incentive distribution rights have received incentive distributions for the prior four consecutive fiscal quarters based on the highest level of incentive distributions that the holders of incentive distribution rights are entitled to receive under our partnership agreement.

Distributions From Capital Surplus

How Distributions From Capital Surplus Will Be Made

Distributions from capital surplus, if any, will be made in the following manner: