As used in this Quarterly Report on Form 10-Q ("Quarterly Report"), unless the context otherwise requires, prior toMay 28, 2021 , references to "Sprague Resources ," the "Partnership," "we," "our," "us," or like terms, refer toSprague Resources LP and its subsidiaries; references to our "General Partner" refer toSprague Resources GP LLC ; references to "Axel Johnson" or the "Sponsor" refer toAxel Johnson Inc. and its controlled affiliates, collectively, other thanSprague Resources , its subsidiaries and itsGeneral Partner ; and references to "Sprague Holdings " refer toSprague Resources Holdings LLC , a wholly owned subsidiary of Axel Johnson and the owner of ourGeneral Partner . Prior toMay 28, 2021 , ourGeneral Partner was a wholly owned subsidiary of Axel Johnson. As used in this Quarterly Report, unless the context otherwise requires, effectiveMay 28, 2021 , references to "Sprague Resources ," the "Partnership," "we," "our," "us," or like terms, refer toSprague Resources LP and its subsidiaries; references to our "General Partner" refer toSprague Resources GP LLC ; references to "Hartree" or the "Sponsor" refer toHartree Partners, LP and its controlled affiliates, collectively, other thanSprague Resources , its subsidiaries and itsGeneral Partner ; and references to "Sprague Holdings " refer toSprague HP Holdings, LLC , a wholly owned subsidiary of Hartree and the owner of ourGeneral Partner . EffectiveMay 28, 2021 , ourGeneral Partner is a wholly owned subsidiary of Hartree.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report and any information incorporated by reference, contains statements that we believe are "forward-looking statements". Forward looking statements are statements that express our belief, expectations, estimates, or intentions, as well as those statements we make that are not statements of historical fact, including, among other things, statements relating to the Merger (as defined below) and the expected benefits thereof. Forward-looking statements provide our current expectations and contain projections of results of operations, or financial condition, and/ or forecasts of future events. Words such as "may", "assume", "forecast", "position", "seek", "predict", "strategy", "expect", "intend", "plan", "estimate", "anticipate", "believe", "project", "budget", "outlook", "potential", "will", "could", "should", or "continue", and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or by known or unknown risks or uncertainties which could cause our actual results to differ materially from those contained in any forward-looking statement. Consequently, no forward-looking statements can be guaranteed. You are cautioned not to place undue reliance on any forward-looking statements. Factors that could cause actual results to differ from those in the forward-looking statements include, but are not limited to: (i) our ability to complete the Merger in a timely manner, or at all; (ii) greater than expected operating costs, customer loss, business disruption and employee attrition as a result of the proposed Merger; (iii) diversion of management time on the proposed Merger and changes in management and other personnel before the closing of the Merger; (iv) changes in federal, state, local, and foreign laws or regulations including those that permit us to be treated as a partnership for federal income tax purposes, those that govern environmental protection and those that regulate the sale of our products to our customers; (v) changes in the marketplace for our products or services resulting from events such as dramatic changes in commodity prices, increased competition, increased energy conservation, increased use of alternative fuels and new technologies, changes in local, domestic or international inventory levels, seasonality, changes in supply, weather and logistics disruptions, or general reductions in demand; (vi) security risks including terrorism and cyber-risk, (vii) adverse weather conditions, particularly warmer winter seasons and cooler summer seasons, climate change, environmental releases and natural disasters; (viii) adverse local, regional, national, or international economic conditions, including but not limited to, public health crises that reduce economic activity, affect the demand for travel (public and private), as well as impacting costs of operation and availability of supply (including the coronavirus COVID-19 outbreak), unfavorable capital market conditions and detrimental political developments such as the inability to move products between foreign locales andthe United States ; (ix) nonpayment or nonperformance by our customers or suppliers; (x) shutdowns or interruptions at our terminals and storage assets or at the source points for the products we store or sell, disruptions in our labor force, as well as disruptions in our information technology systems; (xi) unanticipated capital expenditures in connection with the construction, repair, or replacement of our assets; (xii) our ability to integrate acquired assets with our existing assets and to realize anticipated cost savings and other efficiencies and benefits; (xiii) our ability to successfully complete our organic growth and acquisition projects and/or to realize the anticipated financial and operational benefits; and, (xiv) the inability to amend or extend the maturity of our Credit Agreement. These are not all of the important factors that could cause actual results to differ materially from those expressed in our forward-looking statements. Other known or unpredictable factors could also have material adverse effects on future results. Consequently, all of the forward-looking statements made in this Quarterly Report are qualified by these cautionary statements, and we cannot assure you that actual results or developments that we anticipate will be realized or, even if realized, will have the expected consequences to or effect on us or our business or operations. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report may not occur. When considering these forward-looking statements, please note that we provide additional cautionary discussion of risks and uncertainties in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theU.S. Securities and Exchange Commission ("SEC") onMarch 4, 2022 (the "2021 Annual Report"), in Part I, Item 1A "Risk Factors", in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations", and in Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk". In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report may not occur. 21
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Forward-looking statements contained in this Quarterly Report speak only as of the date of this Quarterly Report (or other date as specified in this Quarterly Report) or as of the date given if provided in another filing with theSEC . We undertake no obligation, and disclaim any obligation, to publicly update, review or revise any forward-looking statements to reflect events or circumstances after the date of such statements. All forward looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in our existing and future periodic reports filed with theSEC . 22
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Overview
We are aDelaware limited partnership formed inJune 2011 bySprague Holdings and ourGeneral Partner . We engage in the purchase, storage, distribution and sale of refined products and natural gas, and provide storage and handling services for a broad range of materials. InOctober 2013 , we became a publicly traded master limited partnership ("MLP") and our common units representing limited partner interests are listed on theNew York Stock Exchange ("NYSE") under the ticker symbol "SRLP". Our Predecessor was founded in 1870 as theCharles H. Sprague Company inBoston, Massachusetts ; and, in 1905, the company opened thePenobscot Coal and Wharf Company , a tidewater terminal located inSearsport, Maine . By World War II, the company was operating eleven terminals and a fleet of two dozen vessels transporting coal and other products throughout the world. As fuel needs diversified inthe United States , the company expanded its product offerings and invested in terminals, tankers, and product handling activities. In 1959, the company expanded its oil marketing activities via entry into the distillate oil market. In 1970, the company was sold toRoyal Dutch Shell's Asiatic Petroleum subsidiary; and, in 1972,Royal Dutch Shell sold the company toAxel Johnson Inc. , a member of theAxel Johnson Group of Stockholm, Sweden . OnApril 20, 2021 , the Partnership and Hartree Partner, LP ("Hartree") announced thatSprague Holdings entered into an agreement to sell toSprague HP Holdings, LLC (a wholly-owned subsidiary of Hartree) the interest ofSprague Holdings in the General Partner, the incentive distribution rights and all of the common units representing limited partner interests thatSprague Holdings owned in the Partnership (the "Transaction"). The Transaction was completed and effective onMay 28, 2021 . OnJune 2, 2022 , in response to an unsolicited non-binding proposal received from Hartree onJanuary 11, 2022 , the Partnership, and ourGeneral Partner entered into an Agreement and Plan of Merger (the "Merger Agreement") withSprague Holdings andSparrow HP Merger Sub, LLC ("Merger Sub"), pursuant to which Merger Sub will merge with and into the Partnership, with the Partnership surviving as a direct wholly owned subsidiary of ourGeneral Partner and Hartree (the "Merger"). Under the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding common unit, other than those held bySprague Holdings or its permitted transferees, will be converted into the right to receive$19.00 per Common Unit in cash without any interest thereon (the "Merger Consideration"). The common units and incentive distribution rights in the Partnership held bySprague Holdings and its permitted transferees and the General Partner immediately prior to the effective time of the Merger shall be unaffected by the Merger and shall remain outstanding. The closing of the transactions contemplated by the Merger Agreement are expected to occur in the third quarter of 2022. The Partnership is one of the largest independent wholesale distributors of refined products in theNortheast United States based on aggregate terminal capacity. We own, operate and/or control a network of refined products and materials handling terminals and storage facilities predominantly located in theNortheast United States fromNew York toMaine and inQuebec, Canada that have a combined storage tank capacity of approximately 14.3 million barrels for refined products and other liquid materials, as well as approximately 2.0 million square feet of materials handling capacity. We also have access to approximately 44 third-party terminals in theNortheast United States through which we sell or distribute refined products pursuant to rack, exchange and throughput agreements. We operate under four business segments: refined products, natural gas, materials handling and other operations. See Note 8 - Segment Reporting to our Condensed Consolidated Financial Statements for a presentation of financial results by reportable segment and see Part I, Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations for a discussion of financial results by segment. In our refined products segment we purchase a variety of refined products, such as heating oil, diesel fuel, residual fuel oil, kerosene, jet fuel and gasoline (primarily from refining companies, trading organizations and producers), and sell them to our customers. We have wholesale customers who resell the refined products we sell to them and commercial customers who consume the refined products directly. Our wholesale customers consist of approximately 900 home heating oil retailers and diesel fuel and gasoline resellers. Our commercial customers include federal and state agencies, municipalities, regional transit authorities, drill sites, large industrial companies, real estate management companies, hospitals, educational institutions, and asphalt paving companies. Our customers also include businesses engaged in the development of natural gas resources inPennsylvania and surrounding states.
In our natural gas segment we purchase natural gas from natural gas producers
and trading companies and sell and distribute natural gas to approximately
14,000 commercial and industrial customer locations across 13 states in the
Northeast and Mid-Atlantic United States and
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Our materials handling segment is generally conducted under multi-year agreements as either fee-based activities or as leasing arrangements when the right to use an identified asset (such as storage tanks or storage locations) has been conveyed in the agreement. We offload, store and/or prepare for delivery a variety of customer-owned products, including asphalt, clay slurry, salt, gypsum, crude oil, residual fuel oil, coal, petroleum coke, caustic soda, tallow, pulp and heavy equipment. Historically, a majority of our materials handling activity has generated qualified income. Our other operations segment primarily includes the marketing and distribution of coal conducted in ourPortland, Maine terminal, and commercial trucking activity conducted by our Canadian subsidiary. We take title to the products we sell in our refined products and natural gas segments. In order to manage our exposure to commodity price fluctuations, we use derivatives and forward contracts to maintain a position that is substantially balanced between product purchases and product sales. We do not take title to any of the products in our materials handling segment. As ofJune 30, 2022 , our Sponsor, through its ownership ofSprague Holdings , owns 19,548,849 common units representing an aggregate of 74.5% of the limited partner interest in the Partnership.Sprague Holdings also owns the General Partner, which in turn owns a non-economic interest in the Partnership.Sprague Holdings currently holds incentive distribution rights ("IDRs") which entitle it to receive increasing percentages of the cash the Partnership distributes from distributable cash flow in excess of$0.7676 per unit per quarter, up to a maximum of 50.0%. The maximum distribution of 50% does not include any distributions thatSprague Holdings may receive on any limited partner units that it owns.
Going Concern Assessment and Management's Plans
Pursuant to FASB ASC 205-40, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern, the Partnership is required to assess its ability to continue as a going concern for a period of one year from the date of the issuance of these condensed consolidated financial statements. Substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. This evaluation initially does not take into consideration the potential mitigating effect of management's plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, the Partnerships's management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Partnerships's ability to continue as a going concern. The mitigating effect of the Partnerships's plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. The Partnership's Credit Agreement matures onMay 19, 2023 and has not been renewed as of the date of the issuance of these condensed consolidated financial statements. OnJune 2, 2022 , the Partnership entered in a Merger Agreement withSprague Holdings and Merger Sub, pursuant to whichSprague Holdings will acquire the common units that it does not already own. As the Merger Agreement is subject to customary closing conditions and because the pending Merger may affect how, or if, the Partnership elects to obtain a maturity extension, management has deferred the process to extend the maturity date of its Credit Agreement.. While we plan to renew or extend the terms of the Credit Agreement prior to the stated maturity date, until such time as we have executed an agreement to refinance or extend the maturity of the Credit Agreement, we cannot conclude that it is probable we will do so. Accordingly, the Partnership concluded that there is substantial doubt about its ability to continue as a going concern for a period of at least twelve months from the date of issuance of these financial statements. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. The financial statements do not include adjustments relating to the recoverability and classification of recorded asset amounts or other amounts and classifications of liabilities, other than obligations under the Credit Agreement classified as current, that might result from the outcome of the uncertainties described above.
COVID-19
In 2022, a wide array of sectors continue to be affected by COVID-19, its variants and the related supply chain disruptions brought on by the pandemic, including but not limited to energy, transportation, manufacturing and commercial and retail businesses and global economic conditions continue to be volatile. With the easing of restrictions, health advancements and other ongoing measures to alleviate the pandemic in 2021 and through the second quarter of 2022, demand for refined products 24
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appears to have normalized. In order to continue to mitigate the effects of the pandemic, we continue to focus on the safety of employees and other stakeholders as well as initiatives relating to cost reduction, liquidity and operating efficiencies. The Partnership makes estimates and assumptions that affect the reported amounts on these consolidated financial statements and accompanying notes as of the date of the financial statements. The Partnership assessed accounting estimates that require consideration of forecasted financial information, including, but not limited to, the allowance for credit losses, the carrying value of goodwill, intangible assets, and other long-lived assets. This assessment was conducted in the context of information reasonably available to the Partnership, as well as consideration of the future potential impacts of COVID-19, and its variants, on the Partnership's business as ofJune 30, 2022 . While market conditions for our products and services appear to have stabilized as compared to a year ago, the pandemic remains fluid, indicating that the full impact may not have been realized across our business and operations. The economic and operational landscape has been altered, and it is difficult to determine whether such changes are temporary or permanent, with challenges related to staffing, supply chain, and transportation globally. Accordingly if the impact is more severe or longer in duration than the partnership has assumed, such impact could potentially result in impairments and increases in credit allowances. As we strategize with regard to fiscal year 2022 and beyond, we continue to monitor the evolving impacts of COVID-19 and its variants closely and adapting our operations to changing demand patterns and the potential impact of the COVID-19 pandemic on future cash flows and access to adequate liquidity.
How Management Evaluates Our Results of Operations
Our management uses a variety of financial and operational measurements to analyze our performance. These measurements include: (1) adjusted EBITDA and adjusted gross margin, (2) operating expenses, (3) selling, general and administrative (or SG&A) expenses and (4) heating degree days.
EBITDA, adjusted EBITDA and adjusted gross margin used in this Quarterly Report are non-GAAP financial measures.
EBITDA and Adjusted EBITDA
Management believes that adjusted EBITDA is an aid in assessing repeatable operating performance that is not distorted by non-recurring items or market volatility and the ability of our assets to generate sufficient revenue, that when rendered to cash, will be available to pay interest on our indebtedness and make distributions to our unitholders. We define EBITDA as net income before interest, income taxes, depreciation and amortization. We define adjusted EBITDA as EBITDA adjusted for the change in unrealized hedging gains (losses) with respect to refined products and natural gas inventory, and natural gas transportation contracts, adjusted for changes in the fair value of contingent consideration, and adjusted for the impact of acquisition related expenses.
EBITDA and adjusted EBITDA are used as supplemental financial measures by external users of our financial statements, such as investors, trade suppliers, research analysts and commercial banks to assess:
•The financial performance of our assets, operations and return on capital without regard to financing methods, capital structure or historical cost basis;
•The ability of our assets to generate sufficient revenue, that when rendered to cash, will be available to pay interest on our indebtedness and make distributions to our equity holders;
•Repeatable operating performance that is not distorted by non-recurring items or market volatility; and
•The viability of acquisitions and capital expenditure projects.
EBITDA and adjusted EBITDA are not prepared in accordance with GAAP and should not be considered alternatives to net income or operating income, or any other measure of financial performance presented in accordance with GAAP. EBITDA and adjusted EBITDA exclude some, but not all, items that affect net income and operating income. The GAAP measure most directly comparable to EBITDA and adjusted EBITDA is net income. EBITDA and adjusted EBITDA should not be considered as alternatives to net income or cash provided by (used in) operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and adjusted EBITDA are not presentations made in accordance with GAAP and have important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. Because EBITDA and adjusted EBITDA exclude some, but not all, items that affect net income and are defined differently by different companies, our definitions of EBITDA and adjusted EBITDA may not be comparable to similarly titled measures of other companies. 25
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We recognize that the usefulness of EBITDA and adjusted EBITDA as evaluative tools may have certain limitations, including:
•EBITDA and adjusted EBITDA do not include interest expense. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and impacts our ability to generate profits and cash flows. Therefore, any measure that excludes interest expense may have material limitations;
•EBITDA and adjusted EBITDA do not include depreciation and amortization expense. Because capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate profits, any measure that excludes depreciation and amortization expense may have material limitations;
•EBITDA and adjusted EBITDA do not include provision for income taxes. Because the payment of income taxes is a necessary element of our costs, any measure that excludes income tax expense may have material limitations;
•EBITDA and adjusted EBITDA do not reflect capital expenditures or future requirements for capital expenditures or contractual commitments;
•EBITDA and adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs; and
•EBITDA and adjusted EBITDA do not allow us to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss.
Adjusted Gross Margin
Management purchases, stores and sells energy commodities that experience market value fluctuations. To manage the Partnership's underlying performance, including its physical and derivative positions, management utilizes adjusted gross margin. In determining adjusted gross margin, management adjusts its segment results for the impact of the changes in unrealized gains and losses with regard to refined products and natural gas inventory, and natural gas transportation contracts, which are not marked to market for the purpose of recording unrealized gains or losses in net income. Adjusted gross margin is also used by external users of our consolidated financial statements to assess our economic results of operations and our commodity market value reporting to lenders. We define adjusted gross margin as net sales less cost of products sold (exclusive of depreciation and amortization) adjusted for the impact of the changes in unrealized gains and losses with regard to refined products and natural gas inventory, and natural gas transportation contracts, which are not marked to market for the purpose of recording unrealized gains or losses in net income. Adjusted gross margin has no impact on reported volumes or net sales.
Adjusted gross margin is used as a supplemental financial measure by management to describe our operations and economic performance to investors, trade suppliers, research analysts and commercial banks to assess:
•The economic results of our operations;
•The market value of our inventory and natural gas transportation contracts for financial reporting to our lenders, as well as for borrowing base purposes; and
•Repeatable operating performance that is not distorted by non-recurring items or market volatility.
Adjusted gross margin is not prepared in accordance with GAAP and should not be considered as an alternative to net income or operating income or any other measure of financial performance presented in accordance with GAAP.
We define adjusted unit gross margin as adjusted gross margin divided by units sold, as expressed in gallons for refined products and in MMBtus for natural gas. For a reconciliation of adjusted gross margin and adjusted EBITDA to the GAAP measures most directly comparable, see the reconciliation tables included in "Results of Operations." See Note 8 - Segment Reporting to our Condensed Consolidated Financial Statements for a presentation of our financial results by reportable segment. Management evaluates our segment performance based on adjusted gross margin. Based on the way we manage our business, it is not reasonably possible for us to allocate the components of operating expenses, selling, general and administrative expenses and depreciation and amortization among the operating segments. 26
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Operating Expenses
Operating expenses are costs associated with the operation of the terminals and truck fleet used in our business. Employee wages, pension and 401(k) plan expenses, boiler fuel, repairs and maintenance, utilities, insurance, property taxes, services and lease payments comprise the most significant portions of our operating expenses. Employee wages and related employee expenses included in our operating expenses are incurred on our behalf by ourGeneral Partner and reimbursed by us. These expenses remain relatively stable independent of the volumes through our system but can fluctuate depending on the activities performed during a specific period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") include employee salaries and benefits, discretionary bonus, marketing costs, corporate overhead, professional fees, information technology and office space expenses. Employee wages, related employee expenses and certain rental costs included in our SG&A expenses are incurred on our behalf by ourGeneral Partner and reimbursed by us.
Heating Degree Days
A "degree day" is an industry measurement of temperature designed to evaluate energy demand and consumption. Degree days are based on how much the average temperature departs from a human comfort level of 65°F. Each degree of temperature above 65°F is counted as one cooling degree day, and each degree of temperature below 65°F is counted as one heating degree day. Degree days are accumulated over the course of a year and can be compared to a monthly or a long-term average ("normal") to see if a month or a year was warmer or cooler than usual. Degree days are officially observed by theNational Weather Service and archived by theNational Climate Data Center . In order to incorporate more recent average information and to better reflect the geographic locations of our customer base, we report degree day information forBoston andNew York City (weighted equally) with a historical average for the same geographic locations over the previous ten-year period.
Hedging Activities
We hedge our inventory within the guidelines set in our risk management policies. In a rising commodity price environment, the market value of our inventory will generally be higher than the cost of our inventory. For GAAP purposes, we are required to value our inventory at the lower of cost or net realizable value. The hedges on this inventory will lose value as the value of the underlying commodity rises, creating hedging losses. Because we do not utilize hedge accounting, GAAP requires us to record those hedging losses in our income statements. In contrast, in a declining commodity price market we generally incur hedging gains. GAAP requires us to record those hedging gains in our income statements. The refined products inventory market valuation is calculated using daily independent bulk market price assessments from major pricing services (either Platts or Argus). These third-party price assessments are primarily based in large, liquid trading hubs including but not limited to,New York Harbor (NYH) orUS Gulf Coast (USGC), with our inventory values determined after adjusting these prices to the various inventory locations by adding expected cost differentials (primarily freight) compared to one of these supply sources. Our natural gas inventory is limited, with the valuation updated monthly based on the volume and prices at the corresponding inventory locations. The prices are based on the most applicable monthly Inside FERC, or IFERC, assessments published by Platts near the beginning of the following month. Similarly, we can hedge our natural gas transportation assets (i.e., pipeline capacity) within the guidelines set in our risk management policy. Although we do not own any natural gas pipelines, we secure the use of pipeline capacity to support our natural gas requirements by either leasing capacity over a pipeline for a defined time period or by being assigned capacity from a local distribution company for supplying our customers. As the spread between the price of gas between the origin and delivery point widens (assuming the value exceeds the fixed charge of the transportation), the market value of the natural gas transportation contracts assets will typically increase. If the market value of the transportation asset exceeds costs, we may seek to hedge or "lock in" the value of the transportation asset for future periods using available financial instruments. For GAAP purposes, the increase in value of the natural gas transportation assets is not recorded as income in the income statements until the transportation is utilized in the future (i.e., when natural gas is delivered to our customer). If the value of the natural gas transportation assets increase, the hedges on the natural gas transportation assets lose value, creating hedging losses in our income statements. The natural gas transportation assets market value is calculated daily based on the volume and prices at the corresponding pipeline locations. The daily prices are based on trader assessed quotes which represent observable transactions in the market place, with the end-month valuations primarily based on Platts prices where available or adding a location differential to the price assessment of a more liquid location. As described above, pursuant to GAAP, we value our commodity derivative hedges at the end of each reporting period based on current commodity prices and record hedging gains or losses, as appropriate. Also as described above, and pursuant to 27
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GAAP, our refined products and natural gas inventory and natural gas transportation contract rights, to which the commodity derivative hedges relate, are not marked to market for the purpose of recording gains or losses. In measuring our operating performance, we rely on our GAAP financial results, but we also find it useful to adjust those numbers to reflect the changes in unrealized gains and losses with regard to refined products and natural gas inventory, and natural gas transportation contracts. By making such adjustments, as reflected in adjusted gross margin and adjusted EBITDA, we believe that we are able to align more closely hedging gains and losses to the period in which the revenue from the sale of inventory and income from transportation contracts relating to those hedges is realized.
Trends and Factors that Impact our Business
In addition to the other information set forth in this report, please refer to our 2021 Annual Report for a discussion of the trends and factors that impact our business. 28
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Results of Operations
Our current and future results of operations may not be comparable to our historical results of operations. Our results of operations may be impacted by, among other things, swings in commodity prices, primarily in refined products and natural gas, and acquisitions or dispositions. We use economic hedges to minimize the impact of changing prices on refined products and natural gas inventory. As a result, commodity price increases at the end of a period can create lower gross margins as the economic hedges, or derivatives, for such inventory may lose value, whereas an increase in the value of such inventory is disregarded for GAAP financial reporting purposes and recorded at the lower of cost or net realizable value. Please read "How Management Evaluates Our Results of Operations." The following tables set forth information regarding our results of operations for the periods presented: Three Months Ended June 30, Increase/(Decrease) 2022 2021 $ % (in thousands) Net sales$ 1,278,310 $ 657,672 $ 620,638 94 %
Cost of products sold (exclusive of depreciation and amortization)
1,261,935 659,803 602,132 91 % Operating expenses 22,092 19,148 2,944 15 % Selling, general and administrative 21,941 16,719 5,222 31 % Depreciation and amortization 8,049 8,258 (209) (3) % Total operating costs and expenses 1,314,017 703,928 610,089 87 % Other operating income - 9,725 (9,725) N/A Operating loss (35,707) (36,531) 824 (2) % Interest income 115 77 38 49 % Interest expense (9,242) (8,587) (655) 8 % Loss before income taxes (44,834) (45,041) 207 - % Income tax provision (461) (562) 101 (18) % Net loss$ (45,295) $ (45,603) $ 308 (1) % Six months ended June 30, Increase/(Decrease) 2022 2021 $ % (in thousands) Net sales 3,091,625 1,693,805$ 1,397,820 83 %
Cost of products sold (exclusive of depreciation and amortization)
2,991,013 1,584,585 1,406,428 89 % Operating expenses 45,327 38,379 6,948 18 % Selling, general and administrative 50,661 41,958 8,703 21 % Depreciation and amortization 16,175 16,741 (566) (3) % Total operating costs and expenses 3,103,176 1,681,663 2,819,333 168 % Other operating income - 9,725 (9,725) N/A Operating (loss) income (11,551) 21,867 (33,418) (153) % Other (loss) income (1) 2 (3) (150) % Interest income 143 143 - - % Interest expense (19,814) (17,402) (2,412) 14 % Income (loss) before income taxes (31,223) 4,610 (35,833) (777) % Income tax benefit (provision) 3,874 (1,433) 5,307 (370) % Net (loss) income$ (27,349) $ 3,177 $ (30,526) (961) % 29
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