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Sprague Resources LP (SRLP)
Q2 2020 Earnings Call
Aug 6, 2020, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Sprague Resources Q2 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. David Glendon, CEO. Thank you. Please go ahead, sir.
David C. Glendon -- President and Chief Executive Officer
Thank you, Sadarius. Good afternoon, everyone and welcome to Sprague Resources second quarter 2020 conference call. Joining me today are David Long, our Chief Financial Officer and Paul Scoff, our Vice President and General Counsel. I'd like to remind listeners that some of today's call will include forward-looking statements. These statements are based on our current expectations, which we believe to be reasonable as of today's date. Sprague does not undertake any obligation to update any forward-looking statements to reflect new information or future events. Actual results may differ significantly because of risks and uncertainties that are difficult to predict.
Please refer to our 10-K for a list of risk factors, which could cause our actual results to differ from anticipated results and review our 10-K, 10-Q, current reports and other filings with the SEC. We also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to comparable GAAP measures are available in our non-GAAP quarterly supplement and our earnings press release, both of which can be found in the Investor Relations section of our website.
This morning's press release highlighted our outstanding financial results in the second quarter. But I'd like to first acknowledge the equally impressive efforts across the company to keep our employees and visitors safe, while providing essential fuel and services to our customers across the Northeast. Like all companies and institutions, our first instinct and priority at the onset of the pandemic was ensuring the well-being and personal safety of our employees. And I'm pleased to report that our efforts have resulted in no cases of COVID-19 among our employees or at our facilities.
As we gradually return employees to our office locations, we'll apply that same level of vigilance to maintain the health of our employees while capturing the benefits of daily interactions among colleagues. I'd like to thank our terminal and fleet personnel for their commitment to maintaining safe operations over these past months and asked our office based employees to build on this impressive safety track record through adherence to established protocols.
While the second quarter is often characterized as the slow season in our business after the frantic winter pace, this year was anything but. The simultaneous supply shock from the producer price war and demand shock from the pandemic generated extreme volatility as well as opportunity in commodity markets. At the same time, our efforts to renegotiate our credit facility changed from business as usual to navigating uncertainty as financial markets experienced their own extreme volatility. I couldn't be proud of how our team dealt with these challenges in both delivering strong second quarter results and positioning the company to build on this success.
During our first quarter call, at the outset of this challenge, I noted we expected to see weaker short-term results due to demand destruction. But over the course of 2020, we anticipate the contango structure would offset these reductions given our storage assets and demand profile. Thus far, those comments were accurate thematically, though conservative in their estimates on timing. With respect to Q2 results, we've seen the previous unrealized losses on forward spread positions revert to material unrealized gains as spreads have narrowed.
We have seen recovery in demand for transportation fuels, which is now running between 80% and 90% of normal, depending on location. Due primarily to the increased demand, our inventory had benefited from basis appreciation. Put simply, our storage assets have enabled us to capture substantial gains in this carry structure. Our oil supply team's strategic execution contributed meaningful uplift. In addition, this market structure enables us to continue to efficiently invest capital, bringing out-of-service tanks back into active service with a breakeven return measured in months. The nimble and timely effort from our terminals, engineering and HSE teams to do this, not only allows for near-term benefit but also extends our margin creating opportunity into the future as another source of storage for ourselves, but also as a materials handling possibility for potential throughput partners.
Looking forward, it remains challenging to forecast how these spreads may further strengthen or weaken and the timing associated with additional gains or losses. However, I'm confident that we're well positioned to capitalize on the benefits of controlling storage in a contango environment, especially given our ability to capture these benefits through our extensive marketing business. As most of you know, the process kicked off by the offer from our sponsor to acquire all remaining units, not under their control, did not result in a transaction. While the public MLP markets remain underwhelming, we're optimistic that our efforts to continue to deliver consistent unitholder value will be acknowledged and rewarded. This quarter, the Board of our general partner declared a distribution of $0.6675 per unit equal to the distributions in the first quarter.
Now I'd like to turn the call over to Dave Long for a detailed review of our second quarter results. Dave?
David Long -- Chief Financial Officer
Thank you, Dave, and good afternoon, everyone. Sprague's quarterly adjusted gross margin increased by 35% or $16.9 million to $65.2 million as compared to the second quarter of 2019. This increase was attributable to gains in Refined Products, primarily due to inventory basis appreciation and unrealized gains on forward spread positions, which were partially offset by declines in Natural Gas and Material Handling. I'll provide more detail of the underlying results of each business shortly.
Sprague's second quarter adjusted EBITDA of $28 million increased by $18.3 million or 189% as compared to the prior year. Operating expenses decreased by 12% or $2.6 million in the second quarter, primarily due to decreases in employee-related expenses and to a lesser degree, decreases in stockpile and energy field services expenses. SG&A expenses increased by $1.1 million or 6%, primarily as a result of an increase in incentive compensation, legal and audit-related expenses, which were partially offset by a decrease in travel and promotional activities associated with the COVID-19 restrictions.
Below the EBITDA line, second quarter cash interest of $8.3 million decreased by $0.3 million or 3% below the prior year, which was primarily due to lower borrowing rates. Sprague recorded $1.7 million for cash taxes in the second quarter, which was down modestly year-over-year. Quarterly maintenance capex decreased by $0.8 million to $1.3 million, which was lower principally due to the timing of several IT and terminal related projects.
Given the increase in adjusted EBITDA and lower cash taxes and maintenance capex, Sprague's distributable cash flow for the second quarter increased by $19.8 million year-over-year to $17.2 million, generating a quarterly distribution coverage ratio of 1 times. At the end of the second quarter, Sprague's permanent leverage was 3.6 times, while our borrowing capacity on our working capital and acquisition lines was $115 million [Phonetic] at quarter end.
We'd like to thank again our participating lenders who supported us through the closing of our credit facility during a challenging credit environment in the second quarter. This facility provides sufficient liquidity under attractive terms to support Sprague's ongoing operational needs and growth aspirations. With regard to 2020 guidance, we continue to target full year adjusted EBITDA of $105 million to $120 million.
And now a discussion of our business segments. In Refined Products, sales volumes decreased by 5% for the quarter, primarily in diesel fuel sales as transportation requirements for transit agencies and bus companies declined due to the COVID-19 pandemic. Adjusted gross margin increased by $25.2 million or 91% to $52.9 million. The majority of the quarterly gain was attributable to inventory basis appreciation and unrealized mark-to-market gains on forward spread positions.
In Natural Gas, sales volumes for the quarter decreased by 14% year-over-year, while adjusted gross margin decreased by $6.9 million or 148% to a negative $2.2 million compared to the same period a year ago. The declines reflect a number of market dynamics, including the economic slowdown due to the COVID-19 pandemic, particularly in the hospitality sector and weaker natural gas prices, providing limited supply optimization opportunities. In Material Handling, second quarter adjusted gross margin was $12.9 million, $1.4 million lower than the same period a year ago. The decline was principally due to expiration of a crude by rail handling contract at Kildair in May 2019.
Sprague's U.S. operations were also lower primarily due to reductions from the exit of newsprint handling activity in Maine, lower road sold activity given the mild winter and a decline in handling requirements for building construction materials due to the economic slowdown associated with COVID-19. These decreases were partially offset by higher windmill component handling activity.
At this point, I'd like to open the call for any questions.
Questions and Answers:
Operator
[Operator Instructions] And there are no questions.
David C. Glendon -- President and Chief Executive Officer
Thank you, Sadarius. We appreciate everyone joining today and hope that everyone stays safe and healthy.
Operator
[Operator Closing Remarks]
Duration: 12 minutes
Call participants:
David C. Glendon -- President and Chief Executive Officer
David Long -- Chief Financial Officer
