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As filed with the Securities and Exchange Commission on July 27, 2011

Registration No. 333-            

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549            

 

 

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:

 

Catherine S. Gallagher

Adorys Velazquez

Vinson & Elkins L.L.P.

666 Fifth Avenue, 26th Floor

New York, NY 10103

(212) 237-0000

 

Joshua Davidson

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)

CALCULATION OF REGISTRATION FEE

 

 
Title of Each Class of Securities to be Registered   Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fee

Common units representing limited partner interests

  $165,000,000   $19,157
 
 
(1) Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

 

 

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.

 

 

 


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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 July 27, 2011

PROSPECTUS

 

 

LOGO

Sprague Resources LP

Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of our common units. We are selling              common units and Sprague Resources Holdings LLC, our sole unitholder and a wholly-owned subsidiary of Axel Johnson Inc., is selling              common units. Sprague Resources Holdings LLC may be deemed under federal securities laws to be an underwriter with respect to the common units it is offering hereby. We will not receive any proceeds from the sale of the common units by Sprague Resources Holdings LLC. We currently estimate that the offering price will be between $             and $             per common unit. Prior to this offering, there has been no public market for our common units. We intend to apply to list our common units on the New York Stock Exchange under the symbol “SRLP.”

Investing in our common units involves risks. See “Risk Factors” beginning on page 23.

These risks include the following:

 

   

We may not have sufficient cash from operations 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.

 

   

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. 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 Inc., 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 $             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 cash available for distribution to our unitholders 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)

   $    $     

Proceeds to Sprague Resources Holdings LLC

   $    $     

 

(1) Excludes a structuring fee of an aggregate 0.75% of the gross offering proceeds payable by us and Sprague Resources Holdings LLC to Barclays Capital Inc. Please read “Underwriting” beginning on page 211.

We have granted the underwriters a 30-day option to purchase up to an additional              common units from us on the same terms and conditions as set forth above if the underwriters sell more than              common units in this offering.

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                     , 2011.

 

 

 

Barclays Capital     J.P. Morgan

Prospectus dated                     , 2011


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     23   

Risks Related to Our Business

     23   

Risks Inherent in an Investment in Us

     34   

Tax Risks to Common Unitholders

     43   

USE OF PROCEEDS

     47   

CAPITALIZATION

     48   

DILUTION

     49   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     51   

General

     51   

Minimum Quarterly Distribution

     52   

Unaudited Pro Forma Cash Available for Distribution

     54   

Estimated Cash Available for Distribution

     56   

Assumptions and Considerations

     58   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     63   

Distributions of Available Cash

     63   

Operating Surplus and Capital Surplus

     64   

Subordination Period

     66   

Distributions of Cash From Operating Surplus During the Subordination Period

     68   

Distributions of Cash From Operating Surplus After the Subordination Period

     68   

General Partner Interest

     68   

Incentive Distribution Rights

     68   

Percentage Allocations of Cash Distributions From Operating Surplus

     69   

Sprague Holdings’ Right to Reset Incentive Distribution Levels

     69   

Distributions From Capital Surplus

     72   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     73   

Distributions of Cash Upon Liquidation

     73   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

     76   

Non-GAAP Financial Measures

     79   

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

     81   

Overview

     81   

How Management Evaluates Our Results of Operations

     82   

Recent Trends and Outlook

     84   

Factors that Impact our Business

     85   

Comparability of our Financial Statements

     86   

Results of Operations

     87   

Liquidity and Capital Resources

     94   

Impact of Inflation

     100   

Critical Accounting Policies

     101   

Recent Accounting Pronouncements

     102   

Quantitative and Qualitative Disclosures About Market Risk

     102   

INDUSTRY

     105   

Refined Products

     105   

Natural Gas Industry

     111   

Materials Handling

     114   


Table of Contents

BUSINESS

     118   

Our Partnership

     118   

Refined Products

     121   

Natural Gas Sales

     122   

Materials Handling

     123   

Commodity Risk Management

     125   

Storage and Distribution Services

     126   

Our Terminals

     127   

Competition

     135   

Seasonality

     135   

Environmental

     135   

Security Regulation

     139   

Employee Safety

     139   

Title to Properties, Permits and Licenses

     140   

Facilities

     140   

Employees

     140   

Legal Proceedings

     140   

MANAGEMENT

     142   

Management of Sprague Resources LP

     142   

Board Committees

     142   

Director Compensation

     143   

Directors and Executive Officers

     144   

Reimbursement of Expenses of Our General Partner

     147   

Compensation Discussion and Analysis

     148   

2011 Equity Long-Term Incentive Compensation Plan

     153   

Severance and Change in Control Benefits

     153   

Other Benefits

     153   

Risk Assessment

     155   

Summary Compensation Table for Years Ended December 31, 2010

     156   

Pension Benefits

     157   

Potential Payments Upon Termination or a Change in Control

     159   

Director Compensation

     159   

SELLING UNITHOLDER AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     160   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     162   

Distributions and Payments to Our General Partner and Its Affiliates

     162   

Agreements Governing the Transactions

     164   

Omnibus Agreement

     164   

Services Agreement

     165   

Transportation Services From Sprague Energy Solutions Inc.

     166   

Contribution Agreement

     166   

New Bedford Terminal Operating Agreement

     167   

Procedures for Review, Approval and Ratification of Related Person Transactions

     167   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     168   

Conflicts of Interest

     168   

Fiduciary Duties

     173   

DESCRIPTION OF THE COMMON UNITS

     177   

The Units

     177   

Transfer Agent and Registrar

     177   

Transfer of Common Units

     177   

 

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THE PARTNERSHIP AGREEMENT

     179   

Organization and Duration

     179   

Purpose

     179   

Capital Contributions

     179   

Votes Required For Certain Matters

     179   

Applicable Law; Forum, Venue and Jurisdiction

     181   

Limited Liability

     181   

Issuance of Additional Partnership Interests

     182   

Amendment of Our Partnership Agreement

     183   

No Unitholder Approval

     183   

Merger, Sale or Other Disposition of Assets

     185   

Dissolution

     186   

Liquidation and Distribution of Proceeds

     186   

Withdrawal or Removal of Our General Partner

     186   

Transfer of General Partner Interest

     187   

Transfer of Ownership Interests in Our General Partner

     188   

Transfer of Subordinated Units and Incentive Distribution Rights

     188   

Change of Management Provisions

     188   

Limited Call Right

     189   

Meetings; Voting

     189   

Voting Rights of Incentive Distribution Rights

     190   

Status as Limited Partner

     190   

Non-Citizen Assignees; Redemption

     190   

Non-Taxpaying Assignees; Redemption

     191   

Indemnification

     191   

Reimbursement of Expenses

     191   

Books and Reports

     192   

Right to Inspect Our Books and Records

     192   

Registration Rights

     192   

UNITS ELIGIBLE FOR FUTURE SALE

     193   

Rule 144

     193   

Our Partnership Agreement and Registration Rights

     193   

Lock-Up Agreements

     194   

Registration Statement on Form S-8

     194   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     195   

Taxation of the Partnership

     195   

Tax Consequences of Unit Ownership

     196   

Tax Treatment of Operations

     202   

Disposition of Units

     202   

Uniformity of Units

     204   

Tax-Exempt Organizations and Other Investors

     205   

Administrative Matters

     206   

State, Local and Other Tax Considerations

     208   

INVESTMENT BY EMPLOYEE BENEFIT PLANS

     209   

General Fiduciary Matters

     209   

Prohibited Transaction Issues

     209   

Plan Asset Issues

     210   

UNDERWRITING

     211   

Underwriting Discounts and Expenses

     211   

Option to Purchase Additional Common Units

     212   

 

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Lock-Up Agreements

     212   

Offering Price Determination

     213   

Indemnification

     213   

Stabilization, Short Positions and Penalty Bids

     213   

Electronic Distribution

     214   

New York Stock Exchange

     214   

Discretionary Sales

     214   

Stamp Taxes

     214   

Conflicts of Interest

     215   

FINRA

     215   

Selling Restrictions

     215   

VALIDITY OF THE COMMON UNITS

     218   

EXPERTS

     218   

WHERE YOU CAN FIND MORE INFORMATION

     218   

FORWARD-LOOKING STATEMENTS

     220   

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. Neither we, Sprague Resources Holdings LLC, nor the underwriters have authorized anyone to provide you with additional or different information. We, Sprague Resources Holdings LLC 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 23 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 $             per common unit 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 Energy Corp., our predecessor for accounting purposes, 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 7.9 million barrels (which excludes approximately 1.0 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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The following tables set forth information with respect to our 15 owned and/or operated terminals as of December 31, 2010.

 

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

Albany, NY

     8         765,000       refined products

Quincy, MA

     9         657,000       refined products

Newington, NH: Avery Lane

     11         629,400       refined products; asphalt

Providence, RI(2)

     5         619,800       refined products; asphalt

Everett, MA

     5         357,900       asphalt

Oswego, NY

     4         339,200       refined products; asphalt

Quincy, MA: TRT(3)

     4         302,100       refined products; caustic soda

New Bedford, MA(4)

     2         85,900       refined products

Oceanside, NY

     8         81,800       refined products

Mount Vernon, NY

     7         72,100       refined products

Stamford, CT

     3         46,600       refined products
                    

Total

     144         7,894,000      
                    

 

Dry Storage Terminal

   Number of
Storage Pads
and
Warehouses
     Storage
Capacity

(Square  Feet)
    

Principal Products and
Materials

Newington, NH: River Road(5)

     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(6)

    

 

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 1.0 million barrels of additional storage capacity attributable to 31 storage tanks not currently in service. Please read “Business—Our Terminals” beginning on page 127. 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) One tank with storage capacity of approximately 136,000 barrels is leased from a subsidiary of Dominion Resources, Inc.
(3) Operating assets and real estate are leased from Twin Rivers Technology L.P., an unaffiliated third party.
(4)

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, 2013, unless extended, at the option of the buyer,

 

 

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  to a date on or before January 5, 2016. In the event that such sale is consummated, our operating lease with Sprague Massachusetts Properties LLC will automatically terminate. Please read “Certain Relationships and Related Party Transactions—New Bedford Terminal Operating Agreement” on page 167. We have been advised by Sprague Massachusetts Properties LLC that it does not believe that the sale will be consummated prior to September 30, 2012.
(5) The terminal also has two silos capable of storing a total of approximately 26,000 tons of cement.
(6) 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 our business and report our results of operations under three business segments: refined products, natural gas and materials handling. 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, 2010 and the three months ended March 31, 2011, we sold approximately 1.3 billion and 470.0 million gallons of refined products, respectively. For the year ended December 31, 2010 and the three months ended March 31, 2011, our refined products segment accounted for 73% and 60% of our gross margin, respectively.

We also purchase, sell and distribute natural gas to more than 900 commercial and industrial customers across 11 states in the Northeast and Mid-Atlantic. We purchase the natural gas we sell from natural gas producers and trading companies. We sold 96.6 Bcf of natural gas during the year ended December 31, 2010 and 23.2 Bcf of natural gas during the three months ended March 31, 2011. For the year ended December 31, 2010 and the three months ended March 31, 2011, our natural gas segment accounted for 5% and 26% of our gross margin, respectively.

In our refined products and natural gas segments, we take title to the products we sell. However, we do not take title to any of the products we handle 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.

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 products, including asphalt, clay slurry, salt, gypsum, coal, petroleum coke, caustic soda, tallow, pulp and heavy equipment. For the year ended December 31, 2010, we offloaded, stored and/or prepared for delivery 4.0 million metric short tons of products and 253.6 million gallons of liquid materials. For the three months ended March 31, 2011, we offloaded, stored and/or prepared for delivery 843,000 metric short tons of products and 72.2 million gallons of liquid materials. For the year ended December 31, 2010 and the three months ended March 31, 2011, our materials handling segment accounted for 22% and 14% of our gross margin, respectively.

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

 

 

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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.

 

   

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.

 

   

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 personnel.

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 7.9 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 eight 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 a 50% equity interest in an asphalt and residual fuel oil marketing and storage company that will not be a part of our initial assets. 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 reduce customer cost.

 

   

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 three months ended March 31, 2011, our refined products, natural gas and materials handling segments accounted for 60%, 26% and 14% of our gross margin, respectively.

 

 

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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 in delivering supply and our continuous innovation and implementation of new product and service options for our customers. Over the last three 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 approximately $             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 23 and are summarized as follows:

Risks Related to Our Business

 

   

We may not have sufficient cash from operations 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 cash available for distribution to pay the full minimum quarterly distribution on our subordinated units for the year ended December 31, 2010.

 

   

The assumptions underlying the forecast of cash available for distribution 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 cash available for distribution to differ materially from our forecast.

 

   

The amount of cash we have available for distribution to unitholders 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.

 

 

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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.

 

   

The recent adoption of derivatives legislation by the United States Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity prices, interest rates and other risks associated with our business.

 

   

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 cash available for distribution to our unitholders.

 

   

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.

 

 

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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.

 

   

We depend on unionized labor for our operations in Oceanside, 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 cash available for distribution, 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 fiduciary duties, 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 fiduciary 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 cash available for distribution to our unitholders.

 

   

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 $             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.

 

 

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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 cash available for distribution to unitholders.

 

   

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.

 

   

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.

 

   

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 cash available for distribution to our unitholders would be substantially reduced.

 

   

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

 

   

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 cash available for distribution to our unitholders.

 

 

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A portion of our operations are conducted by a corporate subsidiary that is subject to corporate-level income taxes.

 

   

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.

 

   

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 loaned 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, will occur:

 

   

Axel Johnson will contribute to Sprague Holdings all of the ownership interests in our predecessor;

 

   

Our predecessor will be converted into a limited liability company, Sprague Operating Resources LLC;

 

   

Sprague Operating Resources LLC will distribute to Sprague Holdings certain assets and liabilities that will not be a part of us, including:

 

  $            million of accounts receivable;

 

  our predecessor’s 50% equity interest in Kildair Service Ltd., an asphalt and residual fuel oil marketing and storage company with 1.7 million barrels of storage capacity located in Quebec, Canada, referred to herein as Kildair; and

 

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

 

   

Our general partner will make a capital contribution to us and will maintain its 1.0% general partner interest in us;

 

   

Sprague Holdings will contribute to us all of the membership interests in Sprague Operating Resources LLC, our operating company, in exchange for              common units(1),              subordinated units and the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 49.0%, of the cash we distribute in excess of $             per unit per quarter as described under “Our Cash Distribution Policy and Restrictions on Distributions” beginning on page 51;

 

 

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We will issue and sell, and Sprague Holdings will sell,             (1) and              common units to the public, respectively, in this offering, representing an aggregate     % limited partner interest in us;

 

   

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

 

   

We will enter into an amended and restated credit agreement, which we refer to as the new credit agreement, consisting of a working capital facility of up to $800.0 million and an acquisition facility of up to $200.0 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 98;

 

   

We will apply the net proceeds from our issuance and sale of              common units as described in “Use of Proceeds” on page 47; and

 

   

We and our general partner 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 164.

Please read “Certain Relationships and Related Party Transactions” beginning on page 162 for additional information.

 

(1) Includes              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. The net proceeds from any exercise of the underwriters’ option to purchase additional common units (approximately $             million based on an assumed initial public offering price of $             per common unit, if exercised in full, after deducting the estimated underwriting discounts and the structuring fee payable by us) will be distributed to Sprague Holdings.

Our Relationship with Axel Johnson Inc.

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    % 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. 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

 

 

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Maritimes, Canada, including its equity interests in Kildair. We will not own any equity interests in Kildair immediately following the closing of this offering. See “Certain Relationships and Related Party Transactions—Omnibus Agreement.”

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 five 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 144.

Holding Company Structure

As is common with publicly traded limited partnerships and in order to maximize operational flexibility, we will conduct our operations through subsidiaries. In order to be treated as a partnership for federal income tax purposes, we must generate 90% or more of our gross income from certain qualifying sources, such as the sale and storage of refined products and natural gas and our fee-based storage and materials handling services for natural resources. However, the income derived from the sale of these products to certain end users may not be considered qualifying income for federal income tax purposes. As a result, we plan on selling products to such end users through Sprague Energy Solutions Inc., a corporate subsidiary of our operating company, Sprague Operating Resources LLC. Income from activities conducted by Sprague Energy Solutions Inc. will be taxed at the applicable corporate income tax rate. However, dividends received by us from Sprague Energy Solutions Inc. will constitute qualifying income. For a more complete description of this qualifying income requirement, please read “Material U.S. Federal Income Tax Consequences—Taxation of the Partnership—Partnership Status” beginning on page 195.

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

     % (1) 

Interests of Sprague Holdings and affiliates:

  

Common Units

     % (1) 

Subordinated Units

     49.0%   

General Partner Interest

     1.0%   

Incentive Distribution Rights

       (2) 
        

Total

     100.0%   
        

 

(1) Assumes no exercise of the underwriters’ option. Please read “—The Formation Transactions” beginning on page 9 for a description of the impact of an exercise of this option on common unit ownership percentages.

 

 

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(2) 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” beginning on page 68. Distributions with respect to the incentive distribution rights will be classified as distributions with respect to equity interests.

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.spragueresources.com and will be activated immediately following the closing of this offering. 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 a manner beneficial to our unitholders. This legal duty is commonly referred to as a “fiduciary duty.” 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 fiduciary duties of our general partner and its board, see “Risk Factors—Risks Inherent in an Investment in Us” beginning on page 34 and “Conflicts of Interest and Fiduciary Duties—Conflicts of Interest” beginning on page 168.

Our partnership agreement limits the liability and fiduciary 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 162.

 

 

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The Offering

 

Common units offered by us

             common units, or              common units if the underwriters exercise their option to purchase additional common units in full.

 

Common units offered by Sprague Holdings

            common units.

 

Units outstanding after this offering

            common units and             subordinated units, representing a 50.0% and 49.0% limited partner interest in us, respectively. If the underwriters do not exercise their option to purchase additional common units, we will issue an additional             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 1.0% general partner interest in us.

 

Use of proceeds

We expect that the net proceeds from our sale of              common units in this offering, after deducting underwriting discounts, the structuring fee and offering expenses payable by us, will be $             million, based on an assumed initial public offering price of $             per common unit. We intend to use the net proceeds to reduce amounts outstanding under the working capital facility of our new credit agreement. Affiliates of each 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, an affiliate of J.P. Morgan Securities LLC is a lender under our existing credit agreement and may receive payments in connection with the amendment and restatement of our existing credit agreement. Please read “Underwriting” beginning on page 211. To the extent the underwriters exercise their option to purchase additional common units, the net proceeds from the issuance and sale of those common units will be distributed to Sprague Holdings.

 

  We will not receive any proceeds from the sale of              common units by Sprague Holdings. Sprague Holdings has informed us that it intends to distribute the net proceeds received by it from the sale of those common units, together with any proceeds received from us that are attributable to an exercise of the underwriters’ option to purchase additional common units, to Axel Johnson. Sprague Holdings may be deemed under federal securities laws to be an underwriter with respect to the common units it is offering hereby.

 

  Please read “Use of Proceeds” on page 47.

 

 

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Cash distributions

We intend to pay the minimum quarterly distribution of $             per unit ($             per unit on an annualized basis) to the extent we have sufficient cash from operations 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 51.

 

  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, 2011, we anticipate that such distribution will cover the period from the closing date of this offering to and including December 31, 2011. We expect to pay this cash distribution before February 14, 2012.

 

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

 

   

first, 99.0% to the holders of common units and 1.0% to our general partner, until each common unit has received the minimum quarterly distribution of $             plus any arrearages from prior quarters;

 

   

second, 99.0% to the holders of subordinated units and 1.0% to our general partner, until each subordinated unit has received the minimum quarterly distribution of $             ; and

 

   

third, 99.0% to all unitholders, pro rata, and 1.0% to our general partner, until each unit has received a distribution of $            .

 

  If cash distributions to our unitholders exceed $             per unit in any quarter, the holders of our incentive distribution rights will receive increasing percentages, up to 49.0%, 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 63.

 

  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 58, we will have sufficient cash available for distribution to pay the full minimum quarterly distribution on all of our common and subordinated units for the twelve months ending September 30, 2012. 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. Please read “Our Cash Distribution Policy and Restrictions on Distributions” beginning on page 51.

 

 

If we assume that we completed the transactions described under “—The Formation Transactions” beginning on page 9 on January 1, 2010 and April 1, 2010, our pro forma cash available for distribution for

 

 

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the year ended December 31, 2010 and the twelve months ended March 31, 2011 would have been approximately $29.5 million and $33.6 million, respectively. These amounts would have been sufficient to pay the full minimum quarterly distribution on all of the common units but would have been insufficient by approximately $             million and $             million, respectively, to pay the full minimum quarterly distribution on the subordinated units for those periods. See “Our Cash Distribution Policy and Restrictions on Distributions” beginning on page 51.

 

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 $             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 operating surplus of at least the minimum quarterly distribution on each outstanding common and subordinated unit and the corresponding distribution on our general partner’s 1.0% interest in respect of each of the prior twelve consecutive quarters;

 

   

Our aggregate operating surplus generated in respect of such twelve consecutive quarters (including operating surplus generated by increases in working capital borrowings and treating any drawdowns from cash reserves established in prior periods as cash received during such quarters but excluding the $             million basket contained in the definition of operating surplus) must equal or exceed the aggregate amount of distributions made in respect of such quarters; and

 

   

The conflicts committee of the board of directors of our general partner, or the board of directors of our general partner based on the recommendation of the conflicts committee, must determine that we will be able to maintain or increase our quarterly distribution per unit from operating surplus for the four succeeding quarterly distributions.

 

  Our partnership agreement provides that the requirements could first be satisfied in connection with a distribution of cash with respect to the quarter ending September 30, 2014 and, if not satisfied in respect of that quarter, could be satisfied on any date thereafter.

 

 

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  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.

 

  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 66.

 

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 (49.0%) 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 common units and our general partner will be entitled to retain its then-current general partner interest. The aggregate number of common units to be issued to holders of our incentive distribution rights will equal 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 69.

 

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 193 and “The Partnership Agreement—Issuance of Additional Partnership Interests” beginning on page 182.

 

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

 

 

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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     % of our common and subordinated units. This will initially give Sprague Holdings the ability to prevent the involuntary removal of our general partner. See “The Partnership Agreement—Withdrawal or Removal of Our General Partner” beginning on page 186.

 

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” on page 189.

 

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, 2014, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $             per common unit, we estimate that your average allocable taxable income per year will be no more than $             per common unit. See “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions” on page 197.

 

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 195.

 

Exchange listing

We intend to apply to list our common units on the NYSE under the symbol “SRLP.”

 

 

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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 Energy Corp., as of the dates and for the periods indicated. The summary historical consolidated financial data presented as of December 31, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010 are derived from the audited historical consolidated financial statements of Sprague Energy Corp. that are included elsewhere in this prospectus. The summary historical consolidated financial data presented as of December 31, 2008 are derived from the audited historical consolidated balance sheet of Sprague Energy Corp. that is not included in this prospectus. The summary historical consolidated financial data presented as of March 31, 2011 and for the three months ended March 31, 2010 and 2011 are derived from the unaudited historical condensed consolidated financial statements of Sprague Energy Corp. that are included elsewhere in this prospectus. The summary historical consolidated financial data presented as of March 31, 2010 are derived from the unaudited historical condensed consolidated financial statements of Sprague Energy Corp. that are not included in this prospectus.

The summary pro forma consolidated financial data presented for the year ended December 31, 2010 and as of and for the three months ended March 31, 2011 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:

 

   

The contribution to Sprague Holdings by Axel Johnson of all of the ownership interests in our predecessor;

 

   

The conversion of our predecessor into Sprague Operating Resources LLC, which will be our operating subsidiary;

 

   

The distribution to Sprague Holdings by Sprague Operating Resources LLC of certain of its assets and liabilities that will not be a part of us, including:

 

   

$             million of accounts receivable;

 

   

our predecessor’s 50% equity interest in Kildair; and

 

   

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

 

   

The issuance by us to our general partner of a 1.0% general partner interest in us and a capital contribution to us by our general partner;

 

   

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

 

   

The issuance and sale by us, and the sale by Sprague Holdings, of              and              common units, respectively, to the public, representing an aggregate         % 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 98; and

 

   

The application of the net proceeds from the issuance and sale of              common units by us as described in “Use of Proceeds” on page 47.

 

 

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The unaudited pro forma consolidated balance sheet assumes the items listed above occurred as of March 31, 2011. The unaudited pro forma consolidated income statements for the year ended December 31, 2010 and for the three months ended March 31, 2011 assume the items listed above occurred as of January 1, 2010.

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 81. The following table should also be read in conjunction with “Use of Proceeds” on page 47, “—The Formation Transactions” beginning on page 9, the audited historical consolidated financial statements of Sprague Energy Corp., 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 measures EBITDA and adjusted EBITDA, which we use in our business as they are important supplemental measures of our performance. We define and explain these measures under “—Non-GAAP Financial Measures” beginning on page 22 and reconcile them to net income, their most directly comparable financial measure calculated and presented in accordance with GAAP.

 

    Predecessor Historical     Partnership Pro
Forma(1)(2)
 
    Year Ended December 31,     Three Months Ended
March 31,
    Year
Ended
December 31,

2010
    Three
Months
Ended
March 31,
2011
 
    2008     2009     2010     2010     2011      
    (audited)     (unaudited)     (unaudited)  
    (in thousands, except per unit data and operating data)  

Statement of Income Data:

             

Net sales

  $ 4,156,442      $ 2,460,115      $ 2,817,191      $ 924,621      $ 1,265,816      $ 2,817,191      $ 1,265,816   

Cost of products sold

    4,005,305        2,313,644        2,676,301        873,815        1,219,036        2,676,301        1,219,036   
                                                       

Gross margin

    151,137        146,471        140,890        50,806        46,780        140,890        46,780   
                                                       

Operating expenses

    46,761        44,448        41,102        10,279        10,639        41,102        10,639   

Selling, general and administrative expenses

    49,687        47,836        40,625        11,481        12,945        40,123 (3)      11,771 (3) 

Depreciation and amortization

    11,020        10,615        10,531        2,561        2,634        10,531        2,634   
                                                       

Total operating costs and expenses

    107,468        102,899        92,258        24,321        26,218        91,756        25,044   
                                                       

Operating income

    43,669        43,572        48,632        26,485        20,562        49,134        21,736   

Other income

    159        —          894        —          —          894        —     

Interest income

    1,181        383        503        88        185        503        185   

Interest expense

    (24,120     (20,809     (21,897     (5,130     (6,327     (20,153     (5,750
                                                       

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

    20,889        23,146        28,132        21,443        14,420        30,378        16,171   

Income tax provision(4)

    (8,833     (11,843     (10,288     (8,758     (5,981     (1,303     (1,519
                                                       

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

    12,056        11,303        17,844        12,685        8,439        29,075        14,652   

Equity in net income (loss) of foreign affiliate

    9,416        8,441        (2,123     (467     (1,852     —          —     
                                                       

Net income

  $ 21,472      $ 19,744      $ 15,721      $ 12,218      $ 6,587      $ 29,075      $ 14,652   
                                                       

EBITDA (unaudited)(5)

  $ 64,264      $ 62,628      $ 57,934      $ 28,579      $ 21,344      $ 60,559      $ 24,370   

Adjusted EBITDA (unaudited)(5)

  $ 56,295      $ 77,605      $ 53,552      $ 20,591      $ 21,958      $ 56,177      $ 24,984   

Pro forma net income per limited partner unit

            $        $     

Weighted average limited partner units outstanding

             

 

 

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    Predecessor Historical     Partnership Pro
Forma(1)(2)
 
    Year Ended December 31,     Three Months
Ended March 31,
    Year
Ended
December  31,

2010
  Three
Months
Ended
March 31,
2011
 
    2008     2009     2010     2010     2011      
    (audited)     (unaudited)     (unaudited)  
    (in thousands, except per unit data and operating data)  

Cash Flow Data:

             

Net cash provided by (used in):

             

Operating activities

  $ (43,549   $ 159,074      $ 24,997      $ 76,057      $ (2,802    

Investing activities

    (3,521     (7,702     (9,387     (1,224     (323    

Financing activities

    (661     (147,513     (17,162     (68,947     1,289       

Other Financial and Operating Data (unaudited):

             

Capital expenditures(6)

  $ 4,259      $ 7,237      $ 9,587      $ 1,224      $ 323       

Total refined products volumes (barrels)

    36,194        29,298        29,797        10,198        11,200       

Total natural gas volumes (MMBtus)

    99,348        99,121        96,588        27,204        23,233       

Balance Sheet Data (at period end):

             

Cash and cash equivalents

  $ 1,453      $ 5,325      $ 3,854      $ 11,264      $ 2,063        $ 421   

Property, plant and equipment, net

    105,137        102,949        103,461        101,883        101,447          95,712   

Total assets

    973,895        843,517        867,995        705,545        834,292          693,934   

Total debt

    503,335        373,215        408,304        304,784        409,849          342,896   

Total liabilities

    809,187        657,104        697,811        500,314        650,041          561,026   

Total stockholder’s/partners’ equity

    164,708        186,413        170,184        205,231        184,251          132,908   

 

(1) Pro forma amounts reflect deferred debt issuance costs of $3.9 million anticipated to be incurred in connection with entering into our new credit agreement and the resulting decrease in interest expense of $0.6 million and $1.7 million for the three months ended March 31, 2011 and the year ended December 31, 2010, respectively.
(2) Pro forma amounts reflect adjustments to reduce selling, general and administrative expenses, including Axel Johnson corporate overhead charges, by $0.5 million and $1.2 million for the year ended December 31, 2010 and three months ended March 31, 2011, respectively.
(3) Pro forma selling, general and administrative expenses do not give effect to annual incremental selling, general and administrative expenses of approximately $2.5 million that we expect to incur as a result of being a publicly traded partnership.
(4) Prior to the consummation of this offering, our corporate predecessor 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 other than Sprague Energy Solutions Inc. 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. Income from activities conducted by Sprague Energy Solutions Inc. will be taxed at the applicable corporate income tax rate.
(5) For a discussion of the non-GAAP financial measures EBITDA and adjusted EBITDA, please read “—Non-GAAP Financial Measures” beginning on page 22.
(6) Includes approximately $3.6 million, $6.5 million, $8.1 million, $1.0 million and $0.2 million of maintenance capital expenditures for the years ended December 31, 2008, 2009 and 2010 and the three months ended March 31, 2010 and 2011, 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 use 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 increased by unrealized hedging losses and decreased by unrealized hedging gains, in each case with respect to refined products and natural gas inventory. EBITDA and adjusted EBITDA are used as supplemental financial measures by our management and by external users of our financial statements, such as commercial banks and ratings agencies, 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 79.

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  
    Year Ended December 31,     Three Months
Ended March 31,
2011
    Year Ended
December 31,

2010
    Three
Months
Ended
March 31,

2011
 
    2008     2009     2010     2010     2011      
    (in thousands)  

Reconciliation of EBITDA to net income:

             

Net income

  $ 21,472      $ 19,744      $ 15,721      $ 12,218      $ 6,587      $ 29,075      $ 14,652   

Add:

             

Interest expense, net

    22,939        20,426        21,394        5,042        6,142        19,650        5,565   

Tax expense

    8,833        11,843        10,288        8,758        5,981        1,303        1,519   

Depreciation and amortization

    11,020        10,615        10,531        2,561        2,634        10,531        2,634   
                                                       

EBITDA

  $ 64,264      $ 62,628      $ 57,934      $ 28,579      $ 21,344      $ 60,559      $ 24,370   
                                                       

Add/(deduct):

             

Unrealized hedging (gain) loss on inventory:

             

Refined products

    (7,863     14,744        (4,241     (7,744     624        (4,241     624   

Natural gas

    (106     233        (141     (244     (10     (141     (10
                                                       

Adjusted EBITDA

  $ 56,295      $ 77,605      $ 53,552      $ 20,591      $ 21,958      $ 56,177      $ 24,984   
                                                       

 

 

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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 cash from operations 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 $             per unit per quarter, or $             per unit on an annualized basis, we will require cash available for distribution of approximately $             million per quarter, or approximately $             million per year, based on the number of common units and subordinated units and the general partner interest to be outstanding immediately after completion of this offering. We may not have sufficient cash available for distribution 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 cash we have available for distribution 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;

 

   

Fluctuations in our working capital needs;

 

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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 cash available for distribution to pay the full minimum quarterly distribution on our subordinated units for the year ended December 31, 2010 or the twelve months ended March 31, 2011.

The amount of pro forma cash available for distribution generated during the year ended December 31, 2010 and the twelve months ended March 31, 2011 would have been sufficient to allow us to pay the full minimum quarterly distribution on all of our common units, but only a cash distribution of approximately     % and     %, respectively, of the minimum quarterly distribution on all of our subordinated units, for such periods. For a calculation of our ability to make cash distributions to our unitholders based on our pro forma results for the year ended December 31, 2010 and the twelve months ended March 31, 2011, please read “Our Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Cash Available for Distribution.”

The assumptions underlying the forecast of cash available for distribution 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 cash available for distribution to differ materially from our forecast.

The forecast of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations, EBITDA and cash available for distribution for the twelve months ending September 30, 2012. 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. 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.

The amount of cash we have available for distribution to unitholders 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.

The amount of cash we have available for distribution depends primarily on our cash flow, including working capital borrowings, 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.

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

 

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generally better than for the second and third calendar quarters. Over the 36-month period ending March 31, 2011, we generated an average of approximately 69% 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 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.

 

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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;

 

   

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.

 

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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.

The recent adoption of derivatives legislation by the United States Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity prices, interest rates and other risks associated with our business.

The United States Congress recently adopted comprehensive financial reform legislation that establishes federal oversight and regulation of the over-the-counter derivatives market and entities, such as us, that participate in that market. The new legislation, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was signed into law by the President on July 21, 2010 and requires the Commodities Futures Trading Commission, or the CFTC, and the SEC to promulgate rules and regulations implementing the new legislation within 360 days from the date of enactment. In June 2011, the deadline for many of those rules and regulations was extended to December 31, 2011, and the CFTC has indicated that several of its regulations will be promulgated or proposed by the end of 2011. The CFTC has proposed regulations to set position limits for certain futures and option contracts in the major energy markets and to establish minimum capital requirements, although it is not possible at this time to predict whether or when the CFTC will adopt those rules or include comparable provisions in its rulemaking under the Dodd-Frank Act. The Dodd-Frank Act may also require compliance with margin requirements and with certain clearing and trade-execution requirements in connection with certain derivative activities, although the application of those provisions is uncertain at this time. The legislation may also 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.

The new legislation and any new regulations could significantly increase the cost of some derivative contracts (including through requirements to post collateral, which could adversely affect our available liquidity), materially alter the terms of some derivative contracts, reduce the availability of some derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivative contracts and potentially increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the new legislation and any new regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Increased volatility may make us less attractive to certain types of investors. Finally, the Dodd-Frank Act was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. If the new legislation and regulations result in lower commodity prices, our net sales could be adversely affected. Any of these consequences could adversely affect our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

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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, were 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 maintain 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 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, increases in refined product and natural gas prices or disruptions in the credit markets.

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,

 

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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 cash available for distribution to our unitholders. 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 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.

 

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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.

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 cash available for distribution to our unitholders.

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

 

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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 cash available for distribution to our unitholders 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. 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 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.

 

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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 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.

 

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We depend on unionized labor for our operations in Oceanside, 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 cash available for distribution to our unitholders. 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, 2012. 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 cash available for distribution, which could limit our ability to grow and make acquisitions.

We expect that we will distribute most of our cash available for distribution 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 cash available for distribution, 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 fiduciary duties, 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     % 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 a manner that is beneficial to us and our unitholders, 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 fiduciary 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 fiduciary duties owed by our general partner, 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.

 

   

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,

 

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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 operating surplus, or an expansion capital expenditure, which does not. Such determination can affect the amount of cash 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 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 $             million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other 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 communicate such opportunity or information to us. This may create actual and potential conflicts of interest

 

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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 fiduciary duties, 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 cash otherwise available for distribution to our unitholders.

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

Our partnership agreement contains provisions that modify and reduce the fiduciary 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, which requires that it believed that the decision was in the best interest of our partnership, 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;

 

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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 engaged in fraud or willful misconduct 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 fiduciary 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;

 

  (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;

 

  (3) On terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

 

  (4) Fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

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 and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in subclauses (3) or (4) above, then it will be presumed that, in making its decision, 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 cash available for distribution to our unitholders.

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, other than those services provided to our corporate subsidiary, Sprague Energy Solutions Inc. Pursuant to the terms of the services agreement, our general partner will agree to provide the same general and administrative services to Sprague Energy Solutions Inc., which will also agree to reimburse our general partner and its affiliates for all costs and expenses incurred in connection with providing such services. Please read “Certain Relationships and Related Party Transactions—Services Agreement.” 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. Our partnership agreement and the services agreement allow our

 

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general partner to determine, in good faith, the expenses that are allocable to us and to Sprague Energy Solutions Inc. Payments to our general partner and its affiliates may be substantial and will reduce the amount of cash available for distribution to our unitholders.

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 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     % 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.

 

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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 would impact our ability to grow our asset base.

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

The assumed initial public offering price of $             per common unit exceeds our pro forma net tangible book value of $             per unit. Based on the assumed initial public offering price of $             per common unit, you will incur immediate and substantial dilution of $             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 cash available for distribution 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              common units and              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 September 30, 2014) 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.

 

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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 cash available for distribution to unitholders.

The partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating expenditures. In addition, the partnership agreement permits the general partner to reduce cash available for distribution 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. These cash reserves will affect the amount of cash available for distribution to unitholders.

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     % of our common units. At the end of the subordination period (which could occur as early as September 30, 2014), 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     % 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

 

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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.

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              publicly traded common units. In addition, Sprague Holdings will own              common units and subordinated units, representing an aggregate     % 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, Sprague Holdings 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.”

 

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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 (49.0%) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels 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 and our general partner will be entitled to maintain its then-current general partner interest. The number of common units to be issued to the holders of our incentive distribution rights will be equal to an aggregate 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 Operating Surplus.”

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

We intend to apply to list our common units on the NYSE. 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.

 

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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.

We estimate that we will incur approximately $2.5 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 cash available for distribution to our unitholders 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 cash available for distribution to our unitholders 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 cash available for distribution to our unitholders.

We are currently subject to entity level taxes and fees in a number of states, and such taxes and fees will reduce the cash available for distribution to unitholders. 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 cash available for distribution to unitholders.

 

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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.

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.

 

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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.

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 cash available for distribution to our unitholders.

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 cash available for distribution.

A portion of our operations are conducted by a corporate subsidiary that is subject to corporate-level income taxes.

A portion of our operations are conducted by Sprague Energy Solutions Inc., our corporate subsidiary. We may elect to conduct additional operations through our existing corporate subsidiary or additional corporate subsidiaries in the future. Our existing corporate subsidiary is, and any future corporate subsidiaries would be, subject to corporate-level tax, which reduces the cash available for distribution to us and, in turn, to our unitholders. If the IRS were to successfully assert that any corporate subsidiary has more tax liability than we anticipate or legislation were enacted that increased the corporate tax rate, our cash available for distribution to our unitholders would be further reduced.

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

 

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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 loaned 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 is no tax concept of loaning a partnership interest, a unitholder whose common units are loaned to a “short seller” to cover a short sale of common units 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 to the short seller and the unitholder may be required to recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, 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 loan to a short seller should modify any applicable brokerage account agreements to prohibit their brokers from borrowing their common units.

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 24 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 the issuance and sale of              common units by us to the public, after deducting underwriting discounts, the structuring fee and offering expenses payable by us, will be approximately $             million. Our estimates assume an initial public offering price of $             per common unit. An increase or decrease of $1.00 in the assumed initial public offering price per common unit would cause the net proceeds from the issuance and sale of common units by us to the public to increase or decrease, respectively, by approximately $             million. Any increase or decrease in the number of common units offered hereby will result in a corresponding pro rata increase or decrease in the number of common units offered for sale by us and by Sprague Holdings. An increase or decrease of 1.0 million in the number of common units offered hereby, together with a concomitant $1.00 increase or decrease in the assumed initial public offering price per common unit, would cause the net proceeds to us to increase or decrease, respectively, by approximately $             million and $             million, respectively. We intend to use the net proceeds from our sale of common units in this offering to reduce amounts outstanding under the working capital facility of our new credit agreement.

As of June 30, 2011, we had approximately $338.5 million outstanding under the working capital facility of our credit agreement with a year-to-date annualized interest rate of 5.3% and approximately $59.4 million outstanding under the acquisition facility of our credit agreement with a year-to-date annualized interest rate of 5.9%. 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 2015 on or about the anniversary of the completion of this offering. Affiliates of each 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, an affiliate of J.P. Morgan Securities LLC is a lender under our existing credit agreement and may receive payments in connection with the amendment and restatement of our existing credit agreement. Please read “Underwriting.”

We have granted the underwriters a 30-day option to purchase up to             additional common units if the underwriters sell more than the             common units offered hereby. 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 $             million based on an assumed initial public offering price of $             per common unit, if exercised in full, after deducting underwriting discounts and the structuring fee payable by us) will be distributed to Sprague Holdings. If the underwriters do not exercise their option to purchase additional common units, we will issue an additional             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.

We will not receive any proceeds from the sale of              common units by Sprague Holdings. Sprague Holdings has informed us that it intends to distribute the net proceeds received by it from the sale of the common units, together with any proceeds received from us attributable to an exercise of the underwriters’ option to purchase additional common units, to Axel Johnson.

We and Sprague Holdings will pay all underwriting discounts applicable to common units sold by us and it, respectively, in this offering. We and Sprague Holdings will pay a structuring fee equal to an aggregate of 0.75% of the gross proceeds from this offering to Barclays Capital Inc. for evaluation, analysis and structuring of this offering. The allocation of the structuring fee between us and Sprague Holdings will be based on the relative percentages of common units sold in this offering. We will pay all of the offering expenses in connection with this offering.

Sprague Holdings may be deemed under federal securities laws to be an underwriter with respect to the common units it is offering hereby.

 

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CAPITALIZATION

The following table shows our capitalization as of March 31, 2011:

 

   

For our predecessor, Sprague Energy Corp.; and

 

   

On a pro forma basis to give effect to 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 March 31, 2011  
     Predecessor
Historical
    Partnership
Pro Forma
 
     (in thousands)  

Long-term debt (including current maturities):

    

Credit facilities(1)

   $ 406,000      $                    

Other

     3,849     
                

Total long-term debt

   $ 409,849      $     
                

Stockholder’s/partners’ equity:

    

Sprague Energy Corp.

   $ 184,729      $     

Sprague Resources LP:

    

Held by public:

    

Common units(2)

     —       

Held by general partner and its affiliates:

    

Common units(2)

     —       

Subordinated units

     —       

General partner interest

     —       

Accumulated other comprehensive loss, net of tax

     (478  
                

Total stockholder’s/partners’ equity

         184,251     
                

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

   $ 594,100      $     
                

 

(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 $800.0 million and an acquisition facility of up to $200.0 million). As of March 31, 2011, we had approximately $346.6 million and approximately $59.4 million of borrowings outstanding under our working capital facility and our acquisition facility, respectively. As of June 30, 2011, we had approximately $338.5 million and approximately $59.4 million of borrowings outstanding under our 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) Each $1.00 increase (or decrease) in the assumed public offering price to $              per common unit would decrease (or increase) total long-term debt, on a pro forma basis, by approximately $              million, and increase (or decrease) total stockholder’s/partners’ equity, on a pro forma basis, by $              million, in each case after deducting the estimated underwriting discounts, the structuring fee and offering expenses payable by us. Any increase or decrease in the number of common units offered hereby will result in a corresponding pro rata increase or decrease in the number of common units offered for sale by us and by Sprague Holdings. An increase of 1.0 million in the number of common units offered hereby, together with a concomitant $1.00 increase in the assumed offering price to $             per common unit, would decrease total long-term debt and increase total stockholder’s/partners’ equity, in each case on a pro forma basis, by approximately $             million, in each case after deducting the estimated underwriting discounts, the structuring fee and offering expenses payable by us. Similarly, 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 to $              per common unit, would increase total long-term debt and decrease total stockholder’s/partners’ equity, in each case on a pro forma basis, by approximately $              million, in each case after deducting the estimated underwriting discounts, the structuring fee and offering expenses payable by us. 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 March 31, 2011, our net tangible book value was $             million, or $             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 March 31, 2011, 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 $             per common unit, our pro forma as adjusted net tangible book value as of March 31, 2011 would have been $             million, or $             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

      $                

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

   $                   

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

     
           

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

     
           

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

      $                
           

 

(1) Determined by dividing the total number of units (             common units,              subordinated units and the 1.0% general partner interest represented by          notional general partner units, assuming no exercise of the underwriters’ option to purchase additional common units) to be issued to the general partner and Sprague Holdings for their 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 (             common units,              subordinated units and the 1.0% general partner interest represented by         notional general partner 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 $             per common unit.

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

The following table sets forth the number of units that we will issue and the total consideration contributed to us by the general partner and Sprague Holdings in respect of their 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)         

General partner and Sprague Holdings(1)

               $                          

Purchasers in this offering

                                
                              

Total

               $                          
                              

 

(1)

Upon the consummation of the Formation Transactions, including the offering of common units hereby, our general partner and Sprague Holdings will own              common units,              subordinated units and the

 

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  1.0% general partner interest represented by              notional general partner units, assuming no exercise of the underwriters’ option to purchase additional common units.

A $1.00 increase (decrease) in the assumed initial public offering price of $             per common unit would increase (decrease) total consideration paid by purchasers in this offering by $             million, and total consideration provided by our general partner and Sprague Holdings by $             million, in each case assuming the number of common units offered hereby, as set forth on the cover page of this prospectus, remains the same.

 

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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 $             per unit on all our units ($             per unit on an annualized basis) and the corresponding distribution on the 1.0% general partner interest 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 cash available for distribution. 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 cash available for distribution 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 operating surplus, any such distributions would constitute a return of capital and would result in a reduction in the minimum quarterly

 

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distribution and the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Operating Surplus 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 and limited liability company 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 cash available for distribution to our unitholders 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 cash available for distribution, 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 $             per unit per complete quarter, or $             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 $             million per quarter or $             million per year, in each case based on the number of common units and subordinated units and the general partner interest 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.”

As of the date of this offering, our general partner will be entitled to 1.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 1.0% interest in distributions may be reduced if we issue additional units in the future (other than the issuance of common units upon the exercise by the underwriters of their option to purchase additional common units, the issuance of common units to Sprague Holdings upon the expiration of the underwriters’ option to purchase additional common units, the issuance of common units upon conversion of outstanding subordinated units or the issuance of common units upon a reset of incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us to maintain its initial 1.0% general partner interest.

 

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The table below sets forth the common units, subordinated units and general partner interest 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 $             per unit per quarter (or $             per unit on an annualized basis).

 

     Number of Units    Minimum Quarterly
Distributions
 
        One Quarter      Annualized  

Publicly held common units(1)

      $                    $                

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

        

Subordinated units held by Sprague Holdings and its affiliates

        

General partner interest(2)

        
                      

Total

      $                    $                
                      

 

(1) Assumes the underwriters do not exercise their option to purchase additional              common units from Sprague Holdings and that              common units will be issued to Sprague Holdings upon the expiration of the underwriters’ 30-day option period. Irrespective 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 we anticipate will be issued during the twelve months ending September 30, 2012 under the compensation policies that we will adopt following the closing of this offering. Please read “Management—2011 Equity Long Term Incentive Compensation Plan.”
(2) The number of units notionally represented by the 1.0% general partner interest is determined by multiplying the total number of units deemed to be outstanding (i.e., the total number of common and subordinated units outstanding divided by 99.0%) by the 1.0% 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 operating surplus 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, 2011 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 $             per unit each quarter for the four quarters of the twelve months ending September 30, 2012. In those sections, we present the following two tables:

 

   

“Unaudited Pro Forma Cash Available for Distribution,” in which we present our estimate of the amount of cash we would have had available for distribution for the fiscal year ended December 31, 2010 and the twelve months ended March 31, 2011 based on our unaudited pro forma financial statements that are included in this prospectus.

 

   

“Estimated Cash Available for Distribution,” in which we demonstrate our anticipated ability to generate the cash available for distribution necessary for us to pay the minimum quarterly distribution on all units for the twelve months ending September 30, 2012.

 

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Unaudited Pro Forma Cash Available for Distribution

The following table illustrates, on a pro forma basis for the year ended December 31, 2010 and the twelve months ended March 31, 2011, cash available to pay distributions, assuming that the Formation Transactions had occurred as of January 1, 2010 and April 1, 2010, respectively.

If we assume that we completed the transactions described under “Prospectus Summary—The Formation Transactions” on January 1, 2010 and April 1, 2010, our pro forma cash available for distribution for the year ended December 31, 2010 and the twelve months ended March 31, 2011 would have been approximately $29.5 million and $33.6 million, respectively. These amounts would have been sufficient to pay the full minimum quarterly distribution on all of the common units but would have been insufficient by approximately $             million and $             million, respectively, to pay the full minimum quarterly distribution on the subordinated units for those periods. See “Our Cash Distribution Policy and Restrictions on Distributions.”

The pro forma financial statements, from which pro forma cash available for distribution 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, 2010 or April 1, 2010, as applicable. Furthermore, cash available for distribution is 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 cash available for distribution stated above in the manner described in the table below. As a result, the amount of pro forma cash available for distribution should only be viewed as a general indication of the amount of cash available for distribution 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 Cash Available for Distribution

 

     Year Ended
December 31, 2010
    Twelve Months
Ended
March 31, 2011
 
     (in thousands)  

Pro Forma Net Income

   $ 29,075      $ 23,542   

Add:

    

Interest expense, net

     19,650        20,594   

Tax expense

     1,303        826   

Depreciation and amortization

     10,531        10,604   
                

Pro Forma EBITDA(1)

   $ 60,559      $ 55,566   

Add/(deduct):

    

Unrealized hedging (gain) loss on inventory:

    

Refined products

     (4,241     4,127   

Natural gas

     (141     92   
                

Pro Forma Adjusted EBITDA(1)

   $ 56,177      $ 59,785   
                

Less:

    

Cash interest expense, net(2)

   $ (17,162   $ (17,945

Cash taxes

     (1,303     (826

Expansion capital expenditures

     (1,439     (1,197

Maintenance capital expenditures

     (8,148     (7,489

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

     (2,500     (2,500

Add:

    

Elimination of expense relating to cash incentive payments that would have been paid in common units(3)

     2,403        2,589   

Borrowings to finance expansion capital expenditures(4)

     1,439        1,197   
                

Unaudited Pro Forma Cash Available for Distribution

   $ 29,467      $ 33,614   
                

Pro Forma Cash Distributions:

    

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

    

Annual distributions to:

    

Public common unitholders(5)

    

Sprague Holdings and affiliates:

    

Common units

    

Subordinated units

    

General partner interest

    
                

Total distributions

   $                   $                
                

Excess (Shortfall)

   $                   $                
                

Percent of minimum quarterly distributions payable to common unitholders

     100     100

Percent of minimum quarterly distributions payable to subordinated unitholders

                  

 

(1) EBITDA and adjusted EBITDA are defined in “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”
(2) Our pro forma presentations of cash interest expense, net for the year ended December 31, 2010 and the twelve months ended March 31, 2011 exclude non-cash amortization of debt issuance costs incurred in connection with borrowings under our credit agreement of approximately $2.5 million and $2.6 million, respectively.
(3) Reflects the deemed substitution of compensation in the form of common units for cash compensation. See note (5) below.

 

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(4) Because we expect that expansion capital expenditures will primarily be funded through borrowings or the sale of debt or equity securities in the future, we have included borrowings under our new credit agreement to offset our estimated expansion capital expenditures as well as incremental interest expense on these borrowings at an assumed interest rate of 2.70% (assumes LIBOR plus 250 basis points, where LIBOR is approximately 0.20%) for purposes of calculating our pro forma cash available for distribution. Accordingly, our pro forma presentation for the year ended December 31, 2010 reflects the application of assumed borrowings to fund expansion capital expenditures as well as incremental interest expense of $33,000 on these borrowings, and our pro forma presentation for the twelve months ended March 31, 2011 reflects the application of assumed borrowings to fund expansion capital expenditures as well as incremental interest expense of $29,000 on these borrowings.
(5) Includes              common units that would have been issued as compensation under the compensation policies that we will adopt following the closing of this offering. Please read “Management—2011 Equity Long Term Incentive Compensation Plan.” See note (3) above.

Estimated Cash Available for Distribution

We estimate we will generate cash available for distribution of $38.6 million for the twelve months ending September 30, 2012 and will be able to pay the minimum quarterly distribution on all of our common units, subordinated units and the general partner interest 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 cash available for distribution of $38.6 million and how we calculate estimated cash available for distribution, 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 cash available for distribution to vary significantly from our estimates.

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 cash available for distribution for the twelve months ending September 30, 2012. 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 report included in this prospectus relates to the historical information of our predecessor. It does 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 institution.

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 cash available for distribution to allow us to make the full minimum quarterly distribution on all of our outstanding common units, subordinated units and the general partner interest for each quarter

 

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through and including the quarter ending September 30, 2012, 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.

Sprague Resources LP

Estimated Cash Available for Distribution

 

     Twelve  Months
Ending

September 30, 2012
 
     (in thousands)  

Net sales

   $         4,125,764   

Cost of products sold

     3,974,792   
        

Gross margin

     150,972   

Operating costs and expenses

  

Operating expenses

     42,726   

Selling, general and administrative(1)

     48,314   

Depreciation and amortization

     11,049   
        

Total operating expenses

     102,089   
        

Operating income

   $ 48,883   

Tax expense

     1,412   

Interest expense, net

     19,391   
        

Net income

   $ 28,080   
        

Adjustments to reconcile net income to EBITDA:

  

Add:

  

Interest expense, net

     19,391   

Tax expense

     1,412   

Depreciation and amortization expense

     11,049   
        

EBITDA(2)

     59,932   
        

Less:

  

Cash interest expense, net(3)

     (17,159

Cash taxes

     (1,412

Expansion capital expenditures

     (610

Maintenance capital expenditures

     (6,309

Add:

  

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

     3,523   

Borrowings to finance expansion capital expenditures(5)

     610   
        

Estimated cash available for distribution

   $ 38,575   
        

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

  

Annual distributions to:

  

Public common unitholders(6)

   $                

Sprague Holdings and affiliates:

  

Common units

  

Subordinated units

  

General partner interest

  
        

Total distributions to Sprague Holdings

  
        

Total distributions to our unitholders and Sprague Holdings (based on a minimum quarterly distribution of $             per unit per year)

   $                
        

Excess of cash available for distribution over aggregate annualized minimum quarterly distributions

   $     

 

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(1) Includes $2.5 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 $3.5 million of non-cash expense relative to incentive payments that we anticipate will be paid in common units. See note (5) below.
(2) EBITDA is defined in “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.” Because it is not reasonably possible to forecast unrealized hedging gains or losses for future periods, we have not projected any such gains or losses for the forecast period. Accordingly, adjusted EBITDA is projected to be equal to EBITDA for the forecast period.
(3) Cash interest expense, net excludes approximately $2.2 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 the issuance and sale of common units by us to the public to decrease by approximately $             million, which will result in us having an additional approximately $             million in borrowings outstanding under our new credit agreement following the completion of this offering and an additional approximately $             million of estimated cash interest expense, net for the twelve months ending September 30, 2012. 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 the issuance and sale of common units by us to the public to decrease by approximately $             million, which would result in us having an additional approximately $             million in borrowings outstanding under our new credit agreement following completion of this offering and an additional approximately $             million of estimated cash interest expense, net for the twelve months ended September 30, 2012.
(4) Eliminates a non-cash charge associated with compensation that is expected to be paid in common units. See note (5) below.
(5) Because we expect that expansion capital expenditures will primarily be funded through borrowings or the sale of debt or equity securities in the future, we have included borrowings under our new credit agreement to offset our estimated expansion capital expenditures as well as incremental interest expense on these borrowings at an assumed interest rate of 2.70% (assumes LIBOR plus 250 basis points, where LIBOR is approximately 0.20%) for purposes of calculating our pro forma cash available for distribution. Accordingly, our estimated cash available for distribution for the twelve months ending September 30, 2012 reflects the application of assumed borrowings to fund expansion capital expenditures as well as incremental interest expense of $16,000 on these borrowings.
(6) Includes              common units that we anticipate will be issued as compensation during the forecast period under the compensation policies that we will adopt following the closing of this offering. Please read “Management—2011 Equity Long Term Incentive Compensation Plan.” See note (4) above.

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 cash available for distribution 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.

 

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We believe that, following the completion of the offering, we will have sufficient cash available for distribution to allow us to make the full minimum quarterly distribution on all the outstanding units for each quarter through September 30, 2012. Our belief is based on a number of specific assumptions, including the assumptions that:

 

   

Net sales. Net sales are projected be approximately $4.1 billion for the twelve months ending September 30, 2012, as compared to $2.8 billion and $3.2 billion for the year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. We believe net sales for the forecast period will increase primarily as a result of higher commodity prices and, to a lesser extent, higher volumes for refined products.

 

   

Refined Products. Our refined products net sales for the twelve months ending September 30, 2012 is projected to be approximately $3.8 billion, as compared to $2.4 billion and $2.8 billion for the year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. Approximately 90%, or $1.2 billion, of the $1.3 billion increase over the year ended December 31, 2010, on a pro forma basis, is attributable to higher commodity prices. An increase of approximately 66.0 million gallons in sales volumes is estimated to result in the remaining 10% increase in net sales. The increase of $980.7 million over the twelve months ended March 31, 2011, on a pro forma basis, is primarily comprised of a $929.8 million increase attributable to higher commodity prices with the remaining increase in net sales due to an increase of 23.6 million gallons in sales volumes. Approximately 80% of this volume increase is from expected gains in gasoline sales due to our recently entering into additional third-party terminal arrangements. We use the published NYMEX forward price curves for heating oil and Reformulated Blendstock for Oxygenate Blending, or RBOB, along with the residual fuel oil forward swaps prices as of May 9, 2011 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.

 

   

Natural Gas. Our natural gas net sales for the twelve months ending September 30, 2012 is projected to be approximately $316.4 million, as compared to $343.2 million and $330.0 million for the year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. The decrease of $26.8 million, or 8%, over the year ended December 31, 2010, on a pro forma basis, is estimated to be primarily a result of lower sales volumes of 5% leading to a $29.4 million decrease in net sales. This reduction is slightly offset by an expected $2.6 million increase due to higher natural gas prices. The decrease of $13.6 million over the twelve months ended March 31, 2011, on a pro forma basis, is comprised of a 4.3 Bcf decline in sales volumes leading to a reduction in net sales of $15.4 million, partially offset by a $1.7 million increase from higher natural gas prices. The volume decrease is a result of an expected decline in our wholesale supply sales volumes with limited margin impact. We use the published NYMEX forward price curve, as of May 9, 2011, 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.

 

   

Materials Handling. Our materials handling net sales for the twelve months ending September 30, 2012 is projected to be approximately $44.4 million, as compared to $46.7 million and $44.1 million for the year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. Volumes in our materials handling segment are expected to be substantially the same as volumes for the year ended December 31, 2010 and twelve months ended March 31, 2011, in each case on a pro forma basis. Our existing contracts were used as the basis to estimate our net sales for fee-based materials handling services.

 

   

Adjusted Gross Margin. Because it is not reasonably possible to forecast unrealized hedging 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, 2012. Adjusted gross margin is projected to be approximately

 

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$151.0 million for the twelve months ending September 30, 2012. Our adjusted gross margin for the year ended December 31, 2010 and the twelve months ended March 31, 2011 was $136.5 million and $141.1 million, respectively, in each case on a pro forma basis.

 

   

Refined Products. Our refined products adjusted gross margin for the twelve months ending September 30, 2012 is projected to be approximately $96.4 million, as compared to $99.7 million and $101.0 million for the year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. The decrease of $3.4 million, or 3%, over the year ended December 31, 2010, on a pro forma basis, is comprised of a decrease of $8.6 million attributable to a decrease in adjusted unit gross margin which is partially offset by a 5% increase in volumes contributing an additional $5.2 million to adjusted gross margin. The decrease of $4.6 million, or 5%, over the twelve months ended March 31, 2011, on a pro forma basis, is comprised of a decrease of $6.4 million attributable to a decrease in adjusted unit gross margin which is partially offset by a 2% increase in volumes contributing an additional $1.8 million. The increase in volumes is primarily due to an increase in gasoline volumes.

 

   

Natural Gas. Our natural gas adjusted gross margin for the twelve months ending September 30, 2012 is projected to be approximately $24.4 million, as compared to $6.5 million and $9.7 million for the year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. The increase of $17.9 million, or 275%, over the year ended December 31, 2010, on a pro forma basis, is comprised of an increase of $18.5 million attributable to an increase in adjusted unit gross margin which is partially offset by a 9% decrease in volumes negatively impacting adjusted gross margin by $0.6 million. The increase of $14.7 million, or 152%, over the twelve months ended March 31, 2011, on a pro forma basis, is comprised of an increase of $15.2 million attributable to an increase in adjusted unit gross margin which is partially offset by a 5% decrease in volumes negatively impacting adjusted gross margin by $0.5 million. The significantly improved natural gas adjusted gross margin for the forecast period relates to a material underperformance in our supply sourcing and hedging activities in 2010 primarily due to fundamental market changes resulting from factors such as the substantial growth of shale-based production (e.g. the Marcellus Shale). These factors led to material basis losses in the hedge positions that were historically used to hedge our forward sales requirements. In addition, losses on discretionary trading positions were recorded during 2010. The changing market dynamics has now led to more opportunities to hedge our forward sales requirements with either physical deliveries or financial positions, thereby materially reducing the basis risk. Additionally, we no longer enter into discretionary natural gas trading positions as part of our risk management practices and business strategy, other than positions related to a legacy storage asset (0.5 Bcf capacity) under contract through March 2012.

 

   

Materials Handling. Our materials handling gross margin for the twelve months ending September 30, 2012 is projected to be approximately $30.2 million, as compared to $30.3 million and $30.4 million for the year ended December 31, 2010 and twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. This is based on existing contracts and contracts entered into subsequent to March 31, 2011 as well as forecasted growth in gypsum, asphalt and clay slurry products, partially offset by an expected decline in pulp and salt product volumes.

 

   

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, 2012, as compared to $2.7 billion and $3.0 billion for the year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. We believe cost of products sold for the forecast period will increase primarily as a result of higher commodity prices.

 

   

Operating Expenses. Operating expenses for the twelve months ending September 30, 2012 are projected to be approximately $42.7 million, as compared to $41.1 million and $41.5 million for the

 

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year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. The increase in operating expenses for the twelve months ending September 30, 2012 as compared to the year ended December 31, 2010 and the twelve months ended March 31, 2011, in each case on a pro forma basis, is primarily due to inflation-related period over period expense increases.

 

   

Depreciation and Amortization. Depreciation and amortization expenses for the twelve months ending September 30, 2012 are projected to be approximately $11.0 million, as compared to $10.5 million and $10.6 million for the year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. The increase in depreciation and amortization expenses for the twelve months ending September 30, 2012 as compared to the year ended December 31, 2010 and the twelve months ended March 31, 2011, in each case on a pro forma basis, is primarily due to depreciation and amortization related to planned capital expenditures at our terminals and on our truck fleet.

 

   

Selling, General and Administrative Expenses. Our selling, general and administrative expenses for the twelve months ending September 30, 2012 is projected to be approximately $48.3 million. Our selling, general and administrative expenses for the year ended December 31, 2010 and the twelve months ended March 31, 2011 were $40.1 million and $40.7 million, respectively, in each case on a pro forma basis. The increase of selling, general and administrative expenses for the twelve months ending September 30, 2012 is due to higher incentive compensation in the forecasted period resulting from higher earnings during that period, 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.

 

   

Interest Expense, Net. Interest expense, net for the twelve months ending September 30, 2012 is projected to be approximately $19.4 million. Interest expense, net for the year ended December 31, 2010 and the twelve months ended March 31, 2011 was $19.7 million and $20.6 million, respectively, in each case on a pro forma basis. We expect that interest expense, net will decrease in the forecast period based on borrowings under our new credit agreement that will bear a lower variable interest rate and commitment fees than our current credit agreement. This decrease is partially offset by the financing of increased working capital requirements primarily due to forecasted higher commodity prices.

 

   

Cash Interest Expense, Net. Cash interest expense, net excludes approximately $2.2 million, $2.5 million and $2.6 million in non-cash amortization of debt issuance costs incurred in connection with borrowings under our credit agreement for the twelve months ended September 30, 2012, the year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis.

 

   

Expansion Capital Expenditures. Our expansion capital expenditures are projected to be approximately $0.6 million for the twelve months ending September 30, 2012. Our expansion capital expenditures in the year ended December 31, 2010 and the twelve months ended March 31, 2011 were $1.4 million and $1.2 million, respectively, in each case on a pro forma basis. We intend to fund expansion capital expenditures during the forecast period with borrowings under the $200.0 million acquisition facility in our new credit agreement.

 

   

Maintenance Capital Expenditures. Our maintenance capital expenditures for the twelve months ending September 30, 2012 are projected to be approximately $6.3 million, as compared to maintenance capital expenditures of $8.1 million and $7.5 million for the year ended December 31, 2010 and the twelve months ended March 31, 2011, respectively, in each case on a pro forma basis. The forecasted maintenance capital expenditures for the period ending September 30, 2012 are primarily to fund planned capital expenditures at our terminals and on our truck fleet. Maintenance capital expenditures were higher in the year ended December 31, 2010 and the twelve months ended March 31, 2011, in each case on a pro forma basis, due to unplanned maintenance and upgrades for asphalt and residual fuel oil tanks at three of our terminals.

 

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New Bedford Terminal. Our projection assumes that the sale of the New Bedford terminal by Sprague Massachusetts 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, 2013, unless extended, at the option of the buyer, to a date on or before January 5, 2016. In the event that such sale is consummated, our operating lease with 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, 2012. Please read “Certain Relationships and Related Party Transactions—New Bedford 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, 2012. 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 our general partner and Sprague Holdings assume that our general partner maintains its 1.0% general partner interest and that Sprague Holdings does not transfer the incentive distribution rights.

Distributions of Available Cash

General

Within 45 days after the end of each quarter, beginning with the quarter ending December 31, 2011, 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, 2011 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 $             per unit, or $             per unit per year, to the extent we have sufficient cash available for distribution. 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 and Incentive Distribution Rights

As of the date of this offering, our general partner will be entitled to 1.0% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. Our general partner’s initial 1.0% interest in distributions will be reduced if we issue additional units in the future (other than the issuance of common units upon the exercise by the underwriters of their option to purchase additional common units, the issuance of common units to Sprague Holdings upon the expiration of the underwriters’ option to purchase additional common units, the issuance of common units upon conversion of outstanding subordinated units or the issuance of common units upon a reset of incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us to maintain its 1.0% general partner interest.

Sprague Holdings currently holds all of the incentive distribution rights, which entitle it to receive increasing percentages, up to a maximum of 49.0%, of the cash we distribute from operating surplus (as defined below) in excess of $             per unit per quarter. The maximum distribution of 49.0% does not include any distributions that Sprague Holdings may receive on common units or subordinated units that it owns or through our general partner as a result of general partner interest that it owns. See “—Incentive Distribution Rights” for additional information.

 

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Operating Surplus and Capital Surplus

General

All cash distributed will be characterized as either being paid from “operating surplus” or “capital surplus.” We distribute cash from operating surplus differently than we would distribute cash from capital surplus. Operating surplus distributions will be made to our unitholders and our general partner 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 our general partner and all unitholders, but the holder of the incentive distribution rights would generally not participate in any capital surplus distributions with respect to those rights.

Operating Surplus

Operating surplus for any period generally consists of:

 

   

$             million (as described below); plus

 

   

All of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as described below) and the termination prior to the stated maturity of derivative contracts hedging our commodity, interest rate, basis or currency risk with an original term of more than one year (provided that cash receipts from the termination of any derivative contracts hedging our interest rate or currency risk with an original term of more than one year shall be included in operating surplus in equal quarterly installments over the remaining scheduled life of such derivative contracts); plus

 

   

Working capital borrowings made after the end of the period but before the date of determination of operating surplus for the period; plus

 

   

Cash distributions paid in respect of equity interests issued by us after this offering (including incremental distributions on incentive distribution rights) to finance all or a portion of expansion capital expenditures in respect of the period from such financing until the earlier to occur of the date the capital asset commences commercial service or the date it is abandoned or disposed of; plus

 

   

Cash distributions paid in respect of equity interests issued by us after this offering (including incremental distributions on incentive distribution rights) to pay the construction period interest on debt incurred, or to pay construction period distributions on equity issued, to finance the expansion capital expenditures referred to above; less

 

   

Our operating expenditures (as described below) after the closing of this offering; less

 

   

The amount of cash reserves established by the board of directors of our general partner to provide funds for future operating expenditures.

Working capital borrowings are borrowings used for working capital purposes, including the purchase of inventory and other current assets, to fund current liabilities and to pay distributions to unitholders, and specifically excluding any borrowings for the purchase of property, plant and equipment or capital improvements, made in the ordinary course of business pursuant to a credit agreement, commercial paper facility or similar financing arrangement; provided that when incurred it is the intent of the borrower to repay such borrowings within twelve months from sources other than additional working capital borrowings.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures, as described below, and thus reduce operating surplus when made. However, if a working capital borrowing is not repaid during the twelve-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such a working capital borrowing is in fact repaid, it will be excluded from operating expenditures because operating surplus will have been previously reduced by the deemed repayment.

 

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As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by our operations. For example, it includes a basket of $             million that will enable us, if we choose, to distribute as operating surplus cash we receive in the future from non-operating sources such as asset sales, issuances of partnership interests and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus would be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

Operating expenditures generally means all of our cash expenditures, including taxes, reimbursement or payments of expenses incurred by our general partner or its affiliates on our behalf (including pursuant to our services agreement), interest payments, payments made in the ordinary course of business under derivative contracts hedging our commodity, interest rate, basis or currency risk (provided that (1) with respect to amounts paid in connection with the initial purchase of any derivative contract hedging our interest rate or currency risk with an original term of more than one year, such amounts will be amortized over the life of the applicable derivative contract, (2) payments made in connection with the termination of any derivative contract hedging our interest rate or currency risk with an original term of more than one year prior to the expiration of its stipulated settlement or termination date will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such derivative contract and (3) fees paid in connection with the incurrence of long-term debt or the entering into a long-tem debt facility will be included in operating expenditures in equal quarterly installments over the initial term of the debt or facility), repayments of working capital borrowings and maintenance capital expenditures, provided that operating expenditures will not include:

 

   

Repayments of working capital borrowings, if such working capital borrowings were outstanding for twelve months, not repaid, but deemed repaid, thus decreasing operating surplus at such time;

 

   

Payments (including prepayments) of principal of and premium on indebtedness, other than working capital borrowings;

 

   

Expansion capital expenditures;

 

   

Investment capital expenditures;

 

   

Payment of transaction expenses relating to interim capital transactions (as described below);

 

   

Distributions with respect to our units, the general partner interest or the incentive distribution rights; or

 

   

Repurchases of any equity interest, other than repurchases to satisfy obligations under employee benefit plans.

Maintenance capital expenditures reduce operating surplus, but expansion capital expenditures and investment 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. Expansion capital expenditures will also include interest (and related fees) on debt incurred 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.

 

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Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes or development of facilities that are in excess of the maintenance of our existing operating capacity or operating income, but which are not expected to expand for the long-term our operating capacity or operating income.

As described above, none of our investment capital expenditures or expansion capital expenditures will be included in operating expenditures, and thus will not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of the construction, replacement or improvement of a capital asset in respect of the period that begins when we enter into a binding obligation to commence construction of a capital improvement and ending on the earlier to occur of the date any such capital asset commences commercial service or the date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus. Cash losses on disposition of an investment capital expenditure will reduce operating surplus when realized and cash gains from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return on principal.

Where capital expenditures are made in part for maintenance, expansion or investment 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.

Capital Surplus

Capital surplus is defined in our partnership agreement as any distribution of cash in excess of our cumulative operating surplus. Accordingly, capital surplus would generally be generated only by the following, which we refer to as “interim capital transactions”:

 

   

Borrowings other than working capital borrowings;

 

   

Sales of our equity interests and debt securities; and

 

   

Sales or other dispositions of assets for cash, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of normal retirement or replacement of assets.

Characterization of Cash Distributions

We treat all cash distributed as coming from operating surplus until the sum of all cash distributed from the closing of this offering equals the operating surplus as of the most recent date of determination. The characterization of cash distributions as operating surplus 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 operating surplus each quarter in an amount equal to $             per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the

 

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payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of cash from operating surplus 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 operating surplus 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, beginning with the quarter ending September 30, 2014, if each of the following has occurred:

 

   

Quarterly distributions from operating surplus on each outstanding common and subordinated unit and the corresponding distribution on our general partner’s 1.0% interest equaled or exceeded the minimum quarterly distribution in respect of each of the prior twelve consecutive quarters;

 

   

Operating surplus generated in respect of such twelve consecutive quarters (including operating surplus generated by increases in working capital borrowings and treating any drawdowns from cash reserves established in prior periods as cash received during such quarters but excluding the $             million basket contained in the definition of operating surplus) equaled or exceeded the aggregate amount of distributions made in respect of such quarters; and

 

   

The conflicts committee of the board of directors of our general partner, which we refer to as the conflicts committee, or the board of directors of our general partner based on the recommendation of the conflicts committee, must determine that we will be able to maintain or increase our quarterly distribution per unit from operating surplus for the four succeeding quarters.

For purposes of the foregoing determination set forth in the third bullet point above, operating surplus shall not include working capital borrowings made in a period but not used to fund operating expenditures or distributions during such period. The determination that we reasonably should be expected to maintain or increase our quarterly distribution per unit from operating surplus in respect of each of the four succeeding quarters shall be based upon projections and estimates related to such four succeeding quarters that shall not include any net increase in working capital borrowings (comparing the balance as of the date prior to such quarters to the expected balance as of the end of such quarters) other than those reasonably related to growth or other change in our business or an increase in our distributions expected to occur during such quarters. Our partnership agreement provides that either the conflicts committee, or the board itself based on the recommendation of the conflicts committee, shall make the determination of whether and when the subordination period has expired.

The partnership agreement provides that the requirements could first be satisfied in connection with a distribution of cash in respect of the quarter ending September 30, 2014 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.

 

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Distributions of Cash From Operating Surplus During the Subordination Period

Distributions from operating surplus with respect to any quarter during the subordination period will be made in the following manner:

 

   

First, 99.0% to the common unitholders, pro rata, and 1.0% to our general partner, 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, 99.0% to the subordinated unitholders, pro rata, and 1.0% to our general partner, 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 Operating Surplus After the Subordination Period

Distributions from operating surplus in respect of any quarter after the subordination period will be made in the following manner:

 

   

First, 99.0% to all unitholders, pro rata, and 1.0% to our general partner, 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

As of the date of this offering, our general partner will be entitled to 1.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 1.0% interest in distributions may be reduced if we issue additional units in the future (other than the issuance of common units upon the exercise by the underwriters of their option to purchase additional common units, the issuance of common units to Sprague Holdings upon the expiration of the underwriters’ option to purchase additional common units, the issuance of common units upon conversion of outstanding subordinated units or the issuance of common units upon a reset of incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us to maintain its initial 1.0% general partner interest. Our partnership agreement does not require that our general partner fund its capital contribution with cash and our general partner may fund its capital contribution by the contribution to us of common units or other property.

Incentive Distribution Rights

Incentive distribution rights represent the right to receive an increasing percentage (14.0%, 24.0% and 49.0%) of quarterly distributions of cash from operating surplus 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 operating surplus to the common unitholders, subordinated unitholders (if any) and the corresponding distribution on our general partner’s 1.0% interest in an amount equal to the minimum quarterly distribution; and

 

   

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

 

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then additional distributions from operating surplus for that quarter will be made in the following manner:

 

   

First, 99.0% to all unitholders, pro rata, and 1.0% to our general partner, until each unitholder receives a total of $             per unit for that quarter (the “first target distribution”);

 

   

Second, 85.0% to all unitholders, pro rata, 1.0% to our general partner and 14.0% to the holders of incentive distribution rights, pro rata, until each unitholder receives a total of $             per unit for that quarter (the “second target distribution”);

 

   

Third, 75.0% to all unitholders, pro rata, 1.0% to our general partner and 24.0% to the holders of incentive distribution rights, pro rata, until each unitholder receives a total of $             per unit for that quarter (the “third target distribution”); and

 

   

Thereafter, 50.0% to all unitholders, pro rata, 1.0% to our general partner and 49.0% 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 Operating Surplus

The following table illustrates the percentage allocations of cash distributions from operating surplus between the unitholders, our general partner 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 our general partner, the incentive distribution right holders and the unitholders in any cash distributions from operating surplus 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 and our general partner 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     General
Partner
    Incentive
Distribution
Rights Holders
 

Minimum Quarterly Distribution

   $                  99.0     1.0     —     

First Target Distribution

   above $             up to $                   99.0     1.0     —     

Second Target Distribution

   above $             up to $                  85.0     1.0     14.0

Third Target Distribution

   above $             up to $                  75.0     1.0     24.0

Thereafter

   above $                  50.0     1.0     49.0

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 to elect to relinquish the right of the holders of our incentive distribution rights to receive incentive distribution payments based on the initial cash 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. The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that there will be no incentive

 

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distributions paid under the reset target distribution levels until cash distributions per unit following this event increase as described below. 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. We will also issue an additional general partner interest to our general partner in order to maintain the general partner interest it had in us immediately prior to the reset election.

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 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 our cash available for distribution from operating surplus for each quarter thereafter as follows:

 

   

First, 99.0% to all unitholders, pro rata, and 1.0% to our general partner, 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, 1.0% to our general partner and 14.0% 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, 1.0% to our general partner and 24.0% 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, 1.0% to our general partner and 49.0% to the holders of the incentive distribution rights, pro rata.

 

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The following table illustrates the percentage allocation of cash available for distribution from operating surplus between the unitholders, our general partner 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 $            .

 

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

Minimum Quarterly Distribution

   $                 99.0     1.0     —        $            

First Target Distribution

   above $             up to

$            

    99.0     1.0     —        up to $            (1)

Second Target Distribution

   above $             up to

$            

    85.0     1.0     14.0   above $             up to

$            (2)

Third Target Distribution

   above $             up to

$            

    75.0     1.0     24.0   above $             up to

$            (3)

Thereafter

   above $                 50.0     1.0     49.0   above $            (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 cash available for distribution from operating surplus that would be distributed to the unitholders, the general partner 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              common units outstanding, our general partner has maintained its 1.0% general partner interest and the average distribution to each common unit is $             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.

 

    Quarterly
Distribution
per Unit Prior
to Reset
    Common
Unitholders
Cash
Distributions
Prior to Reset
    Additional
Common
Units
    General Partner and Incentive
Distribution Rights Holders

Cash Distributions Prior to Reset
    Total
Distributions
 
        1.0%
General
Partner
    Incentive
Distribution
Rights
    Total    

Minimum Quarterly Distribution

  $                  $                     —        $                  $                  $                   $               

First Target Distribution

        —             

Second Target Distribution

        —             

Third Target Distribution

        —             

Thereafter

        —             
                                                 
    $                     —        $        $        $        $     
                                                 

 

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The following table illustrates the total amount of cash available for distribution from operating surplus that would be distributed to the unitholders, the general partner and the holders of the incentive distribution rights with respect to the quarter in which the reset occurs. The table reflects that as a result of the reset there would be              common units outstanding, our general partner’s 1.0% interest has been maintained and the average distribution to each common unit is $            . The number of additional common units was calculated by dividing (x) $             as the average of the amounts received by the incentive distribution 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 $             of cash available for distribution from operating surplus distributed to each common unit as the average distributed per common unit for the two quarters prior to the reset.

 

    Quarterly
Distribution
per Unit After
Reset
    Common
Unitholders
Cash
Distributions
After Reset
    Additional
Common
Units
    General Partner and Incentive
Distribution Rights Holders

Cash Distributions After Reset
    Total
Distributions
 
        1.0%
General
Partner
    Incentive
Distribution
Rights
    Total    

Minimum Quarterly Distribution

  $                  $                  $                  $                  $                  $                   $               

First Target Distribution

        —             

Second Target Distribution

        —             

Third Target Distribution

        —             

Thereafter

        —             
                                                 
    $         $      $        $        $        $     
                                                 

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:

 

   

First, 99.0% to all unitholders, pro rata, and 1.0% to our general partner, until the minimum quarterly distribution is reduced to zero, as described below;

 

   

Second, 99.0% to the common unitholders, pro rata, and 1.0% to our general partner, until we distribute for each common unit an amount of cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution; and

 

   

Thereafter, we will make all distributions of cash from capital surplus as if they were from operating surplus.

Effect of a Distribution From Capital Surplus

Our partnership agreement treats a distribution of capital surplus as the repayment of the consideration for the issuance of the unit, which is a return of capital. Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the

 

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distribution had in relation to the fair market value of the common units prior to the announcement of the distribution. Because distributions of capital surplus will reduce the minimum quarterly distribution and target distribution levels after any of these distributions are made, it may be easier for Sprague Holdings to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

If we reduce the minimum quarterly distribution and the target distribution levels to zero, all future distributions from operating surplus will be made such that 50.0% is paid to all unitholders, pro rata, and 1.0% is paid to our general partner and 49.0% is paid to the holders of the incentive distribution rights, pro rata.

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus or a reset of target distribution levels, if we combine our units into a lesser number of units or subdivide our units into a greater number of units, we will proportionately adjust:

 

   

The minimum quarterly distribution;

 

   

The target distribution levels;

 

   

The initial unit price, as described below under “—Distributions of Cash Upon Liquidation;” and

 

   

The per unit amount of any outstanding arrearages in payment of the minimum quarterly distribution on the common units.

For example, if a two-for-one split of the units should occur, the minimum quarterly distribution, the target distribution levels and the initial unit price (as described below) would each be reduced to 50.0% of its initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine or subdivide our subordinated units using the same ratio applied to the common units. We will not make any adjustment to the minimum quarterly distribution, the target distribution levels or the initial unit price by reason of the issuance of additional units for cash or property.

In addition, if as a result of a change in law or interpretation thereof, we or any of our subsidiaries (other than our existing corporate subsidiary, Sprague Energy Solutions, Inc.) is treated as an association taxable as a corporation or is otherwise subject to additional taxation as an entity for U.S. federal, state, local or non-U.S. income or withholding tax purposes, our general partner may, in its sole discretion, reduce the minimum quarterly distribution and the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is cash available for distribution for that quarter (after deducting our general partner’s estimate of our additional aggregate liability for the quarter for such income and withholdings taxes payable by reason of such change in law or interpretation) and the denominator of which is the sum of (1) cash available for distribution for that quarter, plus (2) our general partner’s estimate of our additional aggregate liability for the quarter for such income and withholding taxes payable by reason of such change in law or interpretation thereof. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in distributions with respect to subsequent quarters.

Distributions of Cash Upon Liquidation

General

If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to our unitholders, our general partner and the holders of our incentive distribution rights in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

 

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The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of units to a repayment of the initial value contributed by a unitholder to us for their units, which we refer to as the “initial unit price” for each unit. The initial unit price for the common units will be the price paid for the common units issued in this offering. The allocations of gain and loss upon liquidation are also intended, to the extent possible, to entitle the holders of common units to a preference over the holders of subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the holders of common units to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights.

Manner of Adjustments for Gain

If our liquidation occurs before the end of the subordination period, we will allocate any gain to the unitholders in the following manner:

 

   

First, to our general partner to the extent of certain prior losses specially allocated to our general partner;

 

   

Second, 99.0% to the common unitholders, pro rata, and 1.0% to our general partner, until the capital account for each common unit is equal to the sum of: (1) the initial unit price; (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and (3) any unpaid arrearages in payment of the minimum quarterly distribution;

 

   

Third, 99.0% to the subordinated unitholders, pro rata, and 1.0% to our general partner, until the capital account for each subordinated unit is equal to the sum of: (1) the initial unit price; and (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

 

   

Fourth, 99.0% to all unitholders, pro rata, and 1.0% to our general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed 99.0% to the unitholders, pro rata, and 1.0% to our general partner, for each quarter of our existence;

 

   

Fifth, 85.0% to all unitholders, pro rata, 1.0% to our general partner and 14.0% to the holders of the incentive distribution rights, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of cash from operating surplus in excess of the first target distribution per unit that we distributed 85.0% to the unitholders, pro rata, 1.0% to our general partner and 14.0% to the holders of the incentive distribution rights for each quarter of our existence;

 

   

Sixth, 75.0% to all unitholders, pro rata, and 1.0% to our general partner and 24.0% to the holders of the incentive distribution rights, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of cash from operating surplus in excess of the second target distribution per unit that we distributed 75.0% to the unitholders, pro rata, 1.0% to our general partner and 24.0% to the holders of the incentive distribution rights for each quarter of our existence; and

 

   

Thereafter, 50.0% to all unitholders, pro rata, 1.0% to our general partner and 49.0% to the holders of the incentive distribution rights.

 

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If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the first bullet point above and all of the second bullet point above will no longer be applicable.

Manner of Adjustments for Losses

If our liquidation occurs before the end of the subordination period, we will generally allocate any loss to our general partner, the holders of the incentive distribution rights and the unitholders in the following manner:

 

   

First, 99.0% to holders of subordinated units in proportion to the positive balances in their capital accounts and 1.0% to our general partner, until the capital accounts of the subordinated unitholders have been reduced to zero;

 

   

Second, 99.0% to the holders of common units in proportion to the positive balances in their capital accounts and 1.0% to our general partner, until the capital accounts of the common unitholders have been reduced to zero; and

 

   

Thereafter, 100% to our general partner.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

Adjustments to Capital Accounts Upon Issuance of Additional Units

We will make adjustments to capital accounts upon the issuance of additional units. In doing so, we generally will allocate any unrealized and, for tax purposes, unrecognized gain resulting from the adjustments to the unitholders, the holders of the incentive distribution rights and our general partner in the same manner as we allocate gain upon liquidation. By contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders and our general partner based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common and subordinated units. In the event we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The following table presents selected historical consolidated financial and operating data of our predecessor, Sprague Energy Corp., as of the dates and for the periods indicated. The selected historical consolidated financial data presented as of December 31, 2006, 2007 and 2008 and for the years ended December 31, 2006 and 2007 are derived from audited historical consolidated balance sheets of Sprague Energy Corp. that are not included in this prospectus. The selected historical consolidated financial data presented as of December 31, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010 are derived from the audited historical consolidated financial statements of Sprague Energy Corp. that are included elsewhere in this prospectus. The selected historical consolidated financial data presented as of March 31, 2011 and for the three months ended March 31, 2010 and 2011 are derived from the unaudited historical condensed consolidated financial statements of Sprague Energy Corp. that are included elsewhere in this prospectus. The selected historical consolidated financial data presented as of March 31, 2010 are derived from the unaudited historical condensed consolidated financial statements of Sprague Energy Corp. that are not included in this prospectus.

The selected pro forma consolidated financial data presented for the year ended December 31, 2010 and as of and for the three months ended March 31, 2011 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:

 

   

The contribution to Sprague Holdings by Axel Johnson of all of the ownership interests in our predecessor;

 

   

The conversion of our predecessor into Sprague Operating Resources LLC, which will be our operating subsidiary;

 

   

The distribution to Sprague Holdings by Sprague Operating Resources LLC of certain of its assets and liabilities that will not be a part of us, including:

 

   

$             million of accounts receivable;

 

   

certain deferred tax assets and deferred tax liabilities;

 

   

our predecessor’s 50% equity interest in Kildair; and

 

   

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

 

   

The issuance by us to our general partner of a 1.0% general partner interest in us and a capital contribution to us by our general partner;

 

   

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

 

   

The issuance and sale by us, and the sale by Sprague Holdings, of              and              common units, respectively, to the public, representing an aggregate         % 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”; and

 

 

   

The application of the net proceeds from the issuance and sale of              common units by us as described in “Use of Proceeds”.

 

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The unaudited pro forma consolidated balance sheet assumes the items listed above occurred as of March 31, 2011. The unaudited pro forma consolidated income statements for the year ended December 31, 2010 and for the three months ended March 31, 2011 assume the items listed above occurred as of January 1, 2010.

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.” The following table should also be read in conjunction with “Use of Proceeds,” “Prospectus Summary—The Formation Transactions,” the audited historical consolidated financial statements of Sprague Energy Corp. 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 measures EBITDA and adjusted EBITDA, which we use in our business as they are important supplemental measures of our performance. We define and explain these measures under “—Non-GAAP Financial Measures” and reconcile them to net income, their most directly comparable financial measure calculated and presented in accordance with GAAP.

 

    Predecessor Historical     Partnership
Pro Forma(1)(2)
 
  Year Ended December 31,     Three Months Ended
March 31,
    Year
Ended
December  31,

2010
    Three
Months
Ended
March 31,

2011
 
  2006     2007     2008     2009     2010     2010     2011      
    (audited)     (unaudited)     (unaudited)  
    (in thousands, except per unit data and operating data)  

Statement of Income Data:

                 

Net sales

  $ 3,194,897      $ 3,848,657      $ 4,156,442      $ 2,460,115      $ 2,817,191      $ 924,621      $ 1,265,816      $ 2,817,191      $ 1,265,816   

Cost of products sold

    3,047,787        3,744,982        4,005,305        2,313,644        2,676,301        873,815        1,219,036        2,676,301        1,219,036   
                                                                       

Gross margin

    147,110        103,675        151,137        146,471        140,890        50,806        46,780        140,890        46,780   
                                                                       

Operating expenses

    42,435        43,014        46,761        44,448        41,102        10,279        10,639        41,102        10,639   

Selling, general and administrative

    45,671        38,300        49,687        47,836        40,625        11,481        12,945        40,123 (3)      11,771 (3) 

Depreciation and amortization

    11,201        11,470        11,020        10,615        10,531        2,561        2,634        10,531        2,634   
                                                                       

Total operating costs and expenses

    99,307        92,784        107,468        102,899        92,258        24,321        26,218        91,756        25,044   
                                                                       

Operating income

    47,803        10,891        43,669        43,572        48,632        26,485        20,562        49,134        21,736   

Other income

    56        1,358        159        —