| Segment Reporting |
The Partnership has four reporting operating segments that comprise the structure used by the chief operating decision makers (CEO and CFO/COO) to make key operating decisions and assess performance. These segments are refined products, natural gas, materials handling and other activities. The Partnership’s refined products segment purchases a variety of refined products, such as heating oil, diesel fuel, residual fuel oil, asphalt, kerosene, jet fuel and gasoline (primarily from refining companies, trading organizations and producers), and sells them to its customers. The Partnership has wholesale customers who resell the refined products they purchase from the Partnership and commercial customers who consume the refined products they purchase. The Partnership’s wholesale customers consist of home heating oil retailers and diesel fuel and gasoline resellers. The Partnership’s commercial customers include federal and state agencies, municipalities, regional transit authorities, large industrial companies, real estate management companies, hospitals and educational institutions. The Partnership’s natural gas segment purchases natural gas from natural gas producers and trading companies and sells and distributes natural gas to commercial and industrial customers primarily in the Northeast and Mid-Atlantic United States. The Partnership’s materials handling segment offloads, stores, and/or prepares for delivery a variety of customer-owned products, including asphalt, clay slurry, salt, gypsum, crude oil, residual fuel oil, coal, petroleum coke, caustic soda, tallow, pulp and heavy equipment. These services are fee-based activities which are generally conducted under multi-year agreements. The Partnership’s other activities include the purchase, sale and distribution of coal, commercial trucking activities unrelated to its refined products segment and a heating equipment service business. Other activities are not reported separately as they represent less than 10% of consolidated net sales and adjusted gross margin. The Partnership evaluates segment performance based on adjusted gross margin, a non-GAAP measure, which is net sales less cost of products sold (exclusive of depreciation and amortization) increased by unrealized hedging losses and decreased by unrealized hedging gains, in each case with respect to refined products and natural gas inventory, prepaid forward contracts and natural gas transportation contracts. Based on the way the business is managed, it is not reasonably possible for the Partnership to allocate the components of operating costs and expenses among the operating segments. There were no significant intersegment sales for any of the years presented below. The Partnership had no single customer whose revenue was greater than 10% of total net sales for the years ended December 31, 2016, 2015 and 2014, respectively. The Partnership’s foreign sales, primarily sales of refined products, asphalt and natural gas to its customers in Canada, were $196.4 million, $207.7 million and $344.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Summarized financial information for the Partnership’s reportable segments is presented in the table below: | | | | | | | | | | | | | | Years Ended December 31, | | 2016 | | 2015 | | 2014 | Net sales: | | | | | | Refined products | $ | 1,988,597 |
| | $ | 3,063,858 |
| | $ | 4,650,871 |
| Natural gas | 334,003 |
| | 347,453 |
| | 359,984 |
| Materials handling | 45,734 |
| | 45,570 |
| | 37,776 |
| Other operations | 21,664 |
| | 25,033 |
| | 21,131 |
| Net sales | $ | 2,389,998 |
| | $ | 3,481,914 |
| | $ | 5,069,762 |
| Adjusted gross margin (1): | | | | | | Refined products | $ | 142,581 |
| | $ | 170,448 |
| | $ | 146,021 |
| Natural gas | 62,435 |
| | 51,004 |
| | 55,536 |
| Materials handling | 45,712 |
| | 45,564 |
| | 37,811 |
| Other operations | 8,545 |
| | 8,986 |
| | 5,599 |
| Adjusted gross margin | 259,273 |
| | 276,002 |
| | 244,967 |
| Reconciliation to operating income (2): | | | | | | Add: unrealized (loss) gain on inventory derivatives (3) | (31,304 | ) | | (2,079 | ) | | 11,070 |
| Add: unrealized gain (loss) on prepaid forward contract derivatives (4) | 1,552 |
| | (2,628 | ) | | — |
| Add: unrealized (loss) gain on natural gas transportation contracts (5) | (18,612 | ) | | 21,695 |
| | 58,694 |
| Operating costs and expenses not allocated to operating segments: | | | | | | Operating expenses | (65,882 | ) | | (71,468 | ) | | (62,993 | ) | Selling, general and administrative | (84,257 | ) | | (94,403 | ) | | (76,420 | ) | Depreciation and amortization | (21,237 | ) | | (20,342 | ) | | (17,625 | ) | Operating income | 39,533 |
| | 106,777 |
| | 157,693 |
| Other (expense) income | (114 | ) | | 298 |
| | (288 | ) | Interest income | 388 |
| | 456 |
| | 569 |
| Interest expense | (27,533 | ) | | (27,367 | ) | | (29,651 | ) | Income tax provision | (2,108 | ) | | (1,816 | ) | | (5,509 | ) | Net income | $ | 10,166 |
| | $ | 78,348 |
| | $ | 122,814 |
|
| | (1) | The Partnership trades, purchases, stores and sells energy commodities that experience market value fluctuations. To manage the Partnership’s underlying performance, including its physical and derivative positions, management utilizes adjusted gross margin, which is a non-GAAP financial measure. Adjusted gross margin is also used by external users of the Partnership’s consolidated financial statements to assess the Partnership’s economic results of operations and its commodity market value reporting to lenders. In determining adjusted gross margin, the Partnership adjusts its segment results for the impact of unrealized hedging gains and losses with regard to refined products and natural gas inventory, prepaid forward contracts and natural gas transportation contracts, which are not marked to market for the purpose of recording unrealized gains or losses in net income. These adjustments align the unrealized hedging gains and losses to the period in which the revenue from the sale of inventory, prepaid fixed forwards and the utilization of transportation contracts relating to those hedges is realized in net income. Adjusted gross margin has no impact on reported volumes or net sales. |
| | (2) | Reconciliation of adjusted gross margin to operating income, the most directly comparable GAAP measure. |
| | (3) | Inventory is valued at the lower of cost or market. The fair value of the derivatives the Company uses to economically hedge its inventory declines or appreciates in value as the value of the underlying inventory appreciates or declines, which creates unrealized hedging (losses) gains with respect to the derivatives that are included in net income. |
| | (4) | The unrealized hedging gain (loss) on prepaid forward contract derivatives represents the Partnership’s estimate of the change in fair value of the prepaid forward contracts which are not recorded in net income until the forward contract is settled in the future (i.e., when the commodity is delivered to the customer). As these contracts are prepaid, they do not qualify as derivatives and changes in the fair value are therefore not included in net income. The fair value of the derivatives the Partnership uses to economically hedge its prepaid forward contracts declines or appreciates in value as the value of the underlying prepaid forward contract appreciates or declines, which creates unrealized hedging gains (losses) that are included in net income. |
| | (5) | The unrealized hedging (loss) gain on natural gas transportation contracts represents the Partnership’s estimate of the change in fair value of the natural gas transportation contracts which are not recorded in net income until the transportation is utilized in the future (i.e., when natural gas is delivered to the customer), as these contracts do not qualify as derivatives. As the fair value of the natural gas transportation contracts decline or appreciate, the offsetting physical or financial derivative will also appreciate or decline creating unmatched unrealized hedging (losses) gains in net income as of each period end. |
Segment Assets Due to the commingled nature and uses of the Partnership’s fixed assets, the Partnership does not track its fixed assets between its refined products and materials handling operating segments or its other activities. There are no significant fixed assets attributable to the natural gas reportable segment. Changes in the carrying amount of goodwill by segment were as follows: | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2014 | | Activity | | As of December 31, 2015 | | Activity (1) | | As of December 31, 2016 | Refined products | $ | 36,550 |
| | $ | — |
| | $ | 36,550 |
| | $ | — |
| | $ | 36,550 |
| Natural gas | 18,626 |
| | — |
| | 18,626 |
| | 7,262 |
| | 25,888 |
| Materials handling | 6,896 |
| | — |
| | 6,896 |
| | — |
| | 6,896 |
| Other | 1,216 |
| | — |
| | 1,216 |
| | — |
| | 1,216 |
| Total | $ | 63,288 |
| | $ | — |
| | $ | 63,288 |
| | $ | 7,262 |
| | $ | 70,550 |
|
| | (1) | Reflects goodwill attributable to the Santa Buckley Energy, Inc.'s natural gas business acquisition. |
Long-lived Assets Long-lived assets (exclusive of intangible and other assets, net, and goodwill) classified by geographic location were as follows: | | | | | | | | | | As of December 31, | | 2016 | | 2015 | United States | $ | 170,841 |
| | $ | 168,144 |
| Canada | 80,260 |
| | 82,765 |
| Total | $ | 251,101 |
| | $ | 250,909 |
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