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SUSP > SEC Filings for SUSP > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for SUSSER PETROLEUM PARTNERS LP


29-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, as well as the historical consolidated financial statements and notes thereto of Susser Petroleum Company LLC, our Predecessor, and the pro forma financial statements for Susser Petroleum Partners LP included in our prospectus dated September 19, 2012, as filed with the Securities and Exchange Commission ("SEC") on September 21, 2012.
EBITDA, Adjusted EBITDA, and distributable cash flow are non-GAAP financial measures of performance that have limitations and should not be considered as a substitute for net income or cash provided by (used in) operating activities. Please see footnote (1) under "Key Operating Metrics" below for a discussion of our use of EBITDA, Adjusted EBITDA, and distributable cash flow in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and a reconciliation to net income for the periods presented.

Safe Harbor Discussion

This report, including without limitation, our discussion and analysis of our financial condition and results of operations, and any information incorporated by reference, contains statements that we believe are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and are intended to enjoy protection under the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by use of phrases such as "believe," "plan," "expect," "anticipate," "intend," "forecast" or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, costs, anticipated capital expenditures, expected cost savings and benefits are also forward-looking statements. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:

•         SUSS' business strategy and operations and SUSS' conflicts of interest
          with us;


•         Renewal or renegotiation of our long-term distribution contracts with
          our customers;

• Changes in the price of and demand for the motor fuel that we distribute;

• Our dependence on two principal suppliers;

• Competition in the wholesale motor fuel distribution industry;

• Seasonal trends;

• Our ability to make acquisitions;

• Environmental laws and regulations;

• Dangers inherent in the storage of motor fuel; and


• Our reliance on SUSS for transportation services.

For a discussion of these and other risks and uncertainties, please refer to "Item 1A. Risk Factors." The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of March 29, 2013. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available in the future.

Overview
We are a growth-oriented Delaware limited partnership formed by SUSS to engage in the primarily fee-based wholesale distribution of motor fuels to SUSS and third parties. We closed the initial public offering of our common units, including related restructuring transactions and entry into certain key agreements with SUSS, as more particularly described in the prospectus relating to our initial public offering on September 25, 2012.
SUSS operates approximately 560 retail convenience stores under its proprietary Stripes® convenience store brand, primarily in growing Texas markets. Stripes is a leading independent chain of convenience stores in Texas based on store count and retail motor fuel volumes sold. Our business is integral to the success of SUSS' retail operations, and SUSS purchases substantially all of its motor fuel from us. For the year ended December 31, 2012, we distributed 889.8 million gallons of motor fuel to Stripes® convenience stores and SUSS' consignment locations, and 560.2 million gallons of motor fuel to other third party customers. We believe we are the largest independent motor fuel distributor by gallons in Texas, and among the largest distributors of Valero and Chevron branded motor fuel in the United States.
In addition to distributing motor fuel, we also distribute other petroleum products such as propane and lube oil, and we receive rental income from real estate that we lease or sublease. We purchase motor fuel primarily from independent refiners and major oil companies and distribute it throughout Texas and in Louisiana, New Mexico and Oklahoma to:
• Stripes® convenience stores, pursuant to the SUSS Distribution Contract;

• approximately 90 other independently operated consignment locations where SUSS sells motor fuel to retail customers, also pursuant to the SUSS Distribution Contract;

• over 480 convenience stores and retail fuel outlets operated by independent operators, which we refer to as "dealers," pursuant to long-term distribution agreements; and

• over 1,600 other commercial customers, including unbranded convenience stores, other fuel distributors, school districts and municipalities and other industrial customers.

We entered into several agreements with SUSS concurrent with our IPO. See "Item
13. Certain Relationships, Related Transactions and Director Independence" for information regarding related party transactions.

Market and Industry Trends and Outlook
We expect that certain trends and economic or industry-wide factors will continue to affect our business, both in the short-term and long-term. We have based our expectations described below on assumptions made by us and on the basis of information currently available to us. To the extent our underlying assumptions about or interpretation of available information prove to be incorrect, our actual results may vary materially from our expected results. Read "Item 1A. Risk Factors" for additional information about the risks associated with purchasing our common units.

Regional Trends
The majority of our fuel distribution business is conducted in Texas. The economy in Texas continues to fare better than many other parts of the nation, partly as a result of a relatively stable housing market and strong population growth and job creation. In 2012, Texas ranked first in the United States for job growth according to the U.S. Bureau of Labor Statistics and first in the United States for population growth for the ten-year period ended 2010 as reflected in the 2010 census report. We also believe the significant expansion of oil and gas development in the Eagle Ford Shale and Permian Basin has resulted in increased motor fuel usage in South and West Texas. The Texas Comptroller of Public Accounts has reported that gasoline gallons taxed in Texas have grown significantly during the last several decades. From 1989 to 2012, gasoline consumption grew approximately 44.9% from 8.5 billion gallons


to 12.3 billion gallons, or at an approximate 1.6% compound annual growth rate. Gasoline consumption grew in 18 of the 23 years during the period. As of 2011, Texas motor gasoline consumption totaled approximately 8.9% of U.S. consumption. Similarly, diesel gallons taxed in Texas have grown significantly during the last several decades. From 1989 to 2012, diesel consumption grew approximately 152.2%, from 1.6 billion gallons to 4.0 billion gallons, or at an approximate 4.1% compound annual growth rate. Diesel consumption grew in 18 of the 23 years during this period.

Industry Consolidation
We believe that there is considerable opportunity for consolidation in our industry as major integrated oil companies continue to divest sites they own or lease, and independent dealers have experienced pressure from increased competition from non-traditional fuel suppliers, such as Walmart and grocery store chains. We intend to capitalize on the relationship between our wholesale business and SUSS' complementary retail business by jointly pursuing mixed asset acquisition opportunities with SUSS which may not be attractive to a pure wholesaler or pure retailer. Pursuant to the Omnibus Agreement, we will have a right to negotiate with SUSS to acquire any third?party distribution contracts and to distribute fuel to any retail stores or consignment locations included in a potential acquisition under consideration by SUSS, other than any retail stores already party to an existing supply agreement. We therefore expect to have the opportunity to participate with SUSS in acquiring convenience store operations and related wholesale distribution businesses through (i) directly purchasing any dealer distribution contracts or other wholesale distribution contracts and assets owned by the acquisition target, (ii) selling additional fuel volumes to convenience stores that SUSS acquires or to SUSS for any acquired consignment locations, and (iii) entering into additional sale and leaseback arrangements with respect to acquired stores. We believe these opportunities will provide for growth in both our fuel volumes and rental income.

Seasonality
Our business exhibits some seasonality due to our customers' increasing demand for motor fuel during the late spring and summer months as compared to the fall and winter months. Travel, recreation and construction activities typically increase in these months in the geographic areas in which we operate, increasing the demand for motor fuel. Therefore, the volume of motor fuel that we distribute is typically somewhat higher in the second and third quarters of our fiscal year. As a result, our results from operations may vary from period to period.

How We Evaluate and Assess Our Business
Our management uses a variety of financial measurements to analyze our performance. Key measures we use to evaluate and assess our business include the following:

•         Motor fuel gallons sold. One of the primary drivers of our business is
          the total volume of motor fuel sold. Our long-term fuel distribution
          contracts with our customers, including SUSS, typically provide that we
          will distribute motor fuel at a fixed, volume?based profit margin. As a
          result, our gross profit is directly tied to the volume of motor fuel
          that we distribute.


•         Gross profit per gallon. Gross profit per gallon reflects the gross
          profit on motor fuel divided by the number of gallons sold, which we
          typically express in terms of cents per gallon. Historically, sales of
          motor fuel to SUSS' retail convenience stores have been at cost and
          therefore, our Predecessor earned profits only on gallons sold to third
          parties. Pursuant to the SUSS Distribution Contract, we receive a fixed
          profit margin per gallon on all of the motor fuel we distribute to
          Stripes® convenience stores and to SUSS' consignment locations. The
          financial impact of this fee, if it had been generated on our
          historical volumes sold, is reflected in our discussion of pro forma
          results of operations later in this section. Our gross profit cents per
          gallon varies among our third?party customers and is impacted by the
          availability of certain discounts and rebates from our suppliers.
          Pursuant to the SUSS Transportation Contract, SUSS arranges for motor
          fuel to be delivered from our suppliers to our customers, with the
          costs being passed entirely along to our customers. As a result, our
          cost to purchase fuel and any transportation costs that we incur are
          generally passed through to our customers, and therefore do not have a
          substantial impact on our gross profit cents per gallon.


•         Adjusted EBITDA and distributable cash flow. We define Adjusted EBITDA
          as net income before net interest expense, income taxes and
          depreciation, amortization and accretion, as further adjusted to
          exclude allocated non-cash stock?based compensation expense and certain
          other operating expenses that are reflected in our net income that we
          do not believe are indicative of our ongoing core operations, such as
          the gain or loss on disposal of assets. We define distributable cash
          flow as Adjusted EBITDA less cash interest expense, cash state
          franchise expense, maintenance capital expenditures and other non-cash
          adjustments.


We believe Adjusted EBITDA and distributable cash flow are useful to investors in evaluating our operating performance because:

•               securities analysts and other interested parties use such metrics
                as measures of financial performance, ability to make
                distributions to our unitholders and debt service capabilities;

• they are used as performance measures under our revolving credit facility; and

•               they are used by our management for internal planning purposes,
                including aspects of our consolidated operating budget and
                capital expenditures.

For a reconciliation of Adjusted EBITDA and distributable cash flow to their most directly comparable financial measure calculated and presented in accordance with GAAP, read "Key Operating Metrics" below. Factors Affecting Comparability of our Financial Results The Partnership's future results of operations may not be comparable to the Predecessor's historical results of operations for the reasons described below:
Revenues and Gross Profits. Our assets have historically been a part of the integrated operations of SUSS, and our Predecessor distributed motor fuel and other petroleum products to SUSS without any profit margin. Accordingly, the revenues and gross profits in our Predecessor's historical consolidated financial statements do not include the profit margin on fuel sold to SUSS. In addition, our Predecessor's results of operations included results from consignment contracts that were retained by SUSS following the completion of the IPO.
General and Administrative Expenses. Our Predecessor's general and administrative expenses included direct charges for the management of its operations as well as certain expenses allocated from SUSS for general corporate services. These expenses were charged, or allocated, to our Predecessor based on the nature of the expenses. The Partnership continues to incur charges for the management of the operations contributed to the Partnership as well as an allocation for general corporate services. We also expect to incur additional incremental general and administrative expenses as a result of being a separate publicly-traded partnership.
Other Operating Expenses and Depreciation, Amortization and Accretion. Our Predecessor's other operating expenses and depreciation, amortization and accretion include direct charges related to consignment operations not contributed to the Partnership.
Income Tax Expense. Our Predecessor was part of a taxable corporation, and as such, was allocated a portion of federal income tax expense. Our income tax expense only includes applicable Texas franchise tax and any federal and state income taxes related to PropCo.

Key Operating Metrics
The following table sets forth, for the periods indicated, information concerning key measures we rely on to gauge our operating performance. Historical results include our Predecessor's results of operations. See the table below for a disaggregation of 2012 results between our Predecessor (prior to September 25, 2012) and the Partnership (beginning September 25, 2012). The following information is intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.


                                                                       Year Ended
                                                 December 31,         December 31,         December 31,
                                                     2010                 2011               2012 (1)
                                                  Predecessor          Predecessor
                                                  (dollars and gallons in thousands, except motor fuel
                                                          pricing and gross profit per gallon)
Revenues:
Motor fuel sales to third parties (2)          $    1,094,273       $    1,549,143       $    1,694,025
Motor fuel sales to affiliates (2)                  1,578,653            2,257,788            2,570,757
Rental income                                           5,351                5,467                5,045
Other income                                            5,515                7,980                7,514
Total revenue                                  $    2,683,792       $    3,820,378       $    4,277,341
Gross profit:
Motor fuel gross profit to third parties (2)   $       26,065       $       31,217       $       33,292
Motor fuel gross profit to affiliates (2)                   -                    -                7,781
Rental income                                           5,351                5,467                5,045
Other                                                   4,683                6,339                5,384
Total gross profit                             $       36,099       $       43,023       $       51,502
Net income                                     $        9,216       $       10,598       $       17,570
Adjusted EBITDA (3)                            $       20,145       $       23,979       $       31,695
Distributable cash flow (3)                                                                      10,457
Operating Data:
Total motor fuel gallons sold:
 Third-party gallons                                  494,209              522,832              560,191
 Affiliated gallons                                   739,104              789,578              889,755
Average wholesale selling price per gallon     $         2.17       $         2.90       $         2.94
Motor fuel gross profit cents per gallon (2):
Third-party                                               5.3 ˘                6.0 ˘                5.9 ˘
Affiliated                                                0.0 ˘                0.0 ˘                0.9 ˘
Volume-weighted average for all gallons                   2.1 ˘                2.4 ˘                2.8 ˘

(1) Results represent Predecessor activity prior to September 25, 2012 and Partnership activity beginning September 25, 2012. See the disaggregated results in the table below.

(2) For the periods presented prior to September 25, 2012, affiliated sales only include sales to Stripes® convenience stores, for which our Predecessor historically received no margin, and third-party motor fuel sales and gross profit cents per gallon includes the motor fuel sold directly to independently operated consignment locations, as well as sales to third-party dealers and other commercial customers. Following our IPO on September 25, 2012, we sell fuel to SUSS for both Stripes® convenience stores and SUSS' independently operated consignment locations at a fixed profit margin of approximately three cents per gallon. As a result, volumes sold to consignment locations are included in the calculation of third-party motor fuel revenue and gross profit in the historical operating data prior to September 25, 2012, and in the calculation of affiliated motor fuel gross profit cents per gallon, in the historical data beginning September 25, 2012.

(3) We define EBITDA as net income before net interest expense, income tax expense and depreciation and amortization expense. Adjusted EBITDA further adjusts EBITDA to reflect certain other non-recurring and non-cash items. We define distributable cash flow as Adjusted EBITDA less cash interest expense, cash state franchise tax expense, maintenance capital expenditures, and other non-cash adjustments. Adjusted EBITDA and distributable cash flow are not financial measures calculated in accordance with GAAP. Distributable cash flow for the year ended December 31, 2012 does not include results related to our Predecessor prior to September 25, 2012.

We believe EBITDA, Adjusted EBITDA and distributable cash flow are useful to investors in evaluating our operating performance because:
• Adjusted EBITDA is used as a performance measure under our revolving credit facility;

• securities analysts and other interested parties use such metrics as measures of financial performance, ability to make distributions to our unitholders and debt service capabilities;


• they are used by our management for internal planning purposes, including aspects of our consolidated operating budget, and capital expenditures; and

• distributable cash flow provides useful information to investors as it is a widely accepted financial indicator used by investors to compare partnership performance, as it provides investors an enhanced perspective of the operating performance of our assets and the cash our business is generating.

EBITDA, Adjusted EBITDA and distributable cash flow are not recognized terms under GAAP and do not purport to be alternatives to net income (loss) as measures of operating performance or to cash flows from operating activities as a measure of liquidity. EBITDA, Adjusted EBITDA and distributable cash flow have limitations as analytical tools, and one should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations include:
• they do not reflect our total cash expenditures, or future requirements, for capital expenditures or contractual commitments;

• they do not reflect changes in, or cash requirements for, working capital;

• they do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our revolving credit facility or term loan;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and

• because not all companies use identical calculations, our presentation of EBITDA, Adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies.

The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA:

                                                                       Year Ended
                                                   December 31,       December 31,       December 31,
                                                       2010               2011               2012
                                                             Predecessor
                                                                     (in thousands)
Net income                                       $        9,216     $       10,598     $       17,570
Depreciation, amortization and accretion                  4,771              6,090              7,031
Interest expense, net                                       284                324                809
Income tax expense                                        5,236              6,039              5,033
EBITDA                                                   19,507             23,051             30,443
Non-cash stock-based compensation                           552                707                911
Loss on disposal of assets and impairment charge             86                221                341
Adjusted EBITDA                                  $       20,145     $       23,979     $       31,695


The following table is a summary of our results of operations for the twelve months ended December 31, 2012, disaggregated for the periods preceding and following our IPO:

                                             Susser Petroleum
                                                Company LLC      Susser Petroleum
                                                Predecessor        Partners LP
                                              January 1, 2012     September 25,      Twelve Months
                                             Through September     2012 Through          Ended
                                                 24, 2012          December 31,      December 31,
                                                                       2012              2012
                                                                 (in thousands)
Revenues:
Motor fuel sales to third parties            $     1,339,980     $      354,045     $   1,694,025
Motor fuel sales to affiliates                     1,848,655            722,102         2,570,757
Rental income                                          4,023              1,022             5,045
Other income                                           5,764              1,750             7,514
Total revenue                                      3,198,422          1,078,919         4,277,341
Gross profit:
Motor fuel gross profit to third parties              27,678              5,614            33,292
Motor fuel gross profit to affiliates                      6              7,775             7,781
Rental income                                          4,023              1,022             5,045
Other                                                  4,287              1,097             5,384
Total gross profit                                    35,994             15,508            51,502
Net income                                   $         8,420     $        9,150     $      17,570
Adjusted EBITDA (a)                          $        20,272     $       11,423     $      31,695
Distributable cash flow (a)                                      $       10,457

(a) Reconciliation of net income to EBITDA, Adjusted EBITDA and distributable cash flow:

                                                   Susser Petroleum
                                                     Company LLC        Susser Petroleum
                                                     Predecessor          Partners LP
                                                   January 1, 2012       September 25,      Twelve Months
                                                  Through September       2012 Through          Ended
. . .
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