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SUSP > SEC Filings for SUSP > Form 10-Q on 14-Aug-2013All Recent SEC Filings

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Form 10-Q for SUSSER PETROLEUM PARTNERS LP


14-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Unless the context otherwise requires, references in the report to the "Predecessor," "we," "our," "us" or like terms, when used in a historical context (periods prior to September 25, 2012), refer to Susser Petroleum Company LLC and subsidiaries, our predecessor for accounting purposes. References when used in the present tense or prospectively (after September 24, 2012), refer to Susser Petroleum Partners LP and its subsidiaries, also referred to as "SUSP" or the "Partnership." Unless the context otherwise requires, references in this report to "SUSS" or "Parent" refer collectively to Susser Holdings Corporation and any of its subsidiaries, other than Susser Petroleum Partners LP, its subsidiaries and its general partner.
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 our audited financial statements for 2012 contained in our Annual Report on Form 10-K, 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. Please see footnote (3) 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.
Forward-Looking Statements
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.

All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements.

For a discussion of these and other risks and uncertainties, please refer to "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, and in each subsequent quarterly report on Form 10-Q, including this filing. 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 the date hereof. 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, on September 25, 2012. As of June 30, 2013, SUSS operates 567 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 three and six month periods ended June 30, 2013, we distributed 264.1 million and 515.2


million gallons of motor fuel to Stripes® convenience stores and SUSS' consignment locations, and 124.9 million and 240.8 million gallons of motor fuel to other third party customers. We are a leading 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 agreement;

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

• approximately 488 convenience stores and retail fuel outlets operated by independent operators, which we refer to as "dealers," pursuant to long-term distribution agreements; and

• approximately 1,800 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 Note 15 to our Consolidated Financial Statements for information regarding related-party transactions.

Factors Affecting Comparability of our Financial Results The Partnership's post IPO 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 for the three and six months ended June 30, 2012 include our Predecessor's results of operations. 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.


                                                 Three Months Ended                           Six Months Ended
                                            June 30,               June 30,               June 30,            June 30,
                                            2012 (1)                 2013                 2012 (1)              2013
                                          Predecessor                                    Predecessor
                                             (in thousands, except for selling price and gross profit per gallon)
Revenues:
Motor fuel sales to third parties
(2)                                  $           466,743       $      363,318       $           905,543     $   710,822
Motor fuel sales to affiliates (2)               616,727              751,304                 1,247,171       1,482,031
Rental income                                      1,355                2,276                     2,719           3,905
Other income                                       1,686                1,207                     3,731           2,506
Total revenue                                  1,086,511            1,118,105                 2,159,164       2,199,264
Gross profit:
Motor fuel gross profit to third
parties (2)                                       11,570                6,078                    18,682          11,875
Motor fuel gross profit to
affiliates (2)                                         -                7,934                         -          15,352
Rental income                                      1,355                2,276                     2,719           3,905
Other                                              1,255                  668                     2,662           1,380
Total gross profit                                14,180               16,956                    24,063          32,512
Net income                           $             3,703       $        9,680       $             5,377     $    17,907
Adjusted EBITDA (3)                  $             8,048       $       12,840       $            13,012     $    24,067
Distributable cash flow (3)                                    $       11,907                               $    22,342
Operating Data:
Total motor fuel gallons sold:
 Third-party                                     153,565              124,943                   295,147         240,773
 Affiliated gallons                              215,462              264,098                   425,249         515,150
Average wholesale selling price per
gallon                               $              2.94       $         2.87       $              2.99     $      2.90
Motor fuel gross profit cents per
gallon (2):
Third-party                                          7.5 ˘                4.9 ˘                     6.3 ˘           4.9 ˘
Affiliated                                             - ˘                3.0 ˘                       - ˘           3.0 ˘
Volume-weighted average for all
gallons                                              3.1 ˘                3.6 ˘                     2.6 ˘           3.6 ˘

(1) Results represent Predecessor.

(2) For the second quarter and first half of 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, and these sales are classified as affiliated sales.

(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.

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. 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, Adjusted EBITDA and distributable cash flow:

                                           Three Months Ended                 Six Months Ended
                                        June 30,         June 30,         June 30,         June 30,
                                          2012             2013             2012             2013
                                       Predecessor                       Predecessor
                                                              (in thousands)
Net income                           $      3,703      $     9,680     $       5,377     $    17,907
Depreciation, amortization and
accretion                                   1,892            1,837             3,776           3,658
Interest expense, net                          92              766               180           1,449
Income tax expense                          2,102               84             3,074             153
EBITDA                                      7,789           12,367            12,407          23,167
Non-cash stock-based compensation             334              401               569             806
Loss (gain) on disposal of assets
and impairment charge                         (75 )             72                36              94
Adjusted EBITDA                      $      8,048      $    12,840     $      13,012     $    24,067
Cash interest expense                                          671                             1,258
State franchise tax expense (cash)                              72                               141
Maintenance capital expenditures                               190                               326
Distributable cash flow                                $    11,907                       $    22,342

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012 The following discussion of results for the second quarter 2013 compared to the second quarter 2012 reflects the combined results of our Predecessor for the second quarter of 2012 and SUSP results for the second quarter of 2013. The Partnership's post IPO results of operations may not be comparable to the Predecessor's historical results of operations, as further discussed in "Factors Affecting Comparability of our Financial Results" and "Pro Forma Results of Operations."
Revenue. Total revenue for the second quarter of 2013 was $1.1 billion, an increase of $31.6 million, or 2.9%, from the second quarter of 2012. Motor fuel sales to third parties decreased $103.4 million, or 22.2%. Of this decrease, $93.3 million is related to 2012 consignment motor fuel sales which are now included in affiliated sales. Of the remaining decrease, the wholesale selling price per gallon of motor fuel decreased 4.3%. Motor fuel sales to affiliates increased $134.6 million, or 21.8%, from the second quarter of 2012. Of this increase, $91.0 million related to 2013 consignment motor fuel sales that were previously reflected in third party sales for the Predecessor. The remaining increase consisted of an 8.3% increase in gallons sold to affiliates, offset by a 0.6% decrease in the wholesale selling price of motor fuel. Rental revenue of $2.3 million increased by $0.9 million from last year due to the acquisition of 20 convenience store locations from SUSS we subsequently leased back to them.


Cost of Sales and Gross Profit. Gross profit for the second quarter of 2013 was $17.0 million, an increase of $2.8 million, or 19.6%, over the second quarter of 2012. Gross profit on motor fuel sales to third parties decreased $5.5 million primarily attributable to the shift of consignment sales from third party to affiliated sales, as discussed above. The sales price of motor fuel sold to third parties decreased by 13.1 cents per gallon while the cost of fuel decreased 10.5 cents per gallon resulting in a 2.6 cents per gallon decrease in gross profit. The Predecessor sold motor fuel to affiliates at cost, resulting in no gross profit on motor fuel sales to affiliates. SUSP sold fuel to affiliates at a gross profit of approximately 3.0 cents per gallon, resulting in $7.9 million gross profit for the three months ended June 30, 2013. Other gross profit of $3.0 million increased by $0.3 million from last year, primarily attributed to rental income, offset by the reduction of certain income streams not contributed to us at the IPO.
Total Operating Expenses. Total operating expenses for the second quarter of 2013 were $6.4 million, a decrease of $1.9 million, or 22.4%, from the second quarter of 2012. For the second quarter of 2013, general and administrative expenses, or G&A expenses, increased by $0.5 million, or 15.7%, from 2012. The increase in G&A was primarily attributable to increased cost of salaries, and benefits related to annual compensation increases and headcount additions during 2013. A portion of the G&A increase is attributable to a planned $2 million annual increase related to new public company expenses. Also included in G&A expense is $0.4 million of non-cash stock compensation expense, an increase of $0.1 million compared to the prior year. Other operating expenses decreased $1.6 million, or 74.2%, primarily related to operating expenses associated with activities not contributed to us in the IPO. Rent expense was $0.8 million less for the second quarter of 2013 than the second quarter of 2012 as not all Predecessor properties were contributed to us. For the same reason, depreciation, amortization and accretion expense for the second quarter of 2013 of $1.8 million was down $0.1 million, or 2.9%, from 2012.
Income Tax Expense. Income tax expense was $2.0 million less in the second quarter of 2013 than the second quarter of 2012. The effective tax rate for the second quarter of 2013 was 0.7% compared to 36.2% for the second quarter of 2012. The second quarter of 2012 reflects the income tax provision of the Predecessor. The Predecessor was a taxable entity and was included in SUSS' income tax returns. For the second quarter of 2013, SUSP, as a pass through entity, is not subject to income tax, with the exception of PropCo, but is subject to Texas franchise tax.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012 The following discussion of results for the first six months 2013 compared to the first six months 2012 reflects the combined results of our Predecessor for the first six months of 2012 and SUSP results for the first six months of 2013. The Partnership's post IPO results of operations may not be comparable to the Predecessor's historical results of operations, as further discussed in "Factors Affecting Comparability of our Financial Results" and "Pro Forma Results of Operations."
Revenue. Total revenue for the first six months of 2013 was $2.2 billion, an increase of $40.1 million, or 1.9%, from the first six months of 2012. Motor fuel sales to third parties decreased $194.7 million, or 21.5%. Of this decrease, $180.8 million is related to 2012 consignment motor fuel sales which are now included in affiliated sales. Of the remaining decrease, the wholesale selling price per gallon of motor fuel decreased 3.8% offset by gallons sold to third parties which increased 0.9%. Motor fuel sales to affiliates increased $234.9 million, or 18.8%, from the first six months of 2012. Of this increase, $175.1 million related to 2013 consignment motor fuel sales that were previously reflected in third party sales for the Predecessor. The remaining increase consisted of 6.8% increase in gallons sold to affiliates, offset by a 1.9% decrease in the wholesale selling price of motor fuel. Rental revenue of $3.9 million increased by $1.2 million from last year due to the acquisition of 20 convenience store locations from SUSS we subsequently leased back to them. Cost of Sales and Gross Profit. Gross profit for the first six months of 2013 was $32.5 million, an increase of $8.4 million, or 35.1%, over the first six months of 2012. Gross profit on motor fuel sales to third parties decreased $6.8 million primarily attributable to the shift of consignment sales from third party to affiliated sales, as discussed above. The sales price of motor fuel sold to third parties decreased by 11.6 cents per gallon while the cost of fuel decreased 10.2 cents per gallon resulting in a 1.4 cents per gallon decrease in gross profit. The Predecessor sold motor fuel to affiliates at cost, resulting in no gross profit on motor fuel sales to affiliates. SUSP sold fuel to affiliates at a gross profit of approximately 3.0 cents per gallon, resulting in $15.4 million gross profit for the six months ended June 30, 2013. Other gross profit of $5.3 million decreased by $0.1 million from last year, primarily attributed to certain income streams not contributed to us at the IPO offset by additional rent income.
Total Operating Expenses. Total operating expenses for the first six months of 2013 were $13.0 million, a decrease of $2.4 million, or 15.7%, from the first six months of 2012. For the first six months of 2013, general and administrative expenses, or G&A expenses, increased by $1.7 million, or 30.1%, from 2012. The increase in G&A was primarily attributable to increased cost of salaries, bonus and benefits related to annual compensation increases and headcount additions during 2013. A portion of the G&A increase is attributable to a planned $2 million annual increase related to new public company expenses.


Also included in G&A expense is $0.8 million of non-cash stock compensation expense, an increase of $0.2 million compared to the prior year. Other operating expenses decreased $2.4 million, or 67.1%, primarily related to operating expenses associated with activities not contributed to us in the IPO. Rent expense was $1.7 million less in the first six months of 2013 than the first six months of 2012 due to Predecessor properties not being contributed to us. For this same reason, depreciation, amortization and accretion expense for the first six months of 2013 of $3.7 million was down $0.1 million, or 3.1%, from 2012. Income Tax Expense. Income tax expense was $2.9 million less in the first six months of 2013 than the first six months of 2012. The effective tax rate for the first six months of 2013 was 0.8% compared to 36.4% for the first six months of 2012. The six months of 2012 reflects the income tax provision of the Predecessor. The Predecessor was a taxable entity and was included in SUSS' income tax returns. For the first six months of 2013, SUSP, as a pass through entity, is not subject to income tax, with the exception of PropCo which is subject to income tax, but is subject to Texas franchise tax.

Pro Forma Results of Operations
We have provided below certain pro forma results for the three and six months ended June 30, 2012, which give pro forma effect to (i) the contribution by our Predecessor to us of substantially all of the assets and operations comprising its wholesale motor fuel distribution business (other than its motor fuel consignment business and transportation assets and substantially all of its accounts receivable and payable) and the contribution by SUSS and our Predecessor to us of certain convenience store properties and (ii) our entry into the SUSS Distribution agreement, the SUSS Transportation agreement and the Omnibus Agreement as if such transactions had occurred at the beginning of the period presented.
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, as opposed to third parties, without receiving any profit margin. Accordingly, . . .

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