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LGP > SEC Filings for LGP > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for LEHIGH GAS PARTNERS LP


12-Nov-2013

Quarterly Report


Item 2. 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 the Partnership and Predecessor Entity Unaudited Condensed Consolidated and Combined Financial Statements and notes thereto included in this Quarterly Report.

Forward Looking Statements

This Quarterly Report on Form 10-Q and oral statements made regarding the subjects of this Quarterly Report may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, or the Reform Act, which may include, but are not limited to, statements regarding our plans, objectives, expectations and intentions and other statements that are not historical facts, including statements identified by words such as "outlook," "intends," "plans," "estimates," "believes," "expects," "potential," "continues," "may," "will," "should," "seeks," "approximately," "predicts," "anticipates," "foresees," or the negative version of these words or other comparable expressions. All statements addressing operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to revenue growth and earnings or earnings per unit growth, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are based upon our current views and assumptions regarding future events and operating performance and are inherently subject to significant business, economic and competitive uncertainties and contingencies and changes in circumstances, many of which are beyond our control. The statements in this Quarterly Report are made as of the date of this Quarterly Report, even if subsequently made available by us on our website or otherwise. We do not undertake any obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report.

Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Achieving the results described in these statements involves a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following factors:

Availability of cash flow to pay minimum quarterly distributions on our common units;

The availability and cost of competing motor fuels resources;

A rise in fuel prices or a decrease in demand for motor fuels;

The volatility of retail fuel prices as it relates to our retail segment;

The consummation of financing, acquisition or disposition transactions and the effect thereof on our business;

Our existing or future indebtedness;

Our liquidity, results of operations and financial condition;

Future legislation and changes in regulations or governmental policies or changes in enforcement or interpretations thereof;

Future changes in tax regulations;

Changes in energy policy;

Increases in energy conservation efforts;

Technological advances;

Volatility in the capital and credit markets;

The impact of worldwide economic and political conditions;

The impact of wars and acts of terrorism;

Weather conditions or catastrophic weather-related damage;

Earthquakes and other natural disasters;

Unexpected environmental liabilities;

The outcome of pending or future litigation; and,

Other factors, including those discussed in Item 1A. Risk Factors, in our Annual Report on Form 10-K filed with the SEC.

All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Quarterly Report in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors important to you.


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Overview

We are a Delaware limited partnership formed to engage in the distribution of motor fuels, consisting of gasoline and diesel fuel, and to own and lease real estate used in the retail distribution of motor fuels. Since our Predecessor was founded in 1992, we have generated revenues from the wholesale distribution of motor fuels to retail sites and from real estate leases.

Our primary business objective is to make quarterly cash distributions to our unitholders and, over time, to increase our quarterly cash distributions. We intend to make minimum quarterly distributions of at least $0.4375 per unit, per quarter (or $1.75 per unit on an annualized basis). We increased our distribution to $0.4525 per unit (or $1.81 per unit on an annualized basis) effective with the June 2013 distribution, $0.4775 per unit (or $1.91 per unit on an annualized basis) effective with the September distribution, and $0.5025 per unit (or $2.01 per unit on an annualized basis) effective with the December distribution. The amount of any distributions is subject to the discretion of the board of directors of our General Partner which may modify or revoke our cash distribution policy at any time. Our partnership agreement does not require us to pay any distributions at all.

We believe consistent demand for motor fuels in the areas where we operate and the contractual nature of our rent income provides a stable source of cash flow. Cash flows from the wholesale distribution of motor fuels will be generated primarily by a per gallon margin that is either a fixed or variable mark-up per gallon, depending on our contract terms. By delivering motor fuels through independent carriers on the same day we purchase the motor fuels from suppliers, we seek to minimize the commodity price risks typically associated with the purchase and sale of motor fuels. We also generate cash flows from rent income primarily by collecting rent from lessee dealers and LGO pursuant to lease agreements. Our lease agreements with lessee dealers had an average remaining lease term of 2.5 years as of September 30, 2013.

For the three and nine months ended September 30, 2013, we distributed an aggregate of approximately 160.5 million and 470.9 million gallons of motor fuels, respectively. As of September 30, 2013, we distributed motor fuels to 765 sites, comprised of the following classes of business:

212 sites operated by independent dealers;

287 sites owned or leased by us and operated by LGO;

216 sites owned or leased by us and operated by lessee dealers; and

50 Commission Sites (see "Recent Developments - Commission Sites" for additional discussion).

In addition, we distribute motor fuels to ten sub-wholesalers who distribute to additional sites (in prior quarters, we included an estimate of the number of sites to which sub-wholesalers distribute).

Over 70% of the sites to which we distribute motor fuels are owned or leased by us. In addition, we have agreements requiring the operators of these sites to purchase motor fuels from us.

We are focused on owning and leasing sites primarily located in metropolitan and urban areas. We own and lease sites located in Pennsylvania, New Jersey, Ohio, New York, Massachusetts, Kentucky, New Hampshire, Maine, Florida, and with our Rogers and Rocky Top acquisitions further discussed below, Tennessee and Virginia. According to the Energy Information Agency, of the 11 states in which we own and lease sites, five are among the top ten consumers of gasoline in the United States and four are among the top ten consumers of on-highway diesel fuel in the United States for 2012. Over 85% of our sites were located in high-traffic metropolitan and urban areas as of December 31, 2012. We believe the limited availability of undeveloped real estate in many of these areas presents a high barrier to entry for new or existing retail gas station owners to develop competing sites.

Recent Developments

Rogers Acquisition

On September 19, 2013, the Partnership completed its purchase of certain assets from Rogers pursuant to which the Partnership purchased 13 motor fuel stations, four leasehold motor fuel stations, assumed certain third-party supply contracts and purchased certain other assets, which were held or used by Rogers in connection with their motor fuels business and related convenience store business located in the Tri-Cities region of Tennessee area, for $20.0 million. One of the sites initially leased was purchased on October 23, 2013 for $1.1 million.


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Simultaneously, LGO completed its purchase of certain assets from Rogers to acquire retail assets (including fuel and merchandise inventory). The income that these assets generate is non-qualifying for federal income tax purposes. Subsequent to the closing, the Partnership and LGO entered into a sublease agreement for all of the sites and a fuel distribution agreement for the purchase and sale of wholesale fuel. The conflicts committee of the General Partner determined that the apportionment of the consideration payable by each of the Partnership and LGO and the terms and conditions of the agreements with LGO are fair and reasonable to the Partnership.

Aggregate incremental revenues for the acquisition included in the Partnership's statements of operations were $1.9 million for the three and nine months ended September 30, 2013.

Rocky Top Acquisition

Effective September 24, 2013, the Partnership completed its purchase of certain assets from Rocky Top pursuant to which the Partnership purchased one motor fuel station, three leasehold motor fuel stations, assumed certain third-party supply contracts and purchased certain other assets, which were held or used by Rocky Top in connection with their motor fuels business and related convenience store business located in the Knoxville, Tennessee area. Concurrent with the closing, the Partnership entered into a lease for 29 motor fuel stations that the Partnership is obligated to purchase, at the election of the sellers, either
(a) in whole for $26.2 million on or about August 1, 2015, or (b) in approximately equal parts over a 5 year period for an average of $5.3 million per year beginning in 2016. Due to the obligation to purchase the sites under the lease, the lease is accounted for as a financing. The Partnership recorded $26.2 million of debt, which was preliminarily determined to be its fair value, and the payments made until the purchase will be classified as interest expense. The Partnership paid $10.7 million in cash to Rocky Top at closing.

Simultaneously, LGO completed its purchase of certain assets from Rocky Top to acquire retail assets (including fuel and merchandise inventory). The income that these assets generate is non-qualifying for federal income tax purposes. Subsequent to the closing, the Partnership and LGO entered into a sublease agreement for all of the sites and a fuel distribution agreement for the purchase and sale of wholesale fuel. The conflicts committee of the General Partner determined that the apportionment of the consideration payable by each of the Partnership and LGO and the terms and conditions of the agreements with LGO are fair and reasonable to the Partnership.

Aggregate incremental revenues for the acquisition included in the Partnership's statements of operations were $1.6 million for the three and nine months ended September 30, 2013.

Dunmore Acquisition

On December 21, 2012, we completed the Dunmore Acquisition. In connection with this transaction, we acquired 24 motor fuel stations, 23 of which are fee simple interests and one of which is a leasehold interest. Incremental rent income for the Dunmore Acquisition included in our financial results was $0.5 million and $1.5 million for the three and nine months ended September 30, 2013.

Express Lane Acquisition

On December 21, 2012, LGWS entered into a stock purchase agreement, pursuant to which the sellers agreed to sell to LGWS all of the outstanding capital stock of Express Lane. In connection with the stock purchase agreement, on December 22, 2012, LGWS acquired 41 motor fuel service stations, one as a fee simple interest and 40 as leasehold interests. In addition, on December 21, 2012, LGPR acquired from Express Lane, prior to LGWS's acquisition of the stock of Express Lane, an additional fee simple interest in six properties and two fuel purchase agreements. Aggregate incremental revenues for the Express Lane acquisition included in our financial results were $33.4 million and $99.0 million for the three and nine months ended September 30, 2013, respectively.

Site Purchases and Divestitures

The following site purchases and divestitures occurred in the nine months ended September 30, 2013:

In April 2013, the Partnership purchased one site in Pennsylvania for $0.7 million.

In April 2013, the Partnership sold five sites in Ohio for $1.5 million, which were included in assets held for sale at December 31, 2012. This transaction did not have a material impact on the results of operations for 2013.

In May 2013, the Partnership sold one site in Kentucky for $0.7 million. This transaction did not have a material impact on the results of operations for 2013.


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In May 2013, the Partnership purchased four sites in Ohio for $7.1 million. These sites were previously leased through sale-leaseback transactions that were accounted for as lease financing obligations with a remaining balance of $5.1 million. The $2.0 million difference between the purchase price and the remaining balance of the lease financing obligation was recorded as an increase to property and equipment.

In June 2013, the Partnership purchased two sites in Florida for $1.6 million, of which $0.6 million was paid in cash and the remaining balance was financed as a note payable.

Commission Sites

Prior to September 1, 2013, the Partnership leased certain sites to Lehigh Gas-Ohio, LLC, an affiliate ("LGO"), which, in turn, subleased certain of these sites (the "Subleases") to third party commission agents (the "Commission Sites") and entered into commission agreements with the agents to sell motor fuel on behalf of LGO to retail customers (the "Commission Agreements"). In connection with the Commission Agreements, LGO also purchased motor fuel from a subsidiary of the Partnership at wholesale prices. Effective September 1, 2013, the Partnership assumed the Commission Agreements and Subleases from LGO and terminated its leases with LGO for the Commission Sites. As a result, the Partnership now records the retail sale of motor fuels to the end customer and accrues a commission payable to the commission agent at the Commission Sites. Further, the Partnership now records inventory from the time of the purchase of motor fuels from third party suppliers until the retail sale to the end customer at these sites. The Commission Sites generate non-qualifying income for federal income tax purposes that is recorded in LGWS, the taxable subsidiary of the Partnership. In September 2013, the Partnership paid LGO $3.5 million (the "Purchase Price") for the Subleases and Commission Agreements and $1.7 million for the motor fuel inventory. Because the transaction was between entities under common control, the assets and liabilities assumed were recorded at LGO's book value. The Purchase Price is presented as a distribution from partners' capital.

With the addition of the business described above, the Partnership engages in 1) the wholesale distribution of motor fuels (using unrelated third party transportation service providers) to sub-wholesalers, independent dealers, lessee dealers, LGO, and others; 2) the retail distribution of motor fuels to end customers through sites operated by commission agents; and 3) the owning or leasing of sites used in the retail distribution of motor fuels and, in turn, generating rent income from the lease or sublease of the sites to third parties or LGO.

Given this change, the Partnership conducts its business in two segments: 1) the wholesale segment and 2) the retail segment. See "Results of Operations" for additional information.

Amendment of Credit Facility

On May 13, 2013, the Partnership entered into an amendment to the Credit Facility (the "Amendment") to increase its credit line by $75.0 million to $324.0 million from $249.0 million. Subject to the consent of the lenders, the Partnership has the ability under certain circumstances to further increase the amount that it may borrow by $100.0 million to $424.0 million.

Results of Operations

How We Evaluate Our Results of Operations

The primary drivers of our operating results are the volume of motor fuel we distribute, the margin per gallon we are able to generate on the motor fuel we distribute and the rent income we earn on the sites we own or lease. For owned or leased sites, we seek to maximize the overall profitability of our operations, balancing the contributions to profitability of motor fuel distribution and rent income. Our Omnibus Agreement, under which LGC provides management, administrative and operating services for us, enables us to manage a significant component of our operating expenses. Our management relies on financial and operational metrics designed to track the key elements that contribute to our operating performance. To evaluate our operating performance, our management considers gross profit from fuel sales, motor fuel volumes, margin per gallon, rent income for sites we own or lease, EBITDA, Adjusted EBITDA and Distributable Cash Flow.

Gross Profit, Volume and Margin per Gallon - Gross profit from fuel sales represents the excess of revenues from fuel sales, including revenues from fuel sales to affiliates, over cost of revenues from fuel sales, including cost of revenues from fuel sales to affiliates. Volume of motor fuel represents the gallons of motor fuel we distribute to sites. Margin per gallon represents gross profit from fuel sales divided by total gallons of motor fuels distributed. We use volumes of motor fuel we distribute to a site and margin per gallon to assess the effectiveness of our pricing strategies, the performance of a site as compared to other sites we own or lease, and our margins as compared to the margins of sites we seek to acquire or lease.


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Rent Income - We evaluate our sites' performance based, in part, on the rent income we earn from them. For leased sites, we consider the rent income after payment of our lease obligations for the site. We use this information in combination with the fuel-related metrics noted previously to assess the effectiveness of pricing strategies for our leases, the performance of a site as compared to other sites we own or lease, and compare rent income of sites we seek to acquire or lease.

EBITDA, Adjusted EBITDA and Distributable Cash Flow - Our management uses EBITDA, Adjusted EBITDA and Distributable Cash Flow to analyze our performance as more fully described in "Non-GAAP Financial Measures" below.

Factors Affecting the Comparability of Our Financial Results

For the reasons described below, our future results of operations may not be comparable to the historical results of operations for the periods presented below for our Predecessor Entity.

Publicly Traded Partnership Expenses - Our selling, general and administrative expenses include certain third-party costs and expenses resulting from becoming a publicly traded limited partnership. These costs and expenses include legal, accounting and costs associated with the generation and distribution of Form K1s to the unitholders, as well as other costs associated with being a public company, such as director compensation, director and officer insurance, NYSE listing fees and transfer agent fees. Our financial statements reflect the impact of these costs and expenses and will affect the comparability of our financial statements with periods prior to the closing of the Offering.

Omnibus Agreement - As a result of the services provided to us by LGC under the Omnibus Agreement, we do not directly incur a substantial portion of the general and administrative expenses that the Predecessor Entity had historically incurred. Instead, we pay LGC a management fee in an amount equal to
(1) $420,000 per month plus (2) $0.0025 for each gallon of motor fuel we distribute per month for such services.

Impact of the Offering and Related Transactions on Our Revenues - LGO operates certain sites we own and distributes motor fuels, on a retail basis, at these sites. LGO is not one of our predecessor entities. Prior to the Offering, LGO did not pay rent on certain sites it leased from us. Upon completion of the Offering, LGO began paying us rent on these sites.

Income Taxes - Our Predecessor Entity consists of pass-through entities for U.S. federal income tax purposes and has not been subject to U.S. federal income taxes. In order to be treated as a partnership for U.S. federal income tax purposes, we must generate 90% or more of our gross income from certain qualifying sources. As a result, LGWS owns and leases (or leases and subleases) certain of our personal property, as well as provides maintenance and other services to lessee dealers and other customers (including LGO). Except to the extent offset by deductible expenses, income earned by LGWS on the rental of the personal property and from maintenance and other services is taxed at the applicable corporate income tax rate.


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Comparison of Three Months ended September 30, 2013 and 2012

The following table sets forth our statements of operations for the periods
indicated (in thousands):



                                                              Lehigh Gas
                                         Lehigh Gas            Entities
                                         Partners LP         (Predecessor)
                                        Consolidated           Combined
                                           for the              for the
                                        Three Months         Three Months
                                            Ended                Ended
                                        September 30,        September 30,
                                            2013                 2012
                                         (unaudited)          (unaudited)         $ Variance       % Variance
Revenues:
Revenues from fuel sales               $       251,626      $       270,598      $    (18,972 )           (7.0 )%
Revenues from fuel sales to
affiliates                                     228,347              230,754            (2,407 )           (1.0 )%
Rent income                                      4,167                3,184               983             30.9 %
Rent income from affiliates                      5,938                2,090             3,848            184.1 %
Revenues from retail merchandise and
other                                               34                    3                31          1,033.3 %

Total revenues                                 490,112              506,629           (16,517 )           (3.3 )%
Costs and Expenses:
Cost of revenues from fuel sales               246,281              265,380           (19,099 )           (7.2 )%
Cost of revenues from fuel sales to
affiliates                                     222,021              226,274            (4,253 )           (1.9 )%
Cost of revenues from retail
merchandise and other                               34                   -                 34              n/a
Rent expense                                     3,679                3,464               215              6.2 %
Operating expenses                               1,286                1,824              (538 )          (29.5 )%
Depreciation and amortization                    5,212                3,536             1,676             47.4 %
Selling, general and administrative
expenses                                         4,604                3,722               882             23.7 %
Gains on sales of assets, net                       -                  (146 )             146           (100.0 )%

Total costs and operating expenses             483,117              504,054           (20,937 )           (4.2 )%

Operating income                                 6,995                2,575             4,420            171.7 %
Interest expense, net                           (3,349 )             (3,388 )              39             (1.2 )%
Other income, net                                  555                  372               183             49.2 %

Income (loss) from continuing
operations before income taxes                   4,201                 (441 )           4,642         (1,052.6 )%
Income tax expense (benefit) from
continuing operations                             (723 )                 -               (723 )            n/a

Income (loss) from continuing
operations after income taxes                    4,924                 (441 )           5,365         (1,216.6 )%
Income (loss) from discontinued
operations                                          -                    (9 )               9           (100.0 )%

Net income (loss)                      $         4,924      $          (450 )    $      5,374         (1,194.2 )%


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As noted previously, the Partnership began operating in two reportable segments commencing September 1, 2013. As such, the consolidated results of operations for the three months ended September 30, 2013 include one month of activity for the Commission Sites. Unallocated costs consist primarily of interest expense associated with the Credit Facility, selling, general and administrative expenses, income taxes and the elimination of the retail segment's intersegment cost of revenues from fuel sales against the wholesale segment's intersegment revenues from fuel sales. The profit in ending inventory generated by the intersegment fuel sale is also eliminated. The table below presents our results for the three months ended September 30, 2013 by segment.

                                                      Three Months Ended September 30, 2013
                                        Wholesale         Retail         Unallocated         Consolidated
Revenues from fuel sales to external
customers                               $  462,741       $ 17,232       $          -        $      479,973
Intersegment revenues from fuel
sales                                       15,813             -              (15,813 )                 -
Rent income                                  9,773            332                                   10,105
Revenues from retail merchandise and
other                                           -              34                                       34

Total revenues                             488,327         17,598             (15,813 )            490,112

Cost of revenues from fuel sales           467,113         16,977             (15,788 )            468,302
. . .
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