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LGP > SEC Filings for LGP > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for LEHIGH GAS PARTNERS LP

Form 10-Q for LEHIGH GAS PARTNERS LP


8-May-2014

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 unaudited condensed consolidated 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 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 distribution 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 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 income tax legislation;

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 written and oral 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 that are 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. In the third quarter of 2013, we also began generating revenues, on a select basis, through the retail distribution of motor fuels at sites operated by commission agents.

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). Our declared distributions since May 2013 are summarized below:

                                        Quarterly        Annualized
              Distribution Declared    Distribution      Distribution
              May 2013                $       0.4525     $         1.81
              August 2013                     0.4775               1.91
              November 2013                   0.5025               2.01
              March 2014                      0.5125               2.05
              May 2014                        0.5125               2.05

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.

We believe consistent demand for motor fuels in the areas where we operate and the contractual nature of our rent income provide a stable source of cash flow. Cash flows from the wholesale distribution of motor fuels are 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, LGO and non-gas tenants pursuant to lease agreements.

For the quarter ended March 31, 2014, we distributed an aggregate of approximately 160 million gallons of motor fuels. At March 31, 2014, we distributed motor fuels to 801 sites, comprised of the following classes of business:

249 sites operated by independent dealers;

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

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

55 sites owned or leased by us and operated by commission agents.

In addition, we distribute motor fuels to 13 sub-wholesalers who distribute to additional sites.

Over 65% 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 prime locations with strong motor fuel demand. We own and lease sites located in Pennsylvania, New Jersey, Ohio, New York, Massachusetts, Kentucky, New Hampshire, Maine, Florida, Maryland, Delaware, Tennessee and Virginia. We also distribute motor fuel in Georgia. We believe the limited availability of undeveloped real estate particularly in the northeastern U.S. presents a high barrier to entry for new or existing retail gas station owners to develop competing sites.

Recent Developments

Atlas Acquisition

On April 16, 2014, we entered into an agreement to acquire 55 wholesale supply contracts, two commission marketing contracts, 11 fee or leasehold sites and certain other assets from affiliates of Atlas Oil Company. Upon closing, we will pay $38.5 million. In addition, we will acquire certain short-term financing assets associated with the wholesale supply and commission marketing contracts for $11.9 million, bringing total consideration to $50.4 million, subject to closing adjustments.

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These assets are located in the Chicago, Illinois area and are branded BP. The wholesale supply contracts have a remaining average term of 15 years and the fee or leasehold sites are currently leased to third party commission agents. The short-term financing assets relate to previously negotiated purchase agreements of certain sites by the dealers occupying the locations. All of the financing assets relate to sites supplied under contracts acquired in this transaction. The financing assets have a weighted average maturity of June 2015.

In connection with the acquisition, Sam Simon, Chairman and Chief Executive Officer of Atlas Oil Company, will enter into a non-compete agreement that generally restricts him and entities controlled by him from (a) engaging in the wholesale distribution of motor fuel or owning or operating a retail motor fuel facility and/or convenience store within certain territories for one year after the closing date and (b) constructing any new retail motor fuel facility and/or convenience stores within certain territories for five years after the closing date.

The transaction is expected to close in the second quarter of 2014 and will be funded by borrowings under the credit facility. Should either party breach the contract and not cure the breach as required, the other party is entitled to liquidated damages.

PMI Acquisition

On April 28, 2014, we exercised an option ("Option") to purchase 100% of the membership interests of Pinehurst Petroleum, LLC ("Pinehurst") from Joseph L. Smith III and John A. Kopfer, Jr. ("Smith/Kopfer") for $4.0 million. Pinehurst's sole asset was an Agreement and Plan of Merger among Pinehurst Petroleum, LLC, PMI Merger Sub, Inc., Petroleum Marketers, Incorporated, Petroleum Marketers, Incorporated Employee Stock Ownership Trust and Ronald R. Hare, in his capacity as representative (the "Merger Agreement") pursuant to which Pinehurst agreed to acquire all of the shares of Petroleum Marketers, Incorporated ("PMI") for $75.0 million subject to an adjustment for a targeted net working capital of $3.0 million, through the merger of PMI Merger Sub, Inc., a wholly owned subsidiary of Pinehurst, and PMI. Under the terms of the Merger Agreement, the stockholders of PMI agreed to escrow $5.0 million for 25 months after the closing date to secure the indemnity provisions for the benefit of Pinehurst contained in the Merger Agreement. The Merger Agreement also contains customary representations, warranties, agreements and obligations of the parties, and termination, closing conditions and indemnity provisions. The transaction was funded under our credit facility.

On April 30, 2014, pursuant to the Option, we purchased all of the equity interests of Pinehurst. Subsequent to such purchase, the merger became effective and, as a result, we became the owner of PMI. PMI operates two primary lines of business: convenience stores and petroleum products distribution. In its convenience store business, PMI operates 85 convenience stores and 9 co-located branded quick service restaurants located in Virginia. The convenience stores distribute primarily branded fuel and operate under the PMI's own proprietary convenience store brand, "Stop in Food Stores." We initially intend to operate the convenience stores and expect to transfer the operations of certain sites over time to third parties and to affiliated entities. The petroleum products business distributes motor fuels and other petroleum products to customers throughout Virginia, West Virginia, Tennessee and North Carolina.

On May, 1, 2014, immediately subsequent to the effectiveness of the merger, we caused PMI to divest its lubricants business (the "Lubricants Business") to Zimri Holdings, LLC ("Zimri"), an entity owned by Smith/Kopfer for the sum of $14.0 million pursuant to an Asset Purchase Agreement ("APA") between PMI and Zimri. The APA contains customary representations, warranties, agreements and obligations of the parties, as well as indemnity provisions. A trust controlled by Joseph V. Topper, Jr, Chairman and CEO of the general partner of the Partnership, personally financed the purchase of the Lubricants Business by Zimri via a loan to Zimri. The financing by Mr. Topper's trust was approved by the Conflicts Committee of the board of directors of the general partner of the Partnership. It is anticipated that Zimri will re-sell the Lubricants Business to an independent third party at a later date. We are entitled to receive the profit, if any, from the sale of the Lubricants Business to an independent third party.

In connection with the acquisition of PMI and the pending acquisition of assets from certain affiliates of Atlas Oil Company discussed previously, we amended the Omnibus Agreement with our general partner and LGC with regards to the management fee payable by us to LGC effective May 1, 2014. The revised management fee consists of a base monthly fee of $670,000 per month and a variable fee of between zero and $0.003 per gallon for wholesale fuel distribution and $0.015 per gallon for retail fuel distribution at sites we operate. The general partner and LGC may waive all or any portion of the management fee to the extent that all or a portion of the management services are either purchased from another party or not required.

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Amended and Restated Credit Agreement

In March 2014, we entered into an amended and restated credit agreement (the "Credit Facility"). The Credit Facility is a senior secured revolving credit facility maturing March 4, 2019 with a total borrowing capacity of $450 million, under which swingline loans may be drawn up to $10.0 million and standby letters of credit may be issued up to an aggregate of $45.0 million. The Credit Facility may be increased, from time to time, upon our written request, subject to certain conditions, up to an additional $100.0 million. All obligations under the Credit Facility are secured by substantially all of our assets. See "Liqudity and Capital Resources - Long-term Debt - Credit Facility" for additional information.

Outlook

The Partnership expects its total fuel volume to increase in 2014, driven by the Rogers, Rocky Top and Manchester acquisitions in the third and fourth quarters of 2013 and the Atlas and PMI acquisitions in the second quarter of 2014, offset by a decrease in volume as a result of market conditions. Based on current market conditions, we expect our motor fuel gross margins to be consistent with historical results. We expect rent income to increase in 2014 as a result of the 2013 and 2014 acquisitions.

Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information" and Note 8 to the financial statements included within this report and Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013, for a discussion of the risks, uncertainties and factors that may impact future results.

Results of Operations

Evaluating Our Results of Operations

The primary drivers of our operating results are the volume of motor fuels we distribute, the margin per gallon we are able to generate on the motor fuels we distribute and the rent income we earn on the sites we own or sub-lease. For owned or sub-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 sub-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. Wholesale fuel prices are highly correlated to the price of crude oil. The crude oil commodity markets are highly volatile, and the market prices of crude oil, and correspondingly the cost of the gasoline and diesel fuel we purchase from suppliers, experience significant and rapid fluctuations. The prices we charge our customers for fuel and the gross margin we receive on our fuel sales can increase or decrease significantly and rapidly over short periods of time. Generally, our gross margin increases when the price of crude oil decreases and our gross margin decreases when the price of crude oil increases.

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.

Rent Income - We evaluate our sites' performance based, in part, on the rent income we earn from them. For sub-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.

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Comparison of Results for the Three Months Ended March 31, 2014 and 2013

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



                                    Three Months            Three Months
                                       Ended                   Ended
                                   March 31, 2014          March 31, 2013
                                    (unaudited)             (unaudited)            $ Variance          % Variance
Revenues:
Revenues from fuel sales          $        296,784        $        218,304        $     78,480                35.9 %
Revenues from fuel sales to
affiliates                                 174,405                 242,865             (68,460 )             (28.2 )%
Rent income                                  5,508                   3,352               2,156                64.3 %
Rent income from affiliates                  5,187                   6,917              (1,730 )             (25.0 )%
Other revenue                                  137                     423                (286 )             (67.6 )%

Total revenues                             482,021                 471,861              10,160                 2.2 %
Costs and Expenses:
Cost of revenues from fuel
sales                                      291,780                 214,278              77,502                36.2 %
Cost of revenues from fuel
sales to affiliates                        169,759                 236,963             (67,204 )             (28.4 )%
Rent expense                                 3,815                   3,884                 (69 )              (1.8 )%
Operating expenses                           2,198                     820               1,378               168.0 %
Depreciation and amortization                5,936                   4,839               1,097                22.7 %
Selling, general and
administrative expenses                      4,527                   3,579                 948                26.5 %
Gains on sale of assets, net                (1,480 )                    -               (1,480 )               n/a

Total costs and operating
expenses                                   476,535                 464,363              12,172                 2.6 %

Operating income                             5,486                   7,498              (2,012 )             (26.8 )%
Interest expense                            (4,027 )                (3,379 )              (648 )              19.2 %
Other income, net                              104                      81                  23                28.4 %

Income from continuing
operations before income
taxes                                        1,563                   4,200              (2,637 )             (62.8 )%
Income tax expense from
continuing operations                          135                     443                (308 )             (69.5 )%

Net income                        $          1,428        $          3,757        $     (2,329 )             (62.0 )%

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As noted previously, we began operating in two reportable segments as of September 1, 2013. 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 March 31, 2014, by segment (in thousands).

                                                        Three Months Ended March 31, 2014
                                        Wholesale         Retail         Unallocated         Consolidated
Revenues from fuel sales to external
customers                               $  417,887       $ 53,302       $          -        $      471,189
Intersegment revenues from fuel
sales                                       44,685             -              (44,685 )                 -
Rent income                                  9,641          1,054                  -                10,695
Other revenue                                  137             -                   -                   137

Total revenues                             472,350         54,356             (44,685 )            482,021
Cost of revenues from fuel sales           453,212         52,981             (44,654 )            461,539
Rent expense                                 3,636            179                  -                 3,815
Operating expenses                           1,863            335                  -                 2,198
Depreciation and amortization                5,449            487                  -                 5,936
Selling, general and administrative
expenses                                        -              -                4,527                4,527
Gains on sales of assets, net               (1,480 )           -                   -                (1,480 )

Total costs and expenses                   462,680         53,982             (40,127 )            476,535

Operating income                             9,670            374              (4,558 )              5,486
Interest expense                            (1,302 )         (126 )            (2,599 )             (4,027 )
Other income, net                               87             17                  -                   104

Income from continuing operations
before income taxes                          8,455            265              (7,157 )              1,563
Income tax expense                              -              -                  135                  135

Net income                              $    8,455       $    265       $      (7,292 )     $        1,428

Revenues and Costs from Fuel Sales

Our aggregate revenues from fuel sales, which include revenues from fuel sales to affiliates, and aggregate cost of revenues from fuel sales, which include the cost of revenues from fuel sales to affiliates, are principally derived from the purchase and sale of gasoline and diesel fuel with the resulting changes in aggregate revenues from fuel sales, and aggregate cost of revenues from fuel sales, being attributable to the combination of volume of gallons of fuel distributed and/or fluctuations in market prices for crude oil and petroleum products, which are generally passed onto our customers (in thousands, except per gallon data).

                                        Three Months         Three Months
                                           Ended                Ended
                                         March 31,            March 31,              $                %
                                            2014                 2013            Variance          Variance
Revenues from fuel sales               $      471,189       $      461,169       $  10,020               2.2 %
Cost of revenues from fuel sales       $      461,539       $      451,241       $  10,298               2.3 %

Gross margin from fuel sales           $        9,650       $        9,928       $    (278 )            (2.8 )%

Volume (in thousands of gallons)              159,581              149,720           9,861               6.6 %
Sales price per gallon                 $        2.953       $        3.080       $  (0.127 )            (4.1 )%
Gross margin per gallon (a)            $        0.060       $        0.066       $  (0.006 )            (9.1 )%

(a) The wholesale segment gross margin was $0.059 and the retail segment gross margin was $0.021 for the three months ended March 31, 2014. As noted previously, we began operating in two reportable segments as of September 1, 2013.

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The decrease in gross margin was driven by a lower margin per gallon offset by an increase in volume of gallons distributed.

The increase in aggregate revenues from fuel sales resulted from an increase of $30.4 million related to an increase in volume of gallons distributed offset by a decrease of $20.4 million related to lower selling prices per gallon. The increase in volume of gallons distributed was principally related to our 2013 acquisitions, with 9.7 million gallons related to the Manchester acquisition, 7.0 gallons related to the Rocky Top acquisition, 3.9 gallons related to the Rogers acquisition and 0.3 million gallons related to new Getty sites. These . . .

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