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SUSP > SEC Filings for SUSP > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for SUSSER PETROLEUM PARTNERS LP

Form 10-Q for SUSSER PETROLEUM PARTNERS LP


9-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 our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report.


Additional discussion and analysis related to our Partnership is contained in our Annual Report on Form 10-K including the audited financial statements for the fiscal year ended December 31, 2013.
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 (2) 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;

• Changing consumer preferences for alternative fuel sources or improvement in fuel efficiency;

• Competition in the wholesale motor fuel distribution industry;

• Seasonal trends;

• Severe or unfavorable weather conditions;

• Our ability to make acquisitions;

• Environmental, tax and other federal, state and local laws and regulations;

• Dangers inherent in the storage of motor fuel;

•         The fact that we are not fully insured against all risks incident to
          our business;


•         Reliance of our suppliers to provide trade credit terms to adequately
          fund our ongoing operations;

• Acts of war and terrorism;

• Dependence on our information technology systems; 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, 2013, and in each subsequent quarterly report on Form 10-Q, including this


filing. Please refer to "Item 1A. Risk Factors" in SUSS' Annual Report on Form 10-K for the year ended December 30, 2013, and in each subsequent quarterly report, including its Form 10-Q filing for this quarter, for a discussion of risks and uncertainties affecting SUSS, which may indirectly affect SUSP. 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 on September 25, 2012.
SUSS operated 629 retail convenience stores primarily under its proprietary Stripes® convenience store brand at quarter-end, 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 months ended March 31, 2014, we distributed 277.8 million gallons of motor fuel to Stripes® convenience stores and SUSS' consignment locations, and 155.6 million gallons of motor fuel to other third party customers. We believe we are one of the largest independent motor fuel distributors 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;

• 13 independently operated consignment locations where we sell motor fuel under consignment arrangements to retail customers;

• approximately 520 convenience stores and retail fuel outlets operated by independent operators, which we refer to as "dealers," pursuant to long-term distribution agreements; and

• approximately 1,900 other commercial customers, including unbranded convenience stores, other fuel distributors, school districts and municipalities and other industrial customers.

See Note 14 to our Consolidated Financial Statements for information regarding related party transactions.
On April 27, 2014, SUSS entered into an Agreement and Plan of Merger with Energy Transfer Partners, L.P. ("ETP") and certain other related entities, under which ETP will acquire the outstanding common shares of SUSS. By acquiring SUSS, ETP will also own the general partner interest and the incentive distribution rights in SUSP, and approximately 11 million SUSP common units (representing approximately 50.2% of SUSP's outstanding units). Additional information is provided in Note 15 of our Notes to Consolidated Financial Statements.


Key Operating Metrics
The following table sets forth, for the periods indicated, information
concerning key measures we rely on to gauge our operating performance. 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
                                                               March 31,              March 31,
                                                                  2013                  2014
                                                           (in thousands, except for selling price
                                                                and gross profit per gallon)
Revenues:
Motor fuel sales to third parties (1)                      $     356,762           $     444,566
Motor fuel sales to affiliates                                   730,727                 766,090
Rental income                                                      1,629                   3,923
Other income                                                       1,299                   2,008
Total revenue (1)                                              1,090,417               1,216,587
Gross profit:
Motor fuel gross profit to third parties                           5,797                   8,843
Motor fuel gross profit to affiliates                              7,418                   8,366
Rental income                                                      1,629                   3,923
Other                                                                712                     988
Total gross profit                                         $      15,556           $      22,120
Net income                                                 $       8,227           $      10,132
Adjusted EBITDA (2)                                        $      11,227           $      15,674
Distributable cash flow (2)                                $      10,435           $      14,037
Operating Data:
Total motor fuel gallons sold:
 Third-party                                                     115,831                 155,595
 Affiliated gallons                                              251,052                 277,796
Average wholesale selling price per gallon                 $        2.96           $        2.79
Motor fuel gross profit (cents per gallon):
Third-party                                                          5.0 ¢                   5.7 ¢
Affiliated                                                           3.0 ¢                   3.0 ¢
Volume-weighted average for all gallons                              3.6 ¢                   4.0 ¢

(1) In December 2013, we revised our presentation of fuel taxes on motor fuel sales at our consignment locations to present such fuel taxes gross in motor fuel sales. Prior years' motor fuel sales have been adjusted to reflect this revision.

(2) 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. EBITDA, 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 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 loans;

• 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 tables present a reconciliation of net income to EBITDA, Adjusted EBITDA and distributable cash flow:

                                                     Three Months Ended
                                                  March 31,      March 31,
                                                     2013           2014
                                                       (in thousands)
Net income                                       $     8,227    $    10,132
Depreciation, amortization and accretion               1,821          3,326
Interest expense, net                                    683          1,502
Income tax expense                                        69              7
EBITDA                                                10,800         14,967
Non-cash stock based compensation                        405            707
Loss on disposal of assets and impairment charge          22              -
Adjusted EBITDA                                  $    11,227    $    15,674
Cash interest expense                                    587          1,406
State franchise tax expense (cash)                        69             68
Maintenance capital expenditures                         136            163
Distributable cash flow                          $    10,435    $    14,037

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 The following discussion of results for the first quarter 2014 compared to the first quarter 2013 compares the operations ended March 31, 2014 and 2013. Revenue. Total revenue for the first quarter of 2014 was $1.2 billion, an increase of $126.2 million, or 11.6%, from the first quarter of 2013. Motor fuel sales to third parties increased $87.8 million, or 24.6%. The third-party wholesale selling price per gallon of motor fuel decreased 7.2%. This decrease is offset by a 34.3% increase in comparable gallons sold. Motor fuel sales to affiliates increased $35.4 million, or 4.8%, from the first quarter of 2013. This increase consisted of a 10.7% increase in gallons sold to affiliates, offset by a 5.3% decrease in the wholesale selling price of motor fuel. Rental revenue of $3.9 million during the quarter increased by $2.3 million from the first quarter of 2013 due to the acquisition and subsequent leaseback of 26 convenience store locations from SUSS.
Cost of Sales and Gross Profit. Gross profit for the first quarter of 2014 was $22.1 million, an increase of $6.6 million, or 42.2%, over the first quarter of 2013. Gross profit on motor fuel sales to third parties increased $3.0 million primarily due to


additional gallons sold related to new sites. The sales price of motor fuel sold to third parties decreased by 22.3 cents per gallon while the cost of fuel decreased 23.0 cents per gallon resulting in a 0.7 cent per gallon increase in gross profit. SUSP sold fuel to affiliates at a gross profit of approximately 3.0 cents per gallon, resulting in $8.4 million gross profit for the three months ended March 31, 2014. Other gross profit of $4.9 million increased by $2.6 million from the first quarter of 2013, which was primarily attributable to rental income and an increase in oil and lube product sales.
Total Operating Expenses. Total operating expenses for the first quarter of 2014 were $10.5 million, an increase of $3.9 million, or 59.3%, from the first quarter of 2013, partly due to the increase in volumes sold. For the first quarter of 2014, general and administrative expenses, or G&A expenses, allocated by SUSS increased by $1.0 million, or 24.9%, from 2013. The increase is primarily due to $0.7 million related to the Gainesville Acquisition and an increase of $0.3 million in non-cash stock compensation expense compared to the first quarter of 2013. Other operating expenses increased $1.4 million, or 222.3%, primarily related to an increase in truck fuel and maintenance expense of $0.7 million associated with recent Gainesville acquisition. Depreciation, amortization and accretion expense for the first quarter of 2014 of $3.3 million was up $1.5 million, or 82.6%, from 2013 due to an increase in assets being placed into service since the first quarter of 2013.
Interest Expense. Interest expense increase due to the increase in SUSP Revolver borrowings.
Income Tax Expense. Income tax expense accrued for the first quarter of 2014 and 2013 was less than $0.1 million. The effective tax rate for first quarter of 2014 was 0.1% compared to 0.8% in 2013.

Liquidity and Capital Resources
Liquidity. Our principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, to service our debt and to make distributions. We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our revolving credit facility and the issuance of long-term debt or additional partnership units as appropriate given market conditions. We expect that these sources of funds will be adequate to provide for our short-term and long-term liquidity needs.
Our ability to meet our debt service obligations and other capital requirements, including capital expenditures, as well as make acquisitions, will depend on our future operating performance which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. As a normal part of our business, depending on market conditions, we will from time to time consider opportunities to repay, redeem, repurchase or refinance our indebtedness. Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may cause us to seek additional debt or equity financing in future periods. There can be no guarantee that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions. In addition, any of the items discussed in detail under "Item 1A. Risk Factors" in our Annual Report on Form 10-K may also significantly impact our liquidity.
We had $8.2 million and $6.0 million of cash and cash equivalents on hand as of December 31, 2013 and March 31, 2014 respectively, all of which were unrestricted.
Cash Flows Provided by (Used in) Operations. Cash flows provided by operations are our main source of liquidity. Our daily working capital requirements fluctuate within each month, primarily in response to the timing of payments for motor fuel, motor fuel tax and rent. Cash flows from operations were $17.1 million and $(34.2) million for the first three months of 2013 and 2014, respectively. The use of cash for the first quarter 2014 related to an increase in fuel inventory and a temporary increase in accounts receivable stemming from initial inefficiencies in billing following the first quarter implementation of our new logistics software. These timing differences were resolved in the first 30 days of the second quarter.
Capital Expenditures. Capital expenditures, including purchase of intangibles, were $27.9 million and $31.2 million for the three months ended March 31, 2013 and 2014, respectively. Included in our capital expenditures for the quarter ended March 31, 2014, was $31.0 million in expansion capital of which $27.5 million relates to the purchase and leaseback transactions with SUSS, $1.9 million relates to one purchased dealer location and other growth capital projects, including new dealer supply contracts, and $0.2 million in maintenance capital. Our capital spending program is focused on expanding our wholesale distribution network and maintaining our owned properties and equipment. Capital expenditure plans are generally evaluated based on return on investment and estimated incremental cash flow. We develop annual capital spending plans based on historical trends for maintenance capital, plus identified projects for new sites and revenue-generating capital. In addition to the annually recurring capital expenditures, potential acquisition opportunities are evaluated based on their anticipated return on invested capital, accretive impact to operating results, and strategic fit.


Other Investing Activities. During the three months of 2013, we financed most of the $27.5 million purchase of seven retail stores from SUSS, including an additional $0.2 million of final cost true-up adjustments on previously purchased stores, with proceeds from liquidating the remaining $26.0 million of marketable securities.
Cash Flows from Financing Activities. We entered into a $250 million revolving credit facility in conjunction with our IPO in September 2012, which expires on September 25, 2017 (the "SUSP Revolver"). On December 17, 2013, we entered into Amendment No. 1 to the SUSP Revolver which increased the aggregate commitments under the SUSP revolver from $250 million to $400 million. Commitments under the SUSP Revolver can be increased by up to an additional $100 million upon our written request, subject to certain conditions. Interest under the SUSP Revolver is calculated on either a base rate or LIBOR plus a margin, which ranges from 1.00% to 2.25% in case of a base rate and 2.00% to 3.25% in case of a LIBOR rate, based on a total leverage ratio. The initial interest rate was set at LIBOR plus 2.00%. We plan to use the SUSP Revolver to fund growth capital, which may include purchase and leaseback transactions with SUSS convenience store properties. The SUSP Revolver requires us to maintain a minimum consolidated interest coverage ratio of not less than 2.50 to 1.00, and a consolidated total leverage ratio of not more than 4.50 to 1.00, subject to certain adjustments. Indebtedness under the SUSP Revolver is secured by a security interest in, among other things, all of our present and future personal property and all of the personal property of our guarantors, the capital stock of our subsidiaries, and any intercompany debt. Additionally, if our consolidated total leverage ratio exceeds 3.00 to 1.00 at the end of any fiscal quarter, we will be required, upon request of the lenders, to grant mortgage liens on all real property owned by the Partnership and its subsidiary guarantors.
As of March 31, 2014, the SUSP Term Loan was fully paid. There was $230.0 million outstanding borrowings under the SUSP Revolver, an increase of $73.8 million compared to December 31, 2013, and $10.9 million in standby letters of credit. Of the amount borrowed in 2014 on the SUSP revolver, $25.9 million was used to pay down the SUSP Term Loan. The unused availability on the SUSP Revolver at March 31, 2014 was $159.1 million, and we were in compliance with all covenants.
We intend to pay a cash distribution to the holders of our common and subordinated units on a quarterly basis, to the extent we have sufficient cash from our operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partners and its affiliates. We do not have a legal obligation to pay this distribution. Our minimum quarterly distribution of $0.4375 per common and subordinated unit equates to approximately $9.6 million per quarter, or $38.4 million per year, based on the number of common and subordinates units currently outstanding. We paid a cash distribution to shareholders in February 2014 of $10.7 million. On May 5, 2014, we declared a quarterly distribution totaling $11.0 million, or $0.5021 per unit based on the results for the three months ended March 31, 2014. The distribution will be paid on May 30, 2014 to unitholders of record on May 20, 2014.

Contractual Obligations and Commitments
Contractual Obligations. We have contractual obligations which are required to be settled in cash. As of March 31, 2014, we have $230.0 million borrowed on the SUSP Revolver compared to $156.2 million borrowed at December 31, 2013. The SUSP Revolver matures 2017. The outstanding balance on our term loan was $25.9 million as of December 31, 2013 and was fully repaid as of March 31, 2014. See Note 7 in the accompanying Notes to Consolidated Financial Statements for more information on our debt transactions.
We periodically enter into derivatives, such as futures and options, to manage our fuel price risk on inventory in the distribution system. Fuel hedging positions are not significant to our operations.
Properties. Most of our leases are net leases requiring us to pay taxes, insurance and maintenance costs. We believe that no individual site is material to us. The following table summarizes the number of owned and leased properties:

                                              As of March 31, 2014
                                                 Fee              Leased
Operating sites:
Wholesale dealer and consignment sites       47                       12
Stripes locations                            40                        -
Total                                        87                       12
Office and warehouse                          6                        4


Quarterly Results of Operations (unaudited)

The following table sets forth certain unaudited financial and operating data
for each of the last five quarters.The unaudited quarterly information includes
all normal recurring adjustments that we consider necessary for a fair
presentation of the information shown.
                                                                 2013                                    2014
                                          1st             2nd             3rd             4th             1st
                                          QTR             QTR             QTR             QTR             QTR

                                                          (dollars and gallons in thousands)
. . .
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