Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2012, for Lehigh Gas Partners LP (the "Partnership"). The Partnership was formed in December 2011 and completed its Initial Public Offering (IPO) on October 30, 2012. Consequently, the financial statements presented are "special purpose condensed combined" statements for the Predecessor Entity (Selected Lehigh Gas Entities), which were contributed to the Partnership in connection with the IPO. The Partnership engages in the wholesale distribution of motor fuels (gasoline and diesel) and the ownership/leasing of gas station real estate.
Key Financial Metrics (Predecessor Entity)
The following metrics reflect the Predecessor Entity's performance for the periods ended September 30, 2012, compared to the prior year. Amounts are in thousands, except per unit/gallon data.
| Metric | Three Months Ended Sept 30, 2012 |
Three Months Ended Sept 30, 2011 |
Nine Months Ended Sept 30, 2012 |
Nine Months Ended Sept 30, 2011 |
|---|---|---|---|---|
| Total Revenues | $440,609 | $395,631 | $1,314,748 | $1,181,786 |
| Operating Income | $2,488 | $6,006 | $6,057 | $14,849 |
| Net (Loss) Income | $(450) | $3,278 | $(2,238) | $5,288 |
| EBITDA | $6,462 | $9,506 | $19,995 | $23,556 |
| Adjusted EBITDA | $6,316 | $9,523 | $16,876 | $21,941 |
| Cash from Operations | N/A | N/A | $6,368 | $8,336 |
| Total Debt (Long-term + Current) | $170,659 | $185,286 | $170,659 | $185,286 |
| Margin per Gallon (Fuel Sales) | $0.060 | $0.077 | $0.063 | $0.072 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11.4% for the nine months ended Sept 30, 2012, driven by a 12.9% increase in fuel distribution volume (449.1 million gallons vs. 397.8 million gallons). This volume increase was primarily due to new distribution to affiliate LGO (75.4 million gallons) and newly leased Getty sites (26.1 million gallons).
- Margin Compression: Despite higher volumes, gross profit from fuel sales remained flat ($28.5 million) due to a decrease in margin per gallon from $0.072 to $0.063. Selling prices per gallon decreased by $0.035 year-over-year.
- Net Loss: The Predecessor reported a net loss of $2.2 million for the nine months ended Sept 30, 2012, compared to net income of $5.3 million in the prior year. This was driven by increased Selling, General, and Administrative (SG&A) expenses ($14.3 million vs. $9.9 million), largely due to $5.9 million in non-recurring IPO-related costs.
- Asset Sales: The Predecessor recognized a gain on sale of assets of $3.1 million for the nine months ended Sept 30, 2012, compared to $1.6 million in the prior year.
Guidance, Outlook, and Risks
- Post-IPO Structure: Following the October 30, 2012 IPO, the Partnership received net proceeds of $128.3 million. These proceeds were used to repay $57.8 million of the new credit facility, $14.3 million in mortgage notes, and $13.0 million to cancel mandatorily redeemable preferred equity.
- Dividend Policy: The Partnership intends to make minimum quarterly distributions of $0.4375 per unit ($1.75 annualized), though there is no legal obligation to do so.
- Debt Covenants: The new $249 million credit facility requires a Combined Leverage Ratio of no greater than 4.40:1.00 and an Interest Charge Coverage Ratio of at least 3.00:1.00. Distributions are prohibited if the Partnership is not in compliance with these covenants.
- Recent Acquisitions: Subsequent to the reporting period, the Partnership signed a lease for 25 properties in New Jersey (Getty Realty) and entered an agreement to acquire 24 service stations from Dunmore Oil Company for $28.5 million.
- Risks: Key risks include volatility in fuel prices, dependence on a limited number of suppliers (ExxonMobil, Motiva, BP), environmental liabilities (reserves of $22.3 million), and the ability to maintain cash flow sufficient for distributions.
Investor Verification Checklist
- Predecessor vs. Partnership: Verify that financial results presented are for the Predecessor Entity and may not reflect the Partnership's future results due to the new management fee structure and public company costs.
- Related Party Transactions: Review the significant volume of fuel sales to affiliates (LGO) and the transition of rental income recognition from affiliates post-IPO.
- Debt Servicing: Confirm the Partnership's ability to meet the new credit facility covenants (Leverage and Coverage ratios) given the high debt load relative to EBITDA.
- Environmental Reserves: Assess the adequacy of the $22.3 million environmental liability reserve and the corresponding $19.0 million in indemnification assets.
- Non-GAAP Measures: Reconcile Adjusted EBITDA to Net Income to understand the impact of non-recurring IPO costs and asset sales on reported profitability.