Business context and reporting period
Lehigh Gas Partners LP’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2013. The Partnership wholesales gasoline and diesel fuel and owns or leases sites that it rents to independent dealers, lessee dealers, and affiliate LGO. Comparisons are with the predecessor business before the October 2012 IPO; acquisitions, contributed assets, new affiliate rent, and changes in public-company costs limit comparability.
Key financial metrics
Amounts below are in millions of dollars except per-unit data, gallons, and percentages.
| Metric | Q2 2013 | Q2 2012 predecessor | Six months 2013 | Six months 2012 predecessor |
|---|---|---|---|---|
| Total revenue | $487.7 | $490.4 | $959.1 | $906.5 |
| Operating income | $8.6 | $4.2 | $15.7 | $3.7 |
| Net income (loss) | $5.5 | $1.2 | $9.2 | $(1.8) |
| Fuel gross profit | $12.0 | $11.6 | $21.9 | $18.8 |
| Fuel volume | 160.7 million gallons | 157.5 million gallons | 310.4 million gallons | 289.9 million gallons |
| Fuel margin per gallon | $0.075 | $0.073 | $0.071 | $0.065 |
| Adjusted EBITDA | $14.9 | $6.5 | $27.5 | $10.4 |
| Distributable cash flow | $11.2 | Not provided | $20.6 | Not provided |
Operating cash flow was $14.1 million for the first half, versus $12.7 million in the comparable predecessor period. Investing used $1.9 million, compared with $1.5 million provided; financing used $16.5 million, compared with $14.3 million used. Cash fell to $0.5 million from $4.8 million at December 31, 2012.
At June 30, total assets were $317.8 million and total liabilities were $305.2 million. Long-term debt was $185.9 million, including $184.9 million drawn on the revolving facility; lease financing obligations had a $69.9 million present value. The revolving facility was expanded from $249 million to $324 million in May; $14.6 million of letters of credit were outstanding. The Partnership reported compliance with its debt covenants. Its current assets of $27.7 million were below current liabilities of $38.4 million.
Material changes versus the prior comparable period
- Q2 revenue was nearly flat, while first-half revenue increased 5.8%. Aggregate fuel sales revenue rose 4.6% for the first half as volume grew 7.1%; lower average selling prices partly offset volume growth.
- Fuel gross profit increased 3.6% in Q2 and 16.3% in the first half, supported by higher per-gallon margins and volume.
- Rent income, including affiliate rent, rose to $10.3 million in Q2 from $4.0 million and to $20.5 million for the first half from $9.0 million. The increases reflected Getty sites, the Dunmore and Express Lane acquisitions, and sites contributed to the Partnership.
- First-half net income improved from a predecessor loss to profit. The comparison also reflects prior-period asset-sale gains and offering-related costs, as well as the absence of predecessor discontinued-operations income.
Outlook, risks, contingencies, and unusual items
- The stated business objective is to make quarterly cash distributions and grow them over time. Management described expected operating cash flow and borrowing capacity as adequate for anticipated needs, but cautioned that actual results and cash flows may differ. No specific earnings or cash-flow guidance was provided.
- The minimum quarterly distribution was $0.4375 per unit; the Partnership reported increases to $0.4525 effective with the June 2013 distribution and $0.4775 effective with the September distribution. The board may change or suspend distributions, and the credit agreement restricts distributions in specified circumstances.
- After quarter-end, the Partnership signed agreements for the Rocky Top acquisition, involving 30 stations and a planned $10.7 million cash payment plus a later real-estate purchase obligation, and the Rogers acquisition, involving 14 stations for $21.1 million. Both were expected to close in the third quarter; completion was not assured.
- Management identified disclosure controls and procedures as ineffective at June 30 because of material weaknesses in internal controls, including inadequate accounting staffing and review. Remediation efforts were underway; management stated the financial statements were fairly presented.
- The Partnership reported $1.3 million of environmental liabilities and corresponding indemnification assets. Separately, predecessor entities retained $19.7 million of environmental liabilities at June 30; the filing describes indemnification arrangements, but recovery depends on escrows, state programs, insurance, and other factors.
- Other risks include fuel-demand and competition changes, floating-rate debt, environmental exposure, acquisition execution, and related-party dependence. LGC provides management services under an agreement; LGO is an affiliate customer and tenant. The filing states that relevant acquisition and affiliate transactions received conflicts-committee approval.
Important facts for investors to verify
- Whether operating cash flow and distributable cash flow support declared distributions, especially given low cash and negative working capital.
- Debt availability, covenant headroom, interest-rate exposure, and scheduled lease-financing payments; a one-percentage-point rate change was estimated to affect annual interest expense by about $1.8 million.
- Progress in correcting the disclosed material weaknesses and whether later filings report effective controls.
- Closing, financing, and purchase obligations for the Rocky Top and Rogers transactions, and the effect of these related-party operating arrangements.
- Final purchase-price allocations for the Dunmore and Express Lane acquisitions, which remained provisional, and recoverability of environmental indemnification assets.