Susser Petroleum Partners LP (SUSP) - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2012. The filing represents a significant transition for the registrant. On September 25, 2012, Susser Petroleum Partners LP (the "Partnership") completed its Initial Public Offering (IPO) and commenced operations. Prior to this date, the business operated as "Susser Petroleum Company LLC" (the "Predecessor"), a wholly-owned subsidiary of Susser Holdings Corporation (SUSS). The financial results for the three and nine months ended September 30, 2012, combine the Predecessor's results through September 24, 2012, and the Partnership's results for the six days following the IPO. The Partnership is a growth-oriented Delaware limited partnership engaged in the wholesale distribution of motor fuels, primarily to SUSS's Stripes convenience stores and third-party dealers in Texas, New Mexico, Oklahoma, and Louisiana.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2012 | Nine Months Ended Sep 30, 2012 |
|---|---|---|
| Total Revenues | $1,109.6 million | $3,268.8 million |
| Gross Profit | $12.8 million | $36.9 million |
| Net Income | $3.6 million | $9.0 million |
| Adjusted EBITDA | $7.7 million | $20.1 million |
| Cash from Operating Activities | N/A (Nine months: $25.9 million) | $25.9 million |
| Long-Term Debt | $181.7 million | $181.7 million |
| Cash and Cash Equivalents | $14.8 million | $14.8 million |
| Marketable Securities | $180.7 million | $180.7 million |
Note: The Partnership's operations began on September 25, 2012. Net income attributable to the Partnership for the six days of operation was $0.6 million. The majority of the reported net income ($3.0 million for the quarter; $8.4 million for nine months) is attributed to the Predecessor period.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 11.9% ($117.8 million) for the three months ended September 30, 2012, compared to the same period in 2011. This was driven by a 13.8% increase in gallons sold to third parties and a 9.2% increase in gallons sold to affiliates.
- Gross Profit Expansion: Gross profit increased 11.2% to $12.8 million. A material change occurred post-IPO: the Predecessor historically sold fuel to affiliates at cost (zero margin). Post-IPO, the Partnership sells to affiliates at a fixed margin of 3 cents per gallon, generating $0.5 million in gross profit on affiliate sales during the six-day post-IPO period.
- Capital Structure: The balance sheet reflects a major restructuring. Long-term debt increased from $1.1 million (Predecessor) to $181.7 million (Partnership) due to a new $180.7 million term loan secured by marketable securities. Total assets increased from $231.3 million to $307.2 million, largely due to the addition of $180.7 million in marketable securities funded by IPO proceeds.
- Operating Expenses: General and administrative expenses increased 17.9% year-over-year due to salary increases and headcount additions. Depreciation and amortization increased 36.3% due to new capital investments and the acquisition of dealer distribution agreements.
Guidance, Outlook, and Risks
Outlook and Capital Resources: Management intends to pay a minimum quarterly distribution of $0.4375 per unit, equating to approximately $9.6 million per quarter, subject to cash availability. Liquidity is supported by cash from operations, a $250 million revolving credit facility (with $237.2 million available), and $180.7 million in marketable securities. The Partnership plans to sell marketable securities over time to fund capital expenditures while repaying the term loan with revolver borrowings to maintain net debt levels.
Management Commentary: The company views itself as the largest independent motor fuel distributor by gallons in Texas. The shift to a fee-based model with SUSS (the parent company) is expected to stabilize margins on affiliate sales, which were previously zero.
Risks and Contingencies:
- Related Party Dependence: The business is heavily dependent on SUSS for transportation services and as a primary customer (Stripes stores). Conflicts of interest and the renewal of long-term distribution contracts are key risks.
- Market Risk: Exposure to changes in interest rates on variable-rate debt (Term Loan and Revolver). A 1% increase in rates would increase interest expense by approximately $1.8 million annually.
- Commodity Prices: Fluctuations in motor fuel prices and demand impact revenue and working capital requirements.
- Environmental: Risks inherent in the storage and distribution of motor fuel.
Investor Verification Checklist
- IPO Proceeds Allocation: Verify the utilization of the $206 million net IPO proceeds, specifically the $180.7 million invested in marketable securities and the $25 million reimbursement to SUSS for prior capital expenditures.
- Debt Covenants: Confirm compliance with the new credit facility covenants, specifically the minimum consolidated interest coverage ratio of 2.50 to 1.00 and the maximum consolidated total leverage ratio of 4.50 to 1.00.
- Affiliate Transaction Pricing: Review the terms of the 10-year Distribution Agreement with SUSS to ensure the 3 cents per gallon margin on affiliate sales is sustainable and accurately reflected in future periods.
- Predecessor vs. Partnership Results: Distinguish between historical Predecessor results (which included consignment contracts retained by SUSS and zero-margin affiliate sales) and the new Partnership results to accurately assess future performance.
- Goodwill Impairment: Monitor the $12.9 million goodwill balance, which was tested for impairment during the IPO and found to have a fair value exceeding its carrying amount.