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Lehigh Gas Partners LP (NYSE:LGP)

Q1 2013 Earnings Conference Call

May 14, 2013 9:30 am ET

Executives

Joe Topper - Chairman and Chief Executive Officer

Mark Miller - Chief Financial Officer

Dave Hrinak - President

Analysts

Ben Brownlow - Raymond James

Tyras Bookman - Park West

Matt Niblack - HITE

Operator

Good day ladies and gentlemen and welcome to Q1 2013 Lehigh Gas Partners LP Earnings Conference Call. My name is Sandra and I will be your operator today. At this time, all participants are in a listen-only line. We will conduct a Q&A session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I’d now like to hand the call over to Mark Miller, Chief Financial Officer.

Operator

Welcome to the First Quarter 2013 Earnings Conference Call of Lehigh Gas Partners. At this time, all participants are in a listen-only mode. Later in the call, we will conduct a question-and-answer session. Instructions will be given to you at that time to how you may participate.

This conference call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended relating to the Partnership, future business expectations and predictions, and financial conditions and results of operations. These forward-looking statements involve certain risks and uncertainties.

The Partnership has listed some of the important factors that may cause actual results to differ materially from those discussed in such forward-looking statements which are referred to as cautionary statements in its first quarter 2013 earnings news release, which was issued Monday. The news release may be viewed on the Lehigh Gas Partners website at www.lehighgaspartners.com.

All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements. As a reminder, this conference is being recorded.

I will now turn the conference call over to the host, Mr. Mark Miller, Chief Financial Officer of the Partnership. Please proceed.

Mark Miller

Thank you and good morning. Welcome to the Lehigh Gas Partners’ first quarter 2013 earnings call. Joining me on the call today are Joe Topper, CEO and Chairman of the Board and Dave Hrinak, President.

The purpose of today's call is to view our first quarter 2013 results. Once we have concluded our prepared remarks, we will open the session to questions.

Before getting started, I would like to reemphasize what the operator has just explained about forward-looking statements. Any forward-looking statements are based upon our current view and assumptions regarding future events and operating performance are inherently subject to risk and encourage you to review our SEC filings. Specifically our Form 10-K where a detailed review of the risks, uncertainties and other factors that could cause actual results to differ materially from any forward-looking statements.

In addition, certain non-GAAP financial measures will be discussed on this call. We have provided a description of those measurements as well as a discussion of why we believe this information is useful to management in our Form 8-K furnished to the SEC yesterday. Our Form 8-K may be accessed through a link on our website at www.lehighgaspartners.com.

Finally, I encourage all of you to sign up your (lgpe/communication) via the Partnership website to keep up-to-date on activities of the Partnership.

The first quarter 2013 represented the Partnership’s first full quarter as the public Partnership. In addition, to the actual financial results for the quarter, the Partnership is providing certain pro forma results for the period ended March 31, 2012. The Partnership completed initial public offering in October 30, 2012 and as such management believes pro forma results of March 31, 2012 provide investors with a more relevant comparison within actual results our current assets for the period ended March 31, 2012.

Net income for the first quarter 2013 totaled $3.18 million or $0.25 per common unit. For the quarter, EBITDA totaled $12.4 million, adjusted EBITDA totaled $12.6 million and distributable cash flow amounted to $9.3 million or $0.62 per common unit.

The Partnership declared a first quarter distribution of $0.4525 per unit and 3.4% increase over the current quarterly distribution. Based on our distributable cash flow $0.62 per common unit, the coverage ratio on declared first quarter distribution is 1.4 times.

During the first quarter, we distributed 149.7 million gallons of fuel resulting in a $3.81 average selling price per gallon and a $0.69 average margin per gallon. Gross profit from fuel sales for the quarter totaled $10.3 million.

For the first quarter, 2012, the partnership distributed 132.8 million gallons at an average selling price of $3.17 per gallon and a $0.55 average margin per gallon. Gross profit from fuel sales for the first quarter 2012 totaled $7.2 million. Relative to the pro forma results for the first quarter 2012, our fuel volume increased 12.7% and gross profit to fuel sales increased to 41.7% to the first quarter of 2013. The increase in gross profit from fuel sales is driven by higher volume and margin for the quarter relative to the previous year.

Net rental income – rental income expenses for the quarter totaled $6.4 million on pro forma basis the partnership recorded $3.5 million in net rental income in the first quarter 2012. The increase in net rental income for the first quarter 2013 relative to 2012 is primarily due to the increased rent associated with the Getty leases and the Express Land and Dunmore acquisitions completed last year.

On the expense side, operating expenses for the first quarter 2013 totaled $800,000 and selling, general and administrative expenses totaled $3.9 million. For the first quarter 2012, operating expenses totaled $700,000 and selling, general and administrative expenses totaled $2.5 million. Increasing selling, general and administrative expenses in the first quarter of 2013 relative to 2012 was primarily due to the increased professional fees, taxes and public company expenses.

Overall, we are pleased with the financial results for the quarter, our fuel margins normalized relative to the results from the fourth quarter 2012. We added fuel volume and rental income from our acquisitions added positively to our EBITDA and distributable cash flow.

At this point, I would like to introduce Joe Topper, Chairman and CEO, Lehigh Gas Partners to review the distribution increase and to provide an update on our acquisition of leasing activities. Joe?

Joe Topper

Thanks Mark. And thanks everyone for joining us this morning on Lehigh Gas Partners earnings conference call.

As Mark noted, the Partnership announced yesterday a 3.4% increase in its quarterly cash distribution. The 3.4% increase represents the increase of $0.015 per unit and raises the quarterly distribution from $0.4375 per unit to $0.4525 per unit. We are extremely pleased to be able to announce the distribution increase in our first four quarter as a couple of partnership. We are committed to growing our distributable low cash flow and distributions and net increases in line of that commitment.

As a policy note, we intend to announce our quarterly distribution going forward concurrently with our earnings release. Our ability to grow our distributable cash flow and distribution would be driven by successful acquisitions. Last quarter, we reported two large acquisitions, Express lane and Dunmore and we worked hard to integrate these acquisitions this quarter and it cleared that they made a meaningful impact on our financial results.

We continue to evaluate additional acquisition opportunities as Mark would discuss in more detail after the quarter end, we were able to expand and modify our credit facility to provide us additional capital and flexibility to pursue acquisitions.

In short, we continue to be well positioned to pursue acquisition opportunities. Our current pipeline is active and our commitment to you is that we will continue to work hard and to be disciplined in our pursuit of acquisitions.

On the leasing side, I wanted to highlight one transaction for you. During the quarter, we leased 19 sites in the Cleveland market to 7-Eleven. These sites have previously been leased to Lehigh Gas, Ohio. 7-Eleven will rebrand these locations as 7-Eleven and manage the convenient stores. The partnership will continue to supply fuel to these sites. We were pleased to be able to lease these sites in such a great candidate at 7-Eleven. We continue to evaluate our portfolio of opportunities such as to diversify our (inaudible) and to add great high quality tenant.

In summary, it was a great quarter overall and we are particularly pleased to announce the distribution increase and to return more cash to our unitholders.

I’ll now turn back to Mark – over to Mark Miller, our CFO to provide an update on our capital structure.

Mark Miller

Thank you, Joe. As Joe touched on in his comments the Partnership announced yesterday that it had increased (site and) credits driven by $75 million to $374 million. In addition to the increase in the facility size, the facility also permitted to modify certain terms of the agreement to allow the greater leverage and flexibility in regards to acquisitions.

In more detail description of the credit facility amendment will be found on Form 8-K filed yesterday with the Securities and Exchange Commission. As of March 31, 2013, under the Partnership’s credit facility, we had $183.8 million of outstanding borrowings in a $125.7 million available for borrowing net of outstanding borrowings and letter to credit and now will be getting effect to the increase in the facility size. We are very pleased to complete the facility increase and amendment, facility expansion and modification, we have ample capacity and flexibility to complete acquisitions. That concludes our prepared remarks.

We want to thank all of you for listening in our call today. Operator, we would now like to open the line for questions. Thank you.

Joe Topper

I would like to just inform everybody that Lehigh Gas Partners would be presenting at the NAPTP Conference in Connecticut on Wednesday, May 22 at 3:30, we are looking forward to seeing our existing investors as well as meeting any perspective investors at the conference. Thank you. Operator, we are now prepared to take questions

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Okay. We have our first question from Ben Brownlow from Raymond James. Please go ahead sir.

Ben Brownlow - Raymond James

Good morning. And congratulations on another great quarter.

Mark Miller

Thank you very much.

Ben Brownlow - Raymond James

On the SG&A side, there was a little bit higher then on modeled, you just give a little color on the higher rate there and from modeling, anything inside into the run rate going forward?

Mark Miller

Sure. We incurred probably some additional professional fees in the first quarter more than we anticipated and lot of them had to do with year end activities. On a go forward basis, we do expect that our professional fees will decline in the forward quarters.

Ben Brownlow - Raymond James

Okay. And then on the net rental income, the variance between the fourth quarter and the first quarter, I assume was probably, partially the Ford acquisition, is that rental income for the first quarter, the net rental income a fair run rate going forward?

Mark Miller

Yeah, that would be correct. Within the fourth quarter last year, we have only had 10 days with the rental income recorded, approximately, I’m sorry, it was probably more like 7 days of rental income recorded as it related to Dunmore, Express Lane whereas in the first quarter this year, we would had a full three months with the rental income for both Dunmore and Express Lane.

Ben Brownlow - Raymond James

Great. Thank you. And congrats again.

Operator

Next question comes from Tyras Bookman of Park West. Please go ahead.

Tyras Bookman - Park West

Hi. What coverage ratio do you guys want to have, it seems like the coverage ratio that you have right now is way too high and you don’t get paid for it?

Mark Miller

Tyras, I think when we went out and we talk, we said that we are going to target to get to 1.2 but that the acquisitions would probably raise it up to 1.5. And that we would bring it down over time. So, at this point in time, but gives us a lot of opportunity to raise it in the future. But it also gives us time to get more comfortable with the integration of the acquisitions that we have done.

Tyras Bookman - Park West

When do you think you guys were trying to get down to that 1.2?

Mark Miller

In the relatively near future, but our policy is more of a consistent growth in the dividend rather than a lump step.

Tyras Bookman - Park West

Tell me, do you think you guys can get there by the end of the year?

Mark Miller

We could.

Tyras Bookman - Park West

I think your cost of equity would benefit a lot by doing that given that you are a company whose is supposed to grow through acquisition, it seems like that’s prudent?

Mark Miller

I think increasing the dividend in a prudent manner will lower our cost of equity, I agree with you.

Tyras Bookman - Park West

Okay. And I guess one last question, do you guys intend to raise the dividend every quarter instead of increasing the dividend when you do accretive acquisitions?

Mark Miller

I think, our policy would be to be more consistent on a quarterly basis rather than when we do acquisitions.

Tyras Bookman - Park West

Does that mean like, you intend to raise it every quarter or just --

Mark Miller

I don’t, we are not going to be in the business of doing forward statements, but I would tell you, we said a number of times, we like consistent increases to the dividend.

Tyras Bookman - Park West

Okay. Hopefully we will see that 120 coverage ratio, sooner rather than later.

Mark Miller

Hopefully we will be able to increase our earnings faster than we can increase our dividend.

Tyras Bookman - Park West

Okay.

Operator

Thank you. Next question comes from Matt Niblack from HITE. Please go ahead.

Matt Niblack - HITE

Congratulations on a great quarter. Just couple of quick questions. Given the visibility in the runway, did you have between the acquisition pipeline, actually, you recently done the coverage ratio, what range of distribution growth would you expect over the next year or two?

Mark Miller

I think the 1.5 that we increased over the 13.5% increase on an annual basis. And I would that between 12 and 18 would be a reasonable expectation for growth and the dividend.

Matt Niblack - HITE

Okay. And is that something, given that you know the acquisition market do you think is sustainable at those levels from years or this is going to be, we expect this is going to be enough standing here.

Mark Miller

I think its sustainable for a long period of time, it was sustainable from when I thought it was one gas station, so I don’t think, anything has really changed in the industry. The pipeline is robust and keeps getting added as far as opportunities to grow. And so if we have capital to spend I think there will be a very rationale use for a number of years to come.

Matt Niblack - HITE

Great. And then last question, you have the fantastic story that seems to be under cover, under appreciated, we have enjoyed being a part of that but are you -- undergoing efforts to get broader analyst coverage in anyway expand the awareness of the story. Will you be able to tell?

Mark Miller

I think that one of the reasons we are presenting next week at the NAPTP and yes we are trying to increase our coverage in the industry. It’s a relatively young company in the public market but we don’t have – everything we can to broaden our exposure.

Matt Niblack - HITE

Great. We really appreciate our opportunity to be a part of the story and look forward to continue to do so. Thank you.

Mark Miller

Thank you.

Operator

Next question comes from (Michael Hayden) from Robert W. Baird. Please go ahead.

Unidentified Analyst

Good morning thanks for taking my call. If I could please ask about the revolver and availability under the revolver, could I please ask, given your view on the acquisition pipeline and this additional availability, are those two well match i.e., does this revolver availability give you the gun powder that you need to go out there and successfully (in turn) the acquisitions that you are contemplating in the near term?

Mark Miller

Absolutely it does.

Unidentified Analyst

Great. And relative to flexing that revolver by another $100 million, did you characterize the additional hurdles that you might have to jump through to get that additional $100 million of availability?

Mark Miller

We have closed on it yesterday. So that is available today.

Unidentified Analyst

Okay. Very good. And then can I lastly ask you an operational question, could you provide any color on the CNG build out any very early reads on how that’s going?

Mark Miller

Let me clarify. We closed on the first $75 million, the second $100 million Accordion we have not closed on.

Unidentified Analyst

Okay.

Mark Miller

But that subject to us growing the earnings to be make it available. So we would not be needing that for period of quarters, I would guess.

Unidentified Analyst

Okay. Thanks for –

Mark Miller

Go ahead.

Unidentified Analyst

And then can I ask my follow-up question about the CNG business any color there?

Mark Miller

Yes. We just opened up our fifth location. We are doing, I think Clean Energy, they are doing six Pico stations in Philadelphia, we are partner in that with them also. We are starting to see some volume at those sites not that much, I think its going to be a slow path to get there but we think with Clean Energy and the couple of the other partners, we will build an infrastructure that will have people come to it.

Unidentified Analyst

Great. Thanks Mark.

Operator

Thank you. We have no more questions at the line. (Operator Instructions)

Mark Miller

Thank you all for your time. I appreciate your interest and look forward to many more good quarters in the future. Thank you very much.

Operator

Thank you for your participation today, ladies and gentlemen. That concludes your presentation. You may now disconnect. Thank you.

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