Lehigh Gas Partners (NYSE:LGP)
Q4 2013 Earnings Conference Call
March 07, 2014 09:00 AM ET
Joe Topper - Chairman and CEO
Mark Miller - CFO and Treasurer
Dave Hrinak - President
Ben Brownlow - Raymond James
Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2013 Earnings Conference Call for Lehigh Gas Partners. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time on how you may participate.
This conference may contain forward-looking statements relation to the Partnership’s 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 fourth quarter 2013 earnings news release. 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.
In addition, certain non-GAAP financial measures will be discussed on this call. The Partnership has provided a description of these measures as well as a discussion of why they believe this information is useful to management in its Form 8-K furnished to the SEC yesterday. The Form 8-K may be accessed through a link on the Partnership's website at www.lehighgaspartners.com. In addition to accessing the Form 8-K on the Partnership's website, you can also sign-up for LGP's eBlast communication to keep you up-to-date on the activities of the Partnership and be notified of the latest Partnership news. As a reminder, this conference is being recorded.
I will now turn the conference call over to your host, Joe Topper, the Chairman and CEO.
Thank you and good morning. Welcome to Lehigh Gas Partners' fourth quarter 2013 earnings call. Joining me on the call today are Mark Miller, Chief Financial Officer, and Dave Hrinak, President. I will provide a brief overview of our fourth quarter results as well as some initial commentary followed by a review of our fourth consecutive quarterly distribution increase, and then briefly touch on the Manchester acquisition that we completed during the quarter. And finally review our recent financing activity. Mark will then provide a more detailed review of the fourth quarter. Once we’ve conducted our prepared remarks, we will open the section for your questions.
Net income for the fourth quarter of 2013 totaled $3.9 million or $0.25 per basic common unit. For the quarter, EBITDA totaled $12.3 million. Adjusted EBITDA totaled $13.2 million and distributable cash flow amounted to $9 million to $0.57 per basin common unit. Our wholesale gross margin for the quarter was $0.063 per gallon. As we’ve discussed on previous calls, our fuel margins will vary generally within the range and tend to be negatively affected by rising gasoline fuel prices.
The general trend during the year of declining fuel prices in our markets is the worse during the fourth quarter with the latter half of the fourth quarter having generally rising retail gas prices. From a demand perspective we also were more affected by the weather in the fourth and first quarters. When the storms hit our markets we typically see a slight uptick in retail volumes in advance of the storms and then obviously volumes were down during the periods of the winter weather as peoples stay off the roads.
Winter weather events tend to be demand destructive from a motor fuel consumption perspective as people generally don’t make up miles they did not drive during the winter weather event. Based upon National Climatic Data Center data, there were two winter weather events in the north east in December with the significant or notable suicidal impact, the winter storm from December 13th to 16th and the winter storm from December 30th to January 3rd. These storms ranked 40th and 43rd on a list of historical storms, the highest impact on the north east urban quarter according to data from the National Climatic Data Center.
Our sensitivity to winter weather is mitigated by our increasing geographic diversity and also by our rental income which is stable recurring revenue stream that has not affected by temporary weather events. We recorded $6.9 million in net rental income for the quarter, approximately 40% of our total gross profit for the quarter. The Partnership declared a fourth quarter distribution of $0.5125 per unit, a 2% increase over the current quarter distribution. Based upon our distributable cash flow from $0.57 per basic common unit, the coverage ratio for the declared fourth quarter of distribution is approximately 1.1 times.
When we review our distribution policy and coverage, we look at the distribution in the context of an entire year, which tends to mitigate the impact of fuel gross margins going into other quarterly basis. Our gross margin this quarter was lower with negatively impacted our coverage ratio. In the context of an entire cycle, we believe the coverage ratio of approximately 1.2 times is an appropriate level for the partnership. Our intent with our distribution policy is to first generate a sustainable level of distribution in second grow distribution in a durable manger overtime. With that philosophy in mind, we believe $0.01 distribution increased is an appropriate level for the current market condition. In total, the annual cash distribution per unit increased 17.1%, or $0.30 per unit, during the past year from an annual distribution rate of $1.75 per unit as of December 31, 2012. As a reference point for this number, the weighted average annual distribution growth for the Alerian MLP Index of 2013 was 7.3%. Distributing cash back to our unit holders and growing the distribution in a prudent manner is our goal here at Lehigh all result for this past year are indicative of the focus and execution we put into achieving that goal.
Moving on to acquisitions, as previously announced, we closed on the acquisition of certain assets of Manchester Marketing on December 19, 2013. The total consideration, net of working capital and other adjustments, was $10.7 million in cash. The acquisition consisted of 44 independent dealer supply contracts, 5 subjobber supply contracts and certain other assets. The acquired supply contracts are primarily for branded motor fuels and the weighted average remaining term on the supply contracts is approximately 9 years. We’re excited to enter the new market for us in the Richmond Virginia area. The transaction provides us immediate scale in the region and a base upon which to add additional assets in the future. As always we continued to be on the lookout for attractive acquisitions and are constantly evaluating potential opportunity.
On the financing front, we’re pleased to complete during the quarter our first follow-up equity offering, 3.565 million units offerings generated net proceeds of approximately $91.4 million with partnership used to repay debt outstanding under its credit facility and for general partnership purposes. We were gratified at the reception of the transaction by the market and accomplished the number of important objectives for us. The capital base allowed us to reduce our leverage and replenish our acquisition capacity for 2014, also as a result of the transaction, we broadened our institutional relationship increased the number retail distribution systems in which our companies are held and expect to expand the analyst research coverage for the partnership.
At the same time, we completed the equity offering, we began the process of replacing our existing credit facility which we completed earlier this week. Our new facility increased with the capital available us by approximately 126 million enhances our ability to do acquisitions. Mark will provide additional details on the facility in his remarks. With the completion of these two financings we’re well positioned to execute additional acquisitions in 2014 and beyond.
I will now turn it over to Mark for more detailed review of the financial results of the quarter.
Thank you, Joe. The fourth quarter 2013 was our fourth full quarter since our IPO on October 30, 2012. Therefore, in addition to the actual results for the quarter, our earnings release provides certain pro forma results for the periods ended December 31, 2012. We believe these pro forma results offer investors a more relevant comparison. During the fourth quarter 2013, we distributed on a wholesale basis 167 million gallons in motor fuels. That resulted in an average selling price of $2.79 per gallon and a $0.063 average wholesale margin per gallon, also gross profit from motor fuel sales totaled $10.5 million for the quarter.
In our retail segment which represents our commission aging class of trade, we distributed 15.3 million gallons resulting in an average selling price of $3.33 per gallon and a $0.026 average retail margin per gallon. Retail gross profit from fuel sales was $397,000 for the quarter. Because we wholesale distribute to our retail segment, our aggregate total motor fuel distributed for the quarter is 167 million gallons not 167 million wholesale gallons plus 15 million retail gallons. The fourth quarter 2012 on a pro forma basis, the partnership disposal distributed 153.1 million at an average selling price of approximately $3 per gallon and a $0.093 average margin per gallon.
Gross profit from fuel sales for the fourth quarter of 2012 on a pro forma basis totaled $14.2 million. There is no retail segment in the fourth quarter 2012 relative to the pro forma results for the fourth quarter 2012, our wholesale fuel volume increased by %9 and our wholesale gross profit from fuel sales decreased 26% for the fourth quarter 2013. As we have commented at same time 2012, the wholesale gross profit margin in the fourth quarter 2012 was unusually high which drove the gross profit margin decrease for the 2013 on a comparative basis. On a more normalized basis, our wholesale fuel gross profit margin would have increased year-over-year.
The quarter’s net rental income which is rental income less for an expense totaled $6.9 million on a pro forma basis the partnership recorded $4.1 million in net rental income in the fourth quarter 2012. The increase in 2013 compared to 2012 is mainly due to the increase net rent associated with this past year’s acquisitions. Our net rental income for the fourth quarter 2013 represented approximately 40% of our total gross profit margin for the quarter. On the expense side, operating expenses for the fourth quarter 2013 totaled $1.4 million and SG&A expenses totaled $4.6 million. SG&A expenses for the quarter included approximately $300,000 of expenses for completed acquisitions. For the quarter the partnership recorded a net income tax benefit of $1.7 million, the benefit involved approximately $1.9 million in non-cash items including a $1.2 million tax benefit related to the release of our valuation allowance on the previous recorded for tax last year. Excluding these non-cash items the partnership would have recorded a net income tax income expense for the quarter of approximately$ 200,000. In calculating our GCF we only include the current income tax expense of the partnership which excludes the impact of any non-cash charges or benefits. Details of this calculation are included in our press release. For the quarter ended December 31, 2012 the pro forma operating expenses totaled $800,000 and SG&A expenses totaled $10.3 million. The increase in operating expenses for the fourth quarter 2013 relative to 2012 due to an increase in owned and leased sites relative to the previous year. The decrease in SG&A expenses in the fourth quarter 2013 relative to 2012 is due to certain IPO expenses that were included in the fourth quarter of 2012. These IPO expenses were offset by increase….
Pardon the interruption, but this is the conference operator, I’m sorry there was no information left on your recording, the host has requested that I pull your line aside briefly to collect the information, is there someone online. If you’re line is muted could you please…
As Joe noted, rising motor fuel prices tend to depress our motor fuel margins. On sequential basis our wholesale fuel margin….
Pardon the interruption, this is conference operator, I have accessed your line briefly, the host of the call has requested that I verify your name, is there someone online, if your line is muted could you please unmute for me. If you’re on a speaker phone could you please lift up the handset, I’m unable to hear you but I will place you back into your call.
…for continued growth in 2014 and the equity offering reduced our leverage by allowing us to pay down borrowings we had used to finance our acquisitions during the past year. Our general financing strategy is to use our revolver to finance acquisitions we close on them and then issue equity at an appropriate point later in time to pay down that revolver to free up our capacity for more acquisitions. We generally target a 50-50 mix of debt to equity on a long term basis to finance our acquisitions. So over time we will increase permanently our overall revolving utilization as we close on acquisitions. As such our recently completed credit facility provides the native capacity to grow over the long term; it increases our borrowing capacity by a $126 million and extends the term of this facility to five years. In addition it provides us additional flexibility both in structuring and financing additional growth. We were very pleased by the strong response we had syndicating the facility and we have added several new quality institutions as capital providers to the partnership. As of December 31, 2013 the partnership had a $146.3 million of outstanding borrowings under the previous credit facility. Pro forma for the new facility the partnership had $291.4 million available for borrowing, net of outstanding borrowings and lenders’ credit. On the acquisition side the acquisition of the Manchester assets that Joe referenced was financed through our credit facility. The net purchase price for the assets was $10.7 million after certain working capital and other adjustments. Turning to the balance sheet, you will see that the impact of the Manchester acquisition primarily an increase in intangible assets relative to the third quarter. The bulk of the acquired assets consisted a motor fuel distribution contracts. The other significant changes involve the reduction long term debt and the increase in partner’s capital relative to the third quarter as a result of the equity offering. At this time I will turn the call back over to Joe.
Thank you, Mark. That concludes our prepared remarks, operator I’d like to open up the line for questions.
Thank you, (Operator Instructions) and the first question comes from Ben Brownlow from Raymond James.
Ben Brownlow - Raymond James
Good morning, thanks for taking the question. On the retail fuel margins that $0.0266 per gallon that obviously just reflects the gross dollar mark up above what was already made on the wholesale margin.
That’s correct, on the commission classic range you’re talking about.
Ben Brownlow - Raymond James
Yes, and can you just remind us how obviously the, I mean to no surprise those margins are going to be volatile on a quarter to quarter basis but can you just remind us again kind of the annual range or historic annual range that you’ve seen in those margins.
Yes, thanks Ben, historically we’ve been talking about this for this year. Historically, we have been averaging around $0.066 - $0.067 per gallon on a historical average. Historically, the range has been somewhere around 5.3 to 9 to 9.5; so we had a much larger range of variance than we’ve had this year. And as I talked about earlier, without geographic diversity we’ve seen a narrowing of that range of dispersion. So I would expect that the range would narrow from 5.5 to 5.7 to upwards of close to 8. So that we still have some volatility but we will not have this wider volatilities we had in the past.
Ben Brownlow - Raymond James
And next on the retail, the commission sides?
That would be you know, that was on the wholesale side. On the retail side, that volatility on the retail side could be $0.02 to $0.10.
Ben Brownlow - Raymond James
Great, and that stay in your kind of range $0.02 to $0.10.
On an annual basis I would - intend it to be around $0.05.
Ben Brownlow - Raymond James
Okay great, that’s extremely…
And that $0.05 is net credit cards and other expenses that occur.
Ben Brownlow - Raymond James
Great, extremely helpful, and then just one last one from me. On the implied average gallon per independent dealer side, it’s kind of back into; it seems like that average gallon for third-party or independent site as notably higher year-over-year. Is that from extracting lower volume sites in the first-half of ’13? And then just, how should we think about the Virginia acquisition with those 44 sites, you know on a volume basis relative to the existing chain?
The Virginia site, I think we are little bit about the average than we were, I do know the exact numbers. I want to say we’re about 800, 00; I would say the year-over-year increase in the site, it’s because we were buying better performing assets and we were shedding lower performing assets. So our mix was getting better.
And we have no further questions at this moment.
Thank you all for listening, I appreciate your time in investing in Lehigh gas. We look forward to continue and produce good numbers for you. Thank you.
Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.
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