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Lehigh Gas Partners (NYSE:LGP)

Q2 2014 Results Earnings Conference Call

August 7, 2014, 10:00 AM ET

Executives

Joe Topper - Chairman and CEO

Mark Miller - CFO and Treasurer

Kim Bowers - Chairman and CEO of CST Brands

Clay Killinger - CFO of CST Brands

Analysts

Bonnie Herzog – Wells Fargo

Ben Brownlow - Raymond James

Damian Witkowski - Gabelli and Company

Carla Casella – JPMorgan

Bernard Colson – Oppenheimer

David Hartley – Credit Suisse

John Lawrence – Stephens

Abhi Sinha – Wunderlich Securities

James Jampel – HITE Hedge

Matthew Boss – JPMorgan

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Transaction Overview for CST Brands Acquisition of General Partner of Lehigh Gas Partners and Second Quarter 2014 Earnings Conference Call for 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 on how you may participate.

This conference call may contain forward-looking statements relating to CST Brands and the partnership future business expectations and predictions and financial conditions and results of the operations. These forward-looking statements involve certain risks and uncertainties.

CST Brands and the partnership have listed some of the important factors that may cause actual results to differ materially from those discussed in forward-looking statements, which are referred to as cautionary statements, in the transaction and second quarter 2014 earnings news releases. The news releases may be viewed on Lehigh Gas Partners’ website at www.lehighgaspartners.com.

All the subsequent written and oral forward-looking statements attributable to CST Brands or Partnership or persons acting on their 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 in SEC yesterday. The Form 8-K may be accessed through a link on the Partnership's website at www.lehighgaspartners.com. As a reminder, this conference call is being recorded.

I will now turn the conference call over to your host, Mr. Joe Topper, the Chairman and CEO of Lehigh Gas Partners.

Joe Topper

Thank you very much. Thank you and good morning. Welcome to the transaction overview call for CST Brands Acquisition of the General Partner of Lehigh Gas Partners and the second quarter earnings call for LGP.

We've prepared remarks today covering the transaction that was announced last night and will also briefly touch on LGP second quarter earnings before turning the call over for your questions.

Today is a big day for the partnership and the start of a great relationship between LGP and CST Brands. Joining me on the call today as always is Mark Miller, LGP's Chief Financial Officer; in addition, we are thrilled to have us joining us today, to review the transaction, Kim Bowers, the Chairman and Chief Executive Officer of CST Brands and Clay Killinger, the Chief Financial Officer of CST Brands.

Together we will review the transaction announced last night from both CST and LGP's perspective. Our remarks will make reference to the investor presentation filed on Form 8-K for both CST and LGP and available on the SEC website on the websites of CST and LGP respectively.

I'll now turn the call over to Kim Bowers, Chairman and Chief Executive Officer of CST Brands to start the review of the transactions. Kim?

Kim Bowers

Thank you, Joe and good morning, everyone. Thank you for joining us today to discuss and exciting transaction for both CST brands and Lehigh Gas Partners.

As we mentioned in our press release and our investor slides, we believe this is a transaction that will not only unlock value for CST shareholders and LGP unit holders; it provides both companies with an infrastructure for future expansion.

As Joe mentioned, with me from CST Brands is Clay Killinger, our CFO and we also have Joe and his team here as well.

Before we dive into the presentation, I would just like to turn your attention to the forward-looking statements that are on Slide one of the presentation under the safe harbor statements.

If you'll turn to Slide two, this is an overview of the two companies. CST's operations are primarily in the Southwest U.S. and Eastern Canada. Lehigh Gas operations are primarily centered on the East Coast. I've got a slide here in a minute that really shows how all those companies complement the others from a geography standpoint as well.

What's not in the slide is the fact that both CST and LGP are fairly new to the public company sector. CST went public in May of 2013 and LGP not much before that, in October 2012. So as young companies, so to speak from a public sector standpoint both CST and LGP have a great enthusiastic and motivated team to really grow both companies together.

If you do the math on these two on the slides here, this effectively doubles our fuel sites in the U.S. by coming together.

If you'll turn to Slide three, this Slide shows the details of the transaction. As you can see, CST is buying the general partner of Lehigh Gas as well as 100% of the incentive distribution rights of LGP. Public ownership remains as it is today with Joe Topper and other insiders at 44% and the public at 56%.

I am very pleased that Joe has agreed to stay on as CEO and President of LGP and Joe will also be joining the CST Board, following the closing.

In addition to sticking around, help us lead and grow our two companies, Joe is taking 80% of his purchase price in CST stock. To say he is all in is an understatement. He is most definitely filling out. He is buying in.

If four, this shows the structure of LGP after the closing. Again, just to emphasize, we are buying the general partner of Lehigh Gas Partners. There is no change to the limit of partner unit holders.

Over time, CST does expect to receive an ownership in LGP coming units as partial consideration for the dropdowns, but initially CST's interest in LGP is limited to the general partner and all of the incentive distribution rights.

Then if you'll turn to Slide five, Slide five just really provides some of our thoughts on the strategic rationale behind the deal. For CST, we get a growth vehicle for future expansion and we get an infrastructure for the continued development and maintenance of the wholesale fuel supply business, our new store growth platform and really giving us the front seat in what we see as a consolidating industry.

For LGP, it gets a sponsor with a healthy portfolio of dropdown opportunities over five years worth in fact. We get to bring two great teams with complementary skill sets together to enhance total shareholder and unit holder returns. This truly is a win, win. Two strong companies coming together to grow stronger together.

I'll direct you to Slide six. This highlights some of the benefits we see for CST and CST shareholders. As you can see, we gain immediate access to MLP capital markets to really fuel our organic growth. We get to partially monetize the significant trading disparity between C-Corp and MLP structures.

Moreover we get incentive distribution rights that will reach the high splits, senior than if we had weighted to former own MLP in mid 2015. CST will be better positioned to expand our core operations through third party acquisitions and moreover we avoid the expense and risks from an ITO and finally, we are expanding our reach across America and really gaining brand diversity as well.

For Slide seven, I'll turn it over to Joe.

Joe Topper

Thank you, Kim. The benefits for LGP unit holders are obvious and outstanding and great. It provides for a better certainty of and an increased rate of future distribution growth, greater certainty of dropdown asset acquisitions versus third party acquisitions, creates an enhanced platform, which to pursue the third party acquisitions jointly with CST, lessens over time LGP's concentration with LGO, a private affiliate and increases it's concentration with CST, a publicly traded company and increases the geographic and brand diversity of LGP's current portfolio.

Turning back to Kim for closing.

Kim Bowers

Great. If you'll turn to Slide eight, it shows how the two companies will interact after closing and I'll just walk through briefly, but in terms of dropdowns, point A is the new construction, so what we refer to on our calls is our NTIs, our new to industry bills. Our real property will be dropped down or sold to LGP at fair market value and we anticipate that CST will receive cash of at least 75% of that value and LP units up to 25% of that value.

In addition, equity in CST's wholesale fuel supply business will be dropped to LGP over time. Also fair market value with a similar cash to LP unit distribution of 75-25 is what we anticipate.

And finally, CST will continue to receive ongoing income from distributions related to the incentive distribution rights and from the LP units that CST will receive over time in the drops transactions in A&B above.

So over time, we will build an equity position in the LGP units, but in the mean time, there will be a cash flow pull back to CST when we drop our assets, both our new stores and again equity in our wholesale fuel supply business over time.

If you turn to Slide nine, I think Joe and I both really like this slide. It shows combined operations extending from California, all the way to the Eastern tip of Canada, just shy of 3,000 sites. We're doubling our sites in the U.S. alone, but I think what the slide also shows you is how complimentary our geography is.

Really building up a presence on the East Coast will allow us to then continue to do new store growth this direction, look for acquisitions in this area, but as well bring the wholesale business out West as well to marry up with our operation that direction. So this slide really speaks I think graphically to the combination of the two companies here and the strength we will have.

If you turn to Slide 10, this shows both CSTs and LGPs statistics. I want to emphasize a few key stats from this page. We're going to have combined revenues of $16.3 billion. It moves us up significantly on the Fortune 500 list. Our combined annual fuel volume, 3.9 billion gallons a year, 2.9 billion gallons of those in the U.S.

We're going to be in 31 U.S. states and Canadian provinces and just as important, combined the two companies will be marketing fuel under 11 different fuel brands, so real brand diversity from a fuel standpoint.

For Slide 11, I am going to turn the Slide over to Clay and have him walk through the slide.

Clay Killinger

Thanks Kim. Slide 11 outlines the assets that CST has the option to drop down over time into the partnership. The most significant of these assets is our U.S. wholesale fuel supply margin, which we expect to be in the range of $0.03 to $0.05 per gallon.

CST's wholesale fuel volumes were 1.9 billion gallons in 2013 and this represents the fuel distributed to our existing company operated retail locations in the United States.

Applying the 1.9 billion gallons of fuel volume to our expected cents per gallon margins results in potential annual cash flow margins of $57 million to $95 million.

In addition to these base wholesale fuel volumes, we expect to construct new to industry retail locations each year that we expect will add 100 million additional wholesale gallons per year or approximately $3 million to $5 million of margin.

The real property related to these newly constructed stores is expected to approximate $100 million annually, which could be dropped into the partnership and leased back to CST creating more cash flow to LGP.

Now please note that the metrics I just provided are estimates and all future business transactions between CST and LGP are subject to LGP's conflicts committee and CST's Board of Directors. Kim?

Kim Bowers

All right. So if you will turn to Slide 12, this gives you an idea of how today at least we're envisioning the operations will work post close for both companies. You can see on the left hand side of the slide that CST will stay focused on c-store operations, while LGP will continue to focus on the wholesale fuel business.

Think another skill set that LGP definitely brings to the table is a very strong and experienced M&A team that will really help us continue to grow both companies and you can see our middle column here shows the shareholder value that CST is creating both from our U.S. c-store operations.

There is going to be no change in our Canadian operations. Cash flow from the dropdown of CST's wholesale fuel supply business over this five-plus year timeframe cash flow from the dropdowns of the newly constructed real property and then the ongoing income and cash flow from the incentive distribution rights and the common units that CST receives as partial considerations for the draught. So there is a number of points of shareholder value creation here from the CST standpoint.

For Lehigh Gas, we'll continue to manage all U.S. wholesale fuel operations. They will manage the U.S. dealer and agent network and will continue to lease real property and receive lease income from both CST operated stores as well as third parties.

So if you will turn to the final slide, it shows you our closing conditions of which there are actually few, very few. Our credit facilities and we are expecting a close date early in the fourth quarter of 2014. We don't anticipate any issues with meeting our closing condition.

And also for those of you who have listened to the CST earnings calls over the last year or so, you'll recall we've discussed some limitations we faced coming out of the spend and this transaction structure fully complies with our tax matters agreement with Valero.

In sum, both companies are very excited about this transaction and the potential growth that it bring to both our companies, including the potential to unlock $300 million to $500 million in value to CST shareholders, really enabling our $200 million stock buyback program we also announced today, while LGP unit holders will get the benefits of the sponsored MLP with a long term potential of dropdown story.

And with that, I'll turn it back over to Joe.

Joe Topper

Thank you, Kim. Let me briefly touch on LGP's second quarter earnings before we turn the call over to your questions.

For the quarter EBITDA totaled $8.9 million, adjusted EBITDA totaled $10 million and distributable cash flow amounted to $6.4 million of $0.33 per basic common unit.

Included in these amounts, are $5.6 million in acquisition related expenses, $1.5 million in non-cash charges associated with purchase accounting requirements related to our PMI acquisition. Adjusting the results for these non-recurring items, EBITDA totaled $16.1 million and adjusted EBITDA totaled $17.1 million and distributable cash flow amounted to $13.5 million or $0.71 per common unit.

As a reminder, our results this quarter contain approximately two months worth of results for PMI and a little over a month of results from Atlas assets. We believe the adjusted results are more indicative of the earnings and distributed power of the partnership as a result of the recent acquisition, but are not still fully indicative of the run rate of the partnerships, given the recently acquired assets.

Our earnings press release filed yesterday has more details on our earnings as well as a non-recurring items for the quarter.

In general, it was a solid quarter for the partnership as margins and volumes will materially improve from the weakness of the first quarter results.

We are busy at work integrating the Atlas and PMI acquisitions that we closed during the quarter and both acquisitions added positively for the results for the quarter. The partnership declared a second quarter distribution of $0.5225 per unit, an increase of 2% from the first quarter of 2014 distribution.

Based on our distributable cash flow of $0.71 per common unit as adjusted for non-recurring items in my earlier comments, the coverage ratio for the declared second quarter distribution is approximately 1.35 times.

The second quarter distribution represents a 9.4% increase from the second quarter of 2013 distribution rate. We are pleased to announce yet another distribution increase this quarter, our fifth distribution increase in the six full quarters that we've been a public partnership.

As we have stated previously, our goal is to return cash to our unit holders at a sustainable rate and to grow the amount of cash returned over time. One of the main benefits of the transaction to LGP unit holders is that we expect the new relationship with CST to provide greater certainty of and an increased rate of future distribution increases to LGP unit holders.

That concludes our prepared remarks operator and I would like to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. We'll now begin the question-and-answer session. (Operator Instructions) Our first question comes from Bonnie Herzog from Wells Fargo. Please go ahead.

Bonnie Herzog – Wells Fargo

Good morning and congratulations.

Kim Bowers

Thank you, Bonnie.

Bonnie Herzog – Wells Fargo

My first question is you mentioned this $300 million to $500 million value creation, I guess I just want to verify, I assume this is for the five-year period or all in when you think about it.

Kim Bowers

Right. The dropdown of the equity in the fuel supply side.

Joe Topper

I am sorry, Bonnie.

Bonnie Herzog – Wells Fargo

No, no. I am sorry, go aheada.

Joe Topper

I was going to say, you can calculate it at one point nine billion gallons annual times the range at $0.03 to $0.05 and then the difference in MLP multiple of 14 versus the CST multiple or a retail c-store multiple of 8.5.

Bonnie Herzog – Wells Fargo

Okay. So that's kind of the roadmap of how some of the assumptions you are making to get to that range.

Joe Topper

All right. And then I had a question, just in terms of the tax implications of the transaction, some of the assets you are dropping down I believe are non-qualifying, so could you touch on that and then the ultimate potential for dropdown, i.e. is it only the NTIs, Kim or would you consider dropping down some of your older stores possibly all of them eventually?

Kim Bowers

No, I think as we view it today, it's really more focused on the NTIs where we are fully depreciated at this point in time. So the legacy stores will very likely stay where they are. It's the fuel supply piece that's a really bigger nut there and it's the fuel supply into our stores.

Operator

Thank you. Our next question comes from Ben Brownlow from Raymond James. Please go ahead.

Ben Brownlow - Raymond James

Hi. Good morning. Thanks for taking the question. Can you talk about how does the restriction on the asset sales that you have chemically affect the timing of the dropdown and just following up on Bonnie's question, that five-year timeline of that $300 million to $500 million or is there any additional color you can give within that general timeframe on the dropdowns?

Joe Topper

Sure Ben. With respect to the asset drops, we do actually -- we are restricted for dropping assets down that existed prior to our spin day to May 1, but we have had a sufficient amount of new constructed assets since that time and those assets would not be restricted from a time perspective that we could accumulate and drop those down fairly rapidly.

Now of course after May 1, 2015, the restrictions expire and both with respect to assets and the fuel supply. Now the fuel supply numbers and the EBITDA I talked about, that did relate, those do relate, excuse me, to the fuel supply agreement that existed as of May 1, 2013. So that's restricted in terms of when we would be able to drop that would occur until after May 1, 2015.

Ben Brownlow - Raymond James

Okay. Great. And just are there any I guess there wouldn’t have been a direct purchasing synergies, but I guess on the fuel side between the two companies, as you grow in aggregate is there -- are there any initial thoughts on over time purchasing synergies?

Kim Bowers

Well, I think as we see it as we do third party acquisitions, it's smaller chains that have less buying power and together clearly LGP and CST will be a significant brand distributors for a number of different brands and so I think will bring value with the acquisition frame there as well.

For CST, we get some field diversity as well and I think Ben, one of the conversations we've had is the challenge that all of our stores are tied to one brand and getting brand awareness for our store brand, this will help us as we continue to build our new stores to be able to have some optionality particularly as we move into other parts of the country.

Joe Topper

Ben, I might add, size matters and I will tell you that for every acquisition that we've done, we've increased purchasing power of those assets and I think this can only be more accretive to having the partnership with CST.

Operator

Thank you. Our next question comes from Damian Witkowski from Gabelli and Company. Please go ahead.

Damian Witkowski - Gabelli and Company

Good morning, Kim, Joe and Clay. The $0.03 to $0.05 range on the wholesale fuel gallons, what's behind the number, you see that record be actually higher if you decided to and then how quickly do you think you can actually get the entire $1.9 billion gallons and growing into the MLP?

Joe Topper

Well the $0.03 to $0.05 is the current estimate and so we are giving a general range there and it needs to be determined based on the fair value of sort of a transfer price between CST and LGP needs to be approved by the complex committee and the Board of Directors by CST.

We've done significant analysis on the amount of margin that is related into our wholesale fuel. If you recall, what's currently in the wholesale fuel supply business is all fuel that is currently supplied to our retail stores and so it's all sort of internal fuel volume and we are still in the process of determining what range would be appropriate from a fair value standpoint.

So it's still trying to be determined and it will need to be approved by both Boards, but we feel pretty comfortable that it will fall within that range. Clearly the higher end of that range is more valuable to the partnership. We just need to see how that works out.

And then with respect to how long I guess the run rate of the -- we've disclosed five plus years and we think we're pretty -- we're very comfortable with disclosing that. It will be at least a five year drop rate and likely longer.

Damian Witkowski - Gabelli and Company

Okay. And then just as a follow-up, the initial investment $70 million in cash and $2 million of the shares, which is worth little more today, what kind of -- internally what kind of returns are you looking for on that initial investment because you don't have any economic ownership in the LGP currently is just the IDRs, so can you just talk me through how you thought about that?

Joe Topper

Certainly, so running our models, we expect over a four year period of course, of course we are not -- the company just reached it's -- just reached the 15% IDR split with the anticipated asset drops over a four-year period and we looked at the four-year period, we look at it from a return on investment, not necessarily multiples and that ROI meets certainly exceeds our cost of capital when it's very consistent with what our NTIs are achieving right now. So it's a good investment for us.

Operator

Thank you. Our next question comes from Carla Casella from JPMorgan. Please go ahead.

Carla Casella – JPMorgan

Hi, my question relates to CSTs, your comfort with leverage as you look towards this transaction and in future, what is your comfort level with how high you can take your leverage?

Joe Topper

So we anticipate that the general partner will be an unrestricted subsidiary and so we look at leverage both from the CST-only level and also at the LGP-only level and our current leverage is slightly above three times EBITDA and we anticipate that, that will improve over time as we amortize our term loan and there is no change to that and we don't anticipate at the CST level incurring any level of significant debt.

We do have a revolver that we use for working capital purposes and so we are comfortable where the debt level is now and looking at the LGP side, we are going to inherit the credit facility from LGP and they are currently at five as the max and you can go down the floor and we look at that and so we are going to fall -- and we think we are comfortable with where they have been operating and look to that to continue forward.

Carla Casella – JPMorgan

Great. Thank you.

Operator

Thank you. Our next question comes from Bernard Colson from Oppenheimer. Please go ahead.

Bernard Colson – Oppenheimer

Good morning.

Kim Bowers

Good morning.

Bernard Colson – Oppenheimer

So just sort of quickly here, can you just talk about leverage, it seems like LGP is now running in excess of about four times debt to EBITDA basis and I was just wondering how is that okay level for you guys?

Clay Killinger

I will tell you that the leverage ratio right now is kind of reflection as I mentioned earlier in my comments, we didn't have a full quarter for the two acquisitions that we had and that we would expect that we would delever from those earnings as they more fully online.

The second thing is that we have a history of using the revolver to make acquisitions and then paying them down by follow-on equity offerings over time when the market presents itself.

So I would tell you that we like the range of three to four and half times and I would tell you that after the acquisitions are fully on Board, we would be less than four and half and so I think I am comfortable with the range between three and four and half times on an ongoing basis.

Bernard Colson – Oppenheimer

Okay. And the other question was specific to LGP, are you Joe going to continue to look for a third party acquisition to do at the LGP level now or is this relationship and dropdown from CST going to prevent you from doing that stuff?

Joe Topper

Do actually I think this is a great partnership on many different levels. We get the security of the dropdowns from a continuity of dividends and dividend increases, but also we see this as a way to increase our wholesale business as well as our using CST as the operator of the stores as we go out and hunt for more acquisitions and so they are a great operator and actually I am more confident of their performance than our performance and I think we will get better returns because of this partnership.

Operator

Thank you. Our next question comes from David Hartley from Credit Suisse. Please go ahead.

David Hartley – Credit Suisse

Thanks. Good morning and congratulations. First on the $0.03 again, I guess the existing stores are points of distribution with LGP you are getting $0.03 to the GP plus $4.20 a month for management, does that structure change at all and you mentioned $0.03 to $0.05 based on transfer pricing, do you -- will you be mixing the cents per gallon with the existing stores? How should I think about that?

Joe Topper

Well, I think what's happened at the LGP level right now will continue. There are no changes and the $0.03 to $0.05 are solely with respect to CST's existing company operated retail operations and so they really are separate and like I said, the $0.03 to $0.05 is still under evaluation, but we are very comfortable that we think it's going to fall within that range.

So we do look at them separately and I don't think there is going to be any intermingling between…

Clay Killinger

But I think our margin this month -- this quarter was [$0.666], which is approximately the five-year average for our margin. So our base business I will expect to continue in that range of cents per gallon margin and I think I would view the transaction from CST and LGP as on a more fixed rate between the two companies on an ongoing basis, similar to the way such they deal with partnership and they really are two different transactions, but we will always continue to maximize from the LGP wholesale business the returns to the unit holder.

David Hartley – Credit Suisse

Okay. Thanks, that's great. And in terms of the selling of the fuel contracts to LGP, can you talk about being a newbie to this, can you talk about the mechanism involved there and the kind of pricing you would expect?

Clay Killinger

Yes, this is Clay. There will not actually be a selling of the fuel contracts. It will actually be a selling or a dropping of an equity interest in a wholly owned partnership under CST. So it's an equity interest sale between CST and LGP.

The fair value of those -- that sale or drop needs to be determined between the complex committee and Board of Directors that had been determined at this time.

Operator

Thank you. Our next question comes from John Lawrence from Stephens. Please go ahead.

John Lawrence – Stephens

Thank you. Good morning.

Kim Bowers

Good morning.

John Lawrence – Stephens

Clay, would you walk through just a couple of things as far as if you looked at the sort of the pro forma on this most recent quarter, starting off with the $0.5225 and you mentioned that's in the 15% split, so am I right the way to look at that as if you did 9% a year from now, you would move up to that 25% split?

Clay Killinger

We haven’t run any pro forma on the current. We've run a model going forward John, but we do anticipate, so let me answer a question, maybe it's not the one you asked, but we do anticipate reaching the advance splits in the 25% and 50% within two to three year period.

John Lawrence – Stephens

So two to three year period there and secondly, if you just looked at that, so the mechanics today without anything really being dropped in, you exchange the difference for those split increase is all that's really there along with the -- until you drop something down, is that correct? I mean there is no real change until something is actually dropped.

Clay Killinger

That's correct. No real change. We will participate since we do own the IDRs and the IDRs are in the 15% split level. Any acquisitions that occur in LGP continues to be in a very acquisitive mode and I know Joe is out there hunting all the time. So anything that get closes between now and before we start doing those drops, the IDRs will pay out at an incremental 15%, so that's what we will return. That's all status co without any drop.

Operator

Thank you. Our next question comes from Abhi Sinha from Wunderlich Securities. Please go ahead.

Abhi Sinha – Wunderlich Securities

Yes, hi. Good morning, everybody. A quick question basically I need some color if you could provide on what kind of CapEx you have in mind on an annual basis or run rate basis going forward for the next two three years so that we can think of what kind of drop down you could possibly make and how would that translate to growth and distribution, so if any guidance you can provide in that also for the next two three years or may be in the next one to two years.

Joe Topper

Certainly Abhi and as discussed on Slide 11, we're expecting around $100 million of real property CapEx that has a full amount of basis that would be able to be dropped into the partnership and then subsequently leased back to CST at a lease rate and there the assumption is 7.5% Cap rate on that lease back.

Once again that cap rate needs to be approved by the complex committee and the Board, but for modeling purposes, we think that so far it's reasonable and it is an estimate. So we are fairly comfortable for modeling the $100 million real property annually is a good number.

Abhi Sinha – Wunderlich Securities

Okay. That's all I have. Thank you very much.

Kim Bowers

Thank you.

Operator

Thank you. Our next question comes from James Jampel from HITE Hedge. Please go ahead.

James Jampel – HITE Hedge

Thanks for taking the call. I've got a couple questions. First if you could spare us digging up the math here, given the distribution what is now $0.52 per quarter more or less and where is the 50% split level?

Clay Killinger

About $3.

James Jampel – HITE Hedge

$3 or $0.75 a quarter.

Clay Killinger

Right.

James Jampel – HITE Hedge

Great, and Joe, we've been holders of Lehigh for quite some time and we've certainly enjoyed the ride here, but would like to be a bigger portion but liquidity is so tight, do you plan on doing anything to enhance the liquidity, the trading of LGP units?

Joe Topper

I would -- there's not much I can do to increase liquidity other than increasing the float over time, which I think this transaction as we have announced will increase the float over time, but I will tell you that subsequent global market, outstanding shares are significantly larger than ours and they trade at a lower volume than we do, so I would tell you that next time we do a follow-on offering, you'll have a great window to get into to buy some more shares.

Operator

Thank you. Our next question comes from Matthew Boss from JPMorgan.

Matthew Boss – JPMorgan

Hey, good morning. Can you guys talk about potential use of the proceeds and would you consider accelerating the pace of the NTI store growth here as we look forward?

Joe Topper

Certainly under the bond indenture the use of proceeds is mandated to the reinvested in the company in either capital expenditures or a pay down of our existing debt. Now that's officially what needs to be done with those proceeds, but because CST receives its cash, it essentially frees up other cash that CST is generating and that other cash is what would be used to fund next year's NTI growth, which then gets subsequently dropped and monetized and liquidated into reimbursed if you will by the partnership.

We would also take that cash and use to fund our stock repurchase program, which was announced today and then with respect to the last part of your question of have we considered expanding, I know that I've expanded our NTI construction for previous years.

We don't think we are at a saturation point in our markets and in fact with this acquisition and joining forces with LGT it gives us a lot of tremendous amount of other market areas on the East Coast that would give us more development opportunities and so we will certainly be evaluating what we can do to accelerate and grow that.

Once again we have some restrictions in our existing debt covenants and that restrictions, but as we mentioned earlier, as the condition of close, we need to open those credit facilities up for modification and consent and so we will be discussing certain things with our bankers at that time and we will see where we go from there.

Matthew Boss – JPMorgan

Great and then I just had one follow-up. How should we think about valuing the real estate drop down opportunity and is any portion that is embedded in the $300 million to $500 million range that you guys spoke about?

Joe Topper

No, it's not in the $300 million to $500 million, that's only fuel supply and in terms of value, the real property is basically a cost because it's just been acquired and newly constructed. So it will be fair value, but a large portion of that is full basis of cost and then insurers, this came back to an earlier question of what about existing assets that you own for several years?

Those assets have a low tax basis due to tax depreciation and selling those to the partnership and leasing them back will just be too much tax leakage to make it economical. So it's going to be newly constructed assets and the cost basis will be very, very close to fair value.

Operator

Thank you. (Operator instructions) We have a question from John Lawrence from Stephens. Please go ahead.

John Lawrence – Stephens

Yes thanks for the follow-up. Could you tell me Clay if you -- in your pro forma what if -- what is basically, how significant is the change of cost to capital overall in certain scenarios as far as once you go through this process and get that higher return or access to capital?

Clay Killinger

John looking at this -- and we're looking at general trading multiple of LGP and CST, of course obviously they change on a daily basis. It looks like the market is reacting positively. So they do change today as well, but assuming the 14 times multiple -- cash flow multiple enterprise value for LGP and then it ran at 8.5 times for CST.

Clearly the acquisition currency and currency to be use for expansion is to the extent that it can be -- to the extent that we can it's fuel related, should be in the partnership and then non-fuel related c-store operations type capital needs to be in CST as to get the tax treatment that an MLP gets.

So clearly the cost of capital is cheaper under LGP and so we anticipate and the expectation is that's the acquisition currency that we will use going forward.

John Lawrence – Stephens

Great. Thanks a lot and congratulations.

Kim Bowers

Thank you.

Joe Topper

Thank you all for your time and questions. They were very good and we look forward to further calls announcing great news for the partnership between CST and Lehigh Gas Partners. Have a great day.

Operator

Thank you. And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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Source: Lehigh Gas Partners' (LGP) CEO Joe Topper on Q2 2014 Results - Earnings Call Transcript
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