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TABLE OF CONTENTS
TABLE OF CONTENTS 2
As filed with the Securities and Exchange Commission on June 22, 2012
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Susser Petroleum Partners LP
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
5172 (Primary Standard Industrial Classification Code Number) |
30-0740483 (I.R.S. Employer Identification Number) |
555 East Airtex Drive
Houston, Texas 77073
(832) 234-3600
(Address, including zip code, and telephone number,
Including area code, of registrant's principal executive offices)
E.V. Bonner, Jr.
555 East Airtex Drive
Houston, Texas 77073
(832) 234-3600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
| David Palmer Oelman Alan P. Baden Vinson & Elkins L.L.P. 1001 Fannin Street, Suite 2500 Houston, Texas 77002 Tel: (713) 758-2222 Fax: (713) 758-2346 |
William J. Cooper Philip H. Peacock Andrews Kurth LLP 600 Travis Street, Suite 4200 Houston, Texas 77002 Tel: (713) 220-4200 Fax: (713) 220-4285 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
CALCULATION OF REGISTRATION FEE
|
||||
| Title of Each Class of Securities to be Registered |
Proposed Maximum Aggregate Offering Price(1)(2) |
Amount of Registration Fee |
||
|---|---|---|---|---|
Common units representing limited partner interests |
$200,000,000.00 | $22,920.00 | ||
|
||||
- (1)
- Includes
common units issuable upon exercise of the underwriters' option to purchase additional common units.
- (2)
- Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated June 22, 2012
PROSPECTUS
Common Units
Representing Limited Partner Interests
Susser Petroleum Partners LP
This is the initial public offering of our common units representing limited partner interests. Prior to this offering, there has been no public market for our common units. We currently expect the initial public offering price to be between $ and $ per common unit. We have granted the underwriters an option to purchase up to additional common units to cover over-allotments. We intend to apply to list our common units on the New York Stock Exchange or the NASDAQ Global Select Market under the symbol "SUSP."
Investing in our common units involves risks. See "Risk Factors" beginning on page 20.
These risks include the following:
- •
- Susser Holdings Corporation, or SHC, is our largest customer and accounts for a significant majority of our revenues. If
SHC significantly reduces the volume of motor fuel it purchases from us, our ability to make distributions to our unitholders will be adversely affected.
- •
- We may not have sufficient cash from operations to enable us to pay the minimum quarterly distribution.
- •
- SHC, which controls our general partner, has conflicts of interest with us and may favor its own interests to the detriment
of our common unitholders. We have no control over SHC's business decisions and SHC is under no obligation to adopt a business strategy that favors us.
- •
- Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.
- •
- There is no existing market for our common units, and an adequately liquid trading market may not develop. The price of our
common units may fluctuate significantly, and unitholders could lose all or part of their investment.
- •
- Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes. If the IRS were to treat us
as a corporation for federal income tax purposes, then our cash available for distribution to our unitholders could be substantially reduced.
- •
- Our unitholders will be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
| |
Per Common Unit
|
Total
|
|||||
|---|---|---|---|---|---|---|---|
Public Offering Price |
$ | $ | |||||
Underwriting Discount(1) |
$ | $ | |||||
Proceeds to Susser Petroleum Partners LP (before expenses) |
$ | $ | |||||
- (1)
- Excludes a structuring fee equal to % of the gross proceeds of this offering payable to Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays Capital Inc. Please read "Underwriting."
The underwriters expect to deliver the common units to purchasers on or about , 2012 through the book-entry facilities of The Depository Trust Company.
Joint Book-Running Managers
| BofA Merrill Lynch | Barclays |
Co-Managers
, 2012
You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or on our behalf or any other information to which we have referred you in connection with this offering. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.
i
ii
iii
Administrative Matters |
177 | |
State, Local and Other Tax Considerations |
179 | |
INVESTMENT IN SUSSER PETROLEUM PARTNERS LP BY EMPLOYEE BENEFIT PLANS |
180 |
|
UNDERWRITING |
181 |
|
VALIDITY OF OUR COMMON UNITS |
187 |
|
EXPERTS |
187 |
|
WHERE YOU CAN FIND MORE INFORMATION |
187 |
|
FORWARD-LOOKING STATEMENTS |
188 |
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
F-1 |
|
APPENDIX A—AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF SUSSER PETROLEUM PARTNERS LP. |
A-1 |
Until , 2012 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common units, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Industry and Market Data
This prospectus includes industry data and forecasts that we obtained from industry publications and surveys, public filings and internal company sources. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of the included information. Statements as to our market position and market estimates are based on independent industry publications, government publications, third-party forecasts, management's estimates and assumptions about our markets and our internal research. While we are not aware of any misstatements regarding the market, industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings "Forward-Looking Statements" and "Risk Factors" in this prospectus.
Trademarks and Trade Names
We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of SHC and third parties, which are the property of their respective owners. Our use or display of third parties' trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.
iv
This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements, before investing in our common units. The information presented in this prospectus assumes, unless otherwise indicated, that the underwriters' option to purchase additional common units is not exercised. You should read "Risk Factors" beginning on page 20 for information about important risks that you should consider before buying our common units.
References in this prospectus to "Susser Petroleum Partners LP," the "partnership," "we," "our," "us" or like terms, when used in a historical context, refer to Susser Petroleum Company LLC, our predecessor for accounting purposes, also referenced as "our predecessor" or "SPC." SPC is a wholly owned subsidiary of Susser Holdings Corporation, our parent and the owner of our general partner. When used in the present tense or prospectively, those terms refer to Susser Petroleum Partners LP, a Delaware limited partnership, and its subsidiaries. Unless the context otherwise requires, references in this prospectus to "SHC" refer to Susser Holdings Corporation and its subsidiaries, other than Susser Petroleum Partners LP, its subsidiaries and its general partner. References in this prospectus to "our general partner" refer to Susser Petroleum Partners GP LLC, a Delaware limited liability company and the general partner of the partnership.
We are a growth-oriented Delaware limited partnership formed by Susser Holdings Corporation, or SHC, to engage in the primarily fee-based wholesale distribution of motor fuels to SHC and third parties. SHC operates over 540 retail convenience stores under its proprietary Stripes® convenience store brand, primarily in growing Texas markets. Stripes® is the largest independent chain of convenience stores in Texas based on store count and retail motor fuel volumes sold. Our business is integral to the success of SHC's retail operations, and upon the completion of this offering, SHC will purchase all of its motor fuel from us. For the year ended December 31, 2011, we distributed 789.6 million gallons of motor fuel to Stripes® convenience stores and 522.8 million gallons of motor fuel to other customers. We believe we are the largest independent motor fuel distributor by gallons in Texas, and among the largest distributors of Valero and Chevron branded motor fuel in the United States. In addition to distributing motor fuel, we also distribute other petroleum products such as propane and lube oil, and we receive rental income from real estate that we lease or sublease.
We purchase motor fuel primarily from independent refiners and major oil companies and distribute it throughout Texas and in Louisiana, New Mexico and Oklahoma to:
- •
- Stripes® convenience stores, pursuant to a
ten-year motor fuel distribution agreement with SHC, which we refer to as the SHC Distribution Contract;
- •
- over 80 other independently operated consignment locations where SHC sells motor fuel to retail customers, also pursuant
to the SHC Distribution Contract;
- •
- over 480 convenience stores and retail fuel outlets operated by independent operators, which we refer to as "dealers,"
pursuant to long-term distribution agreements; and
- •
- other commercial customers, including unbranded convenience stores, other fuel distributors, school districts and municipalities and other industrial customers.
In addition to SHC's existing Stripes® convenience stores and independently operated consignment locations, we will distribute fuel to substantially all retail convenience stores and independently operated consignment locations that SHC constructs or acquires in the future.
The total amount of motor fuel we sold grew from 892.0 million gallons during 2007 to over 1.3 billion gallons during 2011, primarily as a result of the increase in the number of Stripes®
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convenience stores, growth in average annual per-store volumes at Stripes® convenience stores and expansion of our dealer network. Since January 1, 2007, the number of Stripes® convenience store locations has grown from 325 to over 540, while the amount of motor fuel sold to such stores grew from 426.8 million gallons during 2007 to 789.6 million gallons during 2011. During this period, the combined number of dealer and consignment locations increased from 367 to 565.
During the twelve months ended March 31, 2012 and after giving pro forma effect to the SHC Distribution Contract, approximately 90% of our motor fuel sales by volume would have been made pursuant to fee-based, long-term distribution agreements. Under the SHC Distribution Contract, we will be the exclusive distributor of motor fuel purchased by SHC's existing Stripes® convenience stores and independently operated consignment locations for ten years at cost plus a fixed profit margin of three cents per gallon, as described in more detail below in "—Our Relationship with Susser Holdings Corporation—Our Agreements with SHC." Our third-party dealer distribution contracts generally have an initial term of ten years, and currently have an average remaining term of approximately five years. These contracts typically provide that we will distribute motor fuel at the posted purchase price at the fuel supply terminal, plus transportation costs, taxes and a fixed, volume-based fee, which is usually expressed in cents per gallon.
We believe that we have limited exposure to fluctuating commodity prices because we generally pass the cost of the fuel that we distribute through to our customers. In 2011, over 95% of our motor fuel gallons were purchased only after receiving a customer order, and we held title to the fuel only for the period of time required for delivery. We frequently use commodity derivative instruments to mitigate the price risk for the limited amounts of fuel for which we take title for a more extended period of time, typically not in excess of 60 days.
In addition to revenues earned in our wholesale motor fuel distribution business, we will also receive rental income from convenience store properties that we lease or sublease to SHC and third parties. We currently receive rental income from 54 properties, most of which are in Texas, and all of which we lease to third parties. Pursuant to the omnibus agreement that we will enter into with SHC at the closing of this offering, we will have a three-year option to purchase up to 75 new or recently constructed Stripes® convenience stores from SHC and lease them back to SHC. Furthermore, any stores that we purchase and lease back to SHC pursuant to the 75 store option or otherwise will be added to the SHC Distribution Contract, pursuant to which we will be the exclusive distributor of motor fuel to the applicable stores for ten years from the time of purchase at cost plus a fixed profit margin of three cents per gallon. For a more detailed description of the sale and leaseback option, please read "Business—Our Relationship with Susser Holdings Corporation—Our Agreements with SHC—Omnibus Agreement." Although we may purchase and lease convenience store properties to SHC or third parties, we do not currently operate or have any intention to operate any retail convenience stores that we own or may acquire in the future.
For the year ended December 31, 2011, we would have had pro forma gross profit of approximately $51.2 million, pro forma Adjusted EBITDA of approximately $40.0 million, and pro forma net income of approximately $34.0 million. Sales to SHC would have accounted for approximately 53% of our pro forma gross profit for that period. Please read "—Summary Historical and Pro Forma Financial and Operating Data" for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles, or GAAP.
Our Relationship with Susser Holdings Corporation
One of our principal strengths is our relationship with SHC. SHC is the largest independent operator of convenience stores in Texas based on store count and retail motor fuel volumes sold. The Susser family entered the motor fuel retailing and distribution business in the 1930's. Sam L. Susser,
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the President and Chief Executive Officer of SHC and Chief Executive Officer and chairman of the board of directors of our general partner, joined SHC in 1988, when it operated five stores and had revenues of $8.4 million. SHC has demonstrated a strong track record of internal growth and the ability to successfully integrate acquisitions into its operations, completing 13 significant acquisitions consisting of 520 retail stores and 394 wholesale distribution contracts since 1988. In addition, SHC constructed over 115 large-format convenience stores from January 2000 through December 31, 2011, and intends to open an additional 25 to 30 newly constructed stores during 2012 and 28 to 35 newly constructed stores during 2013. SHC has also developed its proprietary Laredo Taco Company® in-house restaurant concept and implemented it in over 320 Stripes® convenience stores, and intends to implement it in all newly constructed Stripes® convenience stores. In 2006, SHC completed an initial public offering of common stock and SHC's common stock trades on the NASDAQ under the symbol "SUSS."
Following the completion of this offering, SHC will continue to operate its retail convenience store business and will retain its consignment and transportation business, and we will operate the balance of its wholesale motor fuel distribution business and lease convenience store properties. SHC will own our general partner, which controls us, and will also retain a significant economic interest in us through its direct and indirect ownership of % of our limited partner interests and all of our incentive distribution rights, which will entitle SHC to increasing percentages of the cash we distribute in excess of $ per unit per quarter.
Our Agreements with SHC
In connection with the completion of this offering, two long-term, fee-based commercial agreements with SHC will be contributed to us, and we will enter into an omnibus agreement with SHC. These agreements are summarized below:
- •
- the SHC Distribution Contract, a ten-year fuel distribution agreement, pursuant to which we will be the
exclusive distributor of motor fuel purchased by SHC's existing Stripes® convenience stores and independently operated consignment locations
at cost, including tax and transportation costs, plus a fixed profit margin of three cents per gallon;
- •
- a ten-year transportation logistics agreement, pursuant to which SHC will arrange for motor fuel to be
delivered from our suppliers to our customers at rates consistent with those charged to third parties for the delivery of motor fuel, with the cost being entirely passed along to our customers,
including SHC, which we refer to as the SHC Transportation Contract; and
- •
- the omnibus agreement, pursuant to which, among other things, we will receive:
- •
- a three-year option to purchase from SHC up to 75 new or recently constructed Stripes® convenience stores at SHC's cost and lease the stores back
to SHC at a specified rate for a 15-year initial term;
- •
- a ten-year right of first offer to distribute fuel purchased by SHC for newly constructed stores and
independently operated consignment locations at a negotiated rate; and
- •
- a ten-year right to participate in acquisition opportunities with SHC, to the extent we are able to reach an agreement on terms.
In addition, our omnibus agreement provides that SHC is obligated to purchase from us any fuel it sells in the future for its own account, and we are obligated to distribute such volumes to SHC, either at a negotiated rate pursuant to our right of first offer or the alternate fuel sales rate, as described further in "Certain Relationships and Related Transactions—Agreements with Affiliates in Connection with the Transactions—Omnibus Agreement."
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For more information on our agreements with SHC and its subsidiaries, please read "Business—Our Relationship with Susser Holdings Corporation—Our Agreements with SHC," and "Certain Relationships and Related Transactions—Agreements with Affiliates in Connection with the Transactions—Omnibus Agreement." For a discussion of risks that could adversely affect our expected long-term contractual cash flow stability, please read "Risk Factors—Risks Inherent in Our Business."
Our primary business objectives are to maintain stable cash flows and to increase our quarterly cash distribution per unit over time. We intend to accomplish these objectives by executing the following strategies:
- •
- Leverage our relationship with SHC to maintain and grow stable cash flows by:
- •
- Increasing our motor fuel distribution volumes through growth in the number of Stripes® convenience stores and consignment locations and in the
volumes of motor fuel sold at existing Stripes® convenience stores and consignment locations;
- •
- Executing sale and leaseback arrangements with SHC that provide additional rental income and incremental income from motor
fuel sales; and
- •
- Pursuing strategic acquisition opportunities with SHC;
- •
- Expand our third-party wholesale motor fuel distribution business by:
- •
- Expanding our dealer network through the growth of our existing dealer locations, recruitment of new dealers and
acquisitions; and
- •
- Adding new commercial customers;
- •
- Continue to enter into fee-based, long-term distribution contracts with our customers that we
believe will help us achieve cash flow stability;
- •
- Continue to leverage our volume growth and relationships with fuel suppliers to provide attractive motor fuel pricing to
our customers; and
- •
- Pursue a disciplined financial policy and maintain a conservative capital structure.
For a more detailed description of our business strategies, please read "Business—Our Business Strategies."
We believe that we are well positioned to execute our business strategies successfully because of the following competitive strengths:
- •
- Our relationship with SHC, the largest independent convenience store operator in Texas, and the owner of our general
partner, our incentive distribution rights and a majority of our limited partnership units;
- •
- Our position as the largest independent motor fuel distributor in growing Texas markets and our exposure to other adjacent
regions;
- •
- Relatively stable cash flows from long-term, fee-based contracts and real estate rental income;
- •
- Our strong, long-term relationships with suppliers and competitive pricing through ongoing purchases of large volumes of
motor fuel;
- •
- Our strong relationships with our diversified third-party customer base; and
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- •
- Our management team's proven ability to develop and maintain customer relationships, integrate acquisitions and grow operations while maintaining financial discipline.
For a more detailed description of our competitive strengths, please read "Business—Our Competitive Strengths."
An investment in our common units involves risks. You should carefully consider the risks described in "Risk Factors" and the other information in this prospectus before deciding whether to invest in our common units. If any of these risks were to occur, our financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be adversely affected and you could lose all or part of your investment. For more information regarding the known material risks that could impact our business, please read "Risk Factors" beginning on page 20.
We are managed and operated by the board of directors and executive officers of our general partner, Susser Petroleum Partners GP LLC, a wholly owned subsidiary of SHC. Following this offering, SHC will own, directly or indirectly, approximately % of our outstanding common units and all of our outstanding subordinated units and incentive distribution rights. As a result of owning our general partner, SHC will have the right to appoint all of the members of the board of directors of our general partner, including all of our general partner's independent directors. At least one of our general partner's independent directors will be appointed prior to the date our common units are listed for trading on the applicable stock exchange. SHC will appoint our general partner's second independent director within three months of the date our common units begin trading, and our general partner's third independent director within one year from such date. Our unitholders will not be entitled to elect our general partner or its directors or otherwise directly participate in our management or operations. For more information about the executive officers and directors of our general partner, please read "Management."
Following the consummation of this offering, neither our general partner nor SHC will receive any management fee or other compensation in connection with our general partner's management of our business, but we will reimburse our general partner and its affiliates, including SHC, for all expenses they incur and payments they make on our behalf pursuant to our partnership agreement and the omnibus agreement. Neither our partnership agreement nor our omnibus agreement limits the amount of expenses for which our general partner and its affiliates may be reimbursed. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. Please read "Certain Relationships and Related Transactions—Agreements with Affiliates in Connection with the Transactions."
Summary of Conflicts of Interest and Fiduciary Duties
While our relationship with SHC and its subsidiaries is a significant strength, it is also a source of potential conflicts. Our general partner has a legal duty to manage us in a manner beneficial to us and the holders of our common and subordinated units. This legal duty is commonly referred to as a "fiduciary duty." However, the officers and directors of our general partner also have fiduciary duties to manage our general partner in a manner beneficial to its owner, SHC. Additionally, each of our executive officers and certain of our directors are also officers and directors of SHC. As a result, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and SHC and our general partner, on the other hand. For example, our general partner will be entitled to make determinations that affect the amount of cash distributions we make to holders of common and
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subordinated units, which in turn has an effect on whether our general partner receives incentive cash distributions.
Delaware law provides that Delaware limited partnerships may, in their partnership agreements, restrict, eliminate or expand the fiduciary duties owed by the general partner to limited partners and the partnership. Our partnership agreement limits the liability of, and reduces the fiduciary duties owed by, our general partner to our common unitholders. Our partnership agreement also restricts the remedies available to our unitholders for actions that might otherwise constitute a breach of fiduciary duty by our general partner or its officers and directors. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and each unitholder is treated as having consented to various actions and potential conflicts of interest contemplated in the partnership agreement that might otherwise be considered a breach of fiduciary or other duties under applicable state law.
For a more detailed description of the conflicts of interest and the fiduciary duties of our general partner, please read "Conflicts of Interest and Fiduciary Duties." For a description of other relationships with our affiliates, please read "Certain Relationships and Related Transactions."
Our principal executive offices are located at 555 East Airtex Drive, Houston, Texas 77073. Our telephone number is (832) 234-3600. Our website will be located at http://www. .com. We intend to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, or SEC, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus. The SEC maintains an internet site at http://www.sec.gov that contains reports and other information regarding issuers that file electronically with the SEC.
Formation Transactions and Partnership Structure
We are a Delaware limited partnership formed in June 2012 by SHC to own and operate the wholesale motor fuel distribution business that has historically been conducted by SPC, our accounting predecessor and a wholly owned subsidiary of SHC.
Prior to the closing of this offering, the following transactions will occur:
- •
- SPC will contribute substantially all of its wholesale motor fuel distribution business (other than its motor fuel
consignment business and transportation assets and substantially all of its accounts receivable and payable) to a newly formed operating subsidiary, Susser Petroleum Operating LLC ("Susser
Operating");
- •
- SPC and SHC will contribute certain owned and leased convenience store properties to Susser Operating;
- •
- Stripes LLC, a wholly owned subsidiary of SHC, and SPC will enter into the SHC Distribution Contract with Susser
Operating; and
- •
- SPC will enter into the SHC Transportation Contract with Susser Operating and one of its wholly owned subsidiaries.
At the closing of this offering the following transactions will occur:
- •
- SHC will contribute to us all of the equity interests in Susser Operating;
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- •
- We will issue to our general partner a 0.0% non-economic general partner interest in us;
- •
- We will issue to SHC and a wholly owned subsidiary of SHC an aggregate
of common units representing a
% limited partner interest in us and subordinated units
representing a % limited partner interest in us, as well as all of our incentive distribution
rights. To the extent that the underwriters do not exercise their right to purchase up to common units, up
to common units will be issued to SHC within 30 days
of the completion of this offering for no additional consideration, and the aggregate limited partner interest represented by SHC's common units will increase to up to %. Please read
"—The Offering—Units outstanding after this offering;"
- •
- We will issue to the public common
units representing a % limited partner interest in us (
common units if the underwriters exercise their option to purchase additional common units in full), and
we will use the net proceeds from this offering as described under "Use of
Proceeds;"
- •
- We will enter into a new $ million credit facility including both a revolving credit facility, which
will remain undrawn at the closing of this offering, and a term loan facility. We will borrow approximately $146.8 million of term debt, which will be secured by an equivalent amount of U.S.
Treasury or other investment grade securities, and will use the proceeds as described under "Use of Proceeds;" and
- •
- We will enter into the omnibus agreement with SHC, pursuant to which, among other things, (i) SHC will provide us with certain rights relating to certain future business opportunities; (ii) SHC will provide certain operational services to us in support of our operations and various centralized corporate services; and (iii) the parties will agree to certain indemnification obligations.
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The following is a simplified diagram of our ownership structure after giving effect to this offering and the related transactions.
Public Common Units(2) |
% | |||
Interests of SHC: |
||||
Common Units(2) |
% | |||
Subordinated Units |
% | |||
General Partner Interest |
0.0 | % | ||
|
100.0 | % | ||
- (1)
- One
of our operating subsidiaries, Susser Petroleum Property Company LLC ("Susser Propco"), will be treated as a corporation for U.S. federal income tax
purposes. Susser Propco does not presently own or operate any assets. However, we expect that this subsidiary will own all Stripes®
convenience stores purchased from SHC in connection with our option to execute sale and leaseback transactions under the omnibus agreement or otherwise.
- (2)
- common units will be issued to SHC at the closing of this offering and up to common units will be issued to SHC within 30 days of this offering. However, if the underwriters exercise their option to purchase additional common units in part or in full, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the public and the remainder, if any, will be issued to SHC. Please read "—The Offering—Units outstanding after this offering."
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| Common units offered to the public | common units. | |
common units if the underwriters exercise their option to purchase an additional common units (the "option units") in full. |
||
Units outstanding after this offering |
common units and subordinated units, for a total of limited partner units, regardless of whether or not the underwriters exercise their option to purchase any of the option units. Of this amount, common units will be issued to SHC or a wholly owned subsidiary of SHC at the closing of this offering and, assuming the underwriters do not exercise their option to purchase any of the option units, all such option units will be issued to SHC 30 days following this offering, upon the expiration of the underwriters' option exercise period. However, if the underwriters do exercise their option to purchase any portion of the option units, we will (i) issue to the public the number of option units purchased by the underwriters pursuant to such exercise and (ii) issue to SHC, upon the expiration of the option exercise period, all remaining option units. Any such option units issued to SHC will be issued for no additional consideration. Accordingly, the exercise of the underwriters' option will not affect the total number of common units outstanding. In addition, our general partner will own a 0.0% non-economic general partner interest in us. |
|
Use of proceeds |
We intend to use the estimated net proceeds of approximately $ million from this offering, based upon the assumed initial public offering price of $ per common unit (the midpoint of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, structuring fees and offering expenses, to: |
|
|
• distribute $ million to SHC as reimbursement of certain capital expenditures incurred with respect to the assets contributed to us; and |
|
|
• purchase approximately $146.8 million of U.S. Treasury or other investment grade securities, which will be assigned as collateral to secure a new $146.8 million term loan that will be fully guaranteed by SHC, the proceeds of which will be distributed to SHC. |
9
| If the underwriters exercise their option to purchase the option units in full, the additional net proceeds would be approximately $ million. The net proceeds from any exercise of such option will be used to purchase additional U.S. Treasury or other investment grade securities, which will be assigned as collateral to secure an equal amount of additional term loan borrowings that will be fully guaranteed by SHC, the proceeds of which will be distributed to SHC. See "Use of Proceeds." | ||
Cash distributions |
Upon completion of this offering, our partnership agreement will provide for a minimum quarterly distribution of $ per common unit and subordinated unit ($ per common unit and subordinated unit on an annualized basis) to the extent we have sufficient cash after establishment of reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We refer to this cash as "available cash," and it is defined in our partnership agreement included in this prospectus as Appendix A. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption "Cash Distribution Policy and Restrictions on Distributions." |
|
For the first quarter that we are publicly traded, we will pay investors in this offering a prorated distribution covering the period from the completion of this offering through , 2012, based on the actual length of that period. |
||
Our partnership agreement requires us to distribute all of our available cash each quarter in the following manner: |
||
|
• first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $ plus any arrearages from prior quarters; |
|
|
• second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $ ; and |
|
|
• third, to all unitholders, pro rata, until each unit has received a distribution of $ . |
|
If cash distributions to our unitholders exceed $ per unit in any quarter, the holders of our incentive distribution rights will receive increasing percentages, up to 50%, of the cash we distribute in excess of that amount. We refer to these distributions as "incentive distributions." Please read "Provisions of Our Partnership Agreement Relating to Cash Distributions." |
10
| We believe, based on our financial forecast and related assumptions included in "Cash Distribution Policy and Restrictions on Distributions," that we will have sufficient available cash to pay the minimum quarterly distribution of $ on all of our common units and subordinated units for each quarter in the twelve months ending September 30, 2013. However, we do not have a legal obligation to pay quarterly distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement. There is no guarantee that we will distribute quarterly cash distributions to our unitholders in any quarter. Please read "Cash Distribution Policy and Restrictions on Distributions." | ||
Subordinated units |
SHC initially will own, directly or indirectly, all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages. |
|
Conversion of subordinated units |
The subordination period will end on the first business day after we have earned and paid at least (1) $ (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit for each of three consecutive, non-overlapping four-quarter periods ending on or after , 2015 or (2) $ (150% of the annualized minimum quarterly distribution) on each outstanding common and subordinated unit and the related distributions on the incentive distribution rights for the four-quarter period immediately preceding that date, in each case provided there are no arrearages on our common units at that time. |
|
The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holder(s) of subordinated units or their affiliates are voted in favor of that removal. |
||
When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and thereafter no common units will be entitled to arrearages. |
11
| SHC's right to reset the target distribution levels | SHC, as the initial holder of all of our incentive distribution rights, has the right, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (50%) for each of the prior four consecutive whole fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. If SHC transfers all or a portion of our incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution. | |
If SHC elects to reset the target distribution levels, it will be entitled to receive a number of common units equal to the number of common units that would have entitled their holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to SHC on the incentive distribution rights in such prior two quarters. Please read "Provisions of Our Partnership Agreement Relating to Cash Distributions—SHC's Right to Reset Incentive Distribution Levels." |
||
Issuance of additional units |
Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Please read "Units Eligible for Future Sale" and "The Partnership Agreement—Issuance of Additional Interests." |
|
Limited voting rights |
Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 662/3% of the outstanding voting units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, SHC will own an aggregate of % of our outstanding voting units (or % of our outstanding voting units, if the underwriters exercise their option to purchase additional common units in full). This will give SHC the ability to prevent the removal of our general partner. Please read "The Partnership Agreement—Voting Rights." |
12
| Limited call right | If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner will have the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Please read "The Partnership Agreement—Limited Call Right." | |
Estimated ratio of taxable income to distributions |
We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2015, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $ per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $ per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read "Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership" for the basis of this estimate. |
|
Material federal income tax consequences |
For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read "Material U.S. Federal Income Tax Consequences." |
|
Exchange listing |
We intend to apply to list our common units on the New York Stock Exchange (NYSE) or the NASDAQ Global Select Market (NASDAQ) under the symbol "SUSP." |
13
Summary Historical and Pro Forma Financial and Operating Data
The following table shows summary historical financial and operating data of Susser Petroleum Company LLC, our predecessor for accounting purposes, and summary pro forma financial and operating data of Susser Petroleum Partners LP for the periods and as of the dates indicated. The summary historical financial data of our predecessor as of December 31, 2010 and 2011 and for the years ended December 31, 2009, 2010 and 2011 are derived from the audited consolidated financial statements of our predecessor appearing elsewhere in this prospectus. The summary historical balance sheet data of our predecessor as of December 31, 2009 are derived from the unaudited consolidated financial statements of our predecessor not appearing in this prospectus. The summary historical financial data of our predecessor as of March 31, 2012 and for the three months ended March 31, 2011 and March 31, 2012 are derived from the unaudited consolidated financial statements of our predecessor appearing elsewhere in this prospectus.
The summary pro forma financial data of Susser Petroleum Partners LP for the year ended December 31, 2011 and as of and for the three months ended March 31, 2012 are derived from our unaudited pro forma financial statements appearing elsewhere in this prospectus. The pro forma balance sheet assumes that the offering and the related transactions occurred on March 31, 2012, and the pro forma statements of operations for the year ended December 31, 2011 and the three months ended March 31, 2012 assume that the offering and the related transactions occurred on January 1, 2011. These transactions include, and the pro forma financial data give effect to, the following:
- •
- the contribution by SPC to us of substantially all of the assets and operations comprising its wholesale motor fuel
distribution business (other than its motor fuel consignment business and transportation assets and substantially all of its accounts receivable and payable);
- •
- the contribution by SHC and SPC to us of certain convenience store properties;
- •
- the consummation of this offering and our issuance
of common units to the public,
common
units, subordinated units and our incentive distribution rights to SHC and a 0.0% non-economic general
partner interest in us to our general partner;
- •
- our borrowings under our new $ million credit facility of $146.8 million in term debt;
- •
- the application of the net proceeds from this offering, together with the proceeds from borrowings under our new credit
facility, as described under "Use of Proceeds";
- •
- our treatment as a pass-through entity for federal income tax purposes;
- •
- the SHC Distribution Contract and recognition of incremental revenues under this agreement that were not recognized by our
predecessor; and
- •
- the SHC Transportation Contract and the elimination of revenues and costs associated with the transportation business that were included in our predecessor's results of operations.
The pro forma financial data does not give pro forma effect to incremental external general and administrative expenses of approximately $2.0 million that we expect to incur as a result of being a publicly traded partnership.
Our assets have historically been a part of the integrated operations of SHC, and our predecessor distributed motor fuel and other petroleum products to SHC without any profit margin. Accordingly, the gross profit in our predecessor's historical consolidated financial statements relates only to margins received from third parties for our wholesale distribution services. In addition, our predecessor's results of operations included results from consignment contracts that will be retained by SHC following the completion of this offering. At these consignment locations, our predecessor provides and controls motor fuel inventory and price at the site and receives the actual retail selling
14
price for each gallon sold, less a commission paid to the independent operator of the location, as opposed to the fixed profit margin per gallon that we will receive for fuel supplied to SHC for existing consignment locations. For this reason, as well as the other factors described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors Impacting the Comparability of Our Financial Results," our future results of operations will not be comparable to our predecessor's historical results of operations.
The following table should be read together with, and is qualified in its entirety by reference to, the historical and pro forma financial statements and the accompanying notes appearing elsewhere in this prospectus. Among other things, the historical and pro forma financial statements include more detailed information regarding the basis of presentation for the information in the following table. The table should also be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Use of Proceeds" and "Business—Our Relationship with Susser Holdings Corporation."
The following table presents a non-GAAP financial measure, Adjusted EBITDA, which we use in our business as an important supplemental measure of our performance and liquidity. Adjusted EBITDA represents net income before interest expense, income tax expense and depreciation and amortization expense, as further adjusted to reflect certain other non-recurring and non-cash items. This measure is not calculated or presented in accordance with generally accepted accounting principles, or GAAP. We explain this measure under "—Non-GAAP Financial Measure" below and reconcile it to its most directly comparable financial measures calculated and presented in accordance with GAAP.
15
| |
Predecessor Historical |
|
Pro Forma | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Fiscal Year Ended December 31, |
Three Months Ended March 31, |
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Three Months Ended March 31, 2012 |
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| |
Year Ended December 31, 2011 |
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| |
2009 | 2010 | 2011 | 2011 | 2012 | |||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
(in thousands) |
|||||||||||||||||||||||
| |
|
|
|
(unaudited) |
|
(unaudited) |
||||||||||||||||||
Statement of Income Data: |
||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Motor fuel sales to third parties |
$ | 875,891 | $ | 1,094,273 | $ | 1,549,143 | $ | 336,361 | $ | 438,801 | $ | 1,216,896 | $ | 351,845 | ||||||||||
Motor fuel sales to affiliates |
1,205,890 | 1,578,653 | 2,257,788 | 512,358 | 630,443 | 2,605,050 | 722,496 | |||||||||||||||||
Rental income |
4,245 | 5,351 | 5,467 | 1,370 | 1,363 | 3,304 | 839 | |||||||||||||||||
Other income(1) |
7,462 | 5,515 | 7,980 | 1,641 | 2,046 | 4,596 | 1,352 | |||||||||||||||||
Total revenues |
2,093,488 | 2,683,792 | 3,820,378 | 851,730 | 1,072,653 | 3,829,846 | 1,076,532 | |||||||||||||||||
Gross profit: |
||||||||||||||||||||||||
Motor fuel sales to third parties |
20,584 | 26,065 | 31,217 | 6,217 | 7,112 | 18,420 | 5,279 | |||||||||||||||||
Motor fuel sales to affiliates |
— | — | — | — | — | 26,956 | 7,123 | |||||||||||||||||
Rental income |
4,245 | 5,351 | 5,467 | 1,370 | 1,363 | 3,304 | 839 | |||||||||||||||||
Other income |
7,501 | 4,683 | 6,339 | 1,248 | 1,408 | 2,474 | 729 | |||||||||||||||||
Total gross profit |
32,330 | 36,099 | 43,023 | 8,835 | 9,883 | 51,154 | 13,970 | |||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
General and administrative |
7,593 | 8,480 | 10,559 | 2,315 | 2,649 | 9,262 | 2,377 | |||||||||||||||||
Other operating |
4,728 | 4,229 | 4,870 | 1,143 | 1,435 | 1,496 | 560 | |||||||||||||||||
Rent |
1,578 | 3,797 | 4,322 | 1,090 | 1,070 | 1,031 | 267 | |||||||||||||||||
Loss (gain) on disposal of assets |
(6 | ) | 86 | 221 | 91 | 111 | 142 | 106 | ||||||||||||||||
Depreciation, amortization and accretion |
4,901 | 4,771 | 6,090 | 1,189 | 1,884 | 4,281 | 1,400 | |||||||||||||||||
Total operating expenses |
18,794 | 21,363 | 26,062 | 5,828 | 7,149 | 16,212 | 4,710 | |||||||||||||||||
Income from operations |
13,536 | 14,736 | 16,961 | 3,007 | 2,734 | 34,942 | 9,260 | |||||||||||||||||
Other expense: |
||||||||||||||||||||||||
Interest expense, net |
191 | 284 | 324 | 77 | 87 | 691 | 179 | |||||||||||||||||
Income before income taxes |
13,345 | 14,452 | 16,637 | 2,930 | 2,647 | 34,251 | 9,081 | |||||||||||||||||
Tax expense(2) |
4,831 | 5,236 | 6,039 | 1,069 | 972 | 280 | 76 | |||||||||||||||||
Net income |
$ | 8,514 | $ | 9,216 | $ | 10,598 | $ | 1,861 | $ | 1,675 | $ | 33,971 | $ | 9,005 | ||||||||||
Other Financial Data: |
||||||||||||||||||||||||
Adjusted EBITDA(3) |
19,057 | 20,145 | 23,979 | 4,460 | 4,964 | 39,954 | 10,963 | |||||||||||||||||
Capital expenditures |
11,379 | 13,963 | 19,438 | 1,970 | 1,188 | 13,709 | 719 | |||||||||||||||||
Cash Flow Data: |
||||||||||||||||||||||||
Net cash provided by (used in): |
||||||||||||||||||||||||
Operating activities |
9,833 | 17,469 | 14,263 | (2,676 | ) | 878 | ||||||||||||||||||
Investing activities |
(11,356 | ) | (13,897 | ) | (19,153 | ) | (1,970 | ) | (1,188 | ) | ||||||||||||||
Financing activities |
331 | 731 | 381 | (100 | ) | 72 | ||||||||||||||||||
- (1)
- Other
income for historical periods includes income from a transportation services business, which will be retained by SHC following the offering, as well
as income from sales of lube oil, propane and other petroleum products, sales of rights to operate dealer locations and other miscellaneous non-motor fuel income sources.
- (2)
- Historically,
our predecessor's wholesale motor fuel distribution business has been included in SHC's U.S. federal and state tax returns, and therefore,
our predecessor's results of operations include an allocation of SHC's federal income taxes attributable to the wholesale business. Due to our status as a partnership, we will not be subject to U.S.
federal income tax and certain state income taxes in the future, except for our subsidiary that is treated as a corporation for U.S. federal income tax purposes. This subsidiary does not presently
have any operations, but is expected to own stores purchased pursuant to sale and leaseback transactions with SHC and receive rental income from SHC in future periods. In addition, we will continue to
be subject to the Texas franchise tax.
- (3)
- Adjusted EBITDA is defined in "—Non-GAAP Financial Measure" below.
16
| |
Predecessor Historical |
|
Pro Forma | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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Fiscal Year Ended December 31, |
Three Months Ended March 31, |
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Three Months Ended March 31, 2012 |
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| |
Year Ended December 31, 2011 |
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| |
2009 | 2010 | 2011 | 2011 | 2012 | |||||||||||||||||||
| |
|
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(in thousands, except operating data) |
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| |
|
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|
(unaudited) |
|
(unaudited) |
||||||||||||||||||
Balance Sheet Data (at period end): |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 446 | $ | 4,749 | $ | 240 | $ | 3 | $ | 2 | $ | 115 | ||||||||||||
Treasury securities |
— | — | — | — | — | 146,800 | ||||||||||||||||||
Property and equipment, net |
47,602 | 35,247 | 39,049 | 35,373 | 38,987 | 34,116 | ||||||||||||||||||
Total assets |
192,857 | 202,587 | 231,316 | 229,607 | 256,167 | 230,056 | ||||||||||||||||||
Total liabilities |
96,858 | 97,372 | 115,503 | 122,530 | 138,679 | 153,518 | ||||||||||||||||||
Total unitholder's equity |
95,999 | 105,215 | 115,813 | 107,077 | 117,488 | 76,538 | ||||||||||||||||||
Operating Data: |
||||||||||||||||||||||||
Motor fuel gallons sold (in thousands): |
||||||||||||||||||||||||
Stripes® convenience stores |
707,106 | 739,104 | 789,578 | 190,090 | 209,786 | 789,578 | 209,786 | |||||||||||||||||
Consignment locations |
100,609 | 106,073 | 108,944 | 25,999 | 27,655 | 108,944 | 27,655 | |||||||||||||||||
Third-party dealers and other |
394,212 | 388,136 | 413,888 | 95,008 | 113,926 | 413,888 | 113,926 | |||||||||||||||||
Total gallons sold |
1,201,927 | 1,233,313 | 1,312,410 | 311,097 | 351,367 | 1,312,410 | 351,367 | |||||||||||||||||
Average wholesale selling price per gallon(4) |
$ | 1.73 | $ | 2.17 | $ | 2.90 | $ | 2.73 | $ | 3.04 | $ | 2.91 | $ | 3.06 | ||||||||||
Motor fuel gross profit cents per gallon: |
||||||||||||||||||||||||
Affiliated(5) |
0.0¢ | 0.0¢ | 0.0¢ | 0.0¢ | 0.0¢ | 3.0¢ | 3.0¢ | |||||||||||||||||
Third-party(5) |
4.2¢ | 5.3¢ | 6.0¢ | 5.1¢ | 5.0¢ | 4.5¢ | 4.6¢ | |||||||||||||||||
Volume-weighted average for all gallons |
1.7¢ | 2.1¢ | 2.4¢ | 2.0¢ | 2.0¢ | 3.5¢ | 3.5¢ | |||||||||||||||||
Rental locations (at period end) |
80 | 86 | 83 | 81 | 81 | 54 | 54 | |||||||||||||||||
- (4)
- Excludes
excise tax.
- (5)
- Our predecessor sold motor fuel directly to independently operated consignment locations during the historical periods. Following this offering, SHC will retain the consignment contracts and assets, and, pursuant to the SHC Distribution Contract, we will sell fuel to SHC for both Stripes® convenience stores and SHC's independently operated consignment locations at a fixed profit margin of three cents per gallon. As a result, volumes sold to consignment locations are included in the calculation of third-party motor fuel gross profit cents per gallon in the historical operating data and in the calculation of affiliated motor fuel gross profit cents per gallon in the pro forma operating data.
17
We define Adjusted EBITDA as net income before net interest expense, income taxes and depreciation, amortization and accretion, as further adjusted to exclude allocated non-cash stock-based compensation expense and certain other operating expenses that are reflected in our net income that we do not believe are indicative of our ongoing core operations, such as the gain or loss on disposal of assets.
We believe Adjusted EBITDA is useful to investors in evaluating our operating performance because:
- •
- securities analysts and other interested parties use such calculations as a measure of financial performance and debt
service capabilities;
- •
- it facilitates management's ability to measure the operating performance of our business on a consistent basis by
excluding the impact of items not directly resulting from our wholesale motor fuel distribution operations; and
- •
- it is used by our management for internal planning purposes, including aspects of our consolidated operating budget and capital expenditures.
Adjusted EBITDA is not calculated or presented in accordance with GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:
- •
- it does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
- •
- it does not reflect changes in, or cash requirements for, working capital;
- •
- it does not reflect significant interest expense, or the cash requirements necessary to service interest or principal
payments on our new credit facility;
- •
- it does not reflect payments made or future requirements for income taxes;
- •
- although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will
often have to be replaced in the future, and Adjusted EBITDA does not reflect cash requirements for such replacements; and
- •
- because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
18
The following table presents a reconciliation of net income to Adjusted EBITDA:
| |
Predecessor Historical |
|
Pro Forma | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Fiscal Year Ended December 31, |
Three Months Ended March 31, |
|
|
|
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| |
|
Three Months Ended March 31, 2012 |
||||||||||||||||||||||
| |
Year Ended December 31, 2011 |
|||||||||||||||||||||||
| |
2009 | 2010 | 2011 | 2011 | 2012 | |||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
(in thousands) |
|||||||||||||||||||||||
Net income |
$ | 8,514 | $ | 9,216 | $ | 10,598 | $ | 1,861 | $ | 1,675 | $ | 33,971 | $ | 9,005 | ||||||||||
Depreciation, amortization and accretion |
4,901 | 4,771 | 6,090 | 1,189 | 1,884 | 4,281 | 1,400 | |||||||||||||||||
Interest expense, net |
191 | 284 | 324 | 77 | 87 | 691 | 179 | |||||||||||||||||
Income tax expense |
4,831 | 5,236 | 6,039 | 1,069 | 972 | 280 | 76 | |||||||||||||||||
EBITDA |
18,437 | 19,507 | 23,051 | 4,196 | 4,618 | 39,223 | 10,660 | |||||||||||||||||
Non-cash stock-based compensation |
626 | 552 | 707 | 173 | 235 | 589 | 197 | |||||||||||||||||
Loss (gain) on disposal of assets |
(6 | ) | 86 | 221 | 91 | 111 | 142 | 106 | ||||||||||||||||
Adjusted EBITDA |
$ | 19,057 | $ | 20,145 | $ | 23,979 | $ | 4,460 | $ | 4,964 | $ | 39,954 | $ | 10,963 | ||||||||||
The following table presents a reconciliation of net cash provided by (used in) operating activities to Adjusted EBITDA:
| |
Predecessor Historical | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Fiscal Year Ended December 31, |
Three Months Ended March 31, |
||||||||||||||
| |
2009 | 2010 | 2011 | 2011 | 2012 | |||||||||||
| |
(in thousands) |
|||||||||||||||
Net cash provided by (used in) operating activities |
$ | 9,833 | $ | 17,469 | $ | 14,263 | $ | (2,676 | ) | $ | 878 | |||||
Changes in operating assets and liabilities |
4,562 | (4,923 | ) | 3,897 | 6,062 | 2,959 | ||||||||||
Gain (loss) on disposal of assets |
6 | (86 | ) | (221 | ) | (91 | ) | (111 | ) | |||||||
Deferred income tax |
(986 | ) | 1,527 | (1,251 | ) | (245 | ) | (167 | ) | |||||||
Interest expense, net |
191 | 284 | 324 | 77 | 87 | |||||||||||
Income tax expense |
4,831 | 5,236 | 6,039 | 1,069 | 972 | |||||||||||
EBITDA |
18,437 | 19,507 | 23,051 | 4,196 | 4,618 | |||||||||||
Non-cash stock-based compensation |
626 | 552 | 707 | 173 | 235 | |||||||||||
Loss (gain) on disposal of assets |
(6 | ) | 86 | 221 | 91 | 111 | ||||||||||
Adjusted EBITDA |
$ | 19,057 | $ | 20,145 | $ | 23,979 | $ | 4,460 | $ | 4,964 | ||||||
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Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.
If any of the following risks were to occur, our business, financial condition, results of operations and cash available for distribution could be materially adversely affected. In that case, we might not be able to make distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment in us.
Risks Inherent in Our Business
SHC is our largest customer, and we are dependent on SHC for a significant majority of our revenues. Therefore, we are indirectly subject to the business risks of SHC. If SHC changes its business strategy, is unable to satisfy its obligations under our various commercial agreements for any reason, or significantly reduces the volume of motor fuel it purchases under the SHC Distribution Contract, our revenues will decline and our financial condition, results of operations, cash flows and ability to make distributions to our unitholders will be adversely affected.
For the year ended December 31, 2011, on a pro forma basis, SHC would have accounted for approximately 70% of our revenues, 53% of our gross profit and 70% of our motor fuel volumes sold. As we expect to continue to derive a significant percentage of our revenues from SHC for the foreseeable future, we are subject to the risk of nonpayment or nonperformance by SHC under the SHC Distribution Contract. Furthermore, the SHC Distribution Contract does not impose any minimum volume obligations on SHC. If SHC changes its business strategy or significantly reduces the volume of motor fuel it purchases for its Stripes® convenience stores and independently operated consignment locations, our cash flows will be adversely impacted. Any event, whether in our areas of operation or otherwise, that materially and adversely affects SHC's financial condition, results of operation or cash flows may adversely affect our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are indirectly subject to the operational and business risks of SHC, some which are related to the following:
- •
- competitive pressures from convenience stores, gasoline stations, and non-traditional fuel retailers such as
supermarkets, club stores and mass merchants located in SHC's markets;
- •
- volatility in prices for motor fuel, which could adversely impact consumer demand for motor fuel;
- •
- increasing consumer preferences for alternative motor fuels, or improvements in fuel efficiency;
- •
- seasonal trends in the convenience store industry, which significantly impact SHC's motor fuel sales;
- •
- the impact of severe or unfavorable weather conditions on SHC's facilities or communications networks, or on consumer
behavior, travel and convenience store traffic patterns;
- •
- cross-border risks associated with the concentration of SHC's stores in markets bordering Mexico;
- •
- SHC's dependence on information technology systems;
- •
- SHC's ability to build or acquire and successfully integrate new stores;
- •
- the operation of SHC's retail stores in close proximity to stores of our other customers; and
- •
- risks relating to SHC's substantial indebtedness and its dependence on us for cash flow generation.
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Finally, we have no control over SHC, our largest source of revenue and our primary customer. SHC may elect to pursue a business strategy that does not favor us and our business. Please read "—Risks Inherent in an Investment in Us—SHC owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including SHC, have conflicts of interest with us and limited fiduciary duties and they may favor their own interests to the detriment of us and our unitholders."
We may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution to our unitholders.
We may not have sufficient cash each quarter to pay the full amount of our minimum quarterly distribution of $ per unit, or $ per unit per year, which will require us to have available cash of approximately $ per quarter, or $ million per year, based on the number of common and subordinated units to be outstanding after the completion of this offering. The amount of cash we can distribute on our common and subordinated units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on a number of factors, some of which are beyond our control, including, among other things:
- •
- demand for motor fuel in the markets we serve, including seasonal fluctuations in demand for motor fuel;
- •
- competition from other companies that sell motor fuel products in our market areas;
- •
- regulatory action affecting the supply of or demand for motor fuel, our operations, our existing contracts or our
operating costs;
- •
- prevailing economic conditions; and
- •
- volatility of prices for motor fuel.
In addition, the actual amount of cash we will have available for distribution will depend on other factors including:
- •
- the level and timing of capital expenditures we make;
- •
- the cost of acquisitions, if any;
- •
- our debt service requirements and other liabilities;
- •
- fluctuations in our working capital needs;
- •
- reimbursements made to our general partner and its affiliates for all direct and indirect expenses they incur on our
behalf pursuant to the partnership agreement;
- •
- our ability to borrow funds and access capital markets;
- •
- restrictions contained in debt agreements to which we are a party; and
- •
- the amount of cash reserves established by our general partner.
For a description of additional restrictions and factors that may affect our ability to pay cash distributions, please read "Cash Distribution Policy and Restrictions on Distributions."
The assumptions underlying our forecast of available cash included in "Cash Distribution Policy and Restrictions on Distributions" are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause available cash to differ materially from our estimates.
The forecast of available cash set forth in "Cash Distribution Policy and Restrictions on Distributions" includes our forecast of our results of operations and available cash for the twelve
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months ending September 30, 2013. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct, including, but not limited to, the volume of motor fuel that we will sell pursuant to the SHC Distribution Contract and our third-party dealer distribution contracts, and the margins that we will receive on volumes sold to third parties, as well as the amount of rental income that we will receive for convenience stores that we lease or sublease to third-party operators or SHC.
Our forecast of available cash has been prepared by management, and we have not received an opinion or report on it from any independent registered public accountants. The assumptions underlying our forecast of available cash are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause available cash to differ materially from that which is forecasted. If we do not achieve our forecasted results, we may not be able to pay the minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially. Please read "Cash Distribution Policy and Restrictions on Distributions."
The growth of our wholesale business depends in part on SHC's ability to construct, open and profitably operate new Stripes® convenience stores. If SHC does not construct additional Stripes® convenience stores, our growth strategy and ability to increase cash distributions to our unitholders may be adversely affected.
A significant part of our growth strategy is to increase our wholesale fuel distribution volumes and rental income relating to newly constructed Stripes® convenience stores. SHC may not be able to construct and open new convenience stores, and any new stores that SHC opens may be unprofitable or fail to attract expected volumes of motor fuel sales. Several factors that could affect SHC's ability to open and profitably operate new stores include:
- •
- competition in targeted market areas;
- •
- the inability to identify and acquire suitable sites for new stores or to negotiate acceptable leases for such sites;
- •
- difficulties in adapting distribution and other operational and management systems to an expanded network of stores;
- •
- the potential inability to obtain adequate financing to fund its expansion; and
- •
- difficulties in obtaining governmental and other third-party consents, permits and licenses needed to construct and operate additional stores.
Furthermore, SHC is not obligated to construct additional Stripes® convenience stores nor enter into additional sale and leaseback transactions with respect to newly constructed stores beyond the 75 option stores under the omnibus agreement. In addition, SHC currently contracts with a motor fuel wholesaler which distributes motor fuel on a consignment basis to one of SHC's Stripes® convenience stores. Under this arrangement, as a consignee, SHC does not purchase the fuel sold at this store and instead receives a commission on volumes sold by the wholesaler. As a result, we will not distribute any volumes nor earn any revenues for fuel sold at that store. Further, under our omnibus agreement, SHC will continue to have the right to contract for similar third-party consignment sales of motor fuel by third-party wholesalers at any newly constructed or acquired locations, and such wholesalers would not be obligated to purchase any motor fuel from us. If SHC were to determine in the future that growth via the construction of additional Stripes® convenience stores or additional sale and leaseback transactions is not attractive or that it is more advantageous to contract for third-party consignment sales of motor fuel at existing or future locations as opposed to SHC selling the motor fuel, it could adversely impact our ability to grow our motor fuel volumes and rental income and our ability to make distributions to our unitholders could be adversely affected.
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A substantial majority of our revenues are generated under contracts that must be renegotiated or replaced periodically. If we are unable to successfully renegotiate or replace these contracts, then our results of operations and financial condition could be adversely affected.
For the year ended December 31, 2011, on a pro forma basis, SHC would have accounted for approximately 70% of our revenues, 53% of our gross profit and 70% of our motor fuel volumes sold. The SHC Distribution Contract has a term of ten years. However, SHC is under no obligation to renew the SHC Distribution Contract on similar terms or at all, and SHC's failure to renew the SHC Distribution Contract would have a material adverse effect on our business, liquidity and results of operations.
Our third-party revenues are generated under contracts with specified term lengths. As these contracts expire, they must be renegotiated or replaced. Our existing third-party dealer distribution contracts generally have an initial term of ten years and currently have an average remaining term of approximately five years. These dealers have no obligation to renew their distribution contracts with us on similar terms or at all.
Also, we receive rental income from 54 properties that we currently lease or sublease to third parties. Our lessees have no obligation to renew their contracts. Our third-party rental contracts typically have an initial term of five to ten years, and, as of March 31, 2012, had an average remaining life of seven years.
We may be unable to renegotiate or replace our third-party distribution contracts or leases when they expire, and the terms of any renegotiated contracts may not be as favorable as the terms of the contracts they replace. Whether these contracts are successfully renegotiated or replaced is frequently subject to factors beyond our control. Such factors include fluctuations in motor fuel prices, counterparty ability to pay for or accept the contracted volumes and a competitive marketplace for the services offered by us. If we cannot successfully renegotiate or replace our third-party contracts or must renegotiate or replace them on less favorable terms, revenues from these arrangements could decline and our ability to make distributions to our unitholders could be adversely affected.
Our financial condition and results of operations are influenced by changes in the prices of motor fuel, which may adversely impact our margins, our customers' financial condition, the availability of trade credit, as well as the amount of borrowing available for working capital under our new credit agreement.
Our operating results are influenced by prices for motor fuel, pricing volatility and the market for such products. When prices for motor fuel rise, some of our customers may have insufficient credit to purchase motor fuel from us at their historical volumes. In addition, significant and persistent increases in the retail price of motor fuel could also diminish consumer demand, which could subsequently diminish the volume of motor fuel we distribute. Furthermore, higher prices for motor fuel may (1) reduce our access to trade credit support or cause it to become more expensive and (2) decrease the amount of borrowings available for working capital under our new credit agreement as a result of available commitments. On the other hand, significant decreases in wholesale motor fuel prices could result in lower motor fuel gross margins per gallon due to the reduction in value of discounts from our suppliers.
A significant decrease in demand for motor fuel in the areas we serve would reduce our ability to make distributions to our unitholders.
A significant decrease in demand for motor fuel in the areas that we serve could significantly reduce our revenues and, therefore, reduce our ability to make or increase distributions to our unitholders. Our revenues are dependent on various trends, such as trends in commercial truck traffic, travel and tourism in our areas of operation, and these trends can change. Furthermore, seasonal fluctuations or regulatory action, including government imposed fuel efficiency standards, may affect demand for motor fuel. Because certain of our operating costs and expenses are fixed and do not vary with the volumes of motor fuel we distribute, our costs and expenses might not decrease ratably or at
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all should we experience a reduction in our volumes distributed. As a result, we may experience declines in our profit margin if our fuel distribution volumes decrease.
Certain of our contracts with suppliers currently have early payment and volume-related discounts which reduce the price we pay for motor fuel that we purchase from them. If we are unable to renew these contracts on similar terms, our gross profit will correspondingly decrease.
Certain of our contracts with suppliers currently have early payment and volume-related discounts based on the timing of our payment and the market price of the fuel and volumes that we purchase. If we were to be unable to qualify for these discounts, or unable to renew these contracts on similar terms, our gross profit would decrease, which could, in turn, reduce our cash available for distribution to our unitholders.
We currently depend on two principal suppliers for the majority of our motor fuel. A failure by a principal supplier to renew our supply agreement, a disruption in supply or an unexpected change in our supplier relationships could have a material adverse effect on our business.
For fiscal 2011, Valero supplied approximately 40% and Chevron supplied approximately 20% of our consolidated motor fuel purchases. Our supply agreement with Valero expires in July 2018 and our supply agreement with Chevron expires in August 2014. If Valero or Chevron elects not to renew their contracts with us, we may be unable to replace the volume of motor fuel we currently purchase from them on similar terms or at all. Furthermore, a disruption in supply or a significant change in our relationship with our principal fuel suppliers could have a material adverse effect on our business, results of operation and cash available for distribution to our unitholders.
We are exposed to performance risk in our supply chain. If our suppliers are unable to sell to us sufficient amounts of motor fuel products, we may be unable to satisfy our customers' demand for motor fuel.
We rely upon our suppliers to timely provide the volumes and types of motor fuels for which they contract with us. We purchase motor fuels from a variety of suppliers under term contracts. Generally, our supply contracts do not guarantee that we will receive all of the volumes that we need to fulfill the demands of our distribution customers. In times of extreme market demand or supply disruption, we may be unable to acquire enough fuel to satisfy the fuel demand of our customers. Furthermore, the feedstock for a significant portion of our supply comes from other countries, which could be disrupted by political events. In the event that such feedstock becomes scarce, whether as a result of political events or otherwise, we may be unable to meet our customers' demand for motor fuel.
Increasing consumer preferences for alternative motor fuels, or improvements in fuel efficiency, could adversely impact our business.
Any technological advancements, regulatory changes or changes in consumer preferences causing a significant shift toward alternative motor fuels, or non-fuel dependent means of transportation, could reduce demand for conventional petroleum based motor fuels. Additionally, a shift toward electric, hydrogen, natural gas or other alternative or non-fuel-powered vehicles could fundamentally change consumers' spending habits or lead to new forms of fueling destinations or new competitive pressures. Finally, new technologies have been developed and governmental mandates have been implemented to improve fuel efficiency. Any of these outcomes could potentially result in decreased consumer demand for motor fuel, which could have a material adverse effect on our business, financial condition, results of operations and cash available for distribution to our unitholders.
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The wholesale motor fuel distribution industry is characterized by intense competition and fragmentation, and our failure to effectively compete could result in lower margins.
The market for distribution of wholesale motor fuel is highly competitive and fragmented, which results in narrow margins. We have numerous competitors, some of which may have significantly greater resources and name recognition than us. We rely on our ability to provide value-added, reliable services and to control our operating costs in order to maintain our margins and competitive position. If we were to fail to maintain the quality of our services, certain of our customers could choose alternative distribution sources and our margins could decrease. While major integrated oil companies have generally continued to divest retail sites and the corresponding wholesale distribution to such sites, such major oil companies could shift from this strategy and decide to distribute their own products in direct competition with us, or large customers could attempt to buy directly from the major oil companies. The occurrence of any of these events could have a material adverse effect on our business, results of operations and cash available for distribution to our unitholders.
The motor fuel business is subject to seasonal trends, which may affect our earnings and ability to make distributions.
Our customers experience more demand for motor fuel during the late spring and summer months than during the fall and winter. Travel, recreation and construction activities typically increase in these months in the geographic areas in which we operate, increasing the demand for motor fuel. Therefore, the volume of motor fuel that we distribute is typically somewhat higher in the second and third quarters of our fiscal year. As a result, our results from operations may vary from period to period, affecting our earnings and ability to make cash distributions.
Severe weather could adversely affect our business by damaging our, our suppliers or our customers' facilities or communications networks.
A substantial portion of our wholesale distribution network is located on the Texas gulf coast. Although South Texas is generally known for its mild weather, the region is susceptible to severe storms, including hurricanes. A severe storm could damage our facilities or communications networks, or those of our suppliers or our customers, as well as interfere with our ability to distribute motor fuel to our customers or our customers' ability to operate their locations. If warmer temperatures, or other climate changes, lead to changes in extreme weather events, including increased frequency, duration or severity, these weather-related risks could become more pronounced. Any weather-related catastrophe or disruption could have a material adverse effect on our business and results of operations, potentially causing losses beyond the limits of the insurance we currently carry.
Negative events or developments associated with our branded suppliers could have an adverse impact on our revenues.
We believe that the success of our operations is dependent, in part, on the continuing favorable reputation, market value and name recognition associated with the motor fuel brands sold both at Stripes® convenience stores and to independent, branded dealers. Erosion of the value of those brands could have an adverse impact on the volumes of motor fuel we distribute, which in turn could have a material adverse effect on our financial condition and ability to make distributions to our unitholders.
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If we cannot otherwise agree with SHC on fuel supply terms for volumes we sell to SHC in the future (other than for stores purchased by us pursuant to our sale and leaseback option), then we will be required to supply volumes at a price equal to our motor fuel cost plus the alternate fuel sales rate, which will be substantially less than the fixed profit margin of three cents per gallon we will receive for motor fuel sold pursuant to the SHC Distribution Contract. Furthermore, if certain of our increase, we may not realize our anticipated profit margin with regard to motor fuel distributed to SHC at the alternate fuel sales rate.
Our omnibus agreement will provide that if we cannot agree with SHC on fuel supply terms for volumes we sell to SHC in the future (other than for stores purchased by us pursuant to our sale and leaseback option), we will be required to distribute motor fuel to SHC's newly built, acquired or added retail stores or consignment locations at a price equal to our motor fuel cost plus the alternate fuel sales rate, which will be substantially less than the fixed profit margin of three cents we will receive for motor fuel sold pursuant to the SHC Distribution Contract. The alternate fuel sales rate is a per gallon fee we will receive equal to our prior year per-gallon motor fuel distribution costs, excluding the cost of the motor fuel, plus 30% of such costs. Our motor fuel distribution costs include direct distribution expenses as well as general and administrative expenses, maintenance capital expenditures, franchise taxes and other miscellaneous costs. Under the omnibus agreement, the alternate fuel sales rate will reset annually, but the fixed fee included in the rate for a given year will be based on our motor fuel distribution costs for the immediately preceding year. For a discussion of the alternate fuel sales rate, please read "Business—Our Relationship with Susser Holdings Corporation—Our Agreements with SHC—Omnibus Agreement."
Accordingly, even though the alternate fuel sales rate will reset annually, we may not realize our anticipated profit margin on motor fuel distributed to SHC at the alternate fuel sales rate. If our operating costs significantly increase in a given year as compared to immediately preceding year operating costs, the profit margin we receive for fuel distributed at the alternate fuel sales rate will be reduced, which will negatively impact our results of operations and cash available for distribution to our unitholders.
Due to our lack of geographic diversification, adverse developments in our operating areas could adversely affect our results of operations and cash available for distribution to our unitholders.
Our operations are located in Texas, New Mexico, Louisiana and Oklahoma. Due to our lack of geographic diversification, an adverse development in the areas in which we operate, such as a catastrophic weather event or a decrease in demand for motor fuel, could have a significantly greater impact on our results of operations and cash available for distribution than it would if we operated in more diverse locations.
If we do not make acquisitions on economically acceptable terms, our future growth may be limited.
Our ability to grow depends substantially on our ability to make acquisitions that result in an increase in available cash per unit. We intend to expand our dealer distribution network through acquisitions, and we anticipate that we may jointly pursue mutually beneficial acquisition opportunities with SHC. However, we may be unable to take advantage of accretive opportunities for any of the following reasons:
- •
- we are unable to identify attractive acquisition opportunities or negotiate acceptable terms;
- •
- we are unable to reach an agreement with SHC regarding the terms of jointly pursued acquisitions;
- •
- we are unable to raise financing for such acquisitions on economically acceptable terms; or
- •
- we are outbid by competitors.
Pursuant to the omnibus agreement, we will have a three-year option to purchase up to 75 new or recently constructed Stripes® convenience stores from SHC and lease them back to SHC on
26
specified terms set forth in a lease agreement, including a specified lease rate, for an initial term of 15 years. However, such specified terms may not be economically favorable to us in the future, and we may not choose to exercise this option.
In addition, we expect to grow through additional sale and leaseback transactions with SHC beyond the 75 store option set forth in the omnibus agreement. However, SHC is under no obligation to pursue acquisitions with us, enter into additional sale and leaseback arrangements with us beyond the 75 store option or generally pursue projects that enhance the value of our business. Finally, we may complete acquisitions which at the time of completion we believe will be accretive, but which ultimately may not be accretive. If any of these events were to occur, our future growth would be limited.
Any acquisitions we complete are subject to substantial risks that could reduce our ability to make distributions to unitholders.
Even if we do make acquisitions that we believe will increase available cash per unit, these acquisitions may nevertheless result in a decrease in available cash per unit. Any acquisition involves potential risks, including, among other things:
- •
- we may not be able to obtain the cost savings and financial improvements we anticipate or acquired assets may not perform
as we expect;
- •
- we may not be able to successfully integrate the businesses we acquire;
- •
- we may fail or be unable to discover some of the liabilities of businesses that we acquire, including liabilities
resulting from a prior owner's noncompliance with applicable federal, state or local laws;
- •
- acquisitions may divert the attention of our senior management from focusing on our core business;
- •
- we may experience a decrease in our liquidity by using a significant portion of our available cash or borrowing capacity
to finance acquisitions; and
- •
- we face the risk that our existing financial controls, information systems, management resources and human resources will need to grow to support future growth.
Our operations are subject to federal, state and local laws and regulations pertaining to environmental protection and operational safety that may require significant expenditures or result in liabilities that could have a material adverse effect on our business.
Our business is subject to various federal, state and local environmental laws and regulations, including those relating to underground storage tanks, the release or discharge of regulated materials into the air, water and soil, the generation, storage, handling, use, transportation and disposal of hazardous materials, the exposure of persons to regulated materials, and the health and safety of our employees. A violation of, liability under or compliance with these laws or regulations or any future environmental laws or regulations, could have a material adverse effect on our business and results of operations.
Where releases of refined petroleum products, renewable fuels and crude oil have occurred, federal and state laws and regulations require that contamination caused by such releases be assessed and remediated to meet applicable standards. The costs associated with the investigation and remediation of contamination, as well as any associated third-party claims, could be substantial, and could have a material adverse effect on our business and results of operations and our ability to make distributions to our unitholders.
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New, stricter environmental laws and regulations could significantly increase our costs, which could adversely affect our results of operations and financial condition.
The trend in environmental regulation is towards more restrictions and limitations on activities that may affect the environment. Our business may be adversely affected by increased costs and liabilities resulting from such stricter laws and regulations. We try to anticipate future regulatory requirements that might be imposed and plan accordingly to remain in compliance with changing environmental laws and regulations and to minimize the costs of such compliance. However, there can be no assurances as to the timing and type of such changes in existing laws or the promulgation of new laws or the amount of any required expenditures associated therewith.
We are subject to federal, state and local laws and regulations that govern the product quality specifications of the refined petroleum products we purchase, store, transport and sell to our distribution customers.
Various federal, state and local government agencies have the authority to prescribe specific product quality specifications for certain commodities, including commodities that we distribute. Changes in product quality specifications, such as reduced sulfur content in refined petroleum products, or other more stringent requirements for fuels, could reduce our ability to procure product, require us to incur additional handling costs and/or require the expenditure of capital. If we are unable to procure product or recover these costs through increased sales, we may not be able to meet our financial obligations. Failure to comply with these regulations could result in substantial penalties.
The dangers inherent in the storage of motor fuel could cause disruptions in our operations and could expose us to potentially significant losses, costs or liabilities.
We store motor fuel in underground and above ground storage tanks. Our operations are subject to significant hazards and risks inherent in storing motor fuel. These hazards and risks include, but are not limited to, fires, explosions, spills, discharges and other releases, any of which could result in distribution difficulties and disruptions, environmental pollution, governmentally-imposed fines or clean-up obligations, personal injury or wrongful death claims and other damage to our properties and the properties of others. Any such event could significantly disrupt our operations or expose us to significant liabilities, to the extent such liabilities are not covered by insurance. Therefore, the occurrence of such an event could have a material adverse effect on our business, financial condition, results of operations and cash available for distribution to our unitholders.
We are not fully insured against all risks incident to our business.
We are not fully insured against all risks incident to our business. We may be unable to obtain or maintain insurance with the coverage that we desire at reasonable rates. As a result of market conditions, the premiums and deductibles for certain of our insurance policies have increased and could continue to do so. Certain insurance coverage could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial condition and ability to make distributions to our unitholders.
Future litigation could adversely affect our financial condition and results of operations.
We are occasionally exposed to various litigation claims in the ordinary course of our business, including dealer litigation and industry-wide or class-action claims arising from the equipment or processes we use or employ or industry-specific business practices. If we were to become subject to any such claims in the future, our defense costs and any resulting awards or settlement amounts may not be fully covered by our insurance policies. An unfavorable outcome or settlement of any future lawsuits could have a material adverse effect on our financial condition, results of operation and cash available for distribution to our unitholders.
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We rely on SHC for transportation of all of our motor fuel, which in turn relies, in part, on third-party transportation providers. As a result, a change in SHC's transportation providers, a significant change in SHC's relationship with its transportation providers or nonperformance or a disruption of motor fuel transportation services by SHC or by SHC's transportation providers could have a material adverse effect on our business.
SHC transports all of our motor fuel from terminals to its Stripes® convenience stores and third-party dealers pursuant to the SHC Transportation Contract. SHC transports a portion of our motor fuel itself and has contracts with third-party transportation carriers for the remainder of our motor fuel. SHC's third-party contracts with its transportation providers may be terminated by either party upon 30 days' notice. A change in transportation providers, a significant change in SHC's relationship with its transportation providers or nonperformance or a disruption in service by SHC or by SHC's transportation providers could have a material adverse effect on our business, results of operations and cash available for distribution.
We rely on our suppliers to provide trade credit terms to adequately fund our ongoing operations.
Our business is impacted by the availability of trade credit to fund fuel purchases. An actual or perceived downgrade in our liquidity or operations (including any credit rating downgrade by a rating agency) could cause our suppliers to seek credit support in the form of additional collateral, limit the extension of trade credit, or otherwise materially modify their payment terms. Any material changes in our payments terms, including early payment discounts, or availability of trade credit provided by our principal suppliers could impact our liquidity, results of operations and cash available for distribution to our unitholders.
Because we depend on our senior management's experience and knowledge of our industry, we could be adversely affected were we to lose key members of our senior management team.
We are dependent on the expertise and continued efforts of our senior management team. If, for any reason, our senior executives do not continue to be active in our management, our business, financial condition or results of operations could be adversely affected. In addition, other than the key man life insurance for Sam L. Susser held by SHC, we do not maintain key man life insurance on our senior executives and other key employees.
Terrorist attacks and threatened or actual war may adversely affect our business.
Our business is affected by general economic conditions and fluctuations in consumer confidence and spending, which can decline as a result of numerous factors outside of our control. Terrorist attacks or threats, whether within the United States or abroad, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions impacting our suppliers or our customers may adversely impact our operations. Specifically, strategic targets such as energy related assets (which could include refineries that produce the motor fuel we purchase or ports in which crude oil is delivered) may be at greater risk of future terrorist attacks than other targets in the United States. These occurrences could have an adverse impact on energy prices, including prices for motor fuels, and an adverse impact on our operations. Any or a combination of these occurrences could have a material adverse effect on our business, results of operations and cash available for distribution to our unitholders.
We rely on our information technology systems to manage numerous aspects of our business, and a disruption of these systems or an act of cyber-terrorism could adversely affect our business.
We depend on our information technology (IT) systems to manage numerous aspects of our business transactions and provide analytical information to management. Our IT systems are an
29
essential component of our business and growth strategies, and a serious disruption to our IT systems could significantly limit our ability to manage and operate our business efficiently. These systems are vulnerable to, among other things, damage and interruption from power loss or natural disasters, computer system and network failures, loss of telecommunications services, physical and electronic loss of data, cyber-security breaches or cyber-terrorism, and computer viruses. Any disruption could cause our business and competitive position to suffer and cause our operating results to be reduced.
Our future debt levels may impair our financial condition.
After giving effect to this offering and the related transactions, we estimate that we would have had approximately $147.9 million of debt outstanding on a pro forma basis as of March 31, 2012, substantially all of which would have been secured by U.S. Treasury or other investment grade securities. Following the completion of this offering, we expect that we will have the ability to incur debt, including under a new credit facility we expect to enter into in connection with this offering. The level of our future indebtedness could have important consequences to us, including:
- •
- making it more difficult for us to satisfy our obligations with respect to our credit agreement governing our revolving
credit facility;
- •
- limiting our ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt
service requirements, the execution of our growth strategy and other activities;
- •
- requiring us to dedicate a substantial portion of our cash flow from operations to pay interest on our debt, which would
reduce our cash flow available to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other activities;
- •
- making us more vulnerable to adverse changes in general economic conditions, our industry and government regulations and
in our business by limiting our flexibility in planning for, and making it more difficult for us to react quickly to, changing conditions; and
- •
- placing us at a competitive disadvantage compared with our competitors that have less debt.
In addition, we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to meet our other cash needs. Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. In addition, our ability to service our debt will depend on market interest rates, since we anticipate that the interest rates applicable to our borrowings will fluctuate. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate revenues.
Our new credit facility will have substantial restrictions and financial covenants that may restrict our business and financing activities and our ability to pay distributions to our unitholders.
The operating and financial restrictions and covenants in our new credit facility and any future financing agreements may restrict our ability to finance future operations or capital needs, to engage in or expand our business activities or to pay distributions to our unitholders. Please read "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Anticipated New Credit Facility." Our future ability to comply with these restrictions and covenants is uncertain and will be affected by the levels of cash flow from our operations and other events or circumstances beyond our control. If market or other economic conditions deteriorate,
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our ability to comply with these covenants may be impaired. If we violate any provisions of our new credit facility that are not cured or waived within the appropriate time periods provided in such credit facility, a significant portion of our indebtedness may become immediately due and payable, our ability to make distributions to our unitholders will be inhibited and our lenders' commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments.
We depend on cash flow generated by our subsidiaries.
We are a holding company with no material assets other than the equity interests in our subsidiaries. Upon completion of this offering, we will have three subsidiaries that conduct all of our operations and own all of our assets. These subsidiaries will be distinct legal entities and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries and our subsidiaries may not be able to, or be permitted to, make distributions to us. In the event that we do not receive distributions from our subsidiaries, we may be unable to meet our financial obligations or make distributions to our unitholders.
The impact of derivatives legislation by the United States Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of changes in commodity prices and interest rates and other risks associated with our business.
The United States Congress recently adopted comprehensive financial reform legislation that establishes federal oversight and regulation of the over-the-counter derivatives market and entities, such as us, that participate in that market. The new legislation, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law on July 21, 2010 and required the Commodities Futures Trading Commission (the "CFTC") and the SEC to promulgate rules and regulations implementing the new legislation within 360 days from the date of enactment. The CFTC has also proposed regulations to set position limits for certain futures and option contracts in the major energy markets, although it is not possible at this time to predict whether or when the CFTC will adopt those rules or include comparable provisions in its rulemaking under the Dodd-Frank Act. The Dodd-Frank Act may also require compliance with margin requirements and with certain clearing and trade-execution requirements in connection with certain derivative activities, although the application of those provisions is uncertain at this time. The financial reform legislation may also require the counterparties to our derivative instruments to spin off some of their derivatives activities to a separate entity, which may not be as creditworthy as the current counterparty.
The new legislation and any new regulations could significantly increase the cost of some derivative contracts (including through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of some derivative contracts, reduce the availability of some derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivative contracts, and potentially increase our exposure to less creditworthy counterparties. Any of these consequences could have a material adverse effect on our financial condition, results of operations and cash available for distribution to our unitholders.
Changes in accounting standards, policies, estimates or procedures may impact our reported financial condition or results of operations.
The accounting standard setters, including the Financial Accounting Standards Board, the SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. In addition, the preparation of consolidated financial
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statements in conformity with GAAP requires management to make significant estimates that affect the financial statements. Due to the inherent nature of these estimates, no assurance can be given that we will not be required to recognize significant, unexpected losses due to actual results varying materially from management's estimates. Additional information regarding our critical accounting policies can be found in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations—Significant Accounting Policies and Estimates."
Risks Inherent in an Investment in Us
SHC owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including SHC, have conflicts of interest with us and limited fiduciary duties and they may favor their own interests to the detriment of us and our unitholders.
Following this offering, SHC will own and control our general partner and will appoint all of the officers and directors of our general partner. All of the officers and certain of the directors of our general partner are also officers and/or directors of SHC. Although our general partner has a fiduciary duty to manage us in a manner beneficial to us and our unitholders, the executive officers and directors of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to SHC. Therefore, conflicts of interest may arise between SHC and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates over the interests of our common unitholders. These conflicts include the following situations, among others:
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- Neither our partnership agreement nor any other agreement requires SHC to pursue a business strategy that favors us. The
affiliates of our general partner have fiduciary duties to make decisions in their own best interests and in the best interest of their owners, which may be contrary to our interests. In addition, our
general partner is allowed to take into account the interests of parties other than us or our unitholders, such as SHC, in resolving conflicts of interest, which has the effect of limiting its
fiduciary duty to our unitholders.
- •
- All of the officers and certain of the directors of our general partner are also officers and/or directors of SHC and will
owe fiduciary duties to SHC. Certain officers of our general partner will also devote significant time to the business of SHC and will be compensated by SHC accordingly.
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- Other than as provided in the omnibus agreement, SHC is not limited in its ability to compete with us and may offer
business opportunities or sell assets to parties other than us.
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- The limited partner interests that SHC will initially own will permit it to effectively control any vote of our limited
partners. SHC will be entitled to vote its units in accordance with its own interests, which may be contrary to the interests of our other unitholders.
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- Our partnership agreement limits the liability of, and reduces the fiduciary duties owed by, our general partner and also
restricts the remedies available to unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty. As a result of purchasing common units, unitholders consent to
some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law.
- •
- Except in limited circumstances, our general partner has the power and authority to conduct our business without
unitholder approval.
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- Our general partner determines the amount and timing of asset purchases and sales, borrowings, repayment of indebtedness and issuances of additional partnership securities and
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- •
- Our general partner determines the amount and timing of any capital expenditure and whether a capital expenditure is
classified as a maintenance capital expenditure or an expansion capital expenditure. Please read "Provisions of Our Partnership Agreement Relating to Cash Distributions—Capital
Expenditures." These determinations can affect the amount of cash that is distributed to our unitholders which, in turn, affects the ability of the subordinated units to convert to common units.
Please read "Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units."
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- Our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose
or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period.
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- Our partnership agreement permits us to distribute up to $ million as operating surplus, even if it
is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our
subordinated units or the incentive distribution rights.
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- Our general partner determines which costs incurred by it and its affiliates are reimbursable by us.
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- Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any
services rendered to us or entering into additional contractual arrangements with its affiliates on our behalf. There is no limitation on the amounts our general partner can cause us to pay it or its
affiliates.
- •
- Our general partner intends to limit its liability regarding our contractual and other obligations.
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- Our general partner may exercise its right to call and purchase common units if it and its affiliates own more than 80% of
the common units.
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- Our general partner will control the enforcement of obligations owed to us by it and its affiliates. In addition, our
general partner will decide whether to retain separate counsel or others to perform services for us.
- •
- SHC may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to SHC's incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.
the level of reserves, each of which can affect the amount of cash that is distributed to our unitholders.
Our general partner intends to limit its liability regarding our obligations.
Other than with respect to our new credit facility, our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner's fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such
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reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.
Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.
Our partnership agreement requires that we distribute all of our available cash to our unitholders, and we will rely primarily upon external financing sources, including borrowings under our credit facility and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.
In addition, because we distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement and we do not expect to have any limitations in our new credit facility on our ability to issue additional units, including units ranking senior to the common units. The incurrence of bank borrowings or other debt to finance our growth strategy will result in increased interest expense, which, in turn, may impact the available cash that we have to distribute to our unitholders.
Our partnership agreement limits the liability and duties of our general partner and restricts the remedies available to us and our common unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
Our partnership agreement limits the liability and duties of our general partner, while also restricting the remedies available to our common unitholders for actions that, without these limitations, might constitute breaches of fiduciary duty. Delaware partnership law permits such contractual reductions of fiduciary duty. By purchasing common units, common unitholders consent to be bound by the partnership agreement, and pursuant to our partnership agreement, each holder of common units consents to various actions and conflicts of interest contemplated in our partnership agreement that might otherwise constitute a breach of fiduciary or other duties under Delaware law. Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example:
- •
- Our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed
to its capacity as general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any
interest of, or factors affecting, our common unitholders. Decisions made by our general partner in its individual capacity will be made by SHC, as the owner of our general partner, and not by the
board of directors of our general partner. Examples of these decisions include:
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- Whether to exercise its limited call right;
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- How to exercise its voting rights with respect to any units it may own;
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- Whether to exercise its registration rights; and
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- Whether or not to consent to any merger or consolidation or amendment to our partnership agreement.
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- Our partnership agreement provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as general partner so long as it acted in
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- •
- Our partnership agreement provides that our general partner and the officers and directors of our general partner will not
be liable for monetary damages to us for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our
general partner or those persons acted in bad faith or, in the case of a criminal matter, acted with knowledge that such person's conduct was criminal.
- •
- Our partnership agreement provides that our general partner will not be in breach of its obligations under the partnership
agreement or its duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is:
- •
- approved by the conflicts committee of the board of directors of our general partner, although our general partner is not
obligated to seek such approval; or
- •
- approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates.
good faith, meaning it believed that the decisions were not adverse to the interests of our partnership.
In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee then it will be presumed that, in making its decision, taking any action or failing to act, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read "Conflicts of Interest and Fiduciary Duties."
By purchasing a common unit, a unitholder will become bound by the provisions of our partnership agreement, including the provisions described above. See "Description of the Common Units—Transfer of Common Units."
SHC may compete with us or contract with third-party wholesalers to distribute motor fuel to SHC's convenience stores on a consignment basis.
Pursuant to the ten-year SHC Distribution Contract, we will be the exclusive distributor of all motor fuel purchased by SHC for existing Stripes® convenience stores and independently operated consignment locations, and, pursuant to the omnibus agreement, SHC must purchase any motor fuel it sells at its newly built, acquired or added retail stores from us, unless such stores are already party to a supply agreement. If the SHC Distribution Contract and omnibus agreement expire at the end of their respective ten-year terms and are not renewed, SHC will no longer be required to purchase motor fuel from us and could compete with us. Furthermore, SHC is permitted to compete with us for investment opportunities, and SHC is permitted to own an interest in entities that compete with us.
In addition, SHC will continue to have the right to contract for third-party consignment sales of motor fuel with other wholesalers at any newly constructed or acquired locations. Under these arrangements, as the consignee, SHC would not purchase any fuel and would instead receive a commission on sales made by the wholesaler. As a result, we will not distribute any volumes nor earn any revenues for fuel sold at that store. SHC is under no obligation to purchase fuel from us for its convenience stores if it determines that consignment arrangements with third parties are more advantageous to SHC and its shareholders.
Pursuant to the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, will not apply to our general partner or any of its affiliates, including its executive officers and directors and SHC. Any such person or entity will not be liable to us or to any
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limited partner under our partnership agreement for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read "Conflicts of Interest and Fiduciary Duties."
SHC may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of the conflicts committee of our general partner's board of directors or the holders of our common units. This could result in lower distributions to holders of our common units.
SHC has the right, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (50%) for each of the prior four consecutive whole fiscal quarters (and the amount of each such did not exceed adjusted operating surplus for each such quarter), to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. Following a reset election by SHC, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution reflected by the current target distribution levels.
If SHC elects to reset the target distribution levels, it will be entitled to receive a number of common units equal the number of common units which would have entitled their holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to SHC on the incentive distribution rights in the prior two quarters. We anticipate that SHC would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that SHC could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive incentive distributions based on the initial target distribution levels. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that they would have otherwise received had we not issued new common units to SHC in connection with resetting the target distribution levels. Please read "Provisions of Our Partnership Agreement Relating to Cash Distributions—SHC's Right to Reset Incentive Distribution Levels."
Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which our common units will trade.
Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management's decisions regarding our business. Our unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. The board of directors of our general partner, including the independent directors, will be chosen entirely by SHC due to its ownership of our general partner, and not by our unitholders. Please read "Management—Management of Susser Petroleum Partners LP" and "Certain Relationships and Related Transactions." Unlike a publicly traded corporation, we will not conduct annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of stockholders of corporations. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting our unitholders' ability to influence the manner or direction of management. As a result of these limitations, the price at which
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the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.
Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.
If our unitholders are dissatisfied with the performance of our general partner, they will have limited ability to remove our general partner. Unitholders initially will be unable to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon the completion of this offering to be able to prevent its removal. The vote of the holders of at least 662/3% of all our outstanding common and subordinated units voting together as a single class is required to remove our general partner. Following the closing of this offering, SHC will own, directly or indirectly, an aggregate of % of our common and subordinated units (or % of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). Also, if our general partner is removed without cause during the subordination period and no units held by our general partner or its affiliates are voted in favor of that removal, all remaining subordinated units will automatically convert into common units and any existing arrearages on the common units will be extinguished. Cause is narrowly defined in our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business.
Unitholders will experience immediate and substantial dilution in pro forma net tangible book value of $ per common unit.
The estimated initial public offering price of $ per common unit exceeds our pro forma net tangible book value of $ per common unit. Based on the estimated initial public offering price of $ per common unit, unitholders will incur immediate and substantial dilution of $ per common unit. This dilution results primarily because the assets contributed to us by affiliates of our general partner are recorded at their historical cost in accordance with GAAP, and not their fair value. Please read "Dilution."
Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, our partnership agreement does not restrict the ability of SHC to transfer all or a portion of its direct or indirect interest in our general partner to a third party. Any new owner of our general partner or our general partner interest would then be in a position to replace the board of directors and executive officers of our general partner with its own designees without the consent of unitholders and thereby exert significant control over us, and may change our business strategy. Any of these changes, or any other changes resulting from a change in control of our general partner or general partner interest, may lower the trading price of our common units and otherwise have a material adverse effect on us.
The incentive distribution rights may be transferred by SHC to a third party without unitholder consent.
SHC may transfer all or a portion of its incentive distribution rights to a third party at any time without the consent of our unitholders. If SHC transfers its incentive distribution rights to a third party but retains its ownership interest in our general partner, it would not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of the incentive distribution rights. For example, a transfer of incentive distribution rights by SHC could reduce the likelihood of SHC renewing the SHC Distribution Contract, entering into additional sale and leaseback transactions or otherwise negotiating supply terms with respect to future volumes, as SHC would have less of an economic incentive to grow our business.
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Our general partner has a limited call right that may require unitholders to sell their common units at an undesirable time or price.
If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return or a negative return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act. Upon completion of this offering, and assuming no exercise of the underwriters' option to purchase additional common units, SHC will own, directly or indirectly, an aggregate of approximately % of our common units. At the end of the subordination period, assuming no additional issuances of units (other than upon the conversion of the subordinated units), SHC will own approximately % of our common units. For additional information about the limited call right, please read "The Partnership Agreement—Limited Call Right."
We may issue additional units without unitholder approval, which would dilute existing unitholder ownership interests.
Our partnership agreement does not limit the number of additional limited partner interests we may issue at any time without the approval of our unitholders. The issuance of additional common units or other equity interests of equal or senior rank will have the following effects:
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- our existing unitholders' proportionate ownership interest in us will decrease;
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- the amount of cash available for distribution on each unit may decrease;
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- because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment
of the minimum quarterly distribution will be borne by our common unitholders will increase;
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- the ratio of taxable income to distributions may increase;
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- the relative voting strength of each previously outstanding unit may be diminished; and
- •
- the market price of the common units may decline.
Please read "The Partnership Agreement—Issuance of Additional Interests."
The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets, including sales by SHC or other large holders.
After this offering, we will have common units and subordinated units outstanding, which includes the common units we are selling in this offering that may be resold in the public market immediately ( common units if the underwriters exercise in full their option to purchase additional common units). All of the subordinated units will convert into common units on a one-for-one basis at the end of the subordination period.
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Although all of the common units ( common units if the underwriters exercise in full their option to purchase additional common units) that are issued to SHC will be subject to resale restrictions, such restrictions may be waived in the discretion of certain of the underwriters. In addition, under our partnership agreement, our general partner and its affiliates have registration rights relating to the offer and sale of any units that they hold, subject to certain limitations. Please read "Units Eligible for Future Sale." Sales by SHC or other large holders of a substantial number of our common units in the public markets following this offering, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities.
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
Our partnership agreement restricts unitholders' voting rights by providing that any units held by a person or group that owns 20% or more of any class of units then outstanding, other than our general partner and its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.
Cost reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce cash available for distribution to our unitholders. The amount and timing of such reimbursements will be determined by our general partner.
Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all expenses they incur and payments they make on our behalf pursuant to the omnibus agreement and our partnership agreement. Neither our partnership agreement nor our omnibus agreement will limit the amount of expenses for which our general partner and its affiliates may be reimbursed. Our omnibus agreement and partnership agreement provide that our general partner will determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees to our general partner and its affiliates will reduce the amount of cash available to pay cash distributions to our unitholders. Please read "Cash Distribution Policy and Restrictions on Distributions."
The amount of cash we have available for distribution to holders of our units depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income.
The amount of cash we have available for distribution depends primarily upon our cash flow, including cash flow from working capital or other borrowings, and not solely on profitability, which will be affected by non-cash items. As a result, we may pay cash distributions during periods when we record net losses for financial accounting purposes and may not pay cash distributions during periods when we record net income.
While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions, may be amended.
While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions, may be amended. Our partnership agreement generally may not be amended during the subordination period without the approval of our public common unitholders. However, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common units held by SHC) after the subordination period has ended. At the closing of this offering, SHC will own, directly or indirectly, approximately % of the outstanding
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common units and all of our outstanding subordinated units. Please read "The Partnership Agreement—Amendment of the Partnership Agreement."
There is no existing market for our common units, and a trading market that will provide unitholders with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and unitholders could lose all or part of their investment.
Prior to this offering, there has been no public market for our common units. After this offering, there will be only publicly traded common units ( common units if the underwriters exercise their option to purchase additional common units in full). We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Unitholders may not be able to resell their common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.
The initial public offering price for our common units will be determined by negotiations between us and the representative of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:
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- our quarterly distributions;
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- our quarterly or annual earnings or those of other companies in our industry;
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- announcements by us or our competitors of significant contracts or acquisitions;
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- changes in accounting standards, policies, guidance, interpretations or principles;
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- general economic conditions;
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- the failure of securities analysts to cover our common units after this offering or changes in financial estimates by
analysts;
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- future sales of our common units; and
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- the other factors described in these "Risk Factors."
Unitholders may have liability to repay distributions and in certain circumstances may be personally liable for the obligations of the partnership.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. A purchaser of units who becomes a limited partner is liable for the obligations of the transferring limited partner to make contributions to the partnership that are known to such purchaser at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
In addition, it may be determined that the right, or the exercise of the right by the limited partners as a group, to (i) remove or replace our general partner, (ii) approve some amendments to
40
our partnership agreement or (iii) take other action under our partnership agreement constitutes "participation in the control" of our business. A limited partner that participates in the control of our business within the meaning of the Delaware Act may be held personally liable for our obligations under the laws of Delaware, to the same extent as our general partner. This liability would extend to persons who transact business with us under the reasonable belief that the limited partner is a general partner. In addition, we conduct business in a number of other states in which the limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established. Neither our partnership agreement nor the Delaware Act specifically provides for legal recourse against our general partner if a limited partner were to lose limited liability through any fault of our general partner. Please read "The Partnership Agreement—Limited Liability."
The stock exchanges do not require a publicly traded partnership like us to comply with certain corporate governance requirements.
We intend to apply to list our common units on the NYSE or the NASDAQ. Because we will be a publicly traded partnership, neither the NYSE nor the NASDAQ will require us to have a majority of independent directors on our general partner's board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to stockholders of corporations that are subject to all of the corporate governance requirements of the applicable stock exchange. Please read "Management—Management of Susser Petroleum Partners LP."
We will incur increased costs as a result of being a publicly traded partnership.
We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. For example, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE or NASDAQ, as applicable, require publicly traded entities to adopt various corporate governance practices that will further increase our costs, including requirements to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting.
In addition, following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make certain activities more time-consuming and costly.
We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our general partner's board or as executive officers.
We estimate that we will incur approximately $2.0 million of incremental external costs per year and additional internal costs associated with being a publicly traded partnership. However, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate. Before we are able to make distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be reduced by the costs associated with being a public company.
41
If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which would likely have a negative impact on the market price of our common units.
SHC is a publicly traded corporation and has developed a system of internal controls for compliance with public reporting requirements. However, prior to this offering, our predecessor has not been required to file reports with the SEC on a stand-alone basis and will have lower materiality thresholds on the wholesale business than SHC previously has had. Upon the completion of this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We prepare our consolidated financial statements in accordance with GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. For example, Section 404 will require us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. We must comply with Section 404 for our fiscal year ending December 31, 2013. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm's, conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.
An increase in interest rates will increase our borrowing costs and may cause the market price of our common units to decline.
Like all equity investments, an investment in our common units is subject to certain risks. Borrowings under the new credit facility will bear interest at variable rates. If market interest rates increase, such variable-rate debt will create higher debt service requirements, which could adversely affect our cash flow and ability to make cash distributions. In exchange for accepting these risks, investors may expect to receive a higher rate of return than would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as publicly traded limited partnership interests. Reduced demand for our common units resulting from investors seeking other more favorable investment opportunities may cause the trading price of our common units to decline.
Tax Risks to Common Unitholders
In addition to reading the following risk factors, please read "Material U.S. Federal Income Tax Consequences" for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.
42
Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us as a corporation for federal income tax purposes or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to our unitholders would be substantially reduced.
The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for U.S. federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service, or the IRS, on this or any other tax matter affecting us.
Despite the fact that we are organized as a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for U.S. federal income tax purposes. Although we do not believe, based upon our current operations, that we will be so treated, a change in our business (or a change in current law) could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state income tax at varying rates. Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, our cash available for distribution to our unitholders would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.
We will be subject to the entity-level Texas franchise tax. Imposition of any such additional taxes on us or an increase in the existing tax rates would reduce the cash available for distribution to our unitholders.
Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.
The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of the U.S. Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Currently, one such legislative proposal would eliminate the qualifying income exception upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. Please read "Material U.S. Federal Income Tax Consequences—Taxation of the Partnership—Partnership Status." We are unable to predict whether any such legislation will ultimately be enacted. However, it is possible that a change in law could affect us and may, if enacted, be applied retroactively. Any such changes could negatively impact the value of an investment in our common units
43
We have a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income tax.
We conduct a portion of our operations through a subsidiary that is treated as a corporation for U.S. federal income tax purposes. We intend to engage in our sale and leaseback transactions with SHC, and may elect to conduct additional operations, through this subsidiary in the future. This subsidiary is subject to U.S. corporate-level tax, which may reduce the cash available for distribution to us and, in turn, to our unitholders. If the IRS were to successfully assert that this corporation has more tax liability than we anticipate or legislation were to be enacted that increased the corporate tax rate, our cash available for distribution to our unitholders would be further reduced.
Our unitholders will be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.
Because our unitholders will be treated as partners to whom we will allocate taxable income that could be different in amount than the cash we distribute, our unitholders will be required to pay federal income taxes and, in some cases, state and local income taxes on their share of our taxable income whether or not they receive cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.
We will be considered to have terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Immediately following this offering, SHC will directly and indirectly own more than 50% of the total interests in our capital and profits. Therefore, a transfer by SHC of all or a portion of its direct or indirect interests in us could result in a termination of our partnership for federal income tax purposes. Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation or amortization deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than the calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination would not affect our classification as a partnership for federal income tax purposes, but instead, after our termination, we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. Please read "Material U.S. Federal Income Tax Consequences—Disposition of Units—Constructive Termination" for a discussion of the consequences of our termination for federal income tax purposes.
Tax gain or loss on the disposition of our common units could be more or less than expected.
If a unitholder sells its common units, it will recognize a gain or loss equal to the difference between the amount realized and its tax basis in those common units. Because distributions in excess of a unitholder's allocable share of our net taxable income result in a decrease in its tax basis in its common units, the amount, if any, of such prior excess distributions with respect to the units it sells will, in effect, become taxable income to the unitholder if it sells such units at a price greater than its tax basis in those units, even if the price the unitholder receives is less than its original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture of depreciation deductions and certain other items. In addition, because the amount realized includes a unitholder's share of our nonrecourse liabilities, if a unitholder sells its units, the unitholder may incur a tax liability in excess of the amount of cash it
44
receives from the sale. Please read "Material U.S. Federal Income Tax Consequences—Disposition of Units—Recognition of Gain or Loss" for a further discussion of the foregoing.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.
Investments in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (or "IRAs"), and non-U.S. persons raise issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes, and non-U.S. persons will be required to file U.S. federal tax returns and pay tax on their shares of our taxable income. Unitholders that are tax-exempt entities or non-U.S. persons should consult their tax advisors before investing in our common units.
If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.
The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest by the IRS may materially and adversely impact the market for our common units and the price at which they trade. Our costs of any contest by the IRS will be borne indirectly by our unitholders because the costs will reduce our cash available for distribution.
We will treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.
Because we cannot match transferors and transferees of common units, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to a unitholder. It also could affect the timing of these tax benefits or the amount of gain from a unitholder's sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to a unitholder's tax returns. Please read "Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election" for a further discussion of the effect of the depreciation and amortization positions we adopt.
We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
We generally prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. Nonetheless, we allocate certain deductions for depreciation of capital additions based upon the date the underlying property is placed in service. The use of this proration method may not be permitted under existing Treasury Regulations, and although the U.S. Treasury Department issued proposed Treasury Regulations allowing a similar monthly simplifying convention, such regulations are not final and do not specifically authorize the use of the proration method we have adopted. Accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to successfully challenge
45
our proration method, we may be required to change the allocation of items of income, gain, loss, and deduction among our unitholders.
A unitholder whose common units are the subject of a securities loan (e.g., a loan to a "short seller" to cover a short sale of common units) may be considered as having disposed of those common units. If so, the unitholder would no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.
Because there is no tax concept of loaning a partnership interest, a unitholder whose common units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, he may no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan of their common units should modify any applicable brokerage account agreements to prohibit their brokers from borrowing their common units.
Unitholders will likely be subject to state and local taxes and return filing requirements in states where they do not live as a result of investing in our common units.
In addition to U.S. federal income taxes, unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if they do not live in any of those jurisdictions. We currently own assets or conduct business in Texas, Louisiana, New Mexico and Oklahoma. Each of these states, other than Texas, currently imposes a personal income tax on individuals. Each of these states also imposes an income or other entity-level tax on corporations and other entities. Unitholders may be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. As we make acquisitions or expand our business, we may own assets or conduct business in additional states or non-U.S. jurisdictions that impose a personal income tax or an income or other entity-level tax on corporations and other entities. It is the unitholder's responsibility to file all U.S. federal, state, local and non-U.S. tax returns. Our counsel has not rendered an opinion on the non-U.S., state or local tax consequences of an investment in our common units.
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We intend to use the estimated net proceeds of approximately $ million from this offering, based upon the assumed initial public offering price of $ per common unit (the midpoint of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, structuring fees and offering expenses, to:
- •
- distribute $ million to SHC as reimbursement of certain capital expenditures incurred with respect
to the assets contributed to us in connection with this offering; and
- •
- purchase approximately $146.8 million of U.S. Treasury or other investment grade securities, which will be assigned as collateral to secure a new $146.8 million term loan that will be fully guaranteed by SHC, the proceeds of which will be distributed to SHC.
If and to the extent the underwriters exercise their option to purchase any portion of the option units, the number of option units purchased by the underwriters pursuant to such exercise will be issued to the public and the remainder of the option units, if any, will be issued to SHC. Any such units issued to SHC will be issued for no additional consideration. Accordingly, the exercise of the underwriters' option will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Please read "Underwriting." If the underwriters exercise their option to purchase any option units, the additional net proceeds will be used to purchase a corresponding amount of additional U.S. Treasury or other investment grade securities, which will be assigned as collateral to secure additional term loan borrowings in the amount of such net proceeds, which will be fully guaranteed by SHC and the proceeds of which will be distributed to SHC.
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The following table shows:
- •
- the historical cash and cash equivalents and capitalization of our predecessor as of March 31, 2012; and
- •
- our pro forma cash and cash equivalents and capitalization as of March 31, 2012, adjusted to reflect the pro forma adjustments described in our pro forma financial statements, including the issuance and sale of common units to the public at an assumed initial offering price of $ per common unit (the midpoint of the price range set forth on the cover of this prospectus), the other formation transactions described under "Summary—Formation Transactions and Partnership Structure" and the application of the net proceeds from this offering as described under "Use of Proceeds."
We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, the unaudited historical and pro forma financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with "Summary—Formation Transactions and Partnership Structure," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
| |
As of March 31, 2012 | ||||||
|---|---|---|---|---|---|---|---|
| |
Predecessor Historical |
Susser Petroleum Partners LP Pro Forma |
|||||
| |
(In thousands) |
||||||
Cash and cash equivalents |
$ | 2 | $ | ||||
U.S. Treasury or other investment grade securities |
$ | — | $ | ||||
Debt: |
|||||||
Term loan facility |
— | ||||||
Revolving credit facility |
— | ||||||
Other long-term debt |
1,093 | ||||||
Total debt |
$ | 1,093 | $ | ||||
Partners' equity: |
|||||||
Our predecessor |
$ | 117,488 | $ | ||||
Held by public: |
|||||||
Common units |
— | ||||||
Held by SHC: |
|||||||
Common units |
— | ||||||
Subordinated units |
— | ||||||
General partner interest |
— | ||||||
Total partners' equity |
$ | 117,488 | $ | ||||
Total capitalization |
$ | 118,581 | $ | ||||
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Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the pro forma net tangible book value per common unit after the offering. Based on an assumed initial public offering price of $ per common unit, on a pro forma basis as of March 31, 2012, after giving effect to the offering of common units and the related transactions, our net tangible book value would have been approximately $ million, or $ per common unit. Purchasers of our common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.
Initial public offering price per common unit |
$ | ||||||
Pro forma net tangible book value per common unit before the offering(1) |
$ | ||||||
Increase in pro forma net tangible book value per common unit attributable to purchasers in the offering |
|||||||
Less: Pro forma net tangible book value per common unit after the offering(2) |
|||||||
Immediate dilution in net tangible book value per common unit to purchasers in the offering(3) |
$ | ||||||
- (1)
- Determined
by dividing the pro forma net tangible book value of the contributed assets and liabilities by the number of units
( common units
and subordinated units) to be
issued to SHC and its affiliates for their contribution of assets and liabilities to us.
- (2)
- Determined
by dividing our pro forma net tangible book value, after giving effect to the use of the net proceeds of the offering, by the total number of
units ( common units
and subordinated units) to be outstanding after the offering.
- (3)
- Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters' option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in the offering due to any such exercise of the option.
A $1.00 increase (decrease) in the assumed initial public offering price of $ per common unit would increase (decrease) our pro forma as adjusted net tangible book value per unit by $ .
The following table sets forth the number of units that we will issue and the total consideration contributed to us by our general partner and its affiliates and by the purchasers of our common units in this offering upon completion of the transactions contemplated by this prospectus.
| |
Units | Total Consideration | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Number | Percent | Amount | Percent | ||||||||
SHC and affiliates(1)(2)(3) |
% | $ | % | |||||||||
Purchasers in the offering |
% | $ | % | |||||||||
Total |
100.0 | % | $ | 100.0 | % | |||||||
- (1)
- Upon
the completion of the transactions contemplated by this prospectus, SHC and its affiliates will own common
units and
subordinated units.
- (2)
- The
assets contributed by SHC will be recorded at historical cost. The book value of the consideration provided by SHC as of March 31, 2012 was
approximately $ million.
- (3)
- Assumes the underwriters' option to purchase additional common units is not exercised.
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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
You should read the following discussion of our cash distribution policy in conjunction with "—Significant Forecast Assumptions" below, which includes the factors and assumptions upon which we base our cash distribution policy. In addition, you should read "Forward-Looking Statements" and "Risk Factors" for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.
For additional information regarding our historical and pro forma results of operations, you should refer to our audited historical financial statements as of December 31, 2010 and 2011 and for the fiscal years ended December 31, 2009, 2010 and 2011, our unaudited historical financial statements as of March 31, 2012 and for the three months ended March 31, 2011 and 2012 and our unaudited pro forma financial statements for the year ended December 31, 2011 and as of and for the three months ended March 31, 2012 included elsewhere in this prospectus.
Rationale for Our Cash Distribution Policy
Our partnership agreement requires us to distribute all of our available cash quarterly. Our cash distribution policy reflects a fundamental judgment that our unitholders generally will be better served by our distributing rather than retaining our available cash. Our partnership agreement generally defines available cash as cash on hand at the end of a quarter after the payment of expenses, less the amount of cash reserves established by our general partner to provide for the conduct of our business, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the next four quarters. Our available cash also may include, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute to our unitholders than would be the case if we were subject to entity-level federal income tax.
Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy
There is no guarantee that we will distribute quarterly cash distributions to our unitholders. We do not have a legal obligation to pay our minimum quarterly distribution or any other distribution except as provided in our partnership agreement. Our cash distribution policy may be changed at any time and is subject to certain restrictions and uncertainties, including the following:
- •
- Our cash distribution policy will be subject to restrictions on distributions under our new credit facility, which will
contain financial tests and covenants that we must satisfy. Should we be unable to satisfy these covenants or if we are otherwise in default under our revolving line of credit, we will be prohibited
from making cash distributions to you notwithstanding our stated cash distribution policy.
- •
- Our general partner will have the authority to establish cash reserves for the prudent conduct of our business and for
future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to
our stated cash distribution policy. Our partnership agreement does not set a limit on the amount of cash reserves that our general partner may establish. Any decision to establish cash reserves made
by our general partner in good faith will be binding on our unitholders.
- •
- Prior to making any distribution on our common units, we will reimburse our general partner and its affiliates for all direct and indirect expenses they incur on our behalf pursuant to the
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- •
- While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including
the provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement generally may not be amended during the subordination period without the approval of
our public common unitholders, except in certain limited circumstances when our general partner can amend our partnership agreement without unitholder approval. However, after the subordination period
has ended, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common units held by SHC). At the
closing of this offering, SHC will own, directly or indirectly, approximately % of our limited partner interests. Please read "The Partnership Agreement—Amendment of the
Partnership Agreement."
- •
- Even if our cash distribution policy is not modified or revoked, the decisions regarding the amount of distributions to
pay under our cash distribution policy and whether to pay any distribution are made by our general partner, taking into consideration the terms of our partnership agreement.
- •
- Under Section 17-607 of the Delaware Act, we may not make a distribution if the distribution would
cause our liabilities to exceed the fair value of our assets.
- •
- We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number
of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working
capital requirements or anticipated cash needs.
- •
- Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of existing and future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.
partnership agreement. Our partnership agreement will not limit the amount of expenses for which our general partner and its affiliates may be reimbursed. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of available cash.
Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital
Our partnership agreement requires us to distribute all of our available cash to our unitholders on a quarterly basis. As a result, we expect that we will rely primarily upon external financing sources, including commercial bank borrowings and issuances of debt and equity securities, to fund any future expansion capital expenditures. To the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we intend to distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest all of their available cash to expand ongoing operations. To the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement, and we do not expect that there will be any limitations in our new revolving credit facility, on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial bank borrowings or other debt to finance our growth would result in increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders.
51
Our Minimum Quarterly Distribution
Upon completion of this offering, our partnership agreement will provide for a minimum quarterly distribution of $ per unit for each complete quarter, or $ per unit on an annualized basis. Quarterly distributions, if any, will be made within 45 days after the end of each quarter. This equates to an aggregate cash distribution of approximately $ million per quarter, or approximately $ million per year, based on the number of common and subordinated units to be outstanding immediately after completion of this offering. The table below sets forth the number of common units and subordinated units that will be outstanding immediately after this offering, assuming that the underwriters do not exercise their option to purchase additional common units, and the available cash needed to pay the aggregate minimum quarterly distribution on all of such units for a single fiscal quarter and a four quarter period:
| |
|
Distributions | |||||||
|---|---|---|---|---|---|---|---|---|---|
| |
Number of Units |
||||||||
| |
One Quarter | Annualized | |||||||
Publicly held common units(1) |
$ | $ | |||||||
Common units held by SHC and its affiliates(1) |
|||||||||
Subordinated units held by SHC and its affiliates |
|||||||||
Total |
$ | $ | |||||||
- (1)
- Does not include any common units that may be issued under the long-term incentive plan that our general partner is expected to adopt prior to the closing of this offering.
If the underwriters do not exercise their option to purchase additional common units, we will issue common units to SHC at the expiration of the option period. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the public, and the remainder, if any, will be issued to SHC for no additional consideration. Accordingly, the exercise of the underwriters' option will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units.
SHC will also hold our incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 50.0% of the cash we distribute in excess of $ per unit per quarter.
We will pay our distributions on or about the 15th day of each of February, May, August and November to holders of record on or about the 1st day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date. We will adjust the quarterly distribution for the period from the closing of this offering through , 2012 based on the actual length of the period.
Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any other standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in "good faith," our general partner must believe that the determination is in our best interest. Please read "Conflicts of Interest and Fiduciary Duties."
Our cash distribution policy, as expressed in our partnership agreement, may not be modified or repealed without amending our partnership agreement. However, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from
52
our business and the amount of reserves our general partner establishes in accordance with our partnership agreement as described above.
SHC will initially own, directly or indirectly, all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units will not be entitled to receive any distribution until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. To the extent that we do not pay the minimum quarterly distribution on our common units, our common unitholders will not be entitled to receive such payments in the future except during the subordination period. Subordinated units will not accrue arrearages.
To the extent that we have available cash in any future quarter during the subordination period in excess of the amount necessary to pay the minimum quarterly distribution to holders of our common units, we will use this excess available cash to pay any distribution arrearages on the common units related to prior quarters before any cash distribution is made to holders of subordinated units. When the subordination period ends, all of the subordinated units will convert into an equal number of common units. Please read "Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units."
Unaudited Pro Forma Available Cash for the Year Ended December 31, 2011 and the Twelve Months Ended March 31, 2012
If we had completed the transactions contemplated in this prospectus on January 1, 2011, our unaudited pro forma available cash for the year ended December 31, 2011 would have been approximately $36.0 million. This amount would have been sufficient to pay the full minimum quarterly distribution of $ per unit per quarter (or $ per unit on an annualized basis) on all of our common units and a cash distribution of $ per unit per quarter ($ per unit on an annualized basis), or approximately % of the minimum quarterly distribution, on our subordinated units for the year ended December 31, 2011. If we had completed the transactions contemplated in this prospectus on April 1, 2011, our unaudited pro forma available cash for the twelve months ended March 31, 2012 would have been approximately $37.1 million. This amount would have been sufficient to pay the full minimum quarterly distribution on all of our common units and a cash distribution of $ per unit per quarter ($ per unit on an annualized basis), or approximately % of the minimum quarterly distribution, on our subordinated units for the twelve months ended March 31, 2011.
Our calculation of unaudited pro forma available cash includes incremental external general and administrative expenses that we expect to incur as a result of being a publicly traded partnership, including costs associated with SEC reporting requirements, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities, Sarbanes-Oxley Act compliance, stock exchange listing, registrar and transfer agent fees, incremental director and officer liability insurance and director compensation. We estimate that these incremental external general and administrative expenses initially will be approximately $2.0 million per year. Such expenses are not reflected in our unaudited pro forma financial statements.
Our unaudited pro forma financial statements, from which our unaudited pro forma available cash was derived, do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. Furthermore, available cash is a cash accounting concept, while our predecessor's historical financial statements and our pro forma financial statements were prepared on an accrual basis. We derived the amounts of unaudited pro forma available cash stated above in the manner shown in the table below. As a result, the amount of
53
unaudited pro forma available cash should only be viewed as a general indication of the amount of available cash that we might have generated had we been formed and completed the transactions contemplated in this prospectus in earlier periods.
Our unaudited pro forma financial statements were derived from the audited and unaudited historical financial statements of our predecessor included elsewhere in this prospectus and our predecessor's accounting records, which are also unaudited. Our unaudited pro forma financial statements and the table below should be read together with "Summary—Summary Historical and Pro Forma Financial and Operating Data," "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited and unaudited historical financial statements of our predecessor included elsewhere in this prospectus.
The footnotes to the table below provide additional information about the pro forma adjustments and should be read along with the table.
| |
Pro Forma | ||||||
|---|---|---|---|---|---|---|---|
| |
Year Ended December 31, 2011 |
Twelve Months Ended March 31, 2012 |
|||||
| |
(In thousands, except per unit data) |
||||||
Revenues: |
|||||||
Motor fuel sales |
$ | 3,821,946 | $ | 4,043,527 | |||
Rental income |
3,304 | 3,339 | |||||
Other income(1) |
4,596 | 4,729 | |||||
Total revenues |
3,829,846 | 4,051,595 | |||||
Gross profit: |
|||||||
Motor fuel sales |
45,376 | 47,002 | |||||
Rental income |
3,304 | 3,339 | |||||
Other income(1) |
2,474 | 2,612 | |||||
Total gross profit |
51,154 | 52,953 | |||||
Operating expenses: |
|||||||
Selling, general and administrative |
10,900 | 11,429 | |||||
Rent |
1,031 | 1,033 | |||||
Depreciation and amortization |
4,281 | 4,845 | |||||
Total operating expenses |
16,212 | 17,307 | |||||
Operating income |
34,942 | 35,646 | |||||
Interest expense, net(2) |
691 | 694 | |||||
State franchise tax expense(3) |
280 | 289 | |||||
Net income |
33,971 | 34,663 | |||||
54
| |
Pro Forma | ||||||
|---|---|---|---|---|---|---|---|
| |
Year Ended December 31, 2011 |
Twelve Months Ended March 31, 2012 |
|||||
| |
(In thousands, except per unit data) |
||||||
Adjustments to reconcile net income to Adjusted EBITDA: |
|||||||
Add: |
|||||||
Non-cash stock compensation expense |
589 | 589 | |||||
Loss on disposal of assets(4) |
142 | 189 | |||||
Interest expense, net(2) |
691 | 694 | |||||
Depreciation and amortization |
4,281 | 4,845 | |||||
State franchise tax expense(3) |
280 | 289 | |||||
Adjusted EBITDA(5) |
39,954 | 41,269 | |||||
Less: |
|||||||
Incremental external general and administrative expense(6) |
(2,000 | ) | (2,000 | ) | |||
Cash interest expense, net(2) |
(691 | ) | (694 | ) | |||
State franchise tax expense(3) |
(280 | ) | (289 | ) | |||
Maintenance capital expenditures(7) |
(1,034 | ) | (1,180 | ) | |||
Expansion capital expenditures(7) |
(12,676 | ) | (12,398 | ) | |||
Add: |
|||||||
Capital contributions to fund expansion capital expenditures(8) |
12,676 | 12,398 | |||||
Available cash |
$ | 35,949 | $ | 37,106 | |||
Cash distributions |
|||||||
Distributions to public common unitholders |
|||||||
Distributions to SHC and its affiliates—common units |
|||||||
Distributions to SHC and its affiliates—subordinated units |
|||||||
Total distributions |
$ | $ | |||||
Excess (shortfall) |
$ | $ | |||||
Percent of minimum quarterly distributions payable to common unitholders |
% | % | |||||
Percent of minimum quarterly distributions payable to subordinated unitholders |
% | % | |||||
- (1)
- Other
income and other gross profit includes propane and lube oil sales, sales of rights to operate dealer locations and other miscellaneous
non-motor fuel income sources.
- (2)
- Interest
expense and cash interest expense both reflect, on a net basis, the interest expense related to the $146.8 million of term loan borrowings
we expect to incur under the new credit facility we expect to enter into in connection with this offering, reduced by the interest income related to the $146.8 million of U.S. Treasury or other
investment grade securities we intend to purchase with a portion of the proceeds from this offering. Interest expense and cash interest expense also include interest expense on an existing mortgage
note, net of interest income on notes receivable from dealers.
- (3)
- Includes
the Texas franchise tax. Due to our status as a partnership, we will not be subject to U.S. federal income tax in the future, except for our
subsidiary that is treated as a corporation for U.S. federal income tax purposes. This subsidiary does not presently have any operations, but is expected to own all stores purchased pursuant to sale
and leaseback transactions with SHC and receive rental income from SHC. As a result, we may incur federal income tax expense with regard to the operations of this subsidiary in future periods.
- (4)
- Loss on disposal of assets reflects the non-cash write-off resulting from the sales of excess assets, the closure of certain locations or the termination of certain of our contracts.
55
- (5)
- Adjusted
EBITDA is defined and reconciled to its most directly comparable financial measures calculated and presented in accordance with GAAP in
"Summary—Non-GAAP Financial Measure."
- (6)
- Reflects
the incurrence of estimated incremental cash expenses associated with being a publicly traded partnership of approximately $2.0 million,
including costs associated with SEC reporting requirements, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities,
Sarbanes-Oxley compliance, stock exchange listing, registrar and transfer agent fees, incremental director and officer liability insurance and director compensation. Pro forma selling, general and
administrative expense does not reflect this incremental expense.
- (7)
- Historically,
our predecessor has not made a distinction between maintenance capital expenditures and expansion capital expenditures. Under our partnership
agreement, maintenance capital expenditures are capital expenditures made to maintain our long-term operating income or operating capacity, while expansion capital expenditures are capital
expenditures that we expect will increase our operating income or operating capacity over the long term. Examples of maintenance capital expenditures are those made to maintain existing contract
volumes, including payments to renew existing distribution contracts, or to maintain our real estate leased to third-party dealers in leaseable condition, such as parking lot or roof
replacement/renovation, or to replace equipment required to operate our existing business. In contrast, expansion capital expenditures are those made to acquire additional assets to grow our business,
such as new distribution contracts or real estate, including exercising our options to purchase convenience stores from SHC.
- For
the year ended December 31, 2011, our pro forma capital expenditures totaled $13.7 million, which is less than the total
capital expenditures incurred by our predecessor as we have excluded capital expenditures relating to assets of our predecessor that will not be contributed to us. We estimate that approximately
$1.0 million of our pro forma capital expenditures were maintenance capital expenditures and that approximately $12.7 million of our pro forma capital expenditures were expansion capital
expenditures. Expansion capital expenditures for the year ended December 31, 2011 primarily consisted of investments associated with the acquisition of 121 dealer supply contracts from
Community Fuels of Texas, LP as well as amounts spent to acquire other new dealer contracts.
- For
the twelve months ended March 31, 2012, our pro forma capital expenditures totaled $13.6 million. We estimate that
approximately $1.2 million of our pro forma capital expenditures were maintenance capital expenditures and that $12.4 million of our pro forma capital expenditures were expansion capital
expenditures. Expansion capital expenditures for the twelve months ended March 31, 2012 primarily consisted of expenses associated with the acquisition of the new dealer supply contracts
referenced above.
- (8)
- We have assumed for purposes of calculating our pro forma available cash that we funded our expansion capital expenditures during the year ended December 31, 2011 and the twelve months ended March 31, 2012 with capital contributions made to us by SHC. We expect that in the future, our expansion capital expenditures will primarily be funded through the liquidation of our U.S. Treasury or other investment grade securities, borrowings or the sale of debt or equity securities.
Estimated Available Cash for the Twelve Months Ending September 30, 2013
We forecast that our available cash during the twelve months ending September 30, 2013 will be approximately $44.5 million. This amount would be sufficient to pay the full minimum quarterly distribution of $ per unit on all of our common units and subordinated units for each quarter in the twelve months ending September 30, 2013. The assumed number of outstanding units upon which we have based our belief does not include any common units that may be issued under the long-term incentive plan that our general partner will adopt prior to the completion of this offering.
56
We are providing this forecast to supplement our predecessor's historical and our pro forma financial statements in support of our belief that we will have sufficient available cash to pay the full minimum quarterly distribution on all of our common units and subordinated units for each quarter in the twelve months ending September 30, 2013. Please read "—Significant Forecast Assumptions" for further information as to the assumptions we have made for the forecast. Please read "Management's Discussion and Analysis of Financial Condition and Results of Operations—Significant Accounting Policies and Estimates" for information regarding the accounting policies we have followed for the forecast.
Our forecast reflects our judgment as of the date of this prospectus of the conditions we expect to exist and the course of action we expect to take during the twelve months ending September 30, 2013. We believe that we have a reasonable objective basis for these assumptions and that our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. If our forecasted results are not achieved, we may not be able to pay the minimum quarterly distribution or any other distribution on our common and subordinated units. The assumptions and estimates underlying the forecast are inherently uncertain and, although we consider them reasonable as of the date of this prospectus, they are subject to a wide variety of significant business, economic, and competitive risks and uncertainties that could cause actual results to differ materially from forecasted results, including, among others, the risks and uncertainties described in "Risk Factors." Accordingly, there can be no assurance that the forecast will be indicative of our future performance or that actual results will not differ materially from those presented in the forecast. Inclusion of the forecast in this prospectus should not be regarded as a representation by us, the underwriters or any other person that the results contained in the forecast will be achieved.
As a matter of course, we do not make public forecasts as to future revenues, earnings or other results. The forecast was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in our view, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management's knowledge and belief, our expected future course of action and financial performance. However, this information is not necessarily indicative of future results.
Neither our independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to our forecast, nor have they expressed any opinion or any other form of assurance on our forecast or its achievability, and our independent auditors assume no responsibility for, and disclaim any association with, our forecast.
We do not undertake any obligation to release publicly any revisions or updates that we may make to the forecast or the assumptions used to prepare the forecast to reflect events or circumstances after the date of this prospectus. In light of this, the statement that we believe that we will have sufficient available cash to allow us to pay the full minimum quarterly distribution on all of our common and subordinated units for each quarter in the twelve months ending September 30, 2013
57
should not be regarded as a representation by us, the underwriters or any other person that we will make such distributions. Therefore, you are cautioned not to place undue reliance on this information.
| |
Twelve Months Ending September 30, 2013 |
|||
|---|---|---|---|---|
| |
(In thousands) |
|||
Revenues: |
||||
Motor fuel sales |
$ | 4,285,824 | ||
Rental income |
5,248 | |||
Other income(1) |
5,397 | |||
Total revenues |
4,296,469 | |||
Gross profit: |
||||
Motor fuel sales |
51,977 | |||
Rental income |
5,248 | |||
Other income(1) |
3,628 | |||
Total gross profit |
60,853 | |||
Operating expenses: |
||||
Selling, general and administrative(2) |
12,366 | |||
Rent |
1,070 | |||
Depreciation and amortization |
7,527 | |||
Total operating expenses |
20,963 | |||
Operating income |
39,890 | |||
Interest expense, net(3) |
1,958 | |||
State franchise tax expense, net of other income tax benefit(4) |
254 | |||
Net income |
37,678 | |||
Adjustments to reconcile net income to estimated Adjusted EBITDA: |
||||
Add: |
||||
Non-cash stock compensation expense |
589 | |||
Interest expense, net(3) |
1,958 | |||
Depreciation and amortization |
7,527 | |||
State franchise tax expense, net of other income tax benefit(4) |
254 | |||
Estimated Adjusted EBITDA(5) |
$ | 48,006 | ||
Adjustments to reconcile estimated Adjusted EBITDA to estimated available cash: |
||||
Less: |
||||
Cash interest expense, net(3) |
(1,464 | ) | ||
State franchise tax expense (cash) |
(304 | ) | ||
Maintenance capital expenditures |
(1,700 | ) | ||
Expansion capital expenditures(5) |
(42,500 | ) | ||
Add: |
||||
Liquidation of U.S. Treasury or other investment grade securities to fund expansion capital expenditures(3)(6) |
42,500 | |||
Estimated available cash |
$ | 44,538 | ||
Distributions to public common unitholders |
||||
Distributions to SHC and its affiliates—common units |
||||
Distributions to SHC and its affiliates—subordinated units |
||||
Total distributions |
||||
58
| |
Twelve Months Ending September 30, 2013 |
|||
|---|---|---|---|---|
| |
(In thousands) |
|||
Excess of available cash over aggregate annualized minimum quarterly cash distributions |
||||
- (1)
- Other
income and other gross profit includes propane and lube oil sales, sales of rights to operate dealer locations and other miscellaneous
non-motor fuel income sources.
- (2)
- Includes
estimated incremental cash expenses associated with being a publicly traded partnership of approximately $2.0 million, including costs
associated with SEC reporting requirements, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities, Sarbanes-Oxley
compliance, stock exchange listing, registrar and transfer agent fees, incremental director and officer liability insurance and director compensation.
- (3)
- We
expect to incur $146.8 million of term loan borrowings under our new credit facility at the completion of this offering, which will be secured by
an equal amount of U.S. Treasury or other investment grade securities we intend to purchase with a portion of the proceeds from this offering. We will finance our $42.5 million in expansion
capital expenditures by selling $42.5 million of U.S. Treasury or other investment grade securities. Immediately prior to selling such securities, we will repay $42.5 million of
borrowings under our term loan facility with an equivalent amount of borrowings under our new revolving credit facility. Interest expense and cash interest expense both reflect the interest expense
incurred on our term loan borrowings, net of the interest income received on our U.S. Treasury or other investment grade securities, and our borrowings under our new revolving credit facility.
Interest expense also includes interest expense on an existing mortgage note, net of interest income on notes receivable from dealers.
- (4)
- Includes
the Texas franchise tax. Due to our status as a partnership, we will not be subject to U.S. federal income tax in the future, except for our
subsidiary that is treated as a corporation for U.S. federal income tax purposes. This subsidiary is expected to own the 15 Stripes®
convenience stores we have assumed we will purchase pursuant to sale and leaseback transactions from SHC during the forecast period and will receive rental income from SHC. However, we believe this
rental income will be more than offset by depreciation and interest deductions associated with our purchase and ownership of these stores, resulting in a net federal tax benefit of $50,000 for the
forecast period.
- (5)
- Adjusted
EBITDA is defined and reconciled to its most directly comparable financial measures calculated and presented in accordance with GAAP in
"Summary—Non-GAAP Financial Measure."
- (6)
- Our expansion capital expenditures include an estimated $40.5 million that we expect to pay to SHC to purchase 15 stores in 2013 pursuant to our sale-leaseback option in the omnibus agreement.
59
Significant Forecast Assumptions
The forecast has been prepared by and is the responsibility of our management. Our forecast reflects our judgment as of the date of this prospectus of the conditions we expect to exist and the course of action we expect to take during the forecast period. While the assumptions disclosed in this prospectus are not all-inclusive, the assumptions listed are those that we believe are significant to our forecasted results of operations. We believe we have a reasonable objective basis for these assumptions. We believe that our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and the actual results, and those differences could be material. If our forecast is not achieved, we may not be able to pay cash distributions on our common units at the minimum distribution rate or at all.
General Considerations and Risks
- •
- The volume of motor fuel delivered is the primary factor that will influence whether the amount of cash available for
distribution for the twelve months ending September 30, 2013 is above or below our forecast.
- •
- Our total volume of fuel sold can be impacted by material changes to prices paid by consumers at the pump. While our
overall and average per-store volumes have grown consistently over time, significant increases in fuel prices or significant economic contraction in the areas in which we operate could
materially and adversely impact the volumes of motor fuel we sell. A 10% decline in our estimated volumes distributed to each of our customers on a pro rata basis for the twelve months ending
September 30, 2013 would result in a decline of approximately $5 million in Adjusted EBITDA and available cash for the forecast period, assuming motor fuel prices and all other variables
are held constant.
- •
- Because our motor fuel distribution business is primarily a fee-based business, the overall level of motor fuel prices has a limited effect on our gross profit per gallon. The profit margin we earn on gallons we sell to SHC is fixed under the SHC Distribution Contract, while the profit margin we earn on gallons sold to third parties can vary with the cost of fuel. We estimate that if our projected average motor fuel cost of $2.86 per gallon (excluding transportation costs and excise taxes) for the twelve months ending September 30, 2013 increased or decreased by $0.10, this would result in an approximate $300,000 increase or decrease in Adjusted EBITDA and available cash for the forecast period, assuming no changes to estimated volumes for the forecast period. Although we have not assumed any changes in volumes for purposes of this sensitivity analysis, we believe demand for motor fuel would decrease if there were a material increase in the price of motor fuel and the negative impact to our volumes would partially or completely offset the positive impact on our margins. Please read "Risk Factors—Risks Inherent in Our Business—Our financial condition and results of operations are influenced by changes in the prices of motor fuel, which may adversely impact our margins, our customers' financial condition, the availability of trade credit, as well as the amount of borrowing available for working capital under our credit agreement."
Revenues and Gross Profit
We forecast that our total revenues and gross profit for the twelve months ending September 30, 2013, or the "forecast period," will be $4.3 billion and $60.9 million, respectively, as compared to $4.1 billion and $53.0 million, respectively, on a pro forma basis for the twelve months ended March 31, 2012, or the "base period." We estimate that we will distribute 1.5 billion gallons of motor fuel for the forecast period, as compared to 1.4 billion gallons we distributed for the base
60
period. We anticipate that the profit margin per gallon of motor fuel we distribute will be similar during the forecast period to the profit margin we would have earned on a pro forma basis during the base period. Our revenue forecast is based primarily on the following assumptions:
- •
- Revenues and Gross Profit from Fuel Sales to
SHC. Based on our volume and cost per gallon estimates for the forecast period and our fixed profit margin on fuel sales
to SHC under the SHC Distribution Contract, we forecast that our motor fuel distribution revenues and gross profit from fuel sales to SHC will be $2.9 billion and $30.1 million,
respectively, for the forecast period, as compared to $2.7 billion and $27.6 million, respectively, on a pro forma basis for the base period.
- •
- Volumes to SHC. We estimate that we will distribute
1.0 billion gallons of motor fuel to SHC during the forecast period, as compared to the 920 million gallons we distributed to SHC on a pro forma basis for the base period. This volume
estimate is based on the following assumptions:
- •
- We will distribute motor fuel to an average of 563 Stripes®
convenience stores and 84 consignment locations during the forecast period, as compared to an average of 531 Stripes® convenience stores and
85 consignment locations during the base period. The average number of Stripes® convenience stores for the forecast period takes into
account (i) the stores that SHC expects to have completed prior to the completion of this offering and (ii) assumes that we will exercise our option on 15 new stores built during the
forecast period. Pursuant to the provisions of the omnibus agreement, we have assumed that we will distribute motor fuel to all of these additional stores at a fixed three cent per gallon profit
margin. Our forecast does not reflect an incremental 10.4 million gallons that we expect to distribute during the forecast period to other newly constructed Stripes® convenience stores we
expect to be completed in 2013 based on SHC's announced new store construction plan. Under the omnibus
agreement, we will negotiate with SHC to determine the rate at which we distribute motor fuel to these additional new stores. See "Certain Relationships and Related Transactions—Agreements
with Affiliates in Connection with the Transactions—Omnibus Agreement."
- •
- Annual volumes per Stripes® convenience store will grow by
approximately 4.6% to 1.58 million gallons per store during the forecast period, as compared to 1.51 million gallons per store during the base period, which is consistent with our
historical per Stripes® convenience store growth trends. Historical annual volume growth per Stripes® convenience store averaged 4.9% for 2011 and
averaged 3.8% per year from January 1, 2006 through March 31, 2012. In
recent years, SHC has been focused on the construction of large format stores, which generally sell higher volumes of motor fuel as compared to older, smaller stores, increasing average annual
per-store growth. SHC expects to continue construction of these large format stores in 2012 and 2013.
- •
- Volumes per consignment location will be equal to the consignment volumes distributed during the base period, which is
consistent with our predecessor's historical trends.
- •
- Commodity Prices. We have assumed that our average
weighted cost to purchase each gallon of motor fuel sold during the forecast period will be $2.86 per gallon, which was derived by adjusting our average cost of $2.88 per gallon of motor fuel sold for
fiscal 2011 to reflect the estimated forecast period volume mix by customer group.
- •
- Profit Margin from Sales to SHC. Our profit margin on sales to SHC is fixed at three cents per gallon under the SHC Distribution Contract. We have added the fixed profit margin
Motor Fuel Revenues and Gross Profit
61
- •
- Revenues and Gross Profit from Fuel Sales to Third
Parties. Based on our volume and cost estimates for the forecast period, we forecast that our motor fuel distribution
revenues and gross profit from fuel sales to third parties will be $1.4 billion and $21.9 million, respectively, for the forecast period, as compared to $1.3 billion and
$19.4 million, respectively, on a pro forma basis for the base period.
- •
- Volumes to Third Parties. We estimate that we will
distribute 481 million gallons of motor fuel to third-party dealers and commercial customers during the forecast period, compared to the 433 million gallons we distributed to third-party
dealers and commercial customers for the base period. In calculating our estimated third party gallons for the forecast period, we have assumed (i) that 25 net dealer locations will be added,
based on 35 new dealer locations added, and the closure of ten of our smaller locations, during the forecast period, as compared to our historic average of 40 net dealer additions per year over the
last five years; (ii) annualized volumes for the 121 dealer supply contracts acquired from Community Fuels of Texas, LP in October 2011 based on average monthly volumes for such sites
since the acquisition; (iii) that there will be a slight decline in volumes distributed per existing dealer location for the forecast period as compared to the base period based on historical
trends in dealer volumes and (iv) that volumes to our commercial customers will be similar to those distributed during the base period.
- •
- Commodity Prices. We have assumed that our average
weighted cost to purchase each gallon of motor fuel sold during the forecast period will be $2.86 per gallon, which was derived by adjusting our average cost of $2.88 per gallon of motor fuel sold for
fiscal 2011 to reflect the estimated forecast period volume mix by customer group.
- •
- Profit Margin from Sales to Third Parties. The profit margin we earn on gallons sold to our dealers and other third parties can vary with the cost of fuel. We have assumed that our profit margin per gallon of motor fuel sold to third parties will be 4.5 cents per gallon for the forecast period, which is consistent with our pro forma average profit margin per gallon to third parties for both fiscal 2011 and for the base period and consistent with our commodity price assumptions for the forecast period.
set forth in the SHC Distribution Contract to the average cost per gallon to calculate our assumed revenue per gallon of motor fuel sold. Because we receive a fixed fee for all volumes distributed to SHC, the overall level of motor fuel prices has no direct effect on our profit margin per gallon of motor fuel sold to SHC.
- •
- Rental Income from SHC. We have not historically received any rental income from SHC. We estimate that we will receive $1.9 million in rental income from SHC during the forecast period, based on the assumption that we will exercise our option to purchase each of the 15 Stripes® convenience stores included in the first annual option period, all of which are expected to be purchased prior to May 2013, in each case at the cost set forth in our capital expenditure assumptions below. We have also assumed that we will receive rental income at an annual rate of 8% of the purchase price on such stores as set forth in the omnibus agreement. Our projected rental income only reflects rental income for the portion of the forecast period after the applicable option exercise date and does not reflect the annualized rental income. We estimate that annualized rental income for these 15 stores would be approximately $3.2 million. For a more detailed description of the omnibus agreement, please read "Certain Relationships and Related Transactions—Agreements with Affiliates in Connection with the Transactions—Omnibus Agreement."
Rental Income Revenues and Rent Expense
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- •
- Taxes on Rental Income from
SHC. Our subsidiary that is treated as a corporation for U.S. federal income tax purposes is expected to own the 15 Stripes® convenience stores we have assumed
we will purchase pursuant to sale and leaseback transactions with SHC during the forecast period
and will be subject to federal income tax on rental income received from SHC. However, we believe that the estimated rental income from SHC for the forecast period will be more than offset by
depreciation and interest deductions associated with our purchase and ownership of these stores, resulting in a net federal tax benefit of $50,000 for the forecast period.
- •
- Rental Income from Third
Parties. We estimate that our rental income from third parties will be $3.4 million during the forecast period,
which is the same as it would have been on a pro forma basis during the base period. This estimated rental income is based primarily on the expectation that we will lease or sublease the same 54 sites
to third parties during the forecast period on the same terms as we leased to third parties during the first quarter of 2012.
- •
- Rental Expense Related to Certain Properties Subleased to Third Parties. Twelve of the 54 sites referenced above are properties that we lease from third parties and then subsequently sublease to other third parties. We forecast that our rental expense associated with leasing these 12 sites will be $1.1 million during the forecast period, which is comparable with the rent expense during the base period.
Other Income and Other Gross Profit.
Other income and other gross profit includes propane and lube oil sales, sale of rights to operate dealer locations and other miscellaneous non-fuel income sources. We forecast other income and gross profit for the forecast period of $5.4 million and $3.6 million, respectively, compared to $4.7 million and $2.6 million, respectively, for the base period. The forecast for other gross profit was developed based on recent operating trends, which include increased activity in our propane and lube oil business and a full year impact related to the dealer supply contracts acquired in late 2011.
Selling, General and Administrative Expenses
We estimate that selling, general and administrative ("SG&A") expenses for the forecast period will be approximately $12.4 million, compared to $11.4 million on a pro forma basis for the base period. Our forecast for SG&A expense was developed by reference to our SG&A expense to date in 2012 and during the base period, on a pro forma basis, excluding certain non-recurring or unusually large items. These items included approximately $0.7 million of incremental bonus and 401(k) discretionary match expense that reflected the significant above-target performance of our predecessor for 2011, approximately $200,000 of certain public company expenses of SHC that were allocated to our predecessor in the base period that we do not expect to be allocated in the future and a $200,000 loss on disposal of assets that we do not expect to recur. Estimated corporate overhead costs to manage our business and SHC's business for the forecast period are allocated based on a percentage of time we estimate the employees of our general partner or SHC will devote to the operation of our business. Our forecast also reflects the approximately $2.0 million of incremental SG&A expenses that we expect to incur as a result of being a publicly traded partnership, including costs associated with SEC reporting requirements, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities, Sarbanes-Oxley Act compliance, stock exchange listing, registrar and transfer agent fees, incremental director and officer liability insurance and director compensation.
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Depreciation and Amortization
We estimate that depreciation and amortization will increase to $7.5 million for the forecast period compared to pro forma $4.8 million for the base period. Forecasted depreciation and amortization expense reflects management's estimates, which are based on consistent average depreciable asset lives and depreciation methodologies, taking into account forecasted capital expenditures described below, including the purchase of 15 Stripes® convenience stores for $40.5 million pursuant to the exercise of our sale and leaseback option. We have assumed that the average depreciable asset lives are 40 years for buildings and seven years for equipment.
Capital Expenditures
We estimate that total capital expenditures for the forecast period will be approximately $44.2 million, as compared to $13.6 million for the base period.
- •
- Expansion capital expenditures are projected to be approximately $42.5 million for the forecast period. These
expenditures include an estimated $40.5 million that we expect to pay to SHC to purchase 15 stores during 2013 pursuant to our sale and leaseback option, based on SHC's current average
construction cost of $2.7 million per store, excluding costs for equipment retained by SHC. We expect to exercise our option with respect to each of the 15 stores included in the first annual
option period, and each of those exercised stores and associated fuel volumes will be immediately added to the SHC Distribution Contract at that time. Expansion capital expenditures also include
$2.0 million, primarily to invest in new third-party fuel distribution agreements or real estate associated with acquisitions. Although we may make significant acquisitions during the forecast
period, our forecast does not reflect any multi-unit acquisitions by us or SHC.
- •
- Maintenance capital expenditures are projected to be approximately $1.7 million for the forecast period, as compared to $1.2 million for the base period. Maintenance capital expenditures are incurred primarily to renew existing fuel distribution contracts, to maintain the real estate we lease to third-party dealers in leaseable condition, or to replace equipment required to operate our existing business. The increase of $0.5 million in projected maintenance capital expenditures for the forecast period as compared to the base period is due to an expected increase in the number of distribution contract renewals during the forecast period as compared to the base period and conservative estimates of the costs to renew such contracts. We do not expect to incur any maintenance expense on Stripes® convenience stores leased to SHC because under the form of lease SHC will be responsible for all maintenance, taxes and environmental costs on such stores.
Financing
We estimate that interest expense will be approximately $2.0 million for the forecast period as compared to $0.7 million for the base period. Our interest expense is based on the following financing assumptions:
- •
- $146.8 million of proceeds from this offering will be invested in U.S. treasury or other investment grade
securities.
- •
- Our debt levels during the forecast period will not exceed $147.9 million. $146.8 million will initially be
drawn under our term loan facility. Our revolving credit facility will be undrawn at the completion of this offering.
- •
- Borrowings under our term loan facility will bear an average interest rate of approximately 0.25%, net of interest earned on the $146.8 million of U.S. Treasury or other investment grade securities pledged to secure the term loan.
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- •
- We will finance our $42.5 million in expansion capital expenditures by selling $42.5 million of U.S.
Treasury or other investment grade securities.
- •
- Immediately prior to selling such securities, we will repay $42.5 million of borrowings under our term loan
facility with an equivalent amount of borrowings under our new revolving credit facility.
- •
- The borrowings under our revolving credit facility will bear an average interest rate of 2.58%. This rate is based on a
current forecast of LIBOR for the forecast period plus a margin.
- •
- Net interest expense also includes existing interest expense on mortgage debt, net of interest income on notes receivable from dealers and non-cash amortization of loan fees on our new secured term loan and revolving credit facilities.
Regulatory, Industry and Economic Factors
Our estimated results of operations for the forecast period are based on the following assumptions related to regulatory, industry and economic factors:
- •
- no material nonperformance or credit-related defaults by suppliers, SHC, dealers or our commercial customers;
- •
- no new federal, state or local regulation, or interpretation of existing regulation, of the portions of the motor fuels
industry in which we operate that in either case will be materially adverse to our business or our customers' or suppliers' businesses;
- •
- no material adverse effects to our business, industry or our customers' or suppliers' businesses on account of natural
disasters;
- •
- no material adverse change resulting from supply disruptions or reduced demand for motor fuels; and
- •
- no material adverse changes in market, regulatory and overall economic conditions.
Actual results could vary significantly from the foregoing assumptions. Please read "Risk Factors—Risks Inherent in Our Business—The assumptions underlying our forecast of our available cash included in "Cash Distribution Policy and Restrictions on Distributions" are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause our available cash for distribution to differ materially from our estimates."
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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS
Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.
Distributions of Available Cash
General
Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending , 2012, we distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the completion of the offering through , 2012 based on the actual length of that period.
Definition of Available Cash
Available cash, for any quarter, generally consists of all cash and cash equivalents on hand at the end of that quarter:
- •
- less, the amount of cash reserves established by our general partner
to:
- •
- provide for the proper conduct of our business;
- •
- comply with applicable law, any of our debt instruments or other agreements or any other obligation; or
- •
- provide funds for distributions to our unitholders for any one or more of the next four quarters (provided that our
general partner may not establish cash reserves for the payment of distributions unless it determines that the establishment of such reserves will not prevent us from distributing the minimum
quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter);
- •
- plus, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter.
The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are borrowings that are made under a credit agreement, commercial paper facility or similar financing arrangement with the intent to repay such borrowings within twelve months from sources other than additional working capital borrowings, and that are used solely for working capital purposes or to pay distributions to partners.
Intent to Distribute the Minimum Quarterly Distribution
We intend to distribute to the holders of common and subordinated units at least the minimum quarterly distribution of $ per unit, or $ on an annualized basis, to the extent we have sufficient cash from our operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. However, there is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement.
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General Partner Interest and Incentive Distribution Rights
Initially, our general partner will own a 0.0% non-economic general partner interest. SHC will initially hold our incentive distribution rights, which will entitle it to receive increasing percentages, up to a maximum of 50.0%, of the cash we distribute from operating surplus (as defined below) in excess of $ per unit per quarter. The maximum distribution of 50.0% does not include any distributions that SHC may receive on any limited partner units that it owns.
Operating Surplus and Capital Surplus
General
All cash distributed to unitholders will be characterized as being paid from either "operating surplus" or "capital surplus." Our partnership agreement requires that we distribute available cash from operating surplus differently than available cash from capital surplus. Operating surplus distributions will be made to our unitholders and, if we make quarterly distributions above the first target distribution level described below, to the holder of our incentive distribution rights. We do not anticipate that we will make any distributions from capital surplus. In such an event, however, any capital surplus distribution would be made pro rata to all unitholders, but the holder of the incentive distribution rights would generally not participate in any capital surplus distributions with respect to those rights. For purposes of determining whether a distribution is made from operating surplus, all distributions paid in kind will be treated as having been made in cash.
Operating Surplus
We define operating surplus as:
- •
- $ million (as described below); plus
- •
- all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined
below); plus
- •
- working capital borrowings made after the end of a period but on or before the date of determination of operating surplus
for that period; plus
- •
- cash distributions paid on equity issued (including incremental distributions on incentive distribution rights), other
than equity issued in this offering, to finance all or a portion of expansion capital expenditures in respect of the period from such financing until the earlier to occur of the date the capital asset
commences commercial service and the date that it is abandoned or disposed of; plus
- •
- cash distributions paid on equity issued (including incremental distributions on incentive distribution rights) to pay the
construction period interest on debt incurred, or to pay construction period distributions on equity issued, to finance the expansion capital expenditures referred to above, in each case, in respect
of the period from such financing until the earlier to occur of the date the capital asset is placed in service and the date that it is abandoned or disposed of; less
- •
- all of our operating expenditures (as defined below) after the closing of this offering; less
- •
- the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less
- •
- all working capital borrowings not repaid within twelve months after having been incurred, or repaid within such twelve-month period with the proceeds of additional working capital borrowings; less
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- •
- any loss realized on the disposition of an investment capital expenditure.
As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by our operations. For example, it includes a basket of $ million that will enable us, if we choose, to distribute as operating surplus up to that amount of cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including certain cash distributions on equity interests in operating surplus, as described above, will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to that amount of cash that we receive from non-operating sources.
The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures, as described below, and thus reduce operating surplus when made. However, if a working capital borrowing is not repaid during the twelve-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowing is in fact repaid, it will be excluded from operating expenditures because operating surplus will have been previously reduced by the deemed repayment.
We define operating expenditures as all of our cash expenditures, including, but not limited to, taxes, reimbursement of expenses to our general partner or its affiliates, payments made in the ordinary course of business under interest rate hedge agreements or commodity hedge agreements (provided that (1) payments made in connection with the initial purchase of an interest rate hedge contract or a commodity hedge contract will be amortized over the life of the applicable interest rate hedge contract or commodity hedge contract and (2) payments made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to its stipulated settlement or termination date will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such contract), compensation of officers, directors and employees of our general partner, repayment of working capital borrowings, debt service payments and maintenance capital expenditures (as discussed in further detail below), provided that operating expenditures will not include:
- •
- repayment of working capital borrowings deducted from operating surplus pursuant to the penultimate bullet point of the
definition of operating surplus above when such repayment actually occurs;
- •
- payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness other than working
capital borrowings;
- •
- expansion capital expenditures;
- •
- investment capital expenditures;
- •
- payment of transaction expenses relating to interim capital transactions;
- •
- distributions to our partners (including distributions in respect of our incentive distribution rights); or
- •
- repurchases of equity interests (other than repurchases to fund obligations under employee benefit plans) or reimbursements of our general partner for such purchases.
Interim Capital Transactions
We define cash from interim capital transactions to include proceeds from:
- •
- borrowings other than working capital borrowings;
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- •
- sales of our equity and debt securities; and
- •
- sales or other dispositions of assets for cash, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of normal retirement or replacement of assets.
Capital Surplus
Capital surplus is defined as any distribution of available cash in excess of our operating surplus. Although the cash proceeds from interim capital transactions do not increase operating surplus, all distributions of available cash from whatever source are deemed to be from operating surplus until cumulative distributions of available cash exceed cumulative operating surplus. Thereafter, all distributions of available cash are deemed to be from capital surplus to the extent they continue to exceed cumulative operating surplus.
Characterization of Cash Distributions
Our partnership agreement requires that we treat all available cash distributed by us as coming from operating surplus until the sum of all available cash distributed since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. Our partnership agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As described above, operating surplus includes a basket of $ million, and therefore does not reflect actual cash on hand that is available for distribution to our unitholders. Rather, this provision will enable us, if we choose, to distribute as operating surplus up to that amount of cash we receive in the future from interim capital transactions that would otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus.
Maintenance capital expenditures reduce operating surplus, but expansion capital expenditures and investment capital expenditures do not. Under our partnership agreement, maintenance capital expenditures are capital expenditures made to maintain our long-term operating income or operating capacity, while expansion capital expenditures are capital expenditures that we expect will increase our operating income or operating capacity over the long term. Examples of maintenance capital expenditures are those made to maintain existing contract volumes or renew existing distribution contracts or maintain our real estate leased to third-party dealers in leaseable condition. Maintenance capital expenditures will also include interest (and related fees) on debt incurred and distributions in respect of equity issued (including incremental distributions on incentive distribution rights), other than equity issued in this offering, to finance all or any portion of the construction or development of a replacement asset that are paid in respect of the period that begins when we enter into a binding obligation to commence construction or development of a replacement asset and ending on the earlier to occur of the date that such replacement asset commences commercial service and the date that it is abandoned or disposed of. Capital expenditures made solely for investment purposes will not be considered maintenance capital expenditures.
Expansion capital expenditures are capital expenditures made to increase our operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of new properties or equipment, to the extent such capital expenditures are expected to expand our long-term operating capacity. Expansion capital expenditures will also include interest (and related fees) on debt incurred and distributions in respect of equity issued (including incremental distributions on incentive distribution rights) to finance all or any portion of the construction of a capital improvement paid in respect of the period that commences when we enter into a binding obligation to commence
69
construction of a capital improvement and ending on the earlier to occur of date such capital improvement commences commercial service and the date that it is disposed of or abandoned. Capital expenditures made solely for investment purposes will not be considered expansion capital expenditures.
Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes or the development of assets that are in excess of those needed for the maintenance of our existing operating capacity, but which are not expected to expand, for more than the short term, our operating capacity.
As described above, neither investment capital expenditures nor expansion capital expenditures are included in operating expenditures, and thus will not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of the construction, acquisition or development of a capital improvement during the period that begins when we enter into a binding obligation to commence construction, acquisition or development of a capital improvement and ending on the earlier to occur of the date such capital improvement commences commercial service and the date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus. Losses on the disposition of an investment capital expenditure will reduce operating surplus when realized and cash receipts from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return on principal.
Capital expenditures that are made in part for maintenance capital purposes, investment capital purposes and/or expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditure by our general partner.
General
Our partnership agreement provides that, during the subordination period (which we define below), the common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $ per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. These units are deemed "subordinated" because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions from operating surplus until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be sufficient available cash from operating surplus to pay the minimum quarterly distribution on the common units. SHC will initially own, directly or indirectly, all of our subordinated units.
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Subordination Period
Except as described below, the subordination period will begin on the closing date of this offering and expire on the first business day after a distribution to unitholders has been made in respect of any quarter, beginning with the quarter ending on or after , 2015, if each of the following has occurred:
- •
- distributions of available cash from operating surplus on each of the outstanding common and subordinated units equaled or
exceeded the annualized minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;
- •
- the "adjusted operating surplus" (as defined below) generated during each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common and
subordinated units during those periods on a fully diluted, weighted-average basis; and
- •
- there are no arrearages in the payment of the minimum quarterly distribution on the common units.
Early Termination of Subordination Period
Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day after a distribution to unitholders has been made in respect of any quarter, if each of the following has occurred:
- •
- distributions of available cash from operating surplus on each of the outstanding common and subordinated units exceeded
$ (150.0% of the annualized minimum quarterly distribution) for the four-quarter period immediately preceding that date;
- •
- the "adjusted operating surplus" (as defined below) generated during the four-quarter period immediately
preceding that date equaled or exceeded the sum of (i) $ (150.0% of the annualized minimum quarterly distribution) on all of the outstanding common and subordinated units
during
that period on a fully diluted, weighted-average basis and (ii) the distributions made on the incentive distribution rights; and
- •
- there are no arrearages in the payment of the minimum quarterly distribution on the common units.
In addition, if the unitholders remove our general partner other than for cause:
- •
- the subordinated units held by any person will immediately and automatically convert into common units on a
one-for-one basis, provided (i) neither such person nor any of its affiliates voted any of its units in favor of the removal and (ii) such person is not an
affiliate of the successor general partner; and
- •
- if all of the subordinated units convert pursuant to the foregoing, all cumulative common unit arrearages on the common units will be extinguished and the subordination period will end.
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Effect of Expiration of the Subordination Period
When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will then participate pro-rata with the other common units in distributions of available cash.
Adjusted Operating Surplus
Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net changes in working capital borrowings and net changes in reserves of cash established in prior periods. Adjusted operating surplus consists of:
- •
- operating surplus generated with respect to that period (excluding any amount attributable to the item described in the
first bullet point under the caption "—Operating Surplus and Capital Surplus—Operating Surplus" above); less
- •
- any net increase in working capital borrowings with respect to that period; less
- •
- any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating
expenditure made with respect to that period; plus
- •
- any net decrease in working capital borrowings with respect to that period; plus
- •
- any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument
for the repayment of principal, interest or premium; plus
- •
- any net decrease made in subsequent periods in cash reserves for operating expenditures initially established with respect to such period to the extent such decrease results in a reduction of adjusted operating surplus in subsequent periods pursuant to the third bullet point above.
Distributions of Available Cash From Operating Surplus During the Subordination Period
Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:
- •
- first, to the common unitholders, pro rata, until we distribute for each
common unit an amount equal to the minimum quarterly distribution for that quarter;
- •
- second, to the common unitholders, pro rata, until we distribute for each
common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;
- •
- third, to the subordinated unitholders, pro rata, until we distribute for
each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and
- •
- thereafter, in the manner described in "—Incentive Distribution Rights" below.
The preceding discussion is based on the assumption that we do not issue additional classes of equity interests.
Distributions of Available Cash From Operating Surplus After the Subordination Period
Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:
- •
- first, to the common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter; and
72
- •
- thereafter, in the manner described in "—Incentive Distribution Rights" below.
The preceding discussion is based on the assumption that we do not issue additional classes of equity interests.
Our general partner owns a 0.0% non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity interests in us, and will be entitled to receive distributions on such interests.
Incentive distribution rights represent the right to receive an increasing percentage (15.0%, 25.0% and 50.0%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Upon the closing of this offering, SHC will hold all of our incentive distribution rights, but may transfer these rights, subject to the restrictions set forth in the partnership agreement.
The following discussion assumes that there are no arrearages on the common units and that SHC continues to own the incentive distribution rights.
If for any quarter:
- •
- we have distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to
the minimum quarterly distribution; and
- •
- we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in the payment of the minimum quarterly distribution;
then, our partnership agreement requires that we distribute any additional available cash from operating surplus for that quarter among the unitholders and SHC (in its capacity as the holder of our incentive distribution rights) in the following manner:
- •
- first, to all common unitholders and subordinated unitholders, pro rata,
until each unitholder receives a total of $ per unit for that quarter (the "first target distribution");
- •
- second, 85.0% to all unitholders, pro rata, and 15.0% to SHC (in its
capacity as the holder of our incentive distribution rights), until each unitholder receives a total of $ per unit for that quarter (the "second target distribution");
- •
- third, 75.0% to all unitholders, pro rata, and 25.0% to SHC (in its
capacity as the holder of our incentive distribution rights), until each unitholder receives a total of $ per unit for that quarter (the "third target distribution"); and
- •
- thereafter, 50.0% to all unitholders, pro rata, and 50.0% to SHC (in its capacity as the holder of our incentive distribution rights).
Percentage Allocations of Available Cash From Operating Surplus
The following table illustrates the percentage allocations of available cash from operating surplus between our unitholders and SHC (in its capacity as the holder of our incentive distribution rights) based on the specified target distribution levels. The amounts set forth under "Marginal Percentage Interest in Distributions" are the percentage interests of SHC (in its capacity as the holder of our incentive distribution rights) and our unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column "Total Quarterly Distribution
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Per Common Unit and Subordinated Unit." The percentage interests shown for our unitholders and SHC (in its capacity as the holder of our incentive distribution rights) for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for SHC (in its capacity as the holder of our incentive distribution rights) assume that SHC has not transferred its incentive distribution rights and that there are no arrearages on common units.
| |
|
Marginal Percentage Interest in Distributions |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
Total Quarterly Distribution Per Common Unit and Subordinated Unit |
Unitholders | SHC (in its Capacity as the Holder of Our Incentive Distribution Rights) |
|||||||
Minimum Quarterly Distribution |
$ | 100.0 | % | — | ||||||
First Target Distribution |
above $ | up to $ | 100.0 | % | — | |||||
Second Target Distribution |
above $ | up to $ | 85.0 | % | 15.0 | % | ||||
Third Target Distribution |
above $ | up to $ | 75.0 | % | 25.0 | % | ||||
Thereafter |
above $ | 50.0 | % | 50.0 | % | |||||
SHC's Right to Reset Incentive Distribution Levels
SHC, as the initial holder of our incentive distribution rights, has the right under our partnership agreement to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and target distribution levels upon which the incentive distribution payments to SHC would be based. If SHC transfers all or a portion of our incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes that SHC holds all of the incentive distribution rights at the time that a reset election is made. The right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions are based may be exercised, without approval of our unitholders or the conflicts committee of the board of directors of our general partner, at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the four most recently completed fiscal quarters (and the amount of each such distribution did not exceed adjusted operating surplus for such quarter). The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that there will be no incentive distributions paid under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that SHC would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to SHC.
In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by SHC of incentive distribution payments based on the target distributions prior to the reset, SHC will be entitled to receive a number of newly issued common units based on a predetermined formula described below that takes into account the "cash parity" value of the average of the cash distributions related to the incentive distribution rights received by SHC for the two quarters prior to the reset event as compared to the average of the cash distributions per common unit during this period.
The number of common units that SHC would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the average of the aggregate cash
74
distributions received by SHC in respect of its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election by (y) the average of the cash distributed per common unit during each of these two quarters.
Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average of the cash distributions per common unit for the two fiscal quarters immediately preceding the reset election (which amount we refer to as the "reset minimum quarterly distribution") and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter as follows:
- •
- first, to all unitholders, pro rata, until each unitholder receives an
amount per unit equal to 115.0% of the reset minimum quarterly distribution for that quarter;
- •
- second, 85.0% to all unitholders, pro rata, and 15.0% to SHC (in its
capacity as the holder of our incentive distribution rights), until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;
- •
- third, 75.0% to all unitholders, pro rata, and 25.0% to SHC (in its
capacity as the holder of our incentive distribution rights), until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and
- •
- thereafter, 50.0% to all unitholders, pro rata, and 50.0% to SHC (in its capacity as the holder of our incentive distribution rights).
The following table illustrates the percentage allocation of available cash from operating surplus between the unitholders and SHC (in its capacity as the holder of our incentive distribution rights) at various cash distribution levels (1) pursuant to the cash distribution provisions of our partnership agreement in effect at the closing of this offering, as well as (2) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average of the quarterly cash distributions per common unit during the two fiscal quarters immediately preceding the reset election was $ .
| |
|
Marginal Percentage Interest in Distributions | |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Quarterly Distribution Per Unit Prior to Reset |
Unitholders | SHC (in its Capacity as the Holder of Our Incentive Distribution Rights) |
Quarterly Distribution Per Unit Following Hypothetical Reset |
|||||||
Minimum Quarterly Distribution |
$ | 100.0 | % | — | $ (1) | ||||||
First Target Distribution |
above $ | up to $ | 100.0 | % | — | above $ (1) up to $ (2) | |||||
Second Target Distribution |
above $ | up to $ | 85.0 | % | 15.0 | % | above $ (2) up to $ (3) | ||||
Third Target Distribution |
above $ | up to $ | 75.0 | % | 25.0 | % | above $ (3) up to $ (4) | ||||
Thereafter |
above $ | 50.0 | % | 50.0 | % | above $ (4) | |||||
- (1)
- This
amount is equal to the hypothetical reset minimum quarterly distribution.
- (2)
- This
amount is 115.0% of the hypothetical reset minimum quarterly distribution.
- (3)
- This
amount is 125.0% of the hypothetical reset minimum quarterly distribution.
- (4)
- This amount is 150.0% of the hypothetical reset minimum quarterly distribution.
The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and SHC (in its capacity as the holder of our incentive distribution rights), based on an average of the amounts distributed each quarter for the two quarters
75
immediately prior to the reset. The table assumes that immediately prior to the reset there would be common units outstanding, and the average of the cash distributions made on each common unit for the two quarters prior to the reset would be $ .
| |
|
|
Cash Distributions to SHC (in Its Capacity as the Holder of Our Incentive Distribution Rights) Prior to Reset | |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
Cash Distributions to Common Unitholders Prior to Reset |
|
|||||||||||||
| |
Quarterly Distribution Per Unit Prior to Reset |
Incentive Distribution Rights |
Total | Total Distributions |
||||||||||||
Minimum Quarterly Distribution |
$ | $ | $ | — | $ | $ | ||||||||||
First Target Distribution |
above $ | up to $ | — | |||||||||||||
Second Target Distribution |
above $ | up to $ | ||||||||||||||
Third Target Distribution |
above $ | up to $ | ||||||||||||||
Thereafter |
above $ | |||||||||||||||
|
$ | $ | $ | $ | ||||||||||||
The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and SHC (in its capacity as the holder of our incentive distribution rights), with respect to the quarter in which the reset occurs. The table reflects that as a result of the reset there would be common units outstanding, and the average distribution to each common unit would be $ . The number of common units to be issued to SHC (in its capacity as the holder of our incentive distribution rights) upon the reset was calculated by dividing (1) the average of the aggregate cash distributions received by SHC (in its capacity as the holder of our incentive distribution rights) for the two quarters prior to the reset as shown in the table above, or $ million, by (2) the average of the cash distributions made on each common unit for the two quarters prior to the reset as shown in the table above, or $ .
| |
|
|
Cash Distributions to General Partner After Reset | |
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
Cash Distributions to Common Unitholders After Reset |
|
||||||||||||||||
| |
Quarterly Distribution Per Unit After Reset |
New Common Units |
Incentive Distribution Rights |
Total | Total Distributions |
||||||||||||||
Minimum Quarterly Distribution |
$ | $ | $ | $ | — | $ | $ | ||||||||||||
First Target Distribution |
above $ | up to $ | — | — | — | — | — | ||||||||||||
Second Target Distribution |
above $ | up to $ | — | — | — | — | — | ||||||||||||
Third Target Distribution |
above $ | up to $ | — | — | — | — | — | ||||||||||||
Thereafter |
above $ | — | — | — | — | — | |||||||||||||
|
$ | $ | $ | — | $ | $ | |||||||||||||
SHC will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the prior four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.
76
Distributions From Capital Surplus
How Distributions From Capital Surplus Will Be Made
Our partnership agreement requires that we make distributions of available cash from capital surplus, if any, in the following manner:
- •
- first, to all unitholders, pro rata, until we distribute for each common
unit that was issued in this offering, an amount of available cash from capital surplus equal to the initial public offering price in this offering;
- •
- second, to the common unitholders, pro rata, until we distribute for each
common unit an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and
- •
- thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus.
The preceding paragraph assumes that we do not issue additional classes of equity interests.
Effect of a Distribution From Capital Surplus
Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as the "unrecovered initial unit price." Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price. Because distributions of capital surplus will reduce the minimum quarterly distribution and target distribution levels after any of these distributions are made, it may be easier for SHC (in its capacity as the holder of our incentive distribution rights) to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.
Once we distribute capital surplus on a unit issued in this offering in an amount equal to the initial unit price, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels will be reduced to zero. Our partnership agreement specifies that we will then make all future distributions from operating surplus, with 50.0% being paid to our unitholders and 50.0% to SHC (in its capacity as the holder of our incentive distribution rights). The percentage interest shown for SHC assumes that SHC has not transferred the incentive distribution rights.
Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels
In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our common units into fewer common units or subdivide our common units into a greater number of common units, our partnership agreement specifies that the following items will be proportionately adjusted:
- •
- the minimum quarterly distribution;
- •
- the target distribution levels;
- •
- the unrecovered initial unit price;
- •
- the per unit amount of any outstanding arrearages in payment of the minimum quarterly distribution on the common units;
and
- •
- the number of common units into which a subordinated unit is convertible.
77
For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, each target distribution level and the unrecovered initial unit price would be reduced to 50.0% of its initial level, and each subordinated unit would be convertible into two subordinated units. Our partnership agreement provides that we will not make any adjustment by reason of the issuance of additional units for cash or property.
In addition, if legislation is enacted or if existing law is modified or interpreted by a governmental taxing authority, so that we become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels for each quarter may, in the sole discretion of the general partner, be reduced by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter) and the denominator of which is the sum of available cash for that quarter before any adjustment for estimated taxes. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in subsequent quarters.
Distributions of Cash Upon Liquidation
General
If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and the holders of the incentive distribution rights, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.
The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of common units to a preference over the holders of subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the common unitholders to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights.
Manner of Adjustments for Gain
The manner of the adjustment for gain is set forth in our partnership agreement. If our liquidation occurs before the end of the subordination period, we will generally allocate any gain to our partners in the following manner:
- •
- first, to the common unitholders, pro rata, until the capital account for
each common unit is equal to the sum of: (1) the unrecovered initial unit price; (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;
and (3) any unpaid arrearages in payment of the minimum quarterly distribution;
- •
- second, to the subordinated unitholders, pro rata, until the capital
account for each subordinated unit is equal to the sum of: (1) the unrecovered initial unit price; and (2) the amount of the minimum quarterly distribution for the quarter during which
our liquidation occurs;
- •
- third, to all unitholders, pro rata, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (2) the cumulative
78
- •
- fourth, 85.0% to all unitholders, pro rata, and 15.0% to SHC (in its
capacity as the holder of our incentive distribution rights), until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the second target distribution per
unit over the first target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in
excess of the first target distribution per unit that we distributed 85.0% to the unitholders, pro rata, and 15.0% to SHC (in its capacity as the holder of our incentive distribution rights) for each
quarter of our existence;
- •
- fifth, 75.0% to all unitholders, pro rata, and 25.0% to SHC (in its
capacity as the holder of our incentive distribution rights), until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the third target distribution per
unit over the second target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in
excess of the second target distribution per unit that we distributed 75.0% to the unitholders, pro rata, and 25.0% to SHC (in its capacity as the holder of our incentive distribution rights) for each
quarter of our existence; and
- •
- thereafter, 50.0% to all unitholders, pro rata, and 50.0% to SHC (in its capacity as the holder of our incentive distribution rights).
amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed to the unitholders, pro rata, for each quarter of our existence;
If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the first bullet point above and all of the second bullet point above will no longer be applicable.
We may make special allocations of gain among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public unitholders.
Manner of Adjustments for Losses
If our liquidation occurs before the end of the subordination period, we will generally allocate any loss to our unitholders in the following manner:
- •
- first, to holders of subordinated units in proportion to the positive
balances in their capital accounts and until the capital accounts of the subordinated unitholders have been reduced to zero; and
- •
- thereafter, to the holders of common units in proportion to the positive balances in their capital accounts until the capital accounts of the common unitholders have been reduced to zero.
If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.
We may make special allocations of loss among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public unitholders.
79
Adjustments to Capital Accounts
We will make adjustments to capital accounts upon the issuance of additional units. In doing so, we generally will allocate any unrealized and, for tax purposes, unrecognized gain resulting from the adjustments to the unitholders and the holders of our incentive distribution rights in the same manner as we allocate gain upon liquidation. By contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders based on their percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common and subordinated units. In the event we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders' capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.
80
SELECTED HISTORICAL FINANCIAL DATA
The following table shows selected historical financial data of Susser Petroleum Company LLC, the predecessor for accounting purposes for the periods and as of the dates indicated. The selected historical financial data of the predecessor as of December 31, 2010 and 2011 and for the years ended December 31, 2009, 2010 and 2011 are derived from the audited consolidated financial statements of the predecessor appearing elsewhere in this prospectus. The selected historical financial data of the predecessor as of December 31, 2007, 2008 and 2009 and for the years ended December 31, 2007 and 2008 are derived from the unaudited consolidated financial statements of the predecessor not appearing elsewhere in this prospectus. The selected historical financial data of the predecessor as of March 31, 2012 and for the three months ended March 31, 2011 and March 31, 2012 are derived from the unaudited consolidated historical financial statements of the predecessor appearing elsewhere in this prospectus.
Our assets have historically been a part of the integrated operations of SHC, and the predecessor distributed motor fuel and other petroleum products to SHC without any profit margin. Accordingly, the gross profit in the predecessor's historical consolidated financial statements relate only to gross profit received from third parties for our wholesale distribution services. In addition, the predecessor's results of operations included results from consignment contracts that will be retained by SHC following the completion of this offering. At these consignment locations, the predecessor provides and controls motor fuel inventory and retail price at the site and received the actual retail selling price for each gallon sold, less a commission paid to the independent operator of the location, instead of the fixed profit margin per gallon that we will receive for fuel supplied to SHC for existing consignment locations. For this reason, as well as the other factors described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors Impacting the Comparability of Our Financial Results," our future results of operations will not be comparable to the predecessor's historical results of operations.
The following table should be read together with, and is qualified in its entirety by reference to, the historical and pro forma consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus. Among other things, the historical financial statements include more detailed information regarding the basis of presentation for the information in the following table. The table should also be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Use of Proceeds" and "Business—Our Relationship with Susser Holdings Corporation."
| |
Predecessor Historical | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Fiscal Year Ended December 31, |
Three Months Ended March 31, |
||||||||||||||||||||
| |
2007 | 2008 | 2009 | 2010 | 2011 | 2011 | 2012 | |||||||||||||||
| |
(in thousands) |
|||||||||||||||||||||
| |
(unaudited) |
|
|
|
(unaudited) |
|||||||||||||||||
Statement of Income Data: |
||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||
Motor fuel sales to third parties |
$ | 1,046,808 | $ | 1,323,494 | $ | 875,891 | $ | 1,094,273 | $ | 1,549,143 | $ | 336,361 | $ | 438,801 | ||||||||
Motor fuel sales to affiliates |
911,388 | 1,571,810 | 1,205,890 | 1,578,653 | 2,257,788 | 512,358 | 630,443 | |||||||||||||||
Rental income |
3,666 | 3,676 | 4,245 | 5,351 | 5,467 | 1,370 | 1,363 | |||||||||||||||
Other income |
4,793 | 5,254 | 7,462 | 5,515 | 7,980 | 1,641 | 2,046 | |||||||||||||||
Total revenues |
1,966,655 | 2,904,234 | 2,093,488 | 2,683,792 | 3,820,378 | 851,730 | 1,072,653 | |||||||||||||||
Gross profit: |
||||||||||||||||||||||
Motor fuel sales to third parties |
25,229 | 29,844 | 20,584 | 26,065 | 31,217 | 6,217 | 7,112 | |||||||||||||||
Motor fuel sales to affiliates |
— | — | — | — | — | — | — | |||||||||||||||
Rental income |
3,666 | 3,676 | 4,245 | 5,351 | 5,467 | 1,370 | 1,363 | |||||||||||||||
Other |
3,151 | 4,506 | 7,501 | 4,683 | 6,339 | 1,248 | 1,408 | |||||||||||||||
Total gross profit |
32,046 | 38,026 | 32,330 | 36,099 | 43,023 | 8,835 | 9,883 | |||||||||||||||
81
| |
Predecessor Historical | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Fiscal Year Ended December 31, |
Three Months Ended March 31, |
||||||||||||||||||||
| |
2007 | 2008 | 2009 | 2010 | 2011 | 2011 | 2012 | |||||||||||||||
| |
(in thousands) |
|||||||||||||||||||||
| |
(unaudited) |
|
|
|
(unaudited) |
|||||||||||||||||
Operating expenses: |
||||||||||||||||||||||
General and administrative |
7,850 | 9,286 | 7,593 | 8,480 | 10,559 | 2,315 | 2,649 | |||||||||||||||
Other operating |
3,907 | 4,220 | 4,728 | 4,229 | 4,870 | 1,143 | 1,435 | |||||||||||||||
Rent |
1,040 | 1,039 | 1,578 | 3,797 | 4,322 | 1,090 | 1,070 | |||||||||||||||
Loss (gain) on disposal of assets |
(201 | ) | (66 | ) | (6 | ) | 86 | 221 | 91 | 111 | ||||||||||||
Depreciation, amortization and accretion |
4,311 | 4,423 | 4,901 | 4,771 | 6,090 | 1,189 | 1,884 | |||||||||||||||
Total operating expenses |
16,907 | 18,902 | 18,794 | 21,363 | 26,062 | 5,828 | 7,149 | |||||||||||||||
Income from operations |
15,139 | 19,124 | 13,536 | 14,736 | 16,961 | 3,007 | 2,734 | |||||||||||||||
Other expense (income): |
||||||||||||||||||||||
Interest expense, net |
(25 | ) | 29 | 191 | 284 | 324 | 77 | 87 | ||||||||||||||
Income before income taxes |
15,164 | 19,095 | 13,345 | 14,452 | 16,637 | 2,930 | 2,647 | |||||||||||||||
Income tax expense |
5,594 | 6,874 | 4,831 | 5,236 | 6,039 | 1,069 | 972 | |||||||||||||||
Net income |
$ | 9,570 | $ | 12,221 | $ | 8,514 | $ | 9,216 | $ | 10,598 | $ | 1,861 | $ | 1,675 | ||||||||
Cash Flow Data: |
||||||||||||||||||||||
Net cash provided by (used in): |
||||||||||||||||||||||
Operating activities |
9,833 | 17,469 | 14,263 | (2,676 | ) | 878 | ||||||||||||||||
Investing activities |
(11,356 | ) | (13,897 | ) | (19,153 | ) | (1,970 | ) | (1,188 | ) | ||||||||||||
Financing activities |
331 | 731 | 381 | (100 | ) | 72 | ||||||||||||||||
| |
Predecessor Historical | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
As of December 31, | As of March 31, | ||||||||||||||||||||
| |
2007 | 2008 | 2009 | 2010 | 2011 | 2011 | 2012 | |||||||||||||||
| |
(in thousands) (unaudited) |
|||||||||||||||||||||
Balance Sheet Data (at period end): |
||||||||||||||||||||||
Cash and cash equivalents |
$ | 793 | $ | 1,638 | $ | 446 | $ | 4,749 | $ | 240 | $ | 3 | $ | 2 | ||||||||
Property and equipment, net |
48,067 | 47,969 | 47,602 | 35,247 | 39,049 | 35,373 | 38,987 | |||||||||||||||
Total assets |
164,380 | 158,673 | 192,857 | 202,587 | 231,316 | 229,607 | 256,167 | |||||||||||||||
Total liabilities |
89,116 | 71,188 | 96,858 | 97,372 | 115,503 | 122,530 | 138,679 | |||||||||||||||
Total unitholder's equity |
75,264 | 87,485 | 95,999 | 105,215 | 115,813 | 107,077 | 117,488 | |||||||||||||||
82
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion analyzes the historical financial condition and results of operations of Susser Petroleum Company LLC, our predecessor for accounting purposes, before the impact of pro forma adjustments related to the formation transactions, our entry into our new credit facility, our entry into the SHC Distribution Contract and the SHC Transportation Contract, the completion of this offering and the application of proceeds from this offering. This discussion also analyzes our pro forma revenue and gross profit demonstrating the pro forma impact of the SHC Distribution Contract on our predecessor's historical results of operations. You should read the following discussion of the historical financial condition and results of operations of our predecessor in conjunction with the historical financial statements and accompanying notes of our predecessor and the pro forma condensed financial statements for Susser Petroleum Partners LP included elsewhere in this prospectus. This discussion includes forward-looking statements that are subject to risks and uncertainties that may result in actual results differing from statements we make. Please read "Forward-Looking Statements." Factors that could cause actual results to differ include those risks and uncertainties that are discussed in "Risk Factors."
We are a growth-oriented Delaware limited partnership formed by Susser Holdings Corporation, or SHC, to engage in the primarily fee-based wholesale distribution of motor fuels to SHC and third parties. SHC operates over 540 retail convenience stores under its proprietary Stripes® convenience store brand, primarily in growing Texas markets. Stripes® is the largest independent chain of convenience stores in Texas based on store count and retail motor fuel volumes sold. Our business is integral to the success of SHC's retail operations, and upon the completion of this offering, SHC will purchase all of its motor fuel from us. For the year ended December 31, 2011, we distributed 789.6 million gallons of motor fuel to Stripes® convenience stores and 522.8 million gallons of motor fuel to other customers. We believe we are the largest independent motor fuel distributor by gallons in Texas, and among the largest distributors of Valero and Chevron branded motor fuel in the United States. In addition to distributing motor fuel, we also distribute other petroleum products such as propane and lube oil, and we receive rental income from real estate that we lease or sublease.
For the year ended December 31, 2011, we would have had pro forma gross profit of approximately $51.2 million, pro forma Adjusted EBITDA of approximately $40.0 million, and pro forma net income of approximately $34.0 million. Sales to SHC would have accounted for approximately 53% of our pro forma gross profit for that period. Please read "Summary—Summary Historical and Pro Forma Financial and Operating Data" for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our most directly comparable financial measures calculated and presented in accordance with GAAP.
Wholesale Motor Fuel Distribution
We purchase motor fuel primarily from independent refiners and major oil companies and distribute it throughout Texas and in Louisiana, New Mexico and Oklahoma to:
- •
- Stripes® convenience stores, pursuant to the SHC Distribution
Contract;
- •
- over 80 independently operated consignment locations where SHC sells motor fuel to retail customers, also pursuant to the
SHC Distribution Contract;
- •
- over 480 convenience stores and fueling stations operated by independent operators, which we refer to as "dealers,"
pursuant to long-term distribution agreements; and
- •
- other commercial customers, including unbranded convenience stores, other fuel distributors, school districts and municipalities and other industrial customers.
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We distribute Chevron, CITGO, Conoco, Exxon, Mobil, Phillips 66, Shamrock, Shell, Texaco and Valero branded motor fuel, as well as unbranded motor fuel. We believe the variety and large volumes of branded and unbranded motor fuel that we distribute is a key competitive advantage relative to other, smaller wholesale distributors in our markets. In addition to distributing motor fuel, we also distribute other petroleum products such as propane and lube oil.
Real Estate
In addition to revenues earned in our wholesale motor fuel distribution business, we also receive rental income from convenience store properties that we lease or sublease to SHC and third parties. Our predecessor earned rental income from third parties with respect to 85 properties during 2011. We expect that 54 properties will be contributed to us in connection with this offering, most of which are located in Texas. Pursuant to the omnibus agreement that we will enter into with SHC at the closing of this offering, we will have a three-year option to purchase and lease back to SHC a total of 75 new or recently constructed Stripes® convenience stores on specified terms set forth in a lease agreement for an initial lease term of 15 years. Furthermore, each store that we purchase and lease back to SHC pursuant to the 75 store option or otherwise will be added to the SHC Distribution Contract, and we will be the exclusive distributor of motor fuel to the store for ten years from the time of purchase at cost plus a fixed profit margin of three cents per gallon. For a more detailed description of the sale and leaseback option, please read "Business—Our Relationship with Susser Holdings Corporation—Our Agreements with SHC—Omnibus Agreement." Although we may purchase and lease convenience store properties to SHC or third parties, we do not currently operate or have any intention to operate any retail convenience stores that we own or may acquire in the future.
Our Predecessor, Susser Petroleum Company LLC
Susser Petroleum Company LLC, a wholly owned subsidiary of SHC, is our predecessor for accounting purposes. Our predecessor previously conducted SHC's wholesale motor fuel distribution business, substantially all of which will be contributed to us in connection with this offering. Our predecessor will retain contracts and assets relating to consignment locations and motor fuel transportation services, as well as certain convenience store properties. Our pro forma financial statements included elsewhere in this prospectus reflect the financial impact of SHC's retention of such assets and operations.
Following the completion of this offering, SHC will continue to operate its retail convenience store business and will retain its consignment and transportation business, and we will operate the balance of its wholesale motor fuel distribution business and lease convenience store properties.
How We Evaluate and Assess Our Business
Our management uses a variety of financial measurements to analyze our performance. Key measures we use to evaluate and assess our business include the following:
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- Motor fuel gallons sold. One of the primary drivers of our
business is the total volume of motor fuel sold. Our long-term fuel distribution contracts with our customers, including SHC, typically provide that we will distribute motor fuel at a
fixed, volume-based profit margin. As a result, our gross profit is directly tied to the volume of motor fuel that we distribute.
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- Gross profit per gallon. Gross profit per gallon reflects the gross profit on motor fuel divided by the number of gallons sold, which we typically express in terms of cents per gallon. Historically, sales of motor fuel to SHC's retail convenience stores have been at cost and therefore, our predecessor earned profits only on gallons sold to third parties. Pursuant to the SHC Distribution Contract, we will receive a fixed profit margin per gallon on all of the
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- Adjusted EBITDA. We define Adjusted EBITDA as net income before net interest expense, income taxes and depreciation, amortization and accretion, as further adjusted to exclude allocated non-cash stock-based compensation expense and certain other operating expenses that are reflected in our net income that we do not believe are indicative of our ongoing core operations, such as the gain or loss on disposal of assets.
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- securities analysts and other interested parties use Adjusted EBITDA as a measure of financial performance and debt
service capabilities;
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- it facilitates management's ability to measure the operating performance of our business on a consistent basis by
excluding the impact of items not directly resulting from our wholesale motor fuel distribution operations; and
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- it is used by our management for internal planning purposes, including aspects of our consolidated operating budget and capital expenditures.
motor fuel we distribute to Stripes® convenience stores and to SHC's consignment locations. The financial impact of this fee if it had been generated on our historical volumes sold is reflected in our pro forma financial statements included elsewhere in this prospectus. Our gross profit cents per gallon varies among our third-party customers and is impacted by the availability of certain discounts and rebates from our suppliers. Pursuant to the SHC Transportation Contract, SHC will arrange for motor fuel to be delivered from our suppliers to our customers, with the costs being passed entirely along to our customers. As a result, our cost to purchase fuel and any transportation costs that we incur are generally passed through to our customers, and therefore, do not have a substantial impact on our gross profit cents per gallon.
We believe Adjusted EBITDA is useful to investors in evaluating our operating performance because:
This measure is not calculated or presented in accordance with GAAP. The GAAP measures most directly comparable to Adjusted EBITDA is net income. Adjusted EBITDA should not be considered as an alternative to GAAP net income; it has important limitations as an analytical tool because it excludes some but not all items that affect net income. You should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.
For a reconciliation of Adjusted EBITDA to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read "Summary—Non-GAAP Financial Measure."
Factors Impacting the Comparability of Our Financial Results
Our future results of operations may not be comparable to our predecessor's historical results of operations for the following reasons:
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- Revenues and Gross Profit. Our assets have historically been a part of the integrated operations of SHC, and our predecessor distributed motor fuel and other petroleum products to SHC without any profit margin. Accordingly, the gross profit in our predecessor's historical consolidated financial statements relates only to the profit margin received from third parties for our wholesale distribution services and from consignment contracts that will be retained by SHC following the completion of this offering. At these consignment locations, our predecessor provided and controlled motor fuel inventory and price at the site
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- General and Administrative Expenses. Our predecessor's
general and administrative expenses included direct charges for the management and operation of our wholesale business and certain expenses allocated by SHC for general corporate services, such as
finance, internal audit and legal services. These expenses were charged or allocated to our predecessor based on the nature of the expenses and our predecessor's proportionate share of employee time
and headcount. Following the closing of this offering, SHC will continue to charge us directly for the management and operation of our wholesale business. However, we will no longer bear an expense
allocation for general and administrative expenses related to the retained consignment contracts and transportation business. We also expect to incur additional personnel and related costs and
incremental external general and administrative expenses of approximately $2.0 million annually as a result of being a publicly traded partnership, consisting of costs associated with SEC
reporting requirements, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities, Sarbanes-Oxley Act compliance, stock
exchange listing, registrar and transfer agent fees, incremental director and officer liability insurance and director compensation. These additional personnel and related costs and incremental
external general and administrative expenses are not reflected in our historical or our pro forma financial statements.
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- Financing. There are differences in the way we will finance our operations going forward as compared to the way our predecessor financed its operations. Historically, our predecessor's operations were financed as part of SHC's integrated operations and our predecessor did not record any separate costs associated with financing its operations. Additionally, our predecessor largely relied on internally generated cash flows to satisfy its capital expenditure requirements. Following the closing of this offering, we expect that we will distribute to our unitholders most of the cash generated by our operations. As a result, we expect to fund future capital expenditures primarily from the sale of U.S. Treasury or other investment grade securities, external sources, including borrowings under our revolving credit facility and issuances of equity and debt securities. In connection with the closing of this offering, we expect to enter into a -year, $ million credit facility, consisting of up to a
and received the actual retail selling price for each gallon sold, less a commission paid to the independent operator of the location. As a result, the gross profit received from consignment locations by our predecessor varied in a similar manner to retail fuel margins per gallon, which are driven by changes in fuel prices, competitive dynamics of the market, and other factors. In connection with this offering, the SHC Distribution Contract, a ten-year fuel distribution agreement with certain wholly owned subsidiaries of SHC, will be contributed to us, pursuant to which we will be the exclusive distributor of motor fuel purchased by SHC's existing Stripes® convenience stores and independently operated consignment locations at cost, including tax and transportation costs, plus a fixed profit margin. Based on historical volumes distributed to SHC, and after giving pro forma effect to the SHC Distribution Contract, for the twelve months ended March 31, 2012, we would have derived approximately $27.6 million in gross profit from sales to SHC. Our pro forma gross profit cents per gallon for the year ended December 31, 2011 was 3.5 cents per gallon as compared to the average rate of 2.4 cents per gallon for our predecessor for the same period, primarily as a result of (i) the fixed profit margin of three cents per gallon that we would have earned on the motor fuel distributed to Stripes® convenience stores pursuant to the SHC Distribution Contract instead of no margin historically received by our predecessor and (ii) the fixed profit margin that we would have received on all volumes sold to consignment locations under the SHC Distribution Contract instead of the variable and higher margin received by our predecessor under consignment contracts. For a discussion of the pro forma impact of the SHC Distribution Contract on revenue and gross profit, please read "—Pro Forma Results of Operations."
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- Taxes. Historically, our predecessor's wholesale distribution business has been included in SHC's U.S. federal and state tax returns. SHC's tax obligations have historically been based upon all of its wholesale and retail operations combined, and accordingly, its tax model is not necessarily reflective of the tax model for the wholesale distribution business on a stand-alone basis. Furthermore, due to our status as a partnership, we will not be subject to U.S. federal income tax and certain state income taxes in the future, except for our subsidiary that is treated as a corporation for U.S. federal income tax purposes. This subsidiary does not presently have any operations, but is expected to own all stores purchased pursuant to sale and leaseback transactions with SHC and receive rental income from SHC and, as a result, will be subject to federal income tax on rental income received from SHC. However, in the near term, we believe any rental income we receive from SHC will be more than offset by depreciation and interest deductions associated with our purchase and ownership of any Stripes® convenience stores. In addition, we will continue to be subject to the Texas franchise tax, which is based on taxable margin generated by our Texas operations.
$ million revolving credit facility, and up to a $ million term loan facility. We expect that the revolving credit facility will be available for general partnership purposes, including working capital, capital expenditures and acquisitions.
Market and Industry Trends and Outlook
We expect that certain trends and economic or industry-wide factors will continue to affect our business, both in the short-term and long-term. We have based our expectations described below on assumptions made by us and on the basis of information currently available to us. To the extent our underlying assumptions about or interpretation of available information prove to be incorrect, our actual results may vary materially from our expected results. Please read "Risk Factors" for additional information about the risks associated with purchasing our common units.
Regional Trends
The majority of our fuel distribution business is conducted in Texas. The economy in Texas continues to fare better than many other parts of the nation, partly as a result of a relatively stable housing market and strong population growth and job creation. In 2011, Texas ranked first in the United States for job growth according to the U.S. Bureau of Labor Statistics and first in the United States for population growth for the ten-year period ended 2010 as reflected in the 2010 census report. Furthermore, according to a report issued by the Texas Comptroller of Public Accounts, the population in our South Texas markets, in which the majority of our distribution customers are located, is growing faster than the population of the state as a whole. We also believe the significant expansion of oil and gas development in the Eagle Ford Shale and Permian Basin has resulted in increased motor fuel usage in South and West Texas.
The Texas Comptroller of Public Accounts has reported that gasoline gallons taxed in Texas have grown significantly during the last several decades. From 1989 to 2011, gasoline consumption grew approximately 41.2% from 8.5 billion gallons to 11.9 billion gallons, or at an approximate 1.6% compound annual growth rate. Gasoline consumption grew in 17 of the 22 years during the period. As of 2011, Texas motor gasoline consumption totaled approximately 8.9% of U.S. consumption. Similarly, diesel gallons taxed in Texas have grown significantly during the last several decades. From 1989 to 2011, diesel consumption grew approximately 144.1%, from 1.6 billion gallons to 3.8 billion gallons, or at an approximate 4.1% compound annual growth rate. Diesel consumption grew in 18 of the 22 years during the period.
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Economic Conditions
The condition of credit markets may adversely affect our liquidity. In the recent past, world financial markets experienced a severe reduction in the availability of credit. Although we were not substantially impacted by this condition, possible negative impacts in the future could include a decrease in the availability of borrowings under our credit agreement. In addition, we could experience a tightening of trade credit from our suppliers.
Industry Consolidation
We believe that there is considerable opportunity for consolidation in our industry as major integrated oil companies continue to divest sites they own or lease, and independent dealers have experienced pressure from increased competition from non-traditional fuel suppliers, such as Walmart and grocery store chains. We intend to capitalize on the relationship between our wholesale business and SHC's complementary retail business by jointly pursuing mixed asset acquisition opportunities with SHC which may not be attractive to a pure wholesaler or pure retailer. Pursuant to the omnibus agreement, we will have a right of first offer to negotiate with SHC to acquire any third-party distribution contracts and to distribute fuel to any retail stores or consignment locations included in a potential acquisition under consideration by SHC, other than any retail stores already party to an existing supply agreement. We therefore expect to have the opportunity to participate with SHC in acquiring convenience store operations and related wholesale distribution businesses through (i) directly purchasing any dealer distribution contracts or other wholesale distribution contracts and assets owned by the acquisition target, (ii) selling additional fuel volumes to convenience stores that SHC acquires or to SHC for any acquired consignment locations, and (iii) entering into additional sale and leaseback arrangements with respect to acquired stores. We believe these opportunities will provide for growth in both our fuel volumes and rental income.
Seasonality
Our business exhibits some seasonality due to our customers' increasing demand for motor fuel during the late spring and summer months as compared to the fall and winter months. Travel, recreation and construction activities typically increase in these months in the geographic areas in which we operate, increasing the demand for motor fuel. Therefore, the volume of motor fuel that we distribute is typically somewhat higher in the second and third quarters of our fiscal year. As a result, our results from operations may vary from period to period.
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Historical Results of Operations of Our Predecessor
The following table and discussion is a summary of our predecessor's actual results of operations for each of the years ended December 31, 2009, 2010 and 2011, respectively, and the three months ended March 31, 2011 and March 31, 2012, respectively. These historical results have not been adjusted for the pro forma impacts of this offering.
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Year Ended December 31, | Three Months Ended March 31, |
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2009 | 2010 | 2011 | 2011 | 2012 | |||||||||||
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(In thousands) |
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(Unaudited) |
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Statement of Income Data: |
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Revenues: |
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Motor fuel sales to third parties |
$ | 875,891 | $ | 1,094,273 | $ | 1,549,143 | $ | 336,361 | $ | 438,801 | ||||||
Motor fuel sales to affiliates |
1,205,890 | 1,578,653 | 2,257,788 | 512,358 | 630,443 | |||||||||||
Rental income |
4,245 | 5,351 | 5,467 | 1,370 | 1,363 | |||||||||||
Other income |
7,462 | 5,515 | 7,980 | 1,641 | 2,046 | |||||||||||
Total revenues |
2,093,488 | 2,683,792 | 3,820,378 | 851,730 | 1,072,653 | |||||||||||
Gross profit: |
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Motor fuel sales to third parties |
20,584 | 26,065 | 31,217 | 6,217 | 7,112 | |||||||||||