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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2010

OR

Commission File Number 001-33274

TRAVELCENTERS OF AMERICA LLC

(Exact name of registrant as specified in its charter)

24601 Center Ridge Road, Suite 200, Westlake, OH  44145-5639

(Address of Principal Executive Offices)

(440) 808-9100

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

Number of Common Shares outstanding at November 5, 2010: 17,320,846 common shares.

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TRAVELCENTERS OF AMERICA LLC

FORM 10-Q

September 30, 2010

INDEX

As used herein the terms “we”, “us”, “our” and “TA” include TravelCenters of America LLC and its consolidated subsidiaries unless otherwise expressly stated or the context otherwise requires.

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Part I.  Financial Information

Item 1.  Financial Statements

TravelCenters of America LLC

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TravelCenters of America LLC

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

(in thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TravelCenters of America LLC

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

(in thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TravelCenters of America LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share amounts)

1.             Basis of Presentation, Business Description and Organization

TravelCenters of America LLC, together with its subsidiaries, which we refer to as the Company, we, us and our, operates and franchises travel centers under the “TravelCenters of America,” “TA” and “Petro” brands primarily along the U.S. interstate highway system.  Our customers include trucking fleets and their drivers, independent truck drivers and motorists.  Our travel centers are typically 20 to 25 acre sites and provide our customers with diesel fuel and gasoline, as well as nonfuel products and services such as truck repair and maintenance services, full service restaurants, quick service restaurants, travel and convenience stores and various other driver services.  We also collect rents and franchise royalties from our franchisees.

At September 30, 2010, our business included 229 travel centers in 41 states and in Canada, 166 of which were operated under the “TravelCenters of America” or “TA” brand names and 63 of which were operated under the “Petro” brand name.  We operated 188 of these travel centers, which we refer to as Company operated sites, and our franchisees operated 41 of these travel centers, including 10 travel centers which our franchisees sublease from us.  We lease 145 of our TA branded sites and 40 of our Petro branded sites under leases with subsidiaries of Hospitality Properties Trust, which we refer to as the TA Lease and Petro Lease, respectively.  See Note 5.  We refer to Hospitality Properties Trust and its subsidiaries as HPT.

The accompanying condensed consolidated financial statements are unaudited.  These unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, applicable for interim financial statements.  Therefore, the disclosures do not include all the information necessary for complete financial statements in accordance with GAAP.  These unaudited interim financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2009.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  While our revenues are modestly seasonal, the quarterly variations in our operating results may reflect greater seasonal differences because our rent and certain other costs do not vary seasonally.  For this and other reasons, our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

2.             Recent Accounting Pronouncements

In June 2009 the Financial Accounting Standards Board, or FASB, issued new accounting guidance that (a) eliminates some exceptions previously included in GAAP that were related to consolidating qualifying special purpose entities, (b) contains new criteria for determining the primary beneficiary of a variable interest entity, and (c) increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity.  The new guidance also contains a new requirement that any term, transaction or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying previously issued rules related to variable interest entities.  The qualifying special purpose entity concept and its consolidation exceptions were eliminated, which means more entities are subject to consolidation assessments and reassessments.  We adopted these new requirements as of January 1, 2010.  Adopting these new requirements did not effect our consolidated financial statements.

3.             Earnings Per Share

Unvested shares issued under our equity incentive plan are deemed participating securities because they participate equally in earnings with all of our other common shares.   The following table presents the weighted average common shares and weighted average unvested common shares included as participating securities.

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share amounts)

4.             Inventories

Inventories consisted of the following:

5.             Related Party Transactions

HPT is our former parent company, our principal landlord and our largest shareholder.  Reit Management & Research LLC, or RMR, provides management services to both us and HPT.  One of our Managing Directors is also a managing trustee of HPT and is the chairman and majority owner of RMR and our other Managing Director, President and Chief Executive Officer was a former executive officer of HPT and is also an executive vice president of RMR.  Our Executive Vice President, Chief Financial Officer and Treasurer is a senior vice president of RMR.

The following table summarizes the various amounts paid and expensed under our leases with HPT during the periods noted and reconciles those amounts to the total real estate rent expense reflected in our consolidated financial statements for those periods.

During the nine months ended September 30, 2010 and 2009, we received funding of $7,015 and $5,722, respectively, from HPT for qualifying tenant improvements we made.  As of September 30, 2010, we had received all of the $125,000 tenant improvements allowance available under our lease from HPT without an increase in rent payments.  Portions of this amount were discounted pursuant to the terms of the lease because we elected to receive those funds on an accelerated basis.  If we sell additional qualified improvements to HPT our rent will increase pursuant to our lease terms.

Under the terms of our rent deferral agreement with HPT we have the option to defer our rent payments to HPT by up to $5,000 per month until December 31, 2010.  Beginning January 1, 2010, any deferred rent which remains unpaid accrues interest payable in cash to HPT monthly at the rate of 1% per month.  During the three and nine months ended September 30, 2010, we recognized interest expense of $3,750 and $9,900, respectively, and made cash interest payments of $3,600 and $8,600, respectively, to HPT related to the deferred rent balance. The rent deferral agreement does not provide for rent deferrals after December 31, 2010.  All deferred rent (and interest thereon) not previously paid is due to HPT on July 1, 2011.  This rent deferral agreement has change of control covenants so that amounts deferred will be immediately payable to HPT in the event we experience a change of control, as defined in the agreement, while deferred rent is unpaid.  As of September 30, 2010 and December 31, 2009, we had an aggregate of $135,000 and $90,000, respectively, of deferred rent payable to HPT.

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share amounts)

Other current liabilities in our consolidated balance sheets at September 30, 2010 and December 31, 2009, included $14,279 and $13,946, respectively, for rent due to HPT, excluding deferred rent, and also included $1,300 of interest payable to HPT under the rent deferral agreement as of September 30, 2010.

In connection with our business management and shared services agreement with RMR for the three months ended September 30, 2010 and 2009, we recognized expense of $2,401 and $2,151, respectively.  We recognized expense of $6,629 and $6,257, for the nine months ended September 30, 2010 and 2009, respectively, in connection with this business management and shared services agreement with RMR. We recognize these amounts in selling, general and administrative expenses in our consolidated financial statements.

As of September 30, 2010, we had invested $5,209 in Affiliates Insurance Company, or Affiliates Insurance, concurrently with RMR and other companies to which RMR provides management services. All of our Directors are currently serving on the board of directors of Affiliates Insurance.  At September 30, 2010, we owned approximately 14.29% of Affiliates Insurance.  Although we own less than 20% of Affiliates Insurance, we use the equity method to account for this investment because we believe that we have significant influence over Affiliates Insurance because each of our Directors is a director of Affiliates Insurance. This investment had a carrying value of $5,049 and $5,000 as of September 30, 2010 and December 31, 2009, respectively, and is carried on our balance sheet in other noncurrent assets.  During the three and nine months ended September 30, 2010, we invested $32 and $76, respectively, in Affiliates Insurance.  During the three month period ended September 30, 2010, we recognized income of $25 and during the nine month period ended September 30, 2010, we recognized a loss of $27 related to this investment.  For the three and nine months ended September 30, 2009, we recognized a loss of $23 and $132, respectively, related to this investment.  In June 2010, we, RMR and other companies to which RMR provides management services purchased property insurance pursuant to an insurance program arranged by Affiliates Insurance.  Our first annual premium for this property insurance of $2,308 was paid in June 2010.  We are currently investigating the possibilities to expand our insurance relationships with Affiliates Insurance to include other types of insurance.

We own a 40% minority joint venture interest in Petro Travel Plaza Holdings LLC, or PTP, which owns two travel centers that we operate.  We account for this investment under the equity method and it is carried on our balance sheet in other noncurrent assets.  The carrying value of this investment as of September 30, 2010 and December 31, 2009, was $17,578 and $17,744, respectively.  During the three months ended September 30, 2010 and 2009, we recognized management and accounting fee income from PTP of $200 and $104, respectively.  During the nine months ended September 30, 2010 and 2009, we recognized management and accounting fee income from PTP of $525 and $308, respectively.  At September 30, 2010, we had a net payable to PTP of $673.  At December 31, 2009, we had a net receivable from PTP of $1,809.  During the three months ended September 30, 2010 and 2009, we recognized income of $442 and $335, respectively, as our share of PTP’s net income and we recognized income of $795 and $651, as our share of PTP’s net income during the nine months ended September 30, 2010 and 2009, respectively.  In June 2010, we received a $960 distribution from PTP.

For more information about these and other relationships among us, our Directors, our executive officers, HPT, RMR,  Affiliates Insurance, other companies to which RMR provides management services, PTP and others affiliated with or related to them and about the risks which may arise as a result of those and other related person transactions, please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, our Proxy Statement for our 2010 Annual Meeting of Shareholders, and our other filings with the Securities and Exchange Commission, or the SEC, including the “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Related Party Transactions” sections of our Annual Report on Form 10-K for the year ended December 31, 2009, the information regarding our Directors and executive officers in and the “Related Person Transactions and Company Review of such Transactions” section of our Proxy Statement for our 2010 Annual Meeting of Shareholders, and Item 1.01 of our Current Report on Form 8-K filed with the SEC on January 28, 2010.  In addition, please see the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2009, for a description of risks which may arise from these relationships, as those risk factors may be revised or updated as provided in the “Risk Factors” section of this Quarterly Report on Form 10-Q or our Quarterly Report on Form 10-Q for the Quarterly period ending June 30, 2010.  The foregoing documents are accessible at the website for the SEC, at www.sec.gov.  In addition, copies of certain of our agreements with these parties, including our business management and shared services agreement with RMR, the TA Lease, the Petro Lease and our rent deferral agreement with HPT, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC website.

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share amounts)

6.             Commitments and Contingencies

Guarantees

In the normal course of our business we periodically enter into agreements that contain guarantees or indemnification provisions.  While we cannot estimate the maximum amount to which we may be exposed under such agreements, we do not believe that any potential guaranty or indemnification will have a material adverse effect on our consolidated financial position or results of operations.

We offer a warranty of our workmanship in our truck maintenance and repair facilities, but we believe the annual warranty expense and corresponding liability are not material to us.

Environmental Matters

Extensive environmental laws regulate our operations and properties.  These laws may require us to investigate and clean up hazardous substances, including petroleum products, released at our owned and leased properties.  Governmental entities or third parties may hold us liable for property damage and personal injuries, and for investigation, remediation and monitoring costs incurred in connection with any contamination and regulatory compliance.  We use both underground storage tanks and above ground storage tanks to store petroleum products and waste at our travel centers.  We must comply with environmental laws regarding tank construction, integrity testing, leak detection and monitoring, overfill and spill control, release reporting and financial assurance for corrective action in the event of a release.  At some locations we must also comply with environmental laws relative to vapor recovery or discharges to water.  Under the terms of our leases, we generally have agreed to indemnify HPT for any environmental liabilities related to travel centers that we lease from HPT and we are required to pay all environmental related expenses incurred in the operation of the travel centers.

From time to time we have received, and in the future likely will receive, notices of alleged violations of environmental laws or otherwise became or become aware of the need to undertake corrective actions to comply with environmental laws at our travel centers.  Investigatory and remedial actions were, and regularly are, undertaken with respect to releases of hazardous substances at our travel centers.  In some cases contributions were, and may be, received by us to partially offset environmental costs from insurers, from state funds established for environmental clean up associated with the sale of petroleum products or from indemnitors who agreed to fund certain environmental related costs at travel centers purchased from those indemnitors.  To the extent we incur material amounts for environmental matters for which we do not receive insurance or other third party reimbursement or for which we have not previously recorded a reserve, our operating results may be materially adversely affected.  In addition, to the extent we fail to comply with environmental laws and regulations, or we become subject to costs and requirements not similarly experienced by our competitors, our competitive position may be harmed.

At September 30, 2010, we had an accrued liability of $7,697 for environmental matters, as well as a receivable for expected recoveries of certain of these estimated future expenditures and cash in an escrow account to fund certain of these estimated future expenditures, resulting in an estimated net amount of $2,004 that we expect to fund from future cash flows.  We do not have a reserve for unknown current or potential future environmental matters.  Accrued liabilities related to environmental matters are recorded on an undiscounted basis due to the uncertainty associated with the timing of the related future payments.  We cannot precisely know the ultimate costs we will incur in connection with currently known or future potential environmental related violations, corrective actions, investigation and remediation; however, based on our current knowledge we do not expect that our net costs for such matters to be incurred at our travel centers, individually or in the aggregate, would be material to our financial condition or results of operations.

In addition, we have insurance of up to $35,000 for environmental liabilities at certain of our travel centers that were known at the time the policies were issued, and up to $60,000 for unknown environmental liabilities, subject, in each case, to certain limitations and deductibles.  However, as noted above, we can provide no assurance that:

·      we or a prior owner, operator or occupant of our travel centers did not create a material environmental condition not known to us at this time;

·      future uses or circumstances (including changes in applicable environmental laws and regulations) will not result in the imposition of additional environmental liability upon us;

·      we will be able to maintain similar environmental insurance coverage in the future on acceptable terms; or

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share amounts)

·      future environmental laws or regulations, including those regarding climate change, will not require us to expend significant amounts.

While the costs of our environmental compliance in the past have not had a material adverse impact on us, it is impossible to predict the ultimate effect changing circumstances and changing environmental laws may have on us in the future.  We cannot be certain that additional contamination presently unknown to us does not exist at our sites, or that material liability will not be imposed on us in the future.  If we discover additional environmental problems, or if government agencies impose additional environmental requirements, increased environmental compliance or remediation expenditures may be required, which could have a material adverse effect on us.

Pending Litigation

On February 1, 2008, a purported holder of our shares, Alan R. Kahn filed a purported derivative action in the Delaware Court of Chancery on behalf of us against members of our Board of Directors, HPT and RMR.  This action alleges that our Directors breached their fiduciary duties in connection with our acquisition in 2007 of Petro Stopping Centers, L.P., or the Petro Acquisition, and seeks an award of unspecified damages and reformation of the Petro Lease, which we entered with HPT in connection with the Petro Acquisition.  This action also appears to allege that RMR and HPT aided and abetted our Directors.  Under our limited liability company agreement and agreements with RMR and HPT, we are liable to indemnify our Directors, HPT and RMR for liabilities, costs and expenses incurred by them in connection with this litigation.  On May 6, 2008, we moved to dismiss this complaint.  On June 20, 2008, the plaintiff filed an amended complaint making additional allegations regarding the members of our Board of Directors and withdrawing his request for reformation of the Petro Lease.  On July 2, 2008, we moved to dismiss the amended complaint.  On October 30, 2008, Mr. Kahn’s claims against RMR were voluntarily dismissed.  On December 11, 2008, our motion to dismiss the amended complaint was denied and a previously imposed stay of discovery was lifted.  On January 21, 2009, HPT sent a letter to the plaintiff demanding arbitration of his claims pursuant to the terms of the Petro Lease.  We believe that the plaintiff and HPT have agreed to defer the arbitration demand.  This case is now in the discovery stage.  We continue to believe that the plaintiff’s allegations are without merit.

In July 2008, Riverside County in the State of California filed litigation against us in the Superior Court of California for Riverside County, seeking civil penalties and injunctive relief for alleged past violations of various state laws and regulations relating to management of underground storage tanks.  In April 2009, the California Attorney General intervened in the action.  The California Attorney General’s complaint repeats many of the allegations made by Riverside County and adds allegations of past violations of state laws and regulations governing the management of hazardous wastes.  The complaints by the Attorney General and the Riverside County District Attorney do not identify the amount of civil penalties sought.  We disagree with these allegations and intend to defend these lawsuits.

In May 2010, the California Attorney General filed a separate litigation against us in the Superior Court of California for Alameda County containing allegations of violations of underground storage tank laws and regulations at various facilities in Kern and Merced counties.  On July 26, 2010, the California Attorney General voluntarily dismissed this litigation against us and, on September 2, 2010, refiled its complaint in the Superior Court of California for Merced County.  The complaint does not identify the amount of civil penalties sought.  We disagree with the Attorney General’s allegations and intend to defend this lawsuit.

Beginning in December 2006, a series of class action lawsuits was filed against numerous companies in the petroleum industry, including our predecessor and our subsidiaries, in United States district courts in over 20 states.  Major petroleum refineries and retailers have been named as defendants in one or more of these lawsuits.  The plaintiffs in the lawsuits generally allege that they are retail purchasers who purchased motor fuel at temperature greater than 60 degrees Fahrenheit at the time of sale.  One theory alleges that the plaintiffs purchased smaller quantities of motor fuel than the amount for which defendants charged them because the defendants measured the amount of motor fuel they delivered by volumes which, at higher temperatures, contain less energy.  A second theory alleges that fuel taxes are calculated in temperature adjusted 60 degree gallons and are collected by governmental agencies from suppliers and wholesalers, who are reimbursed in the amount of the tax by the defendant retailers before the fuel is sold to consumers.  These “tax” cases allege that, when the fuel is subsequently sold to consumers at temperatures above 60 degrees, the retailers sell a greater volume of fuel than the amount on which they paid tax, and therefore reap unjust benefit because the customers pay more tax than the retailer pays.  We believe that there are substantial factual and legal defenses to the theories alleged in these so called “hot fuel” lawsuits.  The “temperature” cases seek nonmonetary relief in the form of an order requiring the defendants to install temperature correcting equipment on their retail fuel pumps.  They also seek monetary relief in the form of damages.  The plaintiffs have not quantified the damages they seek.  The “tax” cases also seek monetary relief.  Plaintiffs have proposed a formula (which we dispute) to measure these damages as the difference between the amount of fuel excise taxes paid by defendants and the amount

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share amounts)

collected by defendants on motor fuel sales.  Plaintiffs have taken the position in filings with the Court that under this approach, our damages for an eight-year period for one state would be approximately $10,700.  We deny liability and disagree with the plaintiff’s position.  The cases have been consolidated in the United States District Court for the District of Kansas pursuant to multi-district litigation procedures.  On Friday, May 28, 2010, the Court ruled that, with respect to two cases originally filed in U.S. District Court in the state of Kansas, it would grant plaintiffs’ motion to certify a class of plaintiffs seeking injunctive relief (implementation of fuel temperature equipment and/or posting of notices regarding the effect of temperature on fuel), and that it would defer plaintiffs’ motion to certify a class with respect to damages.  A TA entity was named in one of those two Kansas cases, but the Court ruled that the named plaintiffs were not sufficient to represent a class as to TA, and as a result, there has been no class certified as to TA.  The United States Court of Appeals for the Tenth Circuit has denied a request for interlocutory review of the Court’s class certification decision, and the litigation in the Kansas cases is proceeding.  The U.S. District Court for the District of Kansas has not issued a decision on class certification with respect to the remaining cases that have been consolidated in the multi-district litigation.  Because these various motions are pending, we cannot estimate our ultimate exposure to loss or liability, if any, related to these lawsuits.  However, the continued cost of litigating these cases could be significant.

On April 6, 2009, five independent truck stop owners, who are plaintiffs in a purported class action suit against Comdata Network, Inc., or Comdata, in the United States District Court for the Eastern District of Pennsylvania, filed a motion to amend their complaint to add us as a defendant, which was allowed on March 25, 2010.  The amended complaint also adds as defendants Ceridian Corporation, Pilot Travel Centers LLC and Love’s Travel Stops & Country Stores, Inc.  Comdata markets fuel cards which are used for payments by trucking companies to truck stops.  The amended complaint alleges antitrust violations arising out of Comdata’s contractual relationships with truck stops in connection with its fuel cards.  The plaintiffs are seeking unspecified damages and injunctive relief.  This case is in the discovery stage.  We believe that there are substantial factual and legal defenses to the plaintiffs’ claims against us, but that the costs to defend this case could be significant.

In addition to the legal proceedings referenced above, we are involved from time to time in various other legal and administrative proceedings, including tax audits, and threatened legal and administrative proceedings incidental to the ordinary course of our business, none of which we expect, individually or in the aggregate, to have a material adverse effect on our business, financial condition, results of operations or cash flows.

7.             Income Taxes

Because of our history of operating losses, we do not currently recognize the benefit of all of our deferred tax assets, including tax loss carry forwards, that may be used to offset future taxable income.  We will, however, continue to assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized.  If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our consolidated statement of operations, which will affect our results of operations.  As a result of the large volume of public trading in our shares during 2007, our 2007 federal net operating loss of $50,270 and other tax credit carry forwards are generally not available to us for the purpose of offsetting future taxable income because of certain Internal Revenue Code, or IRC, provisions regarding changes in ownership of our common shares.  As of December 31, 2009, we had an unrestricted federal net operating loss carry forward of approximately $105,227.  IRC provisions do not currently restrict our ability to utilize the federal net operating loss and other tax credit carry forwards generated after 2007, but these carry forwards could be subject to limitation based on changes in ownership of our common shares.  Our net operating loss carry forwards will begin to expire in 2027.

For the nine months ended September 30, 2010, we recognized tax expenses of $687, which includes tax expense of $532 for state taxes on operating income payable without regard to our tax loss carry forwards and $155 related to a deferred liability arising from the amortization of a trademark for tax purposes but not for financial reporting purposes.  Our effective tax rates differed from the statutory rate primarily due to adjustments to our valuation allowance against net deferred tax assets, principally our net operating loss carryforward, and to certain state income taxes that are due without regard to our loss or income.

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share amounts)

8.             Other Information

Interest expense consisted of the following:

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview (dollars in thousands)

The following discussion should be read in conjunction with the financial statements included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2009.

Our revenues and income are subject to potentially material changes as a result of the market prices of diesel fuel and gasoline, as well as the availability of these products.  These factors are subject to the worldwide petroleum products supply chain, which historically has incurred price and supply shocks as a result of, among other things, severe weather, terrorism, political crises, wars and other military actions and variations in demand, which are often the result of changes in the macroeconomic environment.  Over the past few years there has been significant volatility in the cost of fuel: first, as the world value of the U.S. dollar declined and as speculation in the price of petroleum commodities increased during 2007 and into 2008; then in the last half of 2008, the price of fuel declined dramatically as the worldwide recession reduced demand for petroleum products.  During 2009, fuel commodity prices rose, and those increases continued through the first quarter of 2010.  Although they were at a higher level than in the 2009 second and third quarters, during the second and third quarters of 2010 fuel commodity prices generally trended lower.  Additionally, fuel commodity prices were less volatile in the 2010 third quarter than in the 2009 third quarter.  We expect that these significant changes in our costs for these products can largely be passed on to our customers, but often there are delays in passing on price changes that can affect our fuel gross margins.  Although other factors have an effect, fuel gross margins per gallon tend to be lower during periods of rising fuel prices and higher during periods of falling fuel prices.  Also, increased volatility in the crude oil and refined products markets can result in negative effects on our sales and profitability and increases in our working capital requirements.  We expect that the crude oil and refined product markets will continue to be volatile for the foreseeable future.

The trucking industry is the primary customer for our goods and services.  Freight and trucking demand in the U.S. generally reflects the level of commercial activity in the U.S. economy.  The condition of the U.S. economy generally, and the financial condition and activity of the trucking industry in the U.S. specifically, impacted our financial results during the first nine months of 2010 and we expect that they will continue to impact our financial results in future periods.  Our fuel sales volumes and nonfuel revenues in the third quarter and first nine months of 2010 both increased on a same site basis over the comparable periods of the prior year; however, the level of fuel sales volume continues to be well below that experienced before the recession.  As a result, we experienced a net loss of $35,577 during the nine months ended September 30, 2010, although during the third quarter of 2010 we generated net income of $4,466.  Our operating results for each of these periods were significantly influenced by changes in our fuel gross margin that we experienced primarily because of changes in fuel commodity market costs as described above.

During the third quarter of 2010, we experienced an increase in same site fuel sales volume of 5.6%, compared with the third quarter of 2009.  Similarly, during the first nine months of 2010 our same site fuel volumes increased 7.2%, compared with the first nine months of 2009.  We believe that these increases resulted from a combination of our marketing and customer service initiatives and increased trucking activity attributable to increased economic activity in the U.S. during the third quarter and first nine months of 2010, compared to the same periods of the prior year.  The third quarter same site fuel sales volume increase continued the positive trend that began in the fourth quarter of 2009.  The negative trend that had persisted since 2007 moderated during the first three quarters of 2009.  The following table presents the quarterly changes in fuel sales volumes on a same site basis compared to the same quarter of the prior year.

(1)  Includes travel centers that were continuously operated by us, by our predecessor (prior to January 31, 2007) or by the previous owner of the Petro sites (prior to the acquisition by us on May 30, 2007) during the periods presented.

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While the level of fuel sales volume has recently increased, it appears to have moderated during the course of 2010 to date and is still well below pre-recession levels.  While the U.S. economy recently has shown signs of stabilizing and growing, the strength and sustainability of any economic recovery is uncertain, including the risk that a possible “double dip” recession may occur.  If the U.S. economy continues to operate as it has over the past few years or if it worsens, our financial results may not improve and may decline, resulting in our experiencing losses from our operations.

On June 30, 2010, two of our competitors, Pilot Travel Centers LLC and Flying J Inc., announced that they completed a merger, effective July 1, 2010, and that the new company would be called Pilot Flying J.  That merger combined the first and second largest competitors in our industry, based on diesel fuel sales volume.  As a result of this combination, we may see increased competitive pressure that could negatively impact our sales volumes and profitability and could increase our level of selling, general and administrative expense.  In addition, most of our trucking customers transact business with us by use of fuel cards, which are issued by third party fuel card companies.  The fuel card industry has only a few significant participants, including Comdata, the largest issuer of fuel cards, and Transportation Clearing House LLC, or TCH, a company affiliated with Pilot Flying J.  We are unable to determine the extent of the effect the combined Pilot Flying J may have on our financial position, results of operations, or competitive position, although we expect the combination may significantly alter the competitive conditions in the travel center industry.  Further, we are unable to determine the extent of the effect that competition, or lack thereof, between Comdata and TCH in particular, may result in future increases in our transaction fee expenses or working capital requirements, or both.

There can be no assurance that industry conditions will not deteriorate or that any one or more of the risks identified under the sections “Risk Factors” or “Warning Regarding Forward Looking Statements” in our Annual Report on Form 10-K for the year ended December 31, 2009, or in this Quarterly Report on Form 10-Q, or elsewhere in this Quarterly Report on Form 10-Q, or some other unidentified risk will not manifest itself in a manner which is material and adverse to our results of operations, cash flow or financial position.

Summary of Travel Center Site Counts

The following table summarizes the changes in the composition of our business (company operated, franchisee leased and operated or franchisee owned and operated) from January 1, 2009 through September 30, 2010:

Relevance of Fuel Revenues

Due to volatile pricing of fuel products, we believe that fuel revenue is not a reliable metric for analyzing our results of operations from period to period.  As a result solely of changes in fuel prices, our fuel revenue may increase or decrease, in both absolute amounts and on a percentage basis, without a comparable change in fuel sales volumes or in fuel gross margin.  We consider fuel volumes and fuel gross margin to be better measures of comparative performance than fuel revenues.

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Results of Operations (dollars and gallons in thousands)

Three months ended September 30, 2010 compared to September 30, 2009

The following table presents changes in our operating results for the three month period ended September 30, 2010 as compared with the same period in 2009.

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Same Site Comparisons. As part of the discussion and analysis of our operating results we refer to increases and decreases in results on a same site basis.  For purposes of these comparisons, we included a travel center in the following same site comparisons only if we or a franchisee continuously operated it from July 1, 2009, through September 30, 2010.  We did not exclude travel centers from the same site comparisons as a result of expansions in their size or changes in the services offered.  We excluded from the same site comparisons the two sites we operate for PTP because the related amounts are excluded from our consolidated results.  One company operated site is currently excluded from this same site comparison because it has been temporarily closed as a result of flooding in Tennessee in May 2010.

(1)         Includes fuel volume, fuel gross margin, revenues and expenses of company operated travel centers only.

(2)         Excludes real estate rent expense.

Revenues. Revenues for the three month period ended September 30, 2010, were $1,513,110, an increase from the quarter ended September 30, 2009, of $231,191, or 18.0%.

Fuel revenues were 78.8% of total revenues for the quarter ended September 30, 2010, compared to 76.8% for the same period in 2009.  Fuel revenues for the quarter ended September 30, 2010, were $1,192,949, an increase of $208,092, or 21.1%, compared to the same period in 2009.  This increase was principally the result of higher fuel prices in the 2010 period and also resulted from increased fuel sales volume.  The table below shows the changes in fuel revenues between periods that resulted from price and volume changes:

On a same site basis for our company operated sites, fuel sales volume increased by 26,696 gallons, or 5.6%, during the three months ended September 30, 2010, compared to the same period in 2009.  We believe the same site fuel sales volume increase resulted primarily from an increase in trucking activity resulting from some increased economic activity in the U.S. during the third quarter of 2010, as evidenced by the increase in housing starts, as well as the increase in imports into the U.S. that are transported by truck.  In addition, we believe that we have increased our market share of fuel sales as a result of our marketing and customer service initiatives.

Nonfuel revenues were 20.9% of total revenues for the quarter ended September 30, 2010, compared to 22.9% for the same period in 2009.  Nonfuel revenues for the three months ended September 30, 2010, were $316,639, an increase of $23,129, or 7.9%, compared to the same period in 2009.  This change between periods is primarily the result of an increase in unit sales at those sites we operated continuously during both periods.  On a same site basis for our company operated sites, nonfuel revenues increased by

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$26,291, or 9.1% during the three months ended September 30, 2010, compared to the same period in 2009.  We believe the same site nonfuel revenue increase reflects an increased number of customers in our travel centers as a result of the same factors affecting our fuel sales volumes.

Rent and royalty revenues for the three months ended September 30, 2010, were $3,522, a decrease of $30, or 0.8%, compared to the same period in 2009.  Rent and royalty revenues decreased as a result of the termination of four franchise sites in the first quarter of 2010, partially offset by higher royalties resulting from increased revenues at our franchisee locations.

Cost of goods sold (excluding depreciation). Cost of goods sold for the three months ended September 30, 2010, was $1,252,827, an increase of $203,504, or 19.4%, compared to the same period in 2009.

Fuel cost of goods sold for the quarter ended September 30, 2010, of $1,118,307 increased by $193,915, or 21.0%, compared to the same period in 2009.  This increase in fuel cost of goods sold primarily resulted from higher fuel commodity prices as compared to the third quarter of 2009, as well as the fuel sales volume increase described above.  Although they were at a higher level than in the third quarter of 2009, there were more days of declining prices lower throughout the third quarter of 2010.  Additionally, fuel commodity prices were less volatile in the 2010 third quarter than in the 2009 third quarter.  As a result, our fuel gross margin per gallon increased as compared to the prior year when fuel commodity prices were rising during the third quarter. Combined with an increase in fuel sales volumes, the increase in fuel gross margin per gallon resulted in total fuel gross margin of $74,642 that was $14,177 higher in the third quarter of 2010 than in the third quarter of 2009.

Nonfuel cost of goods sold for the three months ended September 30, 2010, was $134,520, an increase of $9,589, or 7.7%, compared to the same period in 2009.  Nonfuel cost of goods sold increased due to the nonfuel sales increases noted above.  Nonfuel cost of goods sold as a percentage of nonfuel revenue was 42.5% for the quarter ended September 30, 2010, compared to 42.6% for the same period in 2009.

Site level operating expenses.  Site level operating expenses for the three months ended September 30, 2010, were $160,500, an increase of $7,127, or 4.6%, compared to the same period in 2009.  This increase in site level operating expenses was primarily attributable to labor and related costs, which principally increased in support of the increases in our fuel and nonfuel sales.  Additionally, we increased our level of maintenance at our operating locations and we experienced increased credit card transaction fees as a result of increased sales levels and higher fuel sales prices.

On a same site basis for our company operated sites, site level operating expenses increased by $8,341, or 5.5%, for the three months ended September 30, 2010, compared to the same period in 2009, primarily due to the increased level of sales and other items noted above.  Site level operating expenses as a percentage of nonfuel revenues for the quarter ended September 30, 2010, were 50.7%, compared to 52.3% for the same period in 2009.  The decrease in operating expenses as a percentage of nonfuel revenues primarily was because certain of our expenses are fixed in nature, or otherwise do not vary directly with sales, so that increases in our revenues did not result in corresponding increases in site level operating expenses.

Selling, general and administrative expenses.  Selling, general and administrative expenses for the three month period ended September 30, 2010, were $20,465, an increase of $815, or 4.1%, compared to the same period in 2009.  This increase primarily resulted from increases in personnel costs and legal expenses.

Real estate rent expense.  Rent expense for the three months ended September 30, 2010, was $58,595, an increase of $120 compared to the same period in 2009.  Under our real estate leases, we paid rent of $46,484 during the three months ended September 30, 2010, of which $2,186 was recognized as interest expense and $696 was recognized as a reduction of our capitalized lease obligation.  During the three months ended September 30, 2010, we accrued $1,685 of noncash rent expense to recognize rent expense on a straight line basis over the terms of those leases that include rent escalation provisions and amortized $1,692 of our tenant improvements allowance as a reduction of rent expense.  In addition, during the three months ended September 30, 2010, we accrued $15,000 of rent expense that was not paid in cash pursuant to our rent deferral agreement with HPT.

Depreciation and amortization expense.  Depreciation and amortization expense for the three months ended September 30, 2010, was $10,611, an increase of $321, or 3.1%, compared to the same period in 2009.  This increase resulted from our increased investment in depreciable assets.

Income/(Loss) from operations.  Our income from operations for the three months ended September 30, 2010, was $10,112, compared to a loss from operations of $9,192 for the same period in 2009.  This increase was the result of the changes in revenues and expenses described above, primarily the increased fuel gross margin and sales volumes and increased nonfuel sales.

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Interest income and expense.  Interest income and expense consisted of the following: