Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
Commission File Number 001-33274
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| | | | |
TRAVELCENTERS OF AMERICA LLC |
(Exact Name of Registrant as Specified in Its Charter) |
| | | | |
Delaware | | 20-5701514 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
| 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 x 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.
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Large accelerated filer o | | Accelerated filer x |
| | |
Non-accelerated filer o | | Smaller reporting company o |
(Do not check if a smaller reporting company) | | |
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 August 5, 2016: 38,852,663 common shares.
TABLE OF CONTENTS
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.
Part I. Financial Information
Item 1. Financial Statements
TravelCenters of America LLC
Consolidated Balance Sheets (Unaudited)
(in thousands)
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Assets | |
| | |
|
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 133,799 |
| | $ | 172,087 |
|
Accounts receivable (less allowance for doubtful accounts of $690 and $850 as of June 30, 2016 and December 31, 2015, respectively) | 125,819 |
| | 91,580 |
|
Inventory | 192,470 |
| | 183,492 |
|
Other current assets | 44,629 |
| | 48,181 |
|
Total current assets | 496,717 |
| | 495,340 |
|
| | | |
Property and equipment, net | 1,042,687 |
| | 989,606 |
|
Goodwill and intangible assets, net | 127,760 |
| | 105,977 |
|
Other noncurrent assets | 32,694 |
| | 30,618 |
|
Total assets | $ | 1,699,858 |
| | $ | 1,621,541 |
|
| | | |
Liabilities and Shareholders' Equity | |
| | |
|
Current liabilities: | |
| | |
|
Accounts payable | $ | 158,040 |
| | $ | 125,079 |
|
Current HPT Leases liabilities | 38,799 |
| | 37,030 |
|
Other current liabilities | 176,774 |
| | 133,513 |
|
Total current liabilities | 373,613 |
| | 295,622 |
|
| | | |
Long term debt | 318,262 |
| | 316,447 |
|
Noncurrent HPT Leases liabilities | 388,970 |
| | 385,498 |
|
Other noncurrent liabilities | 71,938 |
| | 74,655 |
|
Total liabilities | 1,152,783 |
| | 1,072,222 |
|
| | | |
Shareholders' equity: | |
| | |
|
Common shares, no par value, 41,369 and 39,069 shares authorized as of June 30, 2016, and December 31, 2015, respectively, 38,853 shares issued and outstanding as of June 30, 2016, and 38,808 shares issued and outstanding as of December 31, 2015 | 684,727 |
| | 682,219 |
|
Accumulated other comprehensive income (loss) | 66 |
| | (240 | ) |
Accumulated deficit | (139,083 | ) | | (132,660 | ) |
Total TA shareholders' equity | 545,710 |
| | 549,319 |
|
Noncontrolling interests | 1,365 |
| | — |
|
Total shareholders' equity | 547,075 |
| | 549,319 |
|
Total liabilities and shareholders' equity | $ | 1,699,858 |
| | $ | 1,621,541 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TravelCenters of America LLC
Consolidated Statements of Income and Comprehensive Income (Unaudited)
(in thousands, except per share amounts)
|
| | | | | | | |
| Three Months Ended June 30, |
| 2016 | | 2015 |
Revenues: | |
| | |
|
Fuel | $ | 931,211 |
| | $ | 1,125,086 |
|
Nonfuel | 509,524 |
| | 454,630 |
|
Rent and royalties from franchisees | 4,330 |
| | 3,167 |
|
Total revenues | 1,445,065 |
| | 1,582,883 |
|
| | | |
Cost of goods sold (excluding depreciation): | |
| | |
|
Fuel | 829,218 |
| | 1,028,799 |
|
Nonfuel | 237,349 |
| | 208,290 |
|
Total cost of goods sold | 1,066,567 |
| | 1,237,089 |
|
| | | |
Operating expenses: | |
| | |
|
Site level operating | 244,120 |
| | 222,334 |
|
Selling, general and administrative | 36,009 |
| | 30,062 |
|
Real estate rent | 64,736 |
| | 53,308 |
|
Depreciation and amortization | 21,322 |
| | 18,116 |
|
Total operating expenses | 366,187 |
| | 323,820 |
|
| | | |
Income from operations | 12,311 |
| | 21,974 |
|
| | | |
Acquisition costs | 1,092 |
| | 1,127 |
|
Interest expense, net | 6,740 |
| | 5,087 |
|
Income from equity investees | 1,091 |
| | 1,029 |
|
Loss on extinguishment of debt | — |
| | 10,502 |
|
Income before income taxes | 5,570 |
| | 6,287 |
|
Provision for income taxes | 1,985 |
| | 2,515 |
|
Net income | 3,585 |
| | 3,772 |
|
Less net income for noncontrolling interests | 64 |
| | — |
|
Net income attributable to common shareholders | $ | 3,521 |
| | $ | 3,772 |
|
| | | |
Other comprehensive income (loss), net of tax: | |
| | |
|
Foreign currency gain, net of taxes of $11 and $38, respectively | $ | 17 |
| | $ | 46 |
|
Equity interest in investee's unrealized gain (loss) on investments | 43 |
| | (64 | ) |
Other comprehensive income (loss) attributable to common shareholders | 60 |
| | (18 | ) |
| | | |
Comprehensive income attributable to common shareholders | $ | 3,581 |
| | $ | 3,754 |
|
| | | |
Net income per common share attributable to common shareholders: | |
| | |
|
Basic and diluted | $ | 0.09 |
| | $ | 0.10 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TravelCenters of America LLC
Consolidated Statements of Income and Comprehensive Income (Unaudited)
(in thousands, except per share amounts)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2016 | | 2015 |
Revenues: | |
| | |
|
Fuel | $ | 1,640,739 |
| | $ | 2,128,253 |
|
Nonfuel | 960,170 |
| | 856,140 |
|
Rent and royalties from franchisees | 8,606 |
| | 6,191 |
|
Total revenues | 2,609,515 |
| | 2,990,584 |
|
| | | |
Cost of goods sold (excluding depreciation): | |
| | |
|
Fuel | 1,447,045 |
| | 1,919,579 |
|
Nonfuel | 443,680 |
| | 386,712 |
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Total cost of goods sold | 1,890,725 |
| | 2,306,291 |
|
| | | |
Operating expenses: | |
| | |
|
Site level operating | 478,170 |
| | 427,918 |
|
Selling, general and administrative | 66,975 |
| | 57,678 |
|
Real estate rent | 128,265 |
| | 108,912 |
|
Depreciation and amortization | 41,847 |
| | 35,641 |
|
Total operating expenses | 715,257 |
| | 630,149 |
|
| | | |
Income from operations | 3,533 |
| | 54,144 |
|
| | | |
Acquisition costs | 2,061 |
| | 1,541 |
|
Interest expense, net | 13,561 |
| | 11,419 |
|
Income from equity investees | 2,038 |
| | 1,820 |
|
Loss on extinguishment of debt | — |
| | 10,502 |
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(Loss) income before income taxes | (10,051 | ) | | 32,502 |
|
(Benefit) provision for income taxes | (3,692 | ) | | 13,001 |
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Net (loss) income | (6,359 | ) | | 19,501 |
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Less net income for noncontrolling interests | 64 |
| | — |
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Net (loss) income attributable to common shareholders | $ | (6,423 | ) | | $ | 19,501 |
|
| | | |
Other comprehensive income (loss), net of tax: | |
| | |
|
Foreign currency gain (loss), net of taxes of $132 and $(156), respectively | $ | 211 |
| | $ | (300 | ) |
Equity interest in investee's unrealized gain (loss) on investments | 95 |
| | (19 | ) |
Other comprehensive income (loss) attributable to common shareholders | 306 |
| | (319 | ) |
| | | |
Comprehensive (loss) income attributable to common shareholders | $ | (6,117 | ) | | $ | 19,182 |
|
| | | |
Net (loss) income per common share attributable to common shareholders: | |
| | |
|
Basic and diluted | $ | (0.17 | ) | | $ | 0.51 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TravelCenters of America LLC
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
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| | | | | | | |
| Six Months Ended June 30, |
| 2016 | | 2015 |
Cash flows from operating activities: | |
| | |
|
Net (loss) income | $ | (6,359 | ) | | $ | 19,501 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |
| | |
|
Noncash rent expense | (6,768 | ) | | (11,634 | ) |
Depreciation and amortization expense | 41,847 |
| | 35,641 |
|
Deferred income tax provision | (2,627 | ) | | 86 |
|
Loss on extinguishment of debt | — |
| | 10,502 |
|
Changes in operating assets and liabilities, net of effects of business acquisitions: | |
| | |
|
Accounts receivable | (33,270 | ) | | (30,166 | ) |
Inventory | (5,243 | ) | | (3,488 | ) |
Other assets | 7,008 |
| | 3,386 |
|
Accounts payable and other liabilities | 60,728 |
| | 74,982 |
|
Other, net | 980 |
| | 1,440 |
|
Net cash provided by operating activities | 56,296 |
| | 100,250 |
|
| | | |
Cash flows from investing activities: | |
| | |
|
Proceeds from asset sales | 120,961 |
| | 267,933 |
|
Capital expenditures | (143,374 | ) | | (103,291 | ) |
Acquisitions of businesses, net of cash acquired | (72,001 | ) | | (72,644 | ) |
Net cash (used in) provided by investing activities | (94,414 | ) | | 91,998 |
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| | | |
Cash flows from financing activities: | |
| | |
|
Proceeds from sale leaseback transactions with HPT | 148 |
| | 491 |
|
Sale leaseback financing obligation payments | (280 | ) | | (46,110 | ) |
Other, net | (74 | ) | | 23 |
|
Net cash used in financing activities | (206 | ) | | (45,596 | ) |
| | | |
Effect of exchange rate changes on cash | 36 |
| | (44 | ) |
Net (decrease) increase in cash and cash equivalents | (38,288 | ) | | 146,608 |
|
Cash and cash equivalents at the beginning of the period | 172,087 |
| | 224,275 |
|
Cash and cash equivalents at the end of the period | $ | 133,799 |
| | $ | 370,883 |
|
| | | |
Supplemental disclosure of cash flow information: | |
| | |
|
Interest paid (including rent classified as interest and net of capitalized interest) | $ | 13,533 |
| | $ | 11,623 |
|
Income taxes (received) paid, net of refunds | (231 | ) | | 1,295 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
| |
1. | Basis of Presentation, Business Description and Organization |
TravelCenters of America LLC, which we refer to as the Company or we, us and our, is a Delaware limited liability company. As of June 30, 2016, we operated and franchised 540 travel center, standalone convenience store, which we refer to as convenience stores, and standalone restaurant locations described below. Our customers include trucking fleets and their drivers, independent truck drivers, highway and local motorists and casual diners. We also collect rents, royalties and other fees from our tenants, franchisees and dealers.
We manage our business on the basis of two reportable segments: travel centers and convenience stores. See Note 7 for more information about our reportable segments. We have a single travel center located in a foreign country, Canada, that we do not consider material to our operations.
As of June 30, 2016, our business included 255 travel centers in 43 states in the United States, or U.S., primarily along the U.S. interstate highway system, and the province of Ontario, Canada. Our travel centers included 178 operated under the "TravelCenters of America" and "TA" brand names, or the TA brand, and 77 operated under the "Petro Stopping Centers" and "Petro" brand names, or the Petro brand. Of our 255 travel centers at June 30, 2016, we owned 30, we leased 198, including 196 that we leased from Hospitality Properties Trust, or HPT, we operated two for a joint venture in which we own a noncontrolling interest and our franchisees owned or leased from others 25. We operated 225 of our travel centers and franchisees operated 30 travel centers, including five we leased to franchisees. Our travel centers offer a broad range of products and services, including diesel fuel and gasoline, as well as nonfuel products and services such as truck repair and maintenance services, full service restaurants, quick service restaurants, and various customer amenities. We report this portion of our business as our travel center segment.
As of June 30, 2016, our business included 233 standalone convenience stores in 11 states in the U.S. We operate our convenience stores primarily under the "Minit Mart" brand name, or the Minit Mart brand. Of these 233 convenience stores at June 30, 2016, we owned 198, we leased 32, including one that we leased from HPT, and we operated three for a joint venture in which we own a noncontrolling interest. Our convenience stores offer gasoline as well as a variety of nonfuel products, including coffee, groceries, fresh foods and quick service restaurants. We report this portion of our business as our convenience store segment.
As of June 30, 2016, our business included 52 standalone restaurants in 15 states in the U.S. operated primarily under the "Quaker Steak & Lube" brand name, or the QSL brand. Of our 52 standalone restaurants at June 30, 2016, we owned five, we leased seven, we operated one for a joint venture in which we own a noncontrolling interest and our franchisees owned or leased from others 39. As of June 30, 2016, we operated 13 of our standalone restaurants and franchisees operated 39 of our standalone restaurants. We report this portion of our business within corporate and other in our segment information.
The accompanying consolidated financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, applicable for interim financial statements. The disclosures presented 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 fiscal year ended December 31, 2015, or our Annual Report. In the opinion of our management, the accompanying consolidated financial statements include all adjustments, including normal recurring adjustments, considered necessary for a fair presentation. All intercompany transactions and balances have been eliminated. While our revenues are modestly seasonal, the quarterly variations in our operating results may reflect greater seasonal differences because our rent expense 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 a full year.
Certain prior year amounts have been reclassified to conform to the current year presentation.
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
Fair Value Measurement
We refer to our $110,000 of 8.25% Senior Notes due 2028, our $120,000 of 8.00% Senior Notes due 2029, and our $100,000 of 8.00% Senior Notes due 2030 collectively as our Senior Notes, which are our senior unsecured obligations. These amounts of Senior Notes outstanding have been presented on our consolidated balance sheets as long term debt net of debt issuance costs totaling $13,055 and $13,553 as of June 30, 2016, and December 31, 2015, respectively. We estimate that, based on their trading prices (a Level 1 input), the aggregate fair value of our Senior Notes on June 30, 2016, was $332,480.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, which establishes a comprehensive revenue recognition standard under GAAP for virtually all industries. The new standard will apply for annual periods beginning after December 15, 2017, including interim periods therein. We have not yet determined the effects, if any, the adoption of this update may have on our consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented on the balance sheet as a reduction of the associated debt liability. In August 2015, the FASB clarified the previous Accounting Standards Update and issued Accounting Standards Update 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Lines of Credit Arrangements- Amendments to SEC Paragraphs Pursuant to Staff Announcements on June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements. These updates are effective for interim and annual reporting periods beginning after December 15, 2015, and require retrospective application. We adopted this standard during the three months ended March 31, 2016, and applied it to all periods presented. Adoption of this standard resulted in the reclassification of debt issuance costs from other noncurrent assets to long term debt in our consolidated balance sheets. Debt issuance costs related to our line of credit arrangements remain classified as other noncurrent assets.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases, which establishes a comprehensive lease standard under GAAP for virtually all industries. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. The new standard will apply for annual periods beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. We have not yet determined the effects the adoption of this update may have on us; however, we believe the adoption of this update will have a material impact on our consolidated balance sheets due to the recognition of the lease rights and obligations as assets and liabilities. While the adoption will have no effect on the cash we pay, amounts within our statements of income and comprehensive income are expected to change materially.
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
During the six months ended June 30, 2016, we acquired 29 convenience stores and 50 standalone restaurants, 39 of which are operated by franchisees, and we accounted for these transactions as business combinations, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their respective fair values as of the date of acquisition. We have included the results of these acquired businesses in our consolidated financial statements from the dates of acquisition. The pro forma impact of these acquisitions, including the results of operations of the acquired convenience stores and standalone restaurants from the beginning of the periods presented, is not material to our consolidated financial statements.
The following table summarizes the amounts we recorded for the assets we acquired and liabilities we assumed in the business combinations described above, along with resulting goodwill. We expect that all of the goodwill acquired to date will be deductible for tax purposes.
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| | | | | | | | | | | |
| Convenience Stores | | Corporate and Other(1) | | Total |
Inventory | $ | 3,175 |
| | $ | 449 |
| | $ | 3,624 |
|
Property and equipment | 36,289 |
| | 13,215 |
| | 49,504 |
|
Goodwill | 7,219 |
| | — |
| | 7,219 |
|
Intangible assets | 370 |
| | 15,400 |
| | 15,770 |
|
Other assets | 18 |
| | 1,331 |
| | 1,349 |
|
Other liabilities | (1,918 | ) | | (3,547 | ) | | (5,465 | ) |
Total aggregate purchase price | $ | 45,153 |
| | $ | 26,848 |
| | $ | 72,001 |
|
| |
(1) | Includes standalone restaurants. See Note 7 for more segment information. |
The purchase price allocations included in the table above, primarily related to real estate, property and equipment, and intangibles, are based on valuations that are not yet finalized. The process for estimating the fair value of assets acquired and liabilities assumed requires the use of judgment in determining appropriate assumptions and estimates. As we obtain additional information to finalize these preliminary valuations, adjustments to the recorded amounts may be made during the measurement period (up to one year from the acquisition date).
Acquisition costs, such as legal fees, due diligence costs and closing costs, are not included as a component of consideration transferred in business combinations but instead are expensed as incurred. During the three months ended June 30, 2016 and 2015, and six months ended June 30, 2016 and 2015, we incurred acquisition costs totaling $1,092, $1,127, $2,061 and $1,541, respectively, associated with acquisitions considered or completed.
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
On May 19, 2016, our shareholders approved the 2016 Equity Compensation Plan, or the 2016 Plan, under which 2,300 shares were authorized for issuance under the terms of the 2016 Plan.
Changes in Shareholders' Equity
On April 20, 2016, we acquired the Quaker Steak & Lube restaurant business of Lube Holdings, Inc., or the QSL acquisition. The QSL acquisition included a 75% controlling interest in an entity that operates one restaurant and leases certain assets from an entity in which we own a 25% interest. These entities are consolidated in our consolidated financial statements. See Note 2 for more information about the QSL acquisition.
The changes in shareholders' equity for the six months ended June 30, 2016, follow:
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| | | | | | | | | | | |
| Total TA Shareholders' Equity | | Noncontrolling Interests | | Total Shareholders' Equity |
December 31, 2015 | $ | 549,319 |
| | $ | — |
| | $ | 549,319 |
|
Grants under share award plan and share based compensation, net | 2,508 |
| | — |
| | 2,508 |
|
QSL acquisition | — |
| | 1,301 |
| | 1,301 |
|
Other comprehensive income, net of tax | 306 |
| | — |
| | 306 |
|
Net (loss) income | (6,423 | ) | | 64 |
| | (6,359 | ) |
June 30, 2016 | $ | 545,710 |
| | $ | 1,365 |
| | $ | 547,075 |
|
Net Income (Loss) Per Common Share Attributable to Common Shareholders
The following table presents a reconciliation from net income (loss) attributable to common shareholders to net income (loss) available to common shareholders and the related earnings per share.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) attributable to common shareholders, as reported | $ | 3,521 |
| | $ | 3,772 |
| | $ | (6,423 | ) | | $ | 19,501 |
|
Less: net income (loss) attributable to participating securities | 174 |
| | 189 |
| | (315 | ) | | 983 |
|
Net income (loss) available to common shareholders | $ | 3,347 |
| | $ | 3,583 |
| | $ | (6,108 | ) | | $ | 18,518 |
|
| | | | | | | |
Weighted average common shares(1) | 36,921 |
| | 36,433 |
| | 36,907 |
| | 36,418 |
|
| | | | | | | |
Basic and diluted net income (loss) per common share | $ | 0.09 |
| | $ | 0.10 |
| | $ | (0.17 | ) | | $ | 0.51 |
|
| |
(1) | Excludes unvested shares granted under our share award plan, which shares are considered participating securities because they participate equally in earnings and losses with all of our other common shares. The weighted average number of unvested shares outstanding for the three months ended June 30, 2016 and 2015, was 1,903 and 1,932, respectively. The weighted average number of unvested shares outstanding for the six months ended June 30, 2016 and 2015, was 1,905 and 1,933, respectively. |
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
| |
4. | Related Party Transactions |
We have relationships and historical and continuing transactions with HPT, The RMR Group LLC, or RMR, and others related to them, including other companies to which RMR provides management services and which have trustees, directors and officers who are also our directors or officers. For further information about these and other such relationships and certain other related party transactions, please refer to our Annual Report.
Relationship with HPT
HPT is our largest shareholder. As of June 30, 2016, HPT owned 3,420 of our common shares, representing approximately 8.8% of our outstanding common shares. HPT is also our principal landlord. We have five leases with HPT, the four TA Leases for 157 properties, and the Petro Lease for 40 properties. We refer to the four TA Leases and the Petro Lease collectively as the HPT Leases.
On June 1, 2015, we entered a transaction agreement with HPT, or the Transaction Agreement, pursuant to which, among other things, we agreed to sell to HPT five travel centers upon the completion of their development at a purchase price equal to their development costs, including the cost of the land, and HPT agreed to lease back these development properties to us under the HPT Leases.
On March 31, 2016, we sold one of these development properties to HPT for $19,683, and we amended our TA Lease 4 to add this property. Our minimum annual rent under our TA Lease 4 increased by $1,673 as a result of the completion of this sale and lease back.
On June 22, 2016, we entered a First Amendment to Transaction Agreement, or the Amendment, with HPT to, among other things, replace one of the development properties that we had agreed to sell to and lease back from HPT with two existing travel centers owned by us, and amend the Petro Lease to extend its term to 2032. On June 22, 2016, we sold these two travel centers to HPT, for an aggregate of $23,876, and we amended our TA Lease 1 and TA Lease 3 to add these properties. Our minimum annual rent under our TA Lease 1 and TA Lease 3 increased by $1,121 and $908, respectively, as a result of the completion of these sale leaseback transactions. The sale of these two properties generated a gain of $11,794 that was deferred and will be amortized on a straight line basis over the terms of the related leases as a reduction of rent expense.
On June 30, 2016, in connection with the Transaction Agreement, as amended, we sold one of the development properties to HPT for $22,297, and we amended our TA Lease 2 to add this property. Our minimum annual rent under our TA Lease 2 increased by $1,895 as a result of the completion of this sale and lease back.
As of June 30, 2016, the sale and lease back of the two remaining development properties pursuant to the terms of the Transaction Agreement, as amended, are expected to be completed before June 30, 2017.
Because of the relationships between us and HPT, the terms of the Transaction Agreement, the Amendment and lease amendments described above were negotiated and approved by special committees of our Board of Directors and the HPT board of trustees composed of our Independent Directors and HPT's independent trustees who are not also Directors or trustees of the other party, which committees were represented by separate counsel.
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
As of June 30, 2016, the number of properties leased, the terms, the minimum annual rents and the deferred rent balances under our HPT Leases were as follows:
|
| | | | | | | | | | | |
| Number of Properties | | Initial Term End Date(1) | | Minimum Annual Rent as of June 30, 2016 | | Deferred Rent(2) |
TA Lease 1 | 40 | | December 31, 2029 | | $ | 50,651 |
| | $ | 27,421 |
|
TA Lease 2 | 39 | | December 31, 2028 | | 49,817 |
| | 29,107 |
|
TA Lease 3 | 39 | | December 31, 2026 | | 52,130 |
| | 29,324 |
|
TA Lease 4 | 39 | | December 31, 2030 | | 47,171 |
| | 21,233 |
|
Petro Lease | 40 | | June 30, 2032 | | 66,129 |
| | 42,915 |
|
Total | 197 | | | | $ | 265,898 |
| | $ | 150,000 |
|
| |
(1) | We have two renewal options of 15 years each under each of our HPT Leases. |
| |
(2) | Deferred rent for the TA Lease 1, TA Lease 2, TA Lease 3 and TA Lease 4 is due and payable on the respective initial term end dates noted above. Deferred rent for the Petro Lease is due and payable on June 30, 2024. Deferred rent is subject to acceleration at HPT's option upon an uncured default by, or a change in control of, us. |
The following table summarizes the various amounts related to the HPT Leases and leases with other lessors that are reflected in real estate rent expense in our consolidated statements of income and comprehensive income.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Cash payments for rent under the HPT Leases | $ | 65,595 |
| | $ | 58,857 |
| | $ | 130,035 |
| | $ | 116,373 |
|
Change in accrued estimated percentage rent | 37 |
| | (293 | ) | | 283 |
| | (397 | ) |
Adjustments to recognize expense on a straight line basis | (71 | ) | | (4,791 | ) | | (127 | ) | | (5,243 | ) |
Less sale leaseback financing obligation amortization | (118 | ) | | (432 | ) | | (236 | ) | | (1,068 | ) |
Less portion of rent payments recognized as interest expense | (432 | ) | | (968 | ) | | (864 | ) | | (2,420 | ) |
Less deferred tenant improvements allowance amortization | (942 | ) | | (1,442 | ) | | (1,885 | ) | | (3,134 | ) |
Amortization of deferred gain on sale leaseback transactions | (2,385 | ) | | (722 | ) | | (4,693 | ) | | (818 | ) |
Rent expense related to HPT Leases | 61,684 |
| | 50,209 |
| | 122,513 |
| | 103,293 |
|
Rent paid to others(1) | 3,135 |
| | 2,372 |
| | 5,925 |
| | 4,993 |
|
Adjustments to recognize expense on a straight line basis for other leases | (83 | ) | | 727 |
| | (173 | ) | | 626 |
|
Total real estate rent expense | $ | 64,736 |
| | $ | 53,308 |
| | $ | 128,265 |
| | $ | 108,912 |
|
| |
(1) | Includes rent paid directly to HPT's landlords under leases for properties we sublease from HPT as well as rent related to properties we lease from landlords other than HPT. |
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
The following table summarizes the various amounts related to the HPT Leases that are included in our consolidated balance sheets.
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Current HPT Leases liabilities: | |
| | |
|
Accrued rent | $ | 21,933 |
| | $ | 21,098 |
|
Sale leaseback financing obligation(1) | 467 |
| | 469 |
|
Straight line rent accrual(2) | 2,458 |
| | 2,458 |
|
Deferred gain(3) | 10,171 |
| | 9,235 |
|
Deferred tenant improvements allowance(4) | 3,770 |
| | 3,770 |
|
Total Current HPT Leases liabilities | $ | 38,799 |
| | $ | 37,030 |
|
| | | |
Noncurrent HPT Leases liabilities: | |
| | |
|
Deferred rent obligation(5) | $ | 150,000 |
| | $ | 150,000 |
|
Sale leaseback financing obligation(1) | 20,633 |
| | 20,719 |
|
Straight line rent accrual(2) | 48,126 |
| | 48,373 |
|
Deferred gain(3) | 126,739 |
| | 121,049 |
|
Deferred tenant improvements allowance(4) | 43,472 |
| | 45,357 |
|
Total Noncurrent HPT Leases liabilities | $ | 388,970 |
| | $ | 385,498 |
|
| |
(1) | Sale Leaseback Financing Obligation. Prior to June 2015, the assets related to nine travel centers we leased from HPT were reflected in our consolidated balance sheets, as was the related financing obligation. This accounting was required primarily because, at the time of the inception of the applicable HPT Lease, more than a minor portion of these nine travel centers was subleased to third parties. In June 2015, we purchased five of these nine travel centers from HPT. That purchase was accounted for under GAAP as an extinguishment of the related financing obligation and resulted in a loss on extinguishment of debt of $10,502 because the price we paid to HPT to purchase the five properties was $10,502 in excess of the then remaining related financing obligation. Also, because the TA Leases we entered into with HPT in connection with the Transaction Agreement were accounted for under GAAP as new leases and two of the remaining four properties reflected as financings under the prior TA Lease then qualified for operating lease treatment, the remaining net assets and financing obligation related to these two properties were eliminated, resulting in a gain of $1,033, which was deferred and will be recognized over the terms of the applicable TA Leases as a reduction of rent expense. |
| |
(2) | Straight Line Rent Accrual. We accrued rent expense from 2007 to 2012 for stated increases in our minimum annual rents due under our then existing TA lease. While the TA Leases we entered into with HPT in connection with the Transaction Agreement contain no stated rent payment increases, as required under GAAP we continue to amortize this accrual on a straight line basis over the current terms of the TA Leases as a reduction to real estate rent expense. The straight line rent accrual also includes our obligation for the estimated cost of removal of underground storage tanks at properties leased from HPT at the end of the related lease; we recognize these obligations on a straight line basis over the term of the related leases as additional rent expense. |
| |
(3) | Deferred Gain. The deferred gain primarily includes $145,462 of gains from the sales of travel centers and certain other assets to HPT during 2015 and 2016 pursuant to the Transaction Agreement and the First Amendment to Transaction Agreement. We amortize the deferred gains on a straight line basis over the terms of the related leases as a reduction of rent expense. |
| |
(4) | Deferred Tenant Improvements Allowance. HPT funded certain capital projects at the properties we lease under the HPT Leases without an increase in rent payable by us. In connection with HPT's initial capital commitment, we recognized a liability for rent deemed to be related to this capital commitment as a deferred tenant improvements allowance. We amortize the deferred tenant improvements allowance on a straight line basis over the terms of the HPT Leases as a reduction of rent expense. |
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
| |
(5) | Deferred Rent Obligation. Pursuant to a rent deferral agreement with HPT, from July 2008 through December 31, 2010, we deferred a total of $150,000 of rent payable to HPT. This deferred rent obligation was allocated among the HPT Leases. Deferred rent for the TA Leases is due at the end of the initial terms of the respective TA Leases as noted above, and deferred rent for the Petro Lease is due on June 30, 2024. |
HPT waived $61 and $289 of percentage rent under our Petro Lease for the three months ended June 30, 2016 and 2015, respectively, and $372 and $548 for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, HPT has cumulatively waived all of the $2,500 of percentage rent it previously agreed to waive. The total amount of percentage rent (which is net of the waived amount) was $283 and $806 for the three months ended June 30, 2016 and 2015, respectively, and $529 and $1,999 for the six months ended June 30, 2016 and 2015, respectively.
During the six months ended June 30, 2016 and 2015, pursuant to the terms of the HPT Leases, we sold to HPT $55,059 and $40,416, respectively, of improvements we made to properties leased from HPT. As a result, our minimum annual rent payable to HPT increased by $4,680 and $3,435, respectively. At June 30, 2016, our property and equipment balance included $42,100 of improvements of the type that we typically request that HPT purchase for an increase in minimum annual rent; however, HPT is not obligated to purchase these improvements.
Relationship with RMR
Pursuant to our business management agreement and property management agreement with RMR, we incurred aggregate fees of $3,580 and $3,326 for the three months ended June 30, 2016 and 2015, respectively, and $6,813 and $6,496 for the six months ended June 30, 2016 and 2015, respectively. These amounts are included in selling, general and administrative expenses in our consolidated statements of income and comprehensive income.
We have historically awarded share grants to certain RMR employees under our equity compensation plan. In addition, under our business management agreement we reimburse RMR for our allocable costs for internal audit services. The amounts recognized as expense for share grants to RMR employees and internal audit costs were $978 and $850 for the three months ended June 30, 2016 and 2015, respectively, and $2,172 and $1,687 for the six months ended June 30, 2016 and 2015, respectively; these amounts are included in selling, general and administrative expenses in our consolidated statements of income and comprehensive income.
Relationship with AIC
We and six other companies to which RMR provides management services each own in equal amounts Affiliates Insurance Company, or AIC, an insurance company. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC. We currently expect to pay aggregate annual premiums, including taxes and fees, of approximately $2,186 in connection with this insurance program for the policy year ending June 30, 2017, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.
As of June 30, 2016 and December 31, 2015, our investment in AIC had a carrying value of $7,017 and $6,828, respectively. These amounts are included in other noncurrent assets in our consolidated balance sheets. We recognized income of $17 and $23 related to our investment in AIC for the three months ended June 30, 2016 and 2015, respectively, and $94 and $95 for the six months ended June 30, 2016 and 2015, respectively. Our other comprehensive income includes our proportional share of unrealized gains (losses) on securities held for sale, which are owned by AIC, of $43 and $(64) for the three months ended June 30, 2016 and 2015, respectively, and $95 and $(19) for the six months ended June 30, 2016 and 2015, respectively.
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
Relationship with PTP
We own a 40% minority interest in Petro Travel Plaza Holdings LLC, or PTP. As of June 30, 2016 and December 31, 2015, our investment in PTP had a carrying value of $21,986 and $20,042, respectively, which amounts are included in other noncurrent assets in our consolidated balance sheets. In February 2016, we began managing a third standalone convenience store PTP owns. As of June 30, 2016, we managed two travel centers, three convenience stores and one restaurant for PTP for which we receive management and accounting fees. We recognized management and accounting fee income of $226 and $200 for the three months ended June 30, 2016 and 2015, respectively, and $453 and $400 for the six months ended June 30, 2016 and 2015, respectively. At June 30, 2016 and December 31, 2015, we had a net payable to PTP of $1,211 and net receivable from PTP of $43, respectively. We recognized income of $1,074 and $1,006 during the three months ended June 30, 2016 and 2015, respectively, and $1,944 and $1,725 for the six months ended June 30, 2016 and 2015, respectively, related to this investment, which is separate from and in addition to the management and accounting fees we earned.
Legal Proceedings
We are routinely involved in various legal and administrative proceedings, including tax audits, 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.
Environmental Contingencies
Extensive environmental laws regulate our operations and properties. These laws may require us to investigate and clean up hazardous substances, including petroleum or natural gas 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 at our locations. We use both underground storage tanks and above ground storage tanks to store petroleum products, natural gas and other hazardous substances at our locations. 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 the HPT Leases, we generally have agreed to indemnify HPT for any environmental liabilities related to properties that we lease from HPT and we are required to pay all environmental related expenses incurred in the operation of the leased properties. Under an agreement with Equilon Enterprises LLC doing business as Shell Oil Products US, or Shell, we have agreed to indemnify Shell and its affiliates from certain environmental liabilities incurred with respect to our travel centers where Shell has installed natural gas fueling lanes.
From time to time we have received, and in the future likely will receive, notices of alleged violations of environmental laws or otherwise have become or will become aware of the need to undertake corrective actions to comply with environmental laws at our locations. Investigatory and remedial actions were, and regularly are, undertaken with respect to releases of hazardous substances at our locations. In some cases we received, and may receive in the future, contributions to partially offset our 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 locations purchased from those indemnitors. To the extent we incur material amounts for environmental matters for which we do not receive or expect to receive insurance or other third party reimbursement or for which we have not previously recorded a liability, 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.
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
At June 30, 2016, we had a gross accrued liability of $5,845 for environmental matters as well as a receivable for expected recoveries of certain of these estimated future expenditures of $1,095, resulting in an estimated net amount of $4,750 that we expect to fund in the future. We cannot precisely know the ultimate costs we may incur in connection with currently known or future potential environmental related violations, corrective actions, investigation and remediation; however, we do not expect the costs for such matters to be material, individually or in the aggregate, to our financial position or results of operations.
In February 2014, we reached an agreement with the California State Water Resources Control Board, or the State Water Board, to settle certain claims the State Water Board had filed against us in California Superior Court in 2010 relating to alleged violations of underground storage tank laws and regulations for a cash payment of $1,800; suspended penalties of $1,000 that may become payable by us in the future if, prior to March 2019, we fail to comply with specified underground storage tank laws and regulations; and our agreement to invest, prior to March 2018, up to $2,000 of verified costs that are directly related to the development and implementation of a comprehensive California Enhanced Environmental Compliance Program for the underground storage tank systems at all of our California facilities that is above and beyond minimum requirements of California law and regulations related to underground storage tank systems. The settlement, which was approved by the Superior Court on February 20, 2014, also included injunctive relief provisions requiring that we comply with certain California environmental laws and regulations applicable to underground storage tank systems. In October 2015, the State Water Board issued a notice of alleged suspended penalty conduct claiming that we are liable for the full amount of the $1,000 in suspended penalties as a result of five alleged violations of underground storage tank regulations and requesting further information concerning the alleged violations. In November 2015, we filed our response to the October 2015 notice of alleged suspended penalties and in June 2016 we met with the State Water Board to attempt to resolve these matters without a court hearing. We believe we have meritorious defenses to these alleged violations, but cannot predict whether any penalties relating to these matters will be assessed by the Superior Court, which has retained jurisdiction over such matters. The State Water Board also has retained the right to file a separate action relating to these violations, but to date has not done so. As of June 30, 2016, we have recognized a liability of $2,230 with respect to these matters concerning the State Water Board and believe, though we can provide no assurance, that any additional amount of loss we may realize above that accrued, if any, upon the ultimate resolution of this matter will not be material.
We currently have insurance of up to $10,000 per incident and up to $25,000 in the aggregate for certain environmental liabilities, subject, in each case, to certain limitations and deductibles. However, we can provide no assurance that we will be able to maintain similar environmental insurance coverage in the future on acceptable terms.
We cannot predict the ultimate effect changing circumstances and changing environmental laws may have on us in the future or the ultimate outcome of matters currently pending. We cannot be certain that 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 issues, 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.
Inventory consisted of the following:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
Nonfuel products | $ | 161,805 |
| | $ | 159,256 |
|
Fuel products | 30,665 |
| | 24,236 |
|
Total inventory | $ | 192,470 |
| | $ | 183,492 |
|
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
Reportable segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Our reportable segments are travel centers and convenience stores. We measure our reportable segments profitability based on site level gross margin in excess of site level operating expenses. See Note 1 above and Note 15 to the Notes to Consolidated Financial Statements of our Annual Report for more information about our reportable segments.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2016 |
| Travel Centers | | Convenience Stores | | Corporate and Other | | Consolidated |
Revenues: | | | | | | | |
Fuel | $ | 792,016 |
| | $ | 119,193 |
| | $ | 20,002 |
| | $ | 931,211 |
|
Nonfuel | 424,476 |
| | 77,422 |
| | 7,626 |
| | 509,524 |
|
Rent and royalties from franchisees | 3,176 |
| | 57 |
| | 1,097 |
| | 4,330 |
|
Total revenues | 1,219,668 |
| | 196,672 |
| | 28,725 |
| | 1,445,065 |
|
| | | | | | | |
Site level gross margin in excess of site level operating expenses | $ | 120,667 |
| | $ | 10,568 |
| | $ | 3,143 |
| | $ | 134,378 |
|
| | | | | | | |
Corporate operating expenses: | | | | | | | |
Selling, general and administrative | | | | | $ | 36,009 |
| | $ | 36,009 |
|
Real estate rent | | | | | 64,736 |
| | 64,736 |
|
Depreciation and amortization | | | | | 21,322 |
| | 21,322 |
|
Income from operations | | | | | | | 12,311 |
|
| | | | | | | |
Acquisition costs | | | | | 1,092 |
| | 1,092 |
|
Interest expense, net | | | | | 6,740 |
| | 6,740 |
|
Income from equity investees | | | | | 1,091 |
| | 1,091 |
|
Income before income taxes | | | | | | | 5,570 |
|
Provision for income taxes | | | | | 1,985 |
| | 1,985 |
|
Net income | | | | | | | 3,585 |
|
Less net income for noncontrolling interests | | | | | | | 64 |
|
Net income attributable to common shareholders | | | | | | | $ | 3,521 |
|
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2015 |
| Travel Centers | | Convenience Stores | | Corporate and Other | | Consolidated |
Revenues: | | | | | | | |
Fuel | $ | 1,064,268 |
| | $ | 43,481 |
| | $ | 17,337 |
| | $ | 1,125,086 |
|
Nonfuel | 422,651 |
| | 31,751 |
| | 228 |
| | 454,630 |
|
Rent and royalties from franchisees | 3,167 |
| | — |
| | — |
| | 3,167 |
|
Total revenues | 1,490,086 |
| | 75,232 |
| | 17,565 |
| | 1,582,883 |
|
| | | | | | | |
Site level gross margin in excess of site level operating expenses | $ | 119,421 |
| | $ | 3,405 |
| | $ | 634 |
| | $ | 123,460 |
|
| | | | | | | |
Corporate operating expenses: | | | | | | | |
Selling, general and administrative | | | | | $ | 30,062 |
| | $ | 30,062 |
|
Real estate rent | | | | | 53,308 |
| | 53,308 |
|
Depreciation and amortization | | | | | 18,116 |
| | 18,116 |
|
Income from operations | | | | | | | 21,974 |
|
| | | | | | | |
Acquisition costs | | | | | 1,127 |
| | 1,127 |
|
Interest expense, net | | | | | 5,087 |
| | 5,087 |
|
Income from equity investees | | | | | 1,029 |
| | 1,029 |
|
Loss on extinguishment of debt | | | | | 10,502 |
| | 10,502 |
|
Income before income taxes | | | | | | | 6,287 |
|
Provision for income taxes | | | | | 2,515 |
| | 2,515 |
|
Net income | | | | | | | 3,772 |
|
Less net income for noncontrolling interests | | | | | | | — |
|
Net income attributable to common shareholders | | | | | | | $ | 3,772 |
|
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2016 |
| Travel Centers | | Convenience Stores | | Corporate and Other | | Consolidated |
Revenues: | | | | | | | |
Fuel | $ | 1,414,596 |
| | $ | 191,824 |
| | $ | 34,319 |
| | $ | 1,640,739 |
|
Nonfuel | 812,961 |
| | 138,871 |
| | 8,338 |
| | 960,170 |
|
Rent and royalties from franchisees | 7,318 |
| | 191 |
| | 1,097 |
| | 8,606 |
|
Total revenues | 2,234,875 |
| | 330,886 |
| | 43,754 |
| | 2,609,515 |
|
| | | | | | | |
Site level gross margin in excess of site level operating expenses | $ | 221,698 |
| | $ | 14,939 |
| | $ | 3,983 |
| | $ | 240,620 |
|
| | | | | | | |
Corporate operating expenses: | | | | | | | |
Selling, general and administrative | | | | | $ | 66,975 |
| | $ | 66,975 |
|
Real estate rent | | | | | 128,265 |
| | 128,265 |
|
Depreciation and amortization | | | | | 41,847 |
| | 41,847 |
|
Income from operations | | | | | | | 3,533 |
|
| | | | | | | |
Acquisition costs | | | | | 2,061 |
| | 2,061 |
|
Interest expense, net | | | | | 13,561 |
| | 13,561 |
|
Income from equity investees | | | | | 2,038 |
| | 2,038 |
|
Loss before income taxes | | | | | | | (10,051 | ) |
Benefit for income taxes | | | | | (3,692 | ) | | (3,692 | ) |
Net loss | | | | | | | (6,359 | ) |
Less net income for noncontrolling interests | | | | | | | 64 |
|
Net loss attributable to common shareholders | | | | | | | $ | (6,423 | ) |
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2015 |
| Travel Centers | | Convenience Stores | | Corporate and Other | | Consolidated |
Revenues: | | | | | | | |
Fuel | $ | 2,033,237 |
| | $ | 64,867 |
| | $ | 30,149 |
| | $ | 2,128,253 |
|
Nonfuel | 803,150 |
| | 52,596 |
| | 394 |
| | 856,140 |
|
Rent and royalties from franchisees | 6,191 |
| | — |
| | — |
| | 6,191 |
|
Total revenues | 2,842,578 |
| | 117,463 |
| | 30,543 |
| | 2,990,584 |
|
| | | | | | | |
Site level gross margin in excess of site level operating expenses | $ | 249,650 |
| | $ | 5,029 |
| | $ | 1,696 |
| | $ | 256,375 |
|
| | | | | | | |
Corporate operating expenses: | | | | | | | |
Selling, general and administrative | | | | | $ | 57,678 |
| | $ | 57,678 |
|
Real estate rent | | | | | 108,912 |
| | 108,912 |
|
Depreciation and amortization | | | | | 35,641 |
| | 35,641 |
|
Income from operations | | | | | | | 54,144 |
|
| | | | | | | |
Acquisition costs | | | | | 1,541 |
| | 1,541 |
|
Interest expense, net | | | | | 11,419 |
| | 11,419 |
|
Income from equity investees | | | | | 1,820 |
| | 1,820 |
|
Loss on extinguishment of debt | | | | | 10,502 |
| | 10,502 |
|
Income before income taxes | | | | | | | 32,502 |
|
Provision for income taxes | | | | | 13,001 |
| | 13,001 |
|
Net income | | | | | | | 19,501 |
|
Less net income for noncontrolling interests | | | | | | | — |
|
Net income attributable to common shareholders | | | | | | | $ | 19,501 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, or this Quarterly Report, and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, or our Annual Report. Amounts are in thousands of dollars or gallons unless indicated otherwise. Unless the context indicates otherwise, references to our convenience stores and restaurants refers to our standalone convenience stores and restaurants and not the convenience stores and restaurants located at our travel centers or restaurants at our convenience stores.
Company Overview
TravelCenters of America LLC, which we refer to as the Company or we, us and our, is a Delaware limited liability company. As of June 30, 2016, we operated and franchised 540 travel center, standalone convenience store and standalone restaurant locations described below. Our customers include trucking fleets and their drivers, independent truck drivers, highway and local motorists and casual diners. We also collect rents, royalties and other fees from our tenants, franchisees and dealers.
We manage our business on the basis of two reportable segments: travel centers and convenience stores. See Note 1 and Note 7 to the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for more information about our reportable segments. We have a single travel center located in a foreign country, Canada, that we do not consider material to our operations.
As of June 30, 2016, our business included 255 travel centers in 43 states in the United States, or U.S., primarily along the U.S. interstate highway system, and the province of Ontario, Canada. Our travel centers included 178 operated under the "TravelCenters of America" and "TA" brand names, or the TA brand, and 77 operated under the "Petro Stopping Centers" and "Petro" brand names, or the Petro brand. Of our 255 travel centers at June 30, 2016, we owned 30, we leased 198, including 196 that we leased from Hospitality Properties Trust, or HPT, we operated two for a joint venture in which we own a noncontrolling interest and our franchisees owned or leased from others 25. We operated 225 of our travel centers and franchisees operated 30 travel centers, including five we leased to franchisees. Our travel centers offer a broad range of products and services, including diesel fuel and gasoline, as well as nonfuel products and services such as truck repair and maintenance services, full service restaurants, quick service restaurants, and various customer amenities. We report this portion of our business as our travel center segment.
As of June 30, 2016, our business included 233 convenience stores in 11 states in the U.S. We operate our convenience stores primarily under the "Minit Mart" brand name, or the Minit Mart brand. Of these 233 convenience stores at June 30, 2016, we owned 198, we leased 32, including one that we leased from HPT, and we operated three for a joint venture in which we own a noncontrolling interest. Our convenience stores offer gasoline as well as a variety of nonfuel products, including coffee, groceries, fresh foods and quick service restaurants. We report this portion of our business as our convenience store segment.
As of June 30, 2016, our business included 52 standalone restaurants in 15 states in the U.S. operated primarily under the "Quaker Steak & Lube" brand name, or the QSL brand. Of our 52 standalone restaurants at June 30, 2016, we owned five, we leased seven, we operated one for a joint venture in which we own a noncontrolling interest and our franchisees owned or leased from others 39. As of June 30, 2016, we operated 13 of our standalone restaurants and franchisees operated 39 of our standalone restaurants. We report this portion of our business within corporate and other in our segment information.
Executive Summary
Our revenues and income are subject to material changes as a result of market prices and the availability of diesel fuel and gasoline. These factors are subject to the worldwide petroleum products supply chain, which historically has experienced price and supply volatility as a result of, among other things, severe weather, terrorism, political crises, military actions and variations in demand that are often the result of changes in the macroeconomic environment. Over the past few years there have been significant changes in the cost of fuel. During the three and six months ended June 30, 2016, the average fuel price was 22.9% and 31.2%, respectively, below the average fuel price during the three and six months ended June 30, 2015. Some current economic forecasts reflect continued low prices for fuel; however, as noted above, various factors and events can cause fuel prices to change, sometimes suddenly and sharply.
Due to the volatility of our fuel costs and our pricing to fuel customers, 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 materially 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 therefore consider fuel sales volume and fuel gross margin to be better measures of our performance. We generally are able to pass changes in our cost for fuel products to customers, but typically with a delay, such that during periods of modestly rising fuel commodity prices fuel gross margins per gallon tend to be lower than they otherwise may have been, and during periods of modestly falling fuel commodity prices fuel gross margins per gallon tend to be higher than they otherwise may have been. Increases and volatility in the prices we pay for fuel can have negative effects on our sales and profitability and increase our working capital requirements. For more information about fuel market risks that may affect us and our actions to mitigate those risks, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report.
We believe that demand for fuel by trucking companies for any given level of trucking activity will be reduced over time by technological innovations that permit, and regulatory changes that encourage, require or give rise to, improved fuel efficiency of motor vehicle engines, and other fuel conservation practices. We believe these factors, combined with lower demand based on lower levels of freight activity, were contributors to decreases in the level of fuel sales volumes we realized on a same site basis for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015. Our fuel sales volume increased during the three and six months ended June 30, 2016, primarily as a result of sites we acquired since the beginning of the three and six months ended June 30, 2015.
Our fuel gross margin and fuel gross margin per gallon for the three months ended June 30, 2016, were higher than those in the three months ended June 30, 2015, principally due to newly acquired locations and a continued focus on managing our fuel sales pricing to balance sales volume and profitability. Our fuel gross margin and fuel gross margin per gallon for the six months ended June 30, 2016, were lower than those in the six months ended June 30, 2015, primarily due to a favorable purchasing environment in the first four months of 2015 that did not recur in the six months ended June 30, 2016.
The decrease in our net income attributable to common shareholders for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, was primarily due to costs associated with recently acquired sites that have not yet reached their expected stabilized financial results. The net loss attributable to common shareholders we experienced for the six months ended June 30, 2016, as compared to the net income attributable to common shareholders for the six months ended June 30, 2015, was primarily due to lower fuel gross margin for the 2016 period for the reasons noted above as well as the effect of expenses associated with recently acquired sites.
Factors Affecting Comparability
Transaction Agreement with HPT
On June 1, 2015, we entered a transaction agreement with HPT, or the Transaction Agreement, pursuant to which, among other things, we agreed to sell to HPT five travel centers upon the completion of their development at a purchase price equal to their development costs, including the cost of the land, and HPT agreed to lease back these development properties to us. See Note 12 to the Notes to Consolidated Financial Statements included in Item 15 of our Annual Report for more information about our sale leaseback and other related transactions with HPT.
On March 31, 2016, we sold one of these development properties to HPT for $19,683, and we amended our TA Lease 4 to add this property and increase our minimum annual rent under this lease by $1,673 as a result of the completion of this sale and lease back.
On June 22, 2016, we entered a First Amendment to Transaction Agreement with HPT to, among other things, replace one of the development properties that we had agreed to sell to and lease back from HPT with two existing travel centers owned by us, and amend the Petro Lease to extend its term to 2032. On June 22, 2016, we sold these two travel centers to HPT, for an aggregate of $23,876, and we amended our TA Lease 1 and TA Lease 3 to add these properties and increase our minimum annual rent under these leases by $1,121 and $908, respectively, as a result of the completion of these sales and lease backs.
On June 30, 2016, in connection with the Transaction Agreement, as amended, we sold one of the development properties to HPT for $22,297, and we amended our TA Lease 2 to add this property. Our minimum annual rent under our TA Lease 2 increased by $1,895 as a result of the completion of this sale and lease back.
Recently Acquired Sites
From the beginning of 2015 through June 30, 2016, we acquired three travel centers, 198 convenience stores and 51 standalone restaurants. As of June 30, 2016, our investments in these acquired travel centers, convenience stores and standalone restaurants totaled $17,601, $370,359 and $28,204, respectively. We estimate that we will invest an additional $10,712 to complete the expansion and renovation of these travel centers, $15,054 to complete the rebranding, expansion and improvements of these convenience stores and $2,832 to complete the renovation and improvements of these restaurants. We are also currently planning to invest an additional $5,353 to make certain improvements to travel centers acquired prior to 2015.
Since our current acquisition program began in 2011, and through the second quarter of 2016, we have acquired 317 travel centers, convenience stores and standalone restaurants. As of June 30, 2016, our investments, including improvements, in these travel centers, convenience stores and standalone restaurants acquired totaled $319,410, $436,850 and $28,204 respectively. We estimate that we will invest an additional $16,065 to complete the expansion and renovation of certain of these travel centers, $15,054 to complete the rebranding, expansion and improvements of certain of these convenience stores and $2,832 to complete renovation and improvements of certain of these standalone restaurants. These 317 locations generated gross margin in excess of site level operating expenses of $79,303 in the time we owned them during the twelve months ended June 30, 2016, and are expected to generate significant additional amounts of gross margin in excess of site level operating expenses when these acquired sites become fully stabilized.
Capital improvements to recently purchased travel centers, and the development of new travel centers, are often substantial and require a long period of time to plan, design, permit and complete; and, after being completed, the improved, or new, travel centers require a period of time to become part of our customers' supply networks and produce stabilized financial results. We estimate that the travel centers we acquire or develop generally will reach stabilization in approximately the third year after acquisition or completion of development. Capital improvements to recently acquired convenience stores are typically less capital intensive than travel centers. We estimate that the convenience stores we acquire generally will reach stabilization in approximately one year after acquisition. Actual results for travel centers and convenience stores can vary widely from these estimates due to many factors, some of which are outside our control.
Seasonality
Our sales volumes are generally lower in the first and fourth quarters than the second and third quarters of each year. In the first quarter, the movement of freight by professional truck drivers as well as motorist travel are usually at their lowest levels of each calendar year. In the fourth quarter, freight movement is typically lower due to the holiday season. While our revenues are modestly seasonal, quarterly variations in our operating results may reflect greater seasonal differences as our rent and certain other costs do not vary seasonally.
Results of Operations
Consolidated Financial Results
The following table presents changes in our operating results for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2016 | | 2015 | | Change | | 2016 | | 2015 | | Change |
Revenues: | |
| | |
| | |
| | | | | | |
Fuel | $ | 931,211 |
| | $ | 1,125,086 |
| | (17.2 | )% | | $ | 1,640,739 |
| | $ | 2,128,253 |
| | (22.9 | )% |
Nonfuel | 509,524 |
| | 454,630 |
| | 12.1 | % | | 960,170 |
| | 856,140 |
| | 12.2 | % |
Rent and royalties from franchisees | 4,330 |
| | 3,167 |
| | 36.7 | % | | 8,606 |
| | 6,191 |
| | 39.0 | % |
Total revenues | 1,445,065 |
| | 1,582,883 |
| | (8.7 | )% | | 2,609,515 |
| | 2,990,584 |
| | (12.7 | )% |
| | | | | | | | | | | |
Cost of goods sold (excluding depreciation): | |
| | |
| | | | | | | | |
Fuel | 829,218 |
| | 1,028,799 |
| | (19.4 | )% | | 1,447,045 |
| | 1,919,579 |
| | (24.6 | )% |
Nonfuel | 237,349 |
| | 208,290 |
| | 14.0 | % | | 443,680 |
| | 386,712 |
| | 14.7 | % |
Total cost of goods sold | 1,066,567 |
| | 1,237,089 |
| | (13.8 | )% | | 1,890,725 |
| | 2,306,291 |
| | (18.0 | )% |
| | | | | | | | | | | |
Gross margin: | | | | | | | | | | | |
Fuel | 101,993 |
| | 96,287 |
| | 5.9 | % | | 193,694 |
| | 208,674 |
| | (7.2 | )% |
Nonfuel | 272,175 |
| | 246,340 |
| | 10.5 | % | | 516,490 |
| | 469,428 |
| | 10.0 | % |
Rent and royalties from franchisees | 4,330 |
| | 3,167 |
| | 36.7 | % | | 8,606 |
| | 6,191 |
| | 39.0 | % |
Total gross margin | 378,498 |
| | 345,794 |
| | 9.5 | % | | 718,790 |
| | 684,293 |
| | 5.0 | % |
| | | | | | | | | | | |
Operating expenses: | |
| | |
| | | | | | | | |
Site level operating | 244,120 |
| | 222,334 |
| | 9.8 | % | | 478,170 |
| | 427,918 |
| | 11.7 | % |
Selling, general and administrative | 36,009 |
| | 30,062 |
| | 19.8 | % | | 66,975 |
| | 57,678 |
| | 16.1 | % |
Real estate rent | 64,736 |
| | 53,308 |
| | 21.4 | % | | 128,265 |
| | 108,912 |
| | 17.8 | % |
Depreciation and amortization | 21,322 |
| | 18,116 |
| | 17.7 | % | | 41,847 |
| | 35,641 |
| | 17.4 | % |
Total operating expenses | 366,187 |
| | 323,820 |
| | 13.1 | % | | 715,257 |
| | 630,149 |
| | 13.5 | % |
| | | | | | | | | | | |
Income from operations | 12,311 |
| | 21,974 |
| | (44.0 | )% | | 3,533 |
| | 54,144 |
| | (93.5 | )% |
| | | | | | | | | | | |
Acquisition costs | 1,092 |
| | 1,127 |
| | (3.1 | )% | | 2,061 |
| | 1,541 |
| | 33.7 | % |
Interest expense, net | 6,740 |
| | 5,087 |
| | 32.5 | % | | 13,561 |
| | 11,419 |
| | 18.8 | % |
Income from equity investees | 1,091 |
| | 1,029 |
| | 6.0 | % | | 2,038 |
| | 1,820 |
| | 12.0 | % |
Loss on extinguishment of debt | — |
| | 10,502 |
| | NM |
| | — |
| | 10,502 |
| | NM |
|
Income (loss) before income taxes | 5,570 |
| | 6,287 |
| | (11.4 | )% | | (10,051 | ) | | 32,502 |
| | (130.9 | )% |
Provision (benefit) for income taxes | 1,985 |
| | 2,515 |
| | (21.1 | )% | | (3,692 | ) | | 13,001 |
| | (128.4 | )% |
Net income (loss) | 3,585 |
| | 3,772 |
| | (5.0 | )% | | (6,359 | ) | | 19,501 |
| | (132.6 | )% |
Less net income for noncontrolling interests | 64 |
| | — |
| | NM |
| | 64 |
| | — |
| | NM |
|
Net income (loss) attributable to common shareholders | $ | 3,521 |
| | $ | 3,772 |
| | (6.7 | )% | | $ | (6,423 | ) | | $ | 19,501 |
| | (132.9 | )% |
Revenues. Fuel revenues for the three months ended June 30, 2016, were $931,211, a decrease from the three months ended June 30, 2015, of $193,875, or 17.2%. Fuel revenues for the six months ended June 30, 2016, were $1,640,739, a decrease from the six months ended June 30, 2015, of $487,514, or 22.9%. The tables below show the change in sales volumes and fuel revenues by segment for the three and six months ended June 30, 2016 and 2015. Corporate and other fuel gallons sold and fuel revenues represent wholesale sales to the joint venture we operate and to other retailers.
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
Fuel Gallons Sold | | 2016 | | 2015 | | Change | | 2016 | | 2015 | | Change |
Travel centers | | 483,031 |
| | 506,353 |
| | (4.6 | )% | | 959,679 |
| | 988,361 |
| | (2.9 | )% |
Convenience stores | | 66,945 |
| | 20,930 |
| | 219.9 | % | | 121,187 |
| | 33,016 |
| | 267.1 | % |
Corporate and other | | 11,178 |
| | 7,513 |
| | 48.8 | % | | 21,292 |
| | 14,028 |
| | 51.8 | % |
Consolidated totals | | 561,154 |
| | 534,796 |
| | 4.9 | % | | 1,102,158 |
| | 1,035,405 |
| | 6.4 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
Fuel Revenues | | 2016 | | 2015 | | Change | | 2016 | | 2015 | | Change |
Travel centers | | $ | 792,016 |
| | $ | 1,064,268 |
| | (25.6 | )% | | $ | 1,414,596 |
| | $ | 2,033,237 |
| | (30.4 | )% |
Convenience stores | | 119,193 |
| | 43,481 |
| | 174.1 | % | | 191,824 |
| | 64,867 |
| | 195.7 | % |
Corporate and other | | 20,002 |
| | 17,337 |
| | 15.4 | % | | 34,319 |
| | 30,149 |
| | 13.8 | % |
Consolidated totals | | $ | 931,211 |
| | $ | 1,125,086 |
| | (17.2 | )% | | $ | 1,640,739 |
| | $ | 2,128,253 |
| | (22.9 | )% |
The decreases in fuel revenue for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, were due to significant decreases in market prices for fuel partially offset by increases in fuel sales volume in the convenience store segment as a result of newly acquired locations.
Nonfuel revenues for the three months ended June 30, 2016, were $509,524, an increase of $54,894, or 12.1%, compared to the three months ended June 30, 2015. Nonfuel revenues for the six months ended June 30, 2016, were $960,170, an increase of $104,030, or 12.2%, compared to the six months ended June 30, 2015. The increase in nonfuel revenues over the comparable prior year periods primarily resulted from newly acquired locations.
Cost of goods sold (excluding depreciation). Cost of goods sold for the three months ended June 30, 2016, was $1,066,567, a decrease of $170,522, or 13.8%, compared to the three months ended June 30, 2015. Cost of goods sold for the six months ended June 30, 2016, was $1,890,725, a decrease of $415,566, or 18.0%, compared to the six months ended June 30, 2015. The decrease in cost of goods sold for the three and six months ended June 30, 2016, primarily resulted from a decrease in fuel cost of goods sold that was partially offset by an increase in nonfuel cost of goods sold.
Fuel cost of goods sold for the three months ended June 30, 2016, was $829,218, a decrease of $199,581, or 19.4%, compared to the three months ended June 30, 2015, that was primarily due to significant decreases in market prices for fuel. Fuel gross margin for the three months ended June 30, 2016, was $101,993, compared to $96,287 during the three months ended June 30, 2015; this increase in fuel gross margin was primarily due to newly acquired locations and managing our fuel sales pricing to balance sales volume and profitability. Fuel cost of goods sold for the six months ended June 30, 2016, was $1,447,045, a decrease of $472,534, or 24.6%, compared to the six months ended June 30, 2015, that was primarily due to significant decreases in market prices for fuel. Fuel gross margin for the six months ended June 30, 2016, was $193,694 compared to $208,674 during the six months ended June 30, 2015. The decrease in fuel gross margin for the six months ended June 30, 2016, was primarily due to a favorable purchasing environment in the first four months of 2015 that did not recur in the six months ended June 30, 2016.
Nonfuel cost of goods sold for the three months ended June 30, 2016, was $237,349, an increase of $29,059, or 14.0%, compared to the three months ended June 30, 2015, that was primarily due to newly acquired locations. Nonfuel gross margin for the three months ended June 30, 2016, was $272,175, compared to $246,340 during the three months ended June 30, 2015. Nonfuel gross margin was 53.4% and 54.2% of nonfuel revenues during the three months ended June 30, 2016 and 2015, respectively. Nonfuel cost of goods sold for the six months ended June 30, 2016, was $443,680, an increase of $56,968, or 14.7%, compared to the six months ended June 30, 2015. Nonfuel cost of goods sold increased primarily due to newly acquired locations. Nonfuel gross margin for the six months ended June 30, 2016, was $516,490, compared to $469,428 during the six months ended June 30, 2015. Nonfuel gross margin was 53.8% and 54.8% of nonfuel revenues during the six months ended June 30, 2016 and 2015, respectively. The nonfuel gross margin percentage decreased from the prior year periods for both the three and six month periods primarily due to the inclusion of additional convenience stores, as a result of acquisitions since the beginning of 2015. Nonfuel gross margin percentage in our convenience store operations is typically lower than the nonfuel gross margin percentage for our travel center operations.
Site level operating expenses. Site level operating expenses for the three months ended June 30, 2016, were $244,120, an increase of $21,786, or 9.8%, compared to the three months ended June 30, 2015. Site level operating expenses for the six months ended June 30, 2016, were $478,170, an increase of $50,252, or 11.7%, compared to the six months ended June 30, 2015. The increase in site level operating expenses for the three and six months ended June 30, 2016, was primarily due to the newly acquired convenience stores and standalone restaurants.
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended June 30, 2016, were $36,009, an increase of $5,947, or 19.8%, compared to the three months ended June 30, 2015. Selling, general and administrative expenses for the six months ended June 30, 2016, were $66,975, an increase of $9,297, or 16.1%, compared to the six months ended June 30, 2015. The increases in selling, general and administrative expenses for the three and six months ended June 30, 2016, was primarily attributable to increased personnel required to support the growth of our business, as well as increased spending on marketing and promotional activities.
Real estate rent expense. Real estate rent expense for the three months ended June 30, 2016, was $64,736, an increase of $11,428, or 21.4%, compared to the three months ended June 30, 2015. Real estate rent expense for the six months ended June 30, 2016, was $128,265, an increase of $19,353, or 17.8%, compared to the six months ended June 30, 2015. The increase in real estate rent expense for the three and six months ended June 30, 2016, was primarily a result of the sale to, and lease back from, HPT of travel centers and improvements at leased sites since the beginning of 2015.
Depreciation and amortization expense. Depreciation and amortization expense for the three months ended June 30, 2016, was $21,322, an increase of $3,206, or 17.7%, from the three months ended June 30, 2015. Depreciation and amortization expense for the six months ended June 30, 2016, was $41,847, an increase of $6,206, or 17.4%, from the six months ended June 30, 2015. The increase in depreciation and amortization expense for the three and six months ended June 30, 2016, primarily resulted from the locations we acquired and other capital investments we completed (and did not subsequently sell to HPT) since the beginning of 2015. The increase was partially offset by the reduction in our depreciable assets as a result of the sale to, and lease back from, HPT in June 2015 and September 2015 of 14 owned travel centers and certain assets we owned at 11 properties leased from HPT, as well as the sale to, and lease back from, HPT of two development properties in 2016.
Interest expense, net. Interest expense, net, for the three months ended June 30, 2016, was $6,740, an increase of $1,653, or 32.5%, from the three months ended June 30, 2015. Interest expense, net, for the six months ended June 30, 2016, was $13,561, an increase of $2,142, or 18.8%, from the six months ended June 30, 2015. The increases in interest expense, net were primarily a result of our issuance of $100,000 of 8.00% Senior Notes due 2030 in October 2015.
Provision (benefit) for income taxes. The income tax provision reflects an effective tax rate of 35.6% and 40.0% for the three months ended June 30, 2016 and 2015, respectively, and 36.7% and 40.0% for the six months ended June 30, 2016 and 2015, respectively. The decrease in the effective tax rate for the three and six months ended June 30, 2016, was primarily due to certain tax credits that were enacted in December of 2015 and applied retrospectively for 2015 and prospectively for 2016.
Segment Results of Operations
The following is a discussion of fuel and nonfuel revenue and site level gross margin in excess of site level operating expenses by reportable segment.
As part of this discussion and analysis of our reportable segment operating results we refer to increases and decreases in results on a same site basis. We include a location in the same site comparisons only if we continuously operated it for the entire duration since the beginning of the earliest comparative period presented, with the exception of locations we operate that are owned by a joint venture. This data also excludes revenues and expenses that were not generated at locations we operate, such as rent and royalties from franchisees, revenues from the dealer operated convenience store and corporate level selling, general and administrative expenses. We do not exclude locations from the same site comparisons as a result of capital improvements to the site or changes in the services offered.
Travel Centers
The following table presents changes in the operating results of our travel center segment for the three and six months ended June 30, 2016, as compared with the three and six months ended June 30, 2015.
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| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2016 | | 2015 | | Change | | 2016 | | 2015 | | Change |
Number of company operated travel center locations | 225 |
| | 222 |
| | 3 |
| | 225 |
| | 222 |
| | 3 |
|
Number of franchise operated travel center locations | 30 |
| | 30 |
| | — |
| | 30 |
| | 30 |
| | — |
|
| | | | | | | | | | | |
Fuel: | | | | | | | | | | | |
Fuel sales volume (gallons) | 483,031 |
| | 506,353 |
| | (4.6 | )% | | 959,679 |
| | 988,361 |
| | (2.9 | )% |
Fuel revenues | $ | 792,016 |
| | $ | 1,064,268 |
| | (25.6 | )% | | $ | 1,414,596 |
| | $ | 2,033,237 |
| | (30.4 | )% |
Fuel gross margin | 87,731 |
| | 92,873 |
| | (5.5 | )% | | 169,531 |
| | 203,473 |
| | (16.7 | )% |
Fuel gross margin per gallon | $ | 0.182 |
| | $ | 0.183 |
| | (0.5 | )% | | $ | 0.177 |
| | $ | 0.206 |
| | (14.1 | )% |
| | | | | | | | | | | |
Nonfuel: | | | | | | | | | | | |
Nonfuel revenues | $ | 424,476 |
| | $ | 422,651 |
| | 0.4 | % | | $ | 812,961 |
| | $ | 803,150 |
| | 1.2 | % |
Nonfuel gross margin | 243,139 |
| | 236,066 |
| | 3.0 | % | | 468,122 |
| | 452,548 |
| | 3.4 | % |
Nonfuel gross margin percentage | 57.3 | % | | 55.9 | % | | 140pts |
| | 57.6 | % | |