CrossAmerica Partners LP — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. CrossAmerica operates wholesale fuel distribution, fuel-site leasing, retail fuel sales, and convenience stores. Unless otherwise noted, dollar figures below are in millions.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,145.4 | $1,475.0 | $2,161.6 | $2,568.2 |
| Gross profit | $97.7 | $88.9 | $179.8 | $167.8 |
| Operating income | $27.9 | $21.1 | $37.0 | $30.8 |
| Net income | $14.5 | $14.0 | $13.6 | $19.0 |
| Net income available to limited partners | $13.9 | $13.4 | $12.3 | $18.5 |
| Basic earnings per common unit | $0.37 | $0.35 | $0.33 | $0.49 |
| Adjusted EBITDA | $42.2 | $41.4 | $73.9 | $73.4 |
| Distributable cash flow | $30.4 | $32.4 | $49.5 | $56.7 |
| Distribution coverage ratio | 1.53x | 1.63x | 1.24x | 1.42x |
Gross margin was approximately 8.5% in Q2 2023 versus 6.0% in Q2 2022, and 8.3% for the first half versus 6.5% in the prior-year period. These are calculated as gross profit divided by revenue.
- Cash flow: First-half cash from operations was $47.3 million, down from $54.7 million. Investing used $6.7 million and financing used $52.1 million. Capital expenditures were $11.3 million, including $3.5 million sustaining capex.
- Liquidity: Cash was $4.5 million at June 30, versus $16.1 million at year-end 2022. Credit-facility availability, after covenant restrictions, was $159 million at June 30; management reported $166 million as of August 3.
- Debt: Debt and finance lease obligations totaled $774.0 million, including $761.5 million outstanding under the revolving facility. The facility matures March 31, 2028; the effective interest rate, including swaps, was 5.1%. A one-percentage-point SOFR change would affect annual interest expense by approximately $2.6 million.
- Distributions: Quarterly cash distribution was $0.525 per common unit, unchanged year over year. The Board may change or discontinue distributions, and the partnership agreement does not require payment.
Material changes and operating trends
- Q2 revenue fell 22% and first-half revenue fell 16%, primarily reflecting lower fuel prices. Average WTI was $73.54/barrel in Q2 2023 versus $108.83 a year earlier, and $74.73 for the first half versus $102.01.
- Despite lower fuel prices, gross profit increased 10% in Q2 and 7% in the first half. Retail fuel and merchandise gross profit improved, supported by higher margins, better merchandise performance, and conversion of dealer/commission locations to company-operated sites. Wholesale gross profit declined modestly, including from lower supplier terms discounts.
- Interest expense rose 46% in Q2 and 62% in the first half, chiefly due to higher rates; the first-half comparison also includes a $1.1 million write-off of deferred financing costs. First-half net income declined 29%.
- Company-operated retail sites increased to 292 from 253 year over year, while wholesale distribution sites declined to 1,227 from 1,282. Retail operating expenses rose as site count, labor, hours of operation, and inflation-related costs increased.
- Q2 included a $6.7 million net gain on dispositions and lease terminations, primarily from real estate rationalization. The partnership sold six properties in the quarter for $7.8 million in proceeds, including $3.8 million held in a Section 1031 exchange escrow.
Outlook, risks, and contingencies
Management expects the CSS acquisition to support wholesale gross profit, anticipates continued fuel-cost reductions from new or amended supply contracts, and expects higher 2023 interest expense than in 2022. It will consider acquisitions opportunistically; no quantified earnings or distribution guidance is provided. Results are subject to volatile fuel prices, seasonality, inflation, interest rates, competition, and the ability to finance acquisitions within covenant limits.
- The $925 million senior secured revolving facility is secured by substantially all partnership and guarantor assets. The partnership reported covenant compliance at June 30. The facility includes leverage and interest-coverage requirements and restricts distributions if a default exists or would result.
- Environmental liabilities recorded were $7.2 million, with $4.9 million of related indemnification assets. Remediation estimates and reimbursements remain subject to uncertainty. Management said ordinary-course legal proceedings are not reasonably expected to have a material adverse effect, while noting litigation outcomes remain uncertain.
- Fuel sourcing and operations have concentrations: four suppliers accounted for about 80% of wholesale fuel purchases; one supplier accounted for about 47% of merchandise purchases; and two multi-site operators represented about 18% of rent income in the first half.
- Transactions with Topper Group and other affiliates include fuel sales, leases, management services, maintenance, and product purchases. The filing describes independent committee approval for certain arrangements.
- Management concluded disclosure controls were effective at June 30, 2023; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Reconcile reported earnings with distributable cash flow and monitor whether first-half coverage of 1.24x remains adequate as interest costs and operating expenses evolve.
- Confirm current revolving-facility availability, covenant headroom, and borrowing costs; the filing gives different availability figures for June 30 and August 3.
- Assess the sustainability of the $0.525 quarterly distribution given low cash balances, debt, and the Board’s discretion over distributions.
- Track retail-site conversions: gross-profit gains should be weighed against higher labor and operating costs and the decline in wholesale locations.
- Review the contribution of property-sale gains to reported operating income and the status of sale proceeds held in escrow.
- Monitor environmental remediation exposure, fuel and merchandise supplier concentration, related-party dealings, and the sensitivity of results to fuel prices and interest rates.