CrossAmerica Partners LP — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. CrossAmerica wholesales motor fuel, owns or leases retail sites, and operates retail fuel and convenience businesses. Comparisons are with the corresponding 2021 periods.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,475.0 million | $859.3 million | $2,568.2 million | $1,516.6 million |
| Gross profit | $88.9 million | $65.1 million | $167.8 million | $120.0 million |
| Operating income | $21.1 million | $8.2 million | $30.8 million | $7.3 million |
| Net income | $14.0 million | $4.8 million | $19.0 million | $0.8 million |
| Net income available to limited partners | $13.4 million | $4.8 million | $18.5 million | $0.8 million |
| Basic and diluted earnings per common unit | $0.35 | $0.13 | $0.49 | $0.02 |
- Revenue rose 72% in Q2 and 69% for the first half. Management attributed the increase primarily to higher fuel prices and the 7-Eleven site acquisition. Revenue includes excise taxes; gross profit is a more useful measure of underlying economics. Gross margin was approximately 6.0% in Q2 versus 7.6% a year earlier.
- Q2 gross profit increased 37%; first-half gross profit increased 40%. Management cited higher fuel margins, merchandise contribution and acquired locations. Q2 wholesale fuel margin was $0.118 per gallon versus $0.092; first-half margin was $0.111 versus $0.083.
- Interest expense increased 89% in Q2 and 90% in the first half, reflecting higher LIBOR, borrowings associated with the acquisition and financing-cost amortization.
- Cash from operating activities was $54.7 million for the first half, up from $41.0 million. Investing activities used $14.4 million; financing activities used $44.3 million. Period-end cash was $3.6 million, down from $7.6 million at year-end 2021.
- At June 30, total debt and finance lease obligations were $801.0 million, including $626.6 million under the CAPL Credit Facility, $159.0 million under the JKM Credit Facility and $15.5 million of finance leases. Current and long-term operating lease obligations were $170.5 million in total. Debt-facility availability, after covenant restrictions, was $119.4 million under CAPL and $10.0 million under JKM at June 30; the CAPL amount was $135.5 million at August 4.
- First-half capital expenditures were $16.4 million, including $3.2 million sustaining and $13.2 million growth expenditures; cash paid for acquisitions was $1.9 million. Distributions remained $0.525 per common unit per quarter. First-half distributable cash flow was $56.7 million and distribution coverage was 1.42x, both non-GAAP measures defined by the Partnership.
Material changes and significant transactions
- The 106-site 7-Eleven acquisition was completed with the final three properties closing in February 2022. The acquired company-operated sites contributed to increased retail fuel volume, merchandise revenue and operating costs; management said base-business wholesale volume was lower, partly offsetting acquisition-related volume.
- On March 29, Holdings issued $25 million of Series A preferred interests to entities or individuals affiliated with directors and the Topper Group. Proceeds were used to prepay JKM Term Loan borrowings. The preferred interests carry a 9% annual compounded return; before October 2026, it accrues into the liquidation preference rather than being paid in cash. Exchange may be settled in common units valued at $23.74 per unit or, at a holder’s election, cash. Preferred accretion was $0.6 million in the first half.
- Lower acquisition-related legal costs reduced general and administrative expense; operating costs rose with the enlarged retail footprint. The Partnership sold nine properties for $3.8 million in the first half and continued its real estate rationalization program.
Outlook, risks and contingencies
- No specific earnings or distribution guidance was provided. Management expects the 7-Eleven assets to increase gross profit and retail operating expenses in 2022, and anticipates higher interest expense than in 2021 due to LIBOR increases. Acquisitions remain opportunistic and dependent on suitable targets, financing and covenant capacity.
- Fuel prices and margins are volatile. Management noted that higher crude prices can increase wholesale terms discounts, while retail pump-price changes may lag wholesale costs. Inflation may raise fuel, merchandise, card-processing, labor and lease costs; the ability to pass through costs is not assured. The business is seasonal, with historically higher volumes in the second and third quarters.
- COVID-19 effects remain uncertain; sustained lower fuel volumes, margin erosion or fuel-price volatility could adversely affect cash flow and distributions. Other cited risks include competition, financing and covenant compliance, weather, environmental obligations, regulation and litigation.
- At June 30, recorded environmental liabilities were $8.5 million, with $6.6 million of related indemnification or reimbursement assets. Management said ordinary-course litigation is not reasonably expected to have a material adverse effect, while noting litigation outcomes are uncertain. Fuel supplier concentration was significant: four suppliers accounted for approximately 81% of wholesale motor fuel purchases in the first half.
- The Partnership reported compliance with financial covenants for both credit facilities at June 30. Its current liabilities exceeded current assets, and it relies on operating cash flow and credit-facility availability for liquidity. Distributions are discretionary and may be changed or suspended.
Most important facts for investors to verify
- Whether fuel margins and acquired-site contributions persist as fuel prices and market conditions change, and how much of reported growth reflects acquisition versus base-business performance.
- Debt-service capacity and exposure to floating rates, including the effect of rising interest expense, upcoming principal maturities and covenant-limited borrowing availability.
- The sustainability of the $0.525 quarterly distribution in light of cash on hand, capital needs, coverage and management’s stated discretion over distributions.
- The economic and governance implications of the 9% preferred interests issued to related parties, including potential cash settlement or common-unit dilution upon exchange.
- Execution of the 7-Eleven integration and real estate rationalization, together with environmental reserves, supplier concentration and other disclosed operating risks.