CrossAmerica Partners LP — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. CrossAmerica distributes motor fuels, leases and operates retail sites, and operates convenience stores. The quarter includes contributions from acquisitions completed in 2014 and 2015; results are not directly comparable with the prior-year business mix.
Key financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $484.6 million | $482.0 million |
| Gross profit | $35.0 million | $16.7 million |
| Operating income (loss) | $(0.4) million | $5.5 million |
| Net income (loss) attributable to limited partners | $(3.0) million | $1.4 million |
| Net income (loss) per unit | $(0.13) | $0.07 |
| Operating cash flow | $10.9 million | $0.8 million |
| Adjusted EBITDA | $15.6 million | $11.3 million |
| Distributable cash flow (DCF) | $10.1 million | $7.5 million |
Revenue was nearly flat, while gross profit more than doubled. Gross margin was approximately 7.2% of revenue versus 3.5% a year earlier; operating margin declined to approximately negative 0.1% from 1.1%. Higher gross profit did not offset higher operating costs, depreciation and amortization, and interest expense. The filing attributes revenue movements principally to lower fuel prices and acquisition-driven volume and merchandise sales.
Q1 distribution paid was $0.5425 per unit, compared with DCF per diluted unit of $0.4106; distribution coverage was 0.76x, down from 0.79x. DCF is a non-GAAP measure and should be considered alongside GAAP cash flow.
Financial position and liquidity
- Cash was $4.9 million at March 31, down from $15.2 million at year-end. Operating cash flow of $10.9 million was outweighed by $125.7 million of investing cash use, largely for acquisitions; financing provided $104.5 million, primarily through revolving-credit borrowings.
- Total assets were $743.9 million and total liabilities were $566.4 million. Balance-sheet debt and capital lease obligations totaled $406.2 million, including $318.2 million drawn on the revolving facility. The MD&A separately reports $345.4 million of debt excluding lease financing obligations; investors should note the differing presentations.
- Revolver availability was $27.6 million after letters of credit and covenant constraints. The facility had $16.4 million of letters of credit outstanding. The partnership reported compliance with its leverage and interest-coverage covenants.
- Most revolver borrowings were floating-rate; the weighted-average rate was 3.50%. Management estimated that a one-percentage-point rate change would affect annual interest expense by approximately $3.2 million.
Material changes and business developments
- In January, CrossAmerica acquired a 5% limited-partner interest in CST Fuel Supply in exchange for common units valued at approximately $60.4 million; it recognized $1.1 million of equity income/distributions in Q1.
- CrossAmerica acquired the real property of 22 Landmark stores for a final purchase price of approximately $41.3 million, with lease and fuel-supply arrangements with CST.
- In February, it acquired Erickson and related assets for approximately $84.9 million, adding 64 retail sites. The filing reports $34.1 million of incremental Q1 revenue from Erickson and $12.2 million from Landmark after their respective closings.
- Retail segment revenue increased to $142.9 million from $54.4 million, reflecting acquired convenience stores and higher fuel volume. Retail operating income was $1.3 million. Wholesale operating income was $9.7 million, approximately unchanged from the prior year.
- Wholesale fuel volume increased 47%, while the average daily NY Harbor conventional gasoline spot price fell to $1.54 per gallon from $2.74. The partnership also reported 17% of wholesale volume sold to affiliated dealer LGO.
Outlook, risks and other notable items
- Management expected 2015 total fuel volume to increase due to acquisitions, partially offset by market-related volume declines; it expected fuel gross margin per gallon to remain consistent with historical results and rental income to rise. Acquisitions remain dependent on financing availability and terms. No specific earnings or distribution guidance was provided.
- The business is seasonal, with historically higher volumes in the second and third quarters. Fuel-price volatility can affect wholesale incentives and retail margins, and changes in pump prices may lag wholesale price movements.
- Further acquisitions are constrained by a facility requirement to retain at least $20 million of borrowing availability and unrestricted cash after an acquisition; reported availability was $27.6 million at quarter-end.
- Related-party matters include CST management fees and fuel/lease arrangements, LGO fuel purchases and leases, and the CST Fuel Supply investment. Fuel purchases were concentrated among ExxonMobil, BP and Motiva, which supplied approximately 27%, 26% and 22%, respectively, of wholesale fuel in Q1.
- Management reported no litigation expected to have a material adverse effect. Predecessor entities’ environmental liabilities and related indemnification assets were $14.1 million and $12.1 million, respectively, at quarter-end. Outcomes remain subject to uncertainty.
- The partnership recognized a $1.7 million income-tax benefit on its loss. It also reported a workforce reduction in the retail segment, expected to be completed by year-end, with estimated severance and benefit costs of $1.8 million.
- Disclosure controls were assessed as effective. Erickson’s internal controls were still being assessed during integration; management anticipated excluding them from the formal year-end effectiveness evaluation.
Important facts for investors to verify
- Whether acquisition integration and store classification or divestiture decisions affect future operating costs, margins, and cash generation.
- Whether DCF and operating cash flow can support distributions: reported Q1 DCF coverage was 0.76x, and distributions are discretionary.
- Current borrowing availability, covenant headroom, and the effect of floating rates and additional acquisition funding on debt service.
- The scale and terms of related-party transactions, including CST fees and arrangements, and LGO concentration and credit exposure.
- Potential environmental, litigation, and integration exposures, and the progress of the Erickson controls and systems integration.