CrossAmerica Partners LP — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020. CrossAmerica distributes wholesale motor fuel, owns or leases retail sites, and operates retail fuel and convenience stores. The comparison is materially affected by acquisitions and exchanges completed during 2020, including the addition of company-operated stores.
Financial results and condition
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $657.3 million | $391.7 million |
| Gross profit | $54.9 million | $35.7 million |
| Operating income (loss) | $(0.9) million | $77.4 million |
| Net income (loss) | $(4.0) million | $72.1 million |
| Operating cash flow | $17.7 million | $17.8 million |
| Capital expenditures | $10.6 million | $5.4 million |
| Distributable cash flow (non-GAAP) | $15.8 million | $20.4 million |
| Distribution coverage ratio (non-GAAP) | 0.79x | 1.08x |
Revenue rose 68% and gross profit rose 54%, largely reflecting acquired sites, greater fuel volumes, higher fuel prices, and retail merchandise sales. Reported gross profit as a share of revenue was approximately 8.3%, versus 9.1%; the filing notes that fuel prices and business mix affect these figures. Retail gross profit increased substantially with the addition of company-operated sites, while wholesale operating income declined. Q1 2021 results exclude CST Fuel Supply equity income; Q1 2020 included $3.2 million of that income.
The prior-year comparison also includes a $70.9 million net gain on dispositions and lease terminations, including a $67.6 million gain from the sale of the CST Fuel Supply investment. This drove much of the difference in reported operating and net income; Q1 2021 included a $0.6 million net loss on dispositions and lease terminations. Interest expense fell 37% to $3.5 million, primarily due to lower average borrowing rates.
Cash and cash equivalents were $1.0 million at March 31, 2021. Current assets were $80.9 million and current liabilities were $151.3 million; management says current liabilities typically exceed current assets in its business because of settlement timing and lease obligations. Debt and finance lease obligations totaled $545.5 million, including $526.1 million drawn on the revolving facility. Facility availability after covenant restrictions was $115.4 million at quarter-end and $122.6 million on May 6. The partnership was in compliance with its financial covenants at March 31. The facility’s weighted-average interest rate was 2.1%; the effective rate including swaps was 2.3%.
Operating cash flow was nearly unchanged year over year. Investing activities used $9.6 million, while financing activities used $7.6 million; CrossAmerica made $13.0 million of net revolver borrowings and paid $19.9 million in distributions during the quarter. The quarterly distribution remained $0.525 per unit, with a $19.9 million payment declared for May 11. Distributions are discretionary and not guaranteed.
Material changes versus the prior period
- Wholesale fuel volume increased 32%; retail volume increased 171%, reflecting the 2020 acquisitions and exchanges as well as partial recovery from pandemic-related disruption.
- CrossAmerica reported 151 company-operated retail sites at quarter-end, compared with none in Q1 2020, and generated $37.8 million in food and merchandise revenue.
- Wholesale fuel gross profit increased, but wholesale margin per gallon declined to $0.073 from $0.090. Management cited weaker DTW margins amid rising crude prices.
- Operating expenses increased to $29.4 million from $10.7 million, substantially reflecting the expanded retail operations. General and administrative expenses increased to $7.7 million from $4.5 million.
- Capital expenditures increased, primarily due to EMV upgrades and site rebranding. Growth capital expenditures were $9.2 million; sustaining expenditures were $1.4 million.
Outlook, risks, and unusual items
No quantified full-year earnings or cash-flow guidance is provided. Management expects the Circle K exchanges, CST Fuel Supply Exchange, and acquired retail and wholesale contracts to support fuel volume and gross profit, and says it will continue to evaluate acquisitions. It believes operating cash flow, revolver capacity, and potential capital-market or other financing sources will be sufficient for commitments, debt service, expected capital spending, contingencies, and distributions, while cautioning that lower cash flows could impair borrowing capacity and distributions.
- On April 28, 2021, after quarter-end, CrossAmerica agreed to buy assets associated with 106 company-operated sites from 7-Eleven for $263.0 million, subject to adjustments and closing conditions. Sites would close on a rolling basis; FTC-related conditions apply, and the agreement may be terminated in specified circumstances. Expected funding sources include revolver capacity, cash, and/or other debt financing.
- Management reported that fuel volumes had largely recovered in the second half of 2020 and Q1 2021, but the continuing impact of COVID-19 is uncertain. Sustained volume declines or margin erosion could adversely affect cash flow and distributions.
- Crude and wholesale fuel price volatility can rapidly affect wholesale and retail fuel margins. The business is seasonal, with historically stronger volumes in the second and third quarters.
- Supplier and operating concentration warrant attention: four suppliers represented approximately 78% of wholesale fuel purchases in Q1 2021; one carrier delivered approximately 17% of gallons sold; one multi-site operator accounted for approximately 12% of rent income.
- Related-party arrangements include leases, management and store personnel costs, fuel sales, and product purchases involving Topper Group affiliates. The filing reports $12.8 million of expenses under the Topper Group Omnibus Agreement in Q1 2021.
- Recorded environmental liabilities were $4.0 million, with $3.1 million of related indemnification assets. Management stated that ordinary-course legal proceedings are not expected to have a material adverse effect, while noting litigation and remediation estimates involve uncertainty.
Important facts for investors to verify
- Whether acquisition-related volume and retail merchandise gains translate into improved recurring operating income and distributable cash flow.
- Whether the $263.0 million 7-Eleven asset purchase closes as planned, its final cost and financing, and its effect on leverage and covenant headroom.
- Cash generation relative to distributions: Q1 distributable cash flow was below distributions implied by the reported 0.79x coverage ratio.
- Revolver availability, covenant compliance, interest-rate exposure, and refinancing or funding needs after acquisitions.
- Fuel margin trends as crude prices change, pandemic-related demand, and the effect of supplier, carrier, tenant, and related-party concentrations.