CrossAmerica Partners LP — Q2 2017 Form 10-Q
Business context and period. The filing covers the three and six months ended June 30, 2017; financial amounts below are in millions unless noted. CrossAmerica distributes motor fuel wholesale and retail, operates retail sites, and earns income from leased properties. Results are seasonal, with historically higher volumes in the second and third quarters.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $528.8 | $512.6 | $998.1 | $880.4 |
| Gross profit | $41.6 | $40.5 | $79.1 | $77.7 |
| Operating income | $2.7 | $9.4 | $8.3 | $15.3 |
| Net income (loss) attributable to limited partners | $(4.0) | $3.6 | $(2.3) | $5.4 |
| Net income (loss) available to limited partners, after IDR distributions | $(5.0) | $2.8 | $(4.3) | $3.8 |
| Basic earnings (loss) per common unit | $(0.15) | $0.08 | $(0.13) | $0.11 |
| Adjusted EBITDA | $27.8 | $27.1 | $51.5 | $49.3 |
| Distributable cash flow | $21.2 | $21.2 | $38.0 | $38.5 |
| Distribution coverage ratio | 1.01x | 1.07x | 0.92x | 0.97x |
Cash flow and liquidity. Operating cash flow was $49.4 million for the first half, up from $37.0 million; investing used $7.4 million, versus $60.5 million in 2016, which included acquisitions. Financing used $39.9 million, including distributions. Cash was $3.4 million at June 30. Debt and capital lease obligations totaled $475.5 million, including $446.5 million drawn on the $550 million revolving facility. Remaining availability after covenant restrictions was $83.6 million at June 30 and $90.1 million on August 4. The facility rate was 4.11%; leverage was 4.25x against a stated covenant limit generally of 4.50x. The Partnership reported covenant compliance.
Quarterly distribution declared was $0.6225 per unit, payable August 14. The filing cautions that distributions are discretionary and not guaranteed. First-half sustaining capital expenditures were $0.7 million; total capital expenditures were $8.2 million.
Material changes and operating drivers
- Revenue rose 3% in Q2 and 13% for the first half, primarily reflecting higher fuel prices and volume from prior acquisitions. Gross profit increased only 2.7% in Q2 and 1.8% year to date, while operating income and reported net income declined.
- Wholesale segment Adjusted EBITDA rose to $27.7 million in Q2 and $53.3 million for the first half, supported by acquisitions, rental income and wholesale margins. Retail segment Adjusted EBITDA fell to $1.5 million and $1.7 million, respectively; lower merchandise gross profit and weaker retail fuel margins were key factors. Conversions of company-operated stores to lessee-dealer sites also shifted revenue and expenses.
- General and administrative expense increased to $11.9 million in Q2 from $4.9 million. Merger-related charges included $5.3 million of severance and benefits, $1.1 million of retention-bonus expense, and $0.4 million for accelerated equity award vesting. Interest expense increased, reflecting higher borrowing rates and debt levels.
- CST’s merger with Circle K closed June 28. Circle K indirectly controls the general partner, holds a 20.5% limited partner interest, and owns all IDRs.
Outlook, risks and contingencies
- Management expects 2017 fuel volumes and rental income to exceed 2016 levels, citing acquisitions and expected continued conversion of company-operated sites to lessee dealers. It gave no specific earnings or cash-flow guidance and said acquisitions remain dependent on suitable targets, financing and covenant capacity.
- On August 4, CrossAmerica agreed to buy Alabama assets comprising 92 fee-simple sites, five leased sites and fuel-supply business for five independent dealers for $72.3 million, plus inventory value and assumption of certain liabilities. Closing was expected in Q4 2017, subject to customary conditions and a related Circle K transaction.
- Fuel prices are volatile; the Partnership does not hedge fuel purchases. A one-percentage-point change in borrowing rates would affect annual interest expense by about $4.5 million. A $10-per-barrel crude-price change was estimated to affect annual wholesale gross profit by about $2.2 million through supplier discounts.
- Customer and supplier concentration includes DMS and affiliates, which represented 14% of wholesale volume and 23% of rental income in the first half, and CST, which represented 20% of rental income. Three suppliers accounted for 73% of first-half wholesale fuel purchases.
- A former employee seeks approximately $1.6 million in severance benefits; trial had been postponed, and CrossAmerica said it would contest the claim. The filing says other litigation is not expected to have a material adverse effect. Environmental liabilities for contributed sites are subject to predecessor indemnification.
- Management said adoption of the new lease standard is expected to materially affect the balance sheet. It did not anticipate early adoption; the standard was scheduled to take effect in 2019.
Investor verification priorities
- Assess whether first-half distributable cash flow, at 0.92x distribution coverage, can support the distribution, particularly given the Q2 coverage of 1.01x and the distribution’s discretionary status.
- Verify the effect of Circle K’s new control, related-party arrangements, and merger-related personnel costs on governance and recurring expenses.
- Review leverage, covenant headroom, floating-rate exposure and funding plans for the proposed $72.3 million Jet-Pep acquisition and associated inventory and liabilities.
- Track retail-segment margin and merchandise performance, wholesale fuel volumes, and customer and supplier concentration.
- Follow the former employee claim, environmental indemnification exposure, and the disposition of sites held for sale, including the FTC-related divestiture.