CrossAmerica Partners LP — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. CrossAmerica distributes motor fuel wholesale, owns or leases retail sites, and, following an April acquisition, also operates retail stores. Comparisons are affected by acquisitions and exchanges completed during 2020, as well as the COVID-19 pandemic.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $591.0 million | $559.7 million | $1,381.1 million | $1,637.1 million |
| Gross profit | $62.3 million | $41.1 million | $155.6 million | $119.6 million |
| Operating income | $23.7 million | $12.3 million | $107.5 million | $33.9 million |
| Net income | $21.2 million | $7.2 million | $98.5 million | $13.8 million |
| Basic and diluted earnings per common unit | $0.56 | $0.20 | $2.64 | $0.39 |
- Gross margin was approximately 10.5% in Q3 2020 versus 7.4% a year earlier, and approximately 11.3% for the first nine months versus 7.3% in 2019.
- Operating cash flow for the first nine months was $86.5 million, up from $69.5 million. Investing activities used $15.6 million and financing activities used $71.3 million. Capital expenditures and acquisitions totaled $52.7 million.
- At September 30, cash was $1.3 million, current assets were $88.2 million and current liabilities were $153.2 million. Revolver availability, after covenant restrictions, was $229.0 million at quarter-end and $234.8 million on October 29.
- Debt and finance lease obligations totaled $528.2 million, including $507.5 million drawn on the revolver. Revolver borrowings had a 1.91% weighted-average rate; including swaps, the reported effective rate was 2.08%. The Partnership was in compliance with its financial covenants.
- Operating lease obligations totaled $176.4 million on the balance sheet. Quarterly distributions remained $0.525 per unit; reported distribution coverage was 1.50x for Q3 and 1.30x for the nine-month period.
Material changes versus the prior period
- Revenue fell 16% for the first nine months, primarily reflecting lower fuel prices; gross profit rose 30%. Q3 revenue increased 6% and gross profit increased 51%.
- Profit growth included large transaction gains: a $67.6 million gain from exchanging the Partnership’s 17.5% CST Fuel Supply interest, $19.3 million in gains on Circle K property exchanges, and $4.0 million in gains on site sales during the nine-month period. These were partly offset by $10.9 million of lease-termination losses. Accordingly, reported net income and operating income are not a straightforward measure of recurring performance.
- The April 2020 related-party acquisition added retail and wholesale operations. The Partnership reported 149 company-operated sites and 211 commission-agent sites at September 30. It also completed the CST Fuel Supply exchange and the final tranche of its Circle K asset exchanges.
- Nine-month wholesale fuel volume increased 8%, while retail fuel volume increased 38%; comparisons reflect the acquired and exchanged sites. Fuel gross profit benefited from stronger DTW margins as crude prices fell, while lower prices reduced revenue and supplier discounts.
- Interest expense declined 38% for the first nine months, mainly due to lower average borrowing rates. The Partnership entered into swaps that fixed rates on approximately 60% of variable-rate borrowings.
Outlook, risks and unusual items
- Management said fuel volumes had recovered from the sharp March decline but remained below historical levels. It warned that sustained volume weakness or margin erosion could materially affect results, cash flow, financial position and the ability to pay distributions. No specific financial guidance was provided.
- Management expects the Circle K exchanges, CST Fuel Supply exchange and retail and wholesale acquisition to add fuel volume and gross profit, while continuing to pursue acquisitions opportunistically. Fuel margins remain sensitive to crude prices, competitive pump pricing and supplier discounts.
- COVID-19 risks include reduced travel and store traffic, dealer credit deterioration, possible delivery disruption, added safety and staffing costs, and store closures. Seasonal demand also affects volumes.
- Environmental exposure includes recorded environmental liabilities of $4.1 million; indemnification assets were $3.4 million. For certain acquired sites, the Partnership assumed liability for unknown contamination, while sellers or Circle K retained specified known contamination liabilities.
- Related-party considerations include the Topper Group’s control of the general partner and beneficial ownership of 48.9% of limited partner units as of October 29, 2020; the acquisition from Topper-affiliated sellers; and $26.1 million of nine-month expenses under the Topper Group Omnibus Agreement. The filing states that relevant transaction terms were approved by the independent conflicts committee.
- Management concluded disclosure controls were not effective at September 30. The Partnership said it had omitted required CST Fuel Supply financial information from its 2017, 2018 and 2019 annual reports and certain interim reports, and planned to amend certain filings. It stated that adding the information would not affect consolidated financial condition or results of operations.
Important facts for investors to verify
- How much of reported earnings and cash generation is repeatable after excluding transaction gains, lease-termination items and acquisition-related effects.
- Whether fuel volumes continue recovering and whether DTW margin benefits persist as crude prices and market conditions change.
- Distribution sustainability, including cash available after capital needs, debt service and working-capital requirements; distributions remain at the Board’s discretion.
- Revolver capacity, covenant headroom, lease commitments and the impact of interest-rate changes despite the swaps.
- Completion and implications of the promised amendments addressing CST Fuel Supply disclosures and remediation of disclosure-control deficiencies.
- Integration, related-party transaction terms and environmental obligations associated with the acquired and exchanged sites.