CrossAmerica Partners LP — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Unless noted otherwise, dollar amounts are in millions. Results are unaudited.
Business context and major developments
CrossAmerica distributes motor fuel wholesale, operates commission-agent fuel sites, and owns or leases sites that it rents or subleases. In the third quarter, it completed the transition of its remaining company-operated sites to dealer-operated sites; at September 30, it had no company-operated sites and described its focus as wholesale and commission operations.
- Two tranches of an asset exchange with Circle K closed in May and September. CrossAmerica received 116 Circle K-operated stores, which were dealerized, in exchange for properties with approximately equivalent stated fair value. The third tranche was expected in the first quarter of 2020, subject to approval; all exchanges were anticipated to be completed by the end of that quarter.
- Management estimated that the full Circle K exchange would add approximately $7–$8 million to annual EBITDA after all tranches close.
- A new $750 million revolving credit facility was entered into in April, replacing the prior facility and extending maturity to April 2024.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $559.7 | $670.8 | $1,637.1 | $1,898.7 |
| Gross profit | $41.1 | $43.8 | $119.6 | $127.7 |
| Operating income | $12.3 | $13.7 | $33.9 | $19.5 |
| Net income (loss) | $7.2 | $5.3 | $13.8 | $(2.4) |
| Net income (loss) per limited partner unit | $0.20 | $0.15 | $0.39 | $(0.11) |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $69.5 | $57.3 |
- Q3 revenue fell 17% and gross profit fell 6% year over year. For the nine-month period, revenue declined 14% and gross profit declined 6%.
- Lower fuel prices reduced reported revenue and costs of sales. Management also cited lower volumes, largely associated with divestitures, contract exits, site conversions and dealerization. Wholesale motor fuel gross profit improved, while Retail segment gross profit declined following site transitions and divestitures.
- Nine-month net income improved from a loss to a profit. Results were affected by lower depreciation and amortization, including the absence of the prior-year FTC-related impairment charges, as well as lower interest expense. Comparisons are affected by the adoption of lease accounting standard ASC 842 in 2019.
- Management-reported non-GAAP distributable cash flow was $25.7 million for Q3 and $61.3 million for the first nine months; distribution coverage was 1.42x and 1.13x, respectively. These measures are not GAAP substitutes and include management-defined adjustments.
Liquidity, debt and distributions
- At September 30, cash was $5.4 million. Current assets were $56.2 million and current liabilities were $130.1 million.
- Outstanding revolving-credit borrowings were $504.0 million; finance lease obligations were $23.2 million. Operating lease obligations were separately reported at $125.2 million, including current and noncurrent portions.
- Credit-facility availability, after covenant restrictions, was $120.5 million at September 30 and $123.5 million on November 4. The September 30 weighted-average borrowing rate was 4.31%. The Partnership reported compliance with its financial covenants.
- Operating cash flow was $69.5 million for the nine months; investing cash outflow was $13.4 million and financing cash outflow was $53.9 million. Capital expenditures were $18.4 million, including growth spending for fuel-dispenser upgrades, rebranding and Florida site rebuilding.
- The quarterly distribution was $0.525 per common unit, unchanged from Q3 2018. The board approved the Q3 distribution for payment in November. Distributions remain discretionary and may be modified or discontinued.
Outlook, commentary and risks
- Management anticipated that the Circle K exchanges, new fuel supply contracts for approximately 400 stores, and improved pricing and rebranding at Jet-Pep sites would support fuel volume or gross profit. These are expectations, not guaranteed outcomes; the filing provides no comprehensive full-year earnings guidance.
- Dealerization is expected to reduce retail fuel and merchandise margins and related operating expenses while increasing wholesale rental margin. CrossAmerica committed approximately $2.2 million for EMV upgrades at 46 Applegreen sites by October 1, 2020.
- Fuel prices and wholesale margins are exposed to crude-oil volatility, supplier discounts and competitive pass-through timing. The company did not hedge fuel purchases; management estimated a $10-per-barrel crude-price change could affect annual wholesale fuel gross profit by approximately $2 million through supplier discounts. A one-percentage-point change in borrowing rates could affect annual interest expense by approximately $5 million.
- The company has material related-party relationships with Circle K, which indirectly owns the general partner and IDRs, and with DMS, an affiliated dealer and landlord/wholesale customer. Circle K also supplies fuel and is a counterparty to the asset exchange and other agreements.
- Recorded environmental liabilities were $3.5 million, with $3.1 million of related indemnification or reimbursement assets. Management said ordinary-course legal matters were not expected to have a material adverse effect. Circle K agreed to be solely responsible for potential FTC penalties connected with delayed divestitures; CrossAmerica had not accrued a liability for those penalties.
- ASC 842 adoption changed the presentation of certain sale-leaseback payments from principal and interest to rent and makes 2019 results not directly comparable with prior periods. It also produced a $28.9 million transition credit to equity.
Important facts for investors to verify
- Progress, approvals, valuation and expected economics of the remaining Circle K exchange tranches, including whether the projected $7–$8 million annual EBITDA contribution is realized.
- Distribution coverage and cash generation relative to distributions, capital spending and debt service; distributions are not contractually required.
- Revolver capacity, leverage and covenant headroom, interest-rate exposure, and refinancing needs ahead of the April 2024 maturity.
- Effects of dealerization and the new wholesale and lease arrangements on fuel volumes, segment margins and operating costs.
- Related-party agreement terms, environmental exposures and the comparability effects of ASC 842 when assessing reported earnings and cash-flow trends.