CrossAmerica Partners LP — Q1 2016 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2016, compared with Q1 2015. CrossAmerica distributes motor fuel wholesale and retail, leases retail sites, and operates convenience stores. The first quarter is typically a seasonally weaker period. On February 25, 2016, all 7.525 million subordinated units converted into common units.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $367.7 million | $480.5 million |
| Gross profit | $37.2 million | $37.7 million |
| Operating income (loss) | $5.9 million | $(0.4) million |
| Net income (loss) | $1.8 million | $(3.0) million |
| Net income (loss) available to limited partners | $1.0 million | $(3.1) million |
| Basic and diluted earnings (loss) per unit | $0.03 | $(0.13) |
| Cash from operating activities | $18.6 million | $10.9 million |
| Cash used in investing activities | $58.6 million | $125.7 million |
| Cash from financing activities | $40.8 million | $104.5 million |
Gross margin was approximately 10.1% of revenue, versus 7.9% in Q1 2015; revenue and cost of sales are strongly affected by fuel prices, so this comparison should be interpreted in that context. The reported income tax benefit was $0.8 million, primarily reflecting losses in taxable corporate subsidiaries.
Adjusted EBITDA, a non-GAAP measure, was $22.2 million, up from $15.6 million. Distributable Cash Flow was $17.3 million, or $0.5211 per diluted limited partner unit, versus $10.1 million, or $0.4107 per unit. Distribution coverage was 0.88x, compared with 0.76x. Cash distributions paid per unit were $0.5925; the Partnership declared $0.5975 per unit for Q1, payable May 31, 2016.
At March 31, cash was $2.0 million and total current assets were $57.1 million, compared with current liabilities of $69.2 million. Debt and lease financing obligations totaled $509.6 million, including $423.1 million outstanding under the revolving facility; the balance-sheet carrying amount, net of deferred financing fees, was $496.1 million. Revolver availability after covenant constraints was $61.2 million. The facility rate was 3.45%; the Partnership was in compliance with its leverage and interest-coverage covenants.
Material changes versus Q1 2015
- Revenue fell $112.7 million, or 23%, while gross profit declined only $0.5 million, or 1%. Management attributed most of the revenue decline to lower fuel prices: average WTI crude was $33.35 per barrel versus $48.49, down 31%.
- Operating results improved to positive income, helped by a $3.0 million increase in income from the CST Fuel Supply investment, higher rent and other margin, and lower operating and general and administrative expenses. Interest expense rose $0.8 million due to acquisition-related borrowing.
- Retail segment Adjusted EBITDA declined to $1.8 million from $4.8 million, as dealerization reduced company-operated fuel and merchandise activity. Wholesale segment Adjusted EBITDA increased to $24.0 million from $17.6 million.
- Operating cash flow increased $7.7 million. Investing outflows were lower than in 2015, but included $52.3 million for Holiday Stationstores and $2.9 million for fuel supply contracts purchased from CST. Net revolver borrowings were $64.7 million during the quarter.
Outlook, risks and unusual items
- Management expects total fuel volume and rent income to increase in 2016, citing recent acquisitions and further conversion of company-operated sites to lessee dealers. It noted that lower fuel prices may support demand but reduce supplier discounts; no quantified earnings or distribution guidance was provided.
- On March 29, CrossAmerica acquired 31 franchise Holiday Stationstores and three company-operated liquor stores in Wisconsin and Minnesota for approximately $52.3 million, funded with revolver borrowings. Purchase accounting remained preliminary.
- The Partnership converted 52 company-operated stores to lessee dealers during Q1. It continues to supply fuel wholesale and receive rent, while the dealers retain retail fuel and merchandise gross profit.
- Customer and related-party concentration is notable: DMS accounted for approximately 17% of wholesale volume and 30% of rental income; CST accounted for 8% of wholesale volume and 22% of rental income. CST controls the general partner and holds the incentive distribution rights. The filing describes related-party fuel, lease, management-fee and unit-settlement arrangements.
- CST was exploring strategic alternatives. The filing warns that this process could affect services, staffing, acquisitions, growth and CrossAmerica’s financial condition.
- The Partnership cites fuel-price and demand volatility, competition, acquisition integration and financing access, interest-rate exposure, weather, regulation, environmental liabilities and litigation as risks. A 1 percentage-point change in the average revolver rate would affect annual interest expense by approximately $4.2 million. Management stated that disclosed legal matters were not expected to have a material adverse effect; environmental liabilities for contributed sites remain subject to predecessor-entity indemnification.
- Other notable items include $2.8 million of unit repurchases during the quarter and a $1.1 million receivable recorded for the Erickson acquisition working-capital settlement. The filing reports no material change in internal control and says disclosure controls were effective.
Important facts for investors to verify
- Whether operating cash flow and distributable cash flow can sustain the declared distribution, given Q1 coverage below 1.0x.
- Debt capacity, covenant headroom and the cost of funding acquisitions and scheduled Rocky Top site purchases.
- Post-acquisition performance and integration of Holiday, along with the pace and economics of dealerizing company-operated stores.
- Exposure to related parties and customer concentration, including CST’s strategic review and the terms of ongoing arrangements.
- Final Holiday purchase-price allocation and any changes to acquisition-related goodwill, intangible assets or subsequent results.