Crossamerica Partners LP quarterly report, Q3 FY2013

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Business context and reporting period

Lehigh Gas Partners LP (the filing registrant; later known as CrossAmerica Partners LP) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Its business included wholesale motor-fuel distribution and ownership or leasing of fuel-station sites. Beginning September 1, it also operated 50 commission sites as a retailer. The 2013 results are compared with combined predecessor-entity results for 2012, so the periods are not fully comparable; the filing also notes acquisitions, contributed assets and business changes.

Financial and operating highlights

  • Revenue: Q3 revenue was $490.1 million, down 3.3% from $506.6 million. Nine-month revenue was $1.449 billion, up 2.6% from $1.413 billion.
  • Profit: Q3 net income was $4.9 million versus a $0.5 million loss; nine-month net income was $14.2 million versus a $2.2 million loss. Q3 operating income was $7.0 million; nine-month operating income was $22.7 million. Net income per common and subordinated unit was $0.327 for Q3 and $0.940 for nine months.
  • Fuel economics: Gross profit from fuel sales was $11.7 million in Q3 and $33.6 million for nine months. Reported fuel margin per gallon was $0.073 and $0.071, respectively. Nine-month volume increased 4.5% to 470.9 million gallons, while Q3 volume was nearly flat at 160.5 million gallons.
  • Cash flow and distributions: Nine-month operating cash flow was $27.3 million, versus $6.4 million in the prior-period comparison. Investing cash flow was negative $33.4 million, mainly reflecting acquisitions; financing cash flow was positive $1.6 million. Cash declined to $0.2 million from $4.8 million. Management-reported distributable cash flow, a non-GAAP measure, was $31.6 million for nine months. Cash distributions paid were $18.4 million; declared distributions through Q3 were $1.4325 per unit.
  • Margins and expenses: Q3 fuel gross profit improved 20.6% despite lower aggregate fuel-sales revenue, with higher per-gallon margins cited as a driver. Nine-month rent income, including affiliate rent, rose to $30.6 million from $14.3 million, largely due to acquisitions and contributed sites. Depreciation and amortization increased to $14.9 million for nine months; SG&A was $12.0 million.
  • Debt and liquidity: Debt was approximately $243.3 million at September 30, 2013, up from $183.8 million at year-end 2012. The balance sheet reports long-term debt of $243.243 million; the debt note reports total debt of $243.293 million. The revolving facility had a $324 million commitment, $216.1 million outstanding and $14.9 million in letters of credit; reported availability was $93.0 million. Current assets of $23.6 million were below current liabilities of $36.8 million. The facility matures October 2015; the partnership reported covenant compliance.
  • Other obligations: Lease financing obligations totaled $67.6 million on the balance sheet. The partnership also recorded $26.2 million of financing related to Rocky Top sites, with a 7.5% stated rate and a seller election to require site purchases beginning in 2015.

Material changes versus the prior comparable period

  • Q3 fuel-sales revenue fell 4.3% on an aggregate basis, while fuel gross profit increased, reflecting improved reported margin per gallon. For nine months, fuel gross profit rose 17.5%, supported by higher margins and volume growth.
  • Revenue and operations were affected by the Express Lane and Dunmore acquisitions, the September Rogers and Rocky Top acquisitions, and the addition of Getty sites. Q3 and nine-month 2013 results included only one month of Commission Site retail activity.
  • Acquisition and expansion activity drove higher property and equipment, goodwill and borrowings. Cash used in investing increased substantially from the prior-period comparison.
  • The company shifted to reporting wholesale and retail segments after assuming the Commission Site agreements. Comparisons are further affected by the 2012 predecessor basis, post-IPO costs, changed management-fee presentation and asset sales in the prior period.

Outlook, commentary, risks and unusual items

  • Management stated an objective of making quarterly distributions and increasing them over time, with a minimum target of $0.4375 per unit per quarter, subject to board discretion, cash availability, covenants and other conditions. The stated distribution increased to $0.5025 per unit for the December distribution. No specific earnings or revenue guidance is provided.
  • Management expected operating cash flow, facility borrowings and potential capital-market issuances to meet liquidity needs, while cautioning that lower cash flow or other changes could require additional financing. Distributions are not contractually required.
  • Risks include fuel-price and demand volatility, competition, acquisition execution, leverage and refinancing, and environmental and litigation exposure. Retail fuel inventory creates commodity-price exposure; the company did not hedge this exposure at quarter-end. A one-percentage-point increase in the average rate on revolving debt was estimated to increase annual interest expense by about $2.1 million.
  • Environmental liabilities recorded by the partnership were $1.4 million, with indemnification assets. Separate predecessor environmental liabilities of $18.9 million were described as remaining the responsibility of predecessor entities under the Omnibus Agreement, subject to the stated indemnification arrangements.
  • Purchase-accounting valuations for Rogers, Rocky Top and Express Lane remained provisional and could change. The quarter included a $0.9 million valuation-allowance release benefiting tax results and a $5.9 million net deferred tax liability associated with Express Lane-related accounting and asset assignment.
  • Management concluded disclosure controls and procedures were not effective at September 30 because of identified material weaknesses in financial-reporting controls. Remediation efforts were underway; management nevertheless stated the financial statements fairly presented results in all material respects.
  • Related-party relationships are significant: LGC provides management and operating services under an Omnibus Agreement, and the Topper Group controls the general partner through LGC. The partnership paid LGC $5.0 million in management fees for nine months.

Important facts for investors to verify

  1. Reconcile the $50,000 difference between debt reported on the balance sheet and in the debt note, and confirm total debt, lease-financing obligations and remaining facility availability.
  2. Assess debt maturity and refinancing exposure, including the 2015 facility maturity and the Rocky Top purchase obligation and seller election.
  3. Review distribution coverage using cash flow and the partnership’s non-GAAP distributable-cash-flow definition; confirm the effect of subsequent distributions and covenant restrictions.
  4. Evaluate whether acquisition contributions, provisional purchase accounting and the new retail segment make reported growth and margins sustainable and comparable.
  5. Monitor the material weaknesses and remediation progress, related-party transactions, environmental indemnification recoverability and the partnership’s compliance with the 90% qualifying-income test.