CrossAmerica Partners LP — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. CrossAmerica distributes motor fuel wholesale, owns or leases fuel sites, and operates retail and convenience-store locations. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,210.0 | $1,274.4 | $3,371.6 | $3,842.7 |
| Gross profit | $100.4 | $114.7 | $280.2 | $282.5 |
| Operating income | $24.1 | $39.6 | $61.1 | $70.4 |
| Net income | $12.3 | $27.6 | $25.8 | $46.6 |
| Net income available to limited partners | $11.7 | $27.0 | $24.0 | $45.5 |
| Diluted earnings per common unit | $0.31 | $0.71 | $0.63 | $1.20 |
| Adjusted EBITDA (non-GAAP) | $44.2 | $62.2 | $118.1 | $135.5 |
| Distributable Cash Flow (non-GAAP) | $31.4 | $50.9 | $80.9 | $107.5 |
| Distribution coverage ratio (non-GAAP) | 1.57x | 2.55x | 1.35x | 1.80x |
- Gross margin was approximately 8.3% in Q3 2023 versus 9.0% in Q3 2022; for the nine-month periods it was approximately 8.3% versus 7.4%.
- Operating cash flow was $79.0 million for the first nine months, down from $126.5 million. Investing cash outflow was $16.5 million and financing cash outflow was $72.7 million. Capital expenditures were $21.7 million, including $5.3 million of sustaining capital.
- Cash was $5.8 million at September 30, 2023, versus $16.1 million at December 31, 2022. Current assets were $123.3 million and current liabilities $177.2 million.
- Debt under the revolving credit facility was $762.5 million; finance lease obligations were $11.8 million. The facility’s reported effective interest rate, including swaps, was 4.9%. Availability after covenant restrictions was $158 million at September 30 and $171 million at November 2, 2023.
- Quarterly distributions remained $0.525 per common unit ($1.575 for the first nine months), unchanged from 2022. The November 10, 2023 payment was declared at $0.525 per unit.
Material changes and operating drivers
- Q3 revenue decreased 5%, while gross profit fell 12%. For the first nine months, revenue declined 12% but gross profit was down only 1%. Management attributed much of the revenue decrease to lower fuel prices: average WTI was down 12% year over year in Q3 and 22% for the nine-month period.
- Q3 retail fuel gross profit fell $18.3 million, reflecting a 30% decrease in margin per gallon; higher merchandise gross profit and other revenue partly offset the decline. Retail operating expenses rose 12%, mainly with more company-operated sites, expanded operating hours and inflation.
- For the first nine months, retail operating income fell 17%, while wholesale operating income declined 4%. Merchandise gross profit increased as CrossAmerica converted dealer and commission-agent locations to company-operated sites. It converted 35 sites in the nine-month period; company-operated retail locations increased to 293 from 252 a year earlier.
- Interest expense rose 26% in Q3 and 49% for the nine-month period, primarily due to higher interest rates. Nine-month operating cash flow also reflected lower fuel margins, increased interest expense and less favorable working-capital movements.
- In March 2023, CrossAmerica amended and restated its senior secured revolving facility, increasing commitments from $750 million to $925 million and extending maturity to March 31, 2028. It used incremental borrowing to repay and terminate the JKM facility. The partnership reported compliance with financial covenants at September 30.
Outlook, risks and unusual items
- Management expects fuel-price volatility to continue affecting fuel gross profit and anticipates higher 2023 interest expense than in 2022. It expects the CSS acquisition to support wholesale gross profit and cited anticipated savings from new or amended fuel purchase contracts. No specific full-year earnings or cash-flow guidance was provided.
- Management stated it believes available operating cash flow, revolver capacity, capital-market access and other funding sources will meet obligations, expenditures and distributions; results remain exposed to operating and financing risks. Distributions are discretionary and may be changed or suspended.
- The facility is secured by substantially all partnership and guarantor assets. It includes leverage and interest-coverage covenants and restricts distributions in specified default circumstances. A 1 percentage-point change in SOFR was estimated to change annual interest expense by approximately $2.6 million.
- Interest-rate swaps had a fair value of $22.0 million at September 30. The partnership estimated that $12.7 million of gains would be reclassified from accumulated other comprehensive income into interest expense over the next 12 months; the actual amount will vary with rates.
- Real-estate rationalization generated a $6.3 million net gain in the first nine months, alongside a $1.1 million net loss on lease terminations and asset disposals. The partnership sold eight properties for $8.3 million of proceeds during the period.
- Environmental liabilities recorded were $7.3 million, with $5.1 million of related indemnification assets. Management said ordinary-course litigation is not reasonably expected to have a material adverse effect, while noting litigation estimates involve uncertainty.
- Business concentration includes approximately 80% of wholesale fuel purchases from four suppliers and 47% of merchandise purchases from one supplier in the first nine months. Related-party transactions include management services and other costs charged under agreements with Topper Group affiliates.
- Management cited fuel-price and demand volatility, competition, inflation, interest rates, supplier availability, environmental costs, regulation, weather and geopolitical events among risks. It reported no material changes to the risk factors in its 2022 Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Review the trend in retail fuel margins and whether merchandise gains and site conversions can offset weaker fuel profitability and higher store operating costs.
- Assess debt burden, covenant headroom and refinancing exposure, including the $762.5 million facility balance and its March 2028 maturity.
- Compare distributable cash flow with distributions: coverage declined to 1.35x for the first nine months from 1.80x a year earlier.
- Track operating cash flow, working-capital needs, cash balances and revolver availability; confirm subsequent-period liquidity and covenant compliance.
- Evaluate the sustainability of swap benefits, estimated future reclassifications and sensitivity of interest expense to SOFR.
- Consider execution and returns from conversions to company-operated sites, real-estate sales, fuel sourcing initiatives and any further acquisitions.
- Review environmental liabilities and indemnification recoverability, supplier and customer concentration, related-party arrangements, and the partnership’s discretion over future distributions.