CrossAmerica Partners LP — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless noted otherwise, dollar amounts below are in millions. The partnership distributes motor fuel, owns and leases retail sites, and—after an April acquisition—also operates retail stores.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $398.4 | $605.5 | $790.1 | $1,077.3 |
| Gross profit | $57.6 | $41.4 | $93.4 | $78.4 |
| Operating income | $6.3 | $13.9 | $83.8 | $21.5 |
| Net income | $5.2 | $6.4 | $77.3 | $6.7 |
| Net income per common unit | $0.14 | $0.18 | $2.09 | $0.19 |
Q2 gross margin was approximately 14.5%, versus 6.8% a year earlier; the six-month margin was approximately 11.8%, versus 7.3%. Lower crude and wholesale fuel prices reduced reported revenue, but improved DTW margins and transaction-related activity lifted gross profit. Q2 operating income and net income declined despite higher gross profit, reflecting higher operating costs, depreciation and a $10.9 million lease-termination loss.
- Cash flow: Six-month operating cash flow was $61.6 million, compared with $34.2 million. Investing cash outflow was $6.6 million and financing cash outflow was $54.7 million. The period included $10.8 million of capital expenditures, $22.3 million of acquisition cash payments, and $38.1 million of distributions.
- Debt and liquidity: At June 30, revolving borrowings were $503.7 million and finance lease obligations were $21.3 million. Cash was $2.2 million; current assets were $82.0 million against current liabilities of $154.7 million. Credit-facility availability, after covenant restrictions, was $203.1 million at June 30 and $197.8 million at July 31. The partnership reported compliance with its financial covenants.
- Interest-rate exposure: Three swaps covering $300 million of notional debt effectively fixed approximately 60% of variable-rate borrowings. The reported effective rate, including swaps, was 2.35% at June 30.
- Distributions: The quarterly distribution remained $0.525 per unit. Non-GAAP distributable cash flow was $26.0 million in Q2 and $46.5 million for the first half; reported distribution coverage was 1.31x and 1.20x, respectively. These measures are not GAAP measures.
Material changes and unusual items
- Six-month net income included a $67.6 million gain from exchanging the partnership’s 17.5% CST Fuel Supply interest for assets and cash. Together with property-exchange and site-sale gains, this materially boosted reported first-half earnings; it is not representative of recurring operating profit.
- On April 14, the partnership acquired retail and wholesale assets covering 169 retail sites, expanded wholesale distribution by 110 sites, and began operating company-run stores again. Consideration was described as approximately $36 million, exclusive of inventory and in-store cash, including cash and newly issued units. The transaction included ten-year related-party master leases with $8.1 million in annual rent.
- Three Circle K asset-exchange tranches closed in 2020. The final 23 Circle K properties and four partnership properties were expected to be exchanged in the second half of 2020.
- In February, the partnership cancelled its incentive distribution rights in exchange for 2,528,673 common units. The April acquisition also issued 842,891 units to entities controlled by the Topper Group.
- First-half revenue fell 27%, mainly due to lower fuel prices and lower wholesale volume. Q2 wholesale volume rose 0.6% year over year, while first-half wholesale volume fell 1.8%; management attributed the latter primarily to COVID-19, partly offset by acquired volume.
Outlook, risks and contingencies
Management provided no quantified earnings or cash-flow guidance. It expected the asset exchanges, CST Fuel Supply transaction and April acquisition to add fuel volume and gross profit, while noting that COVID-19 continued to weigh on volumes. Fuel volumes had begun recovering in Q2 but remained below historical levels. Management said sustained volume declines or margin erosion could materially affect cash flow, financial condition and the ability to pay distributions. It also cited crude-price volatility, seasonality, dealer credit risk, distribution-channel disruption, integration and acquisition financing, debt covenants, and environmental obligations as risks.
- The April acquisition and CST exchange involve environmental allocation provisions: counterparties retained certain known contamination liabilities, while the partnership assumed liability for unknown contamination at specified sites.
- Recorded environmental liabilities were $4.3 million at June 30, partly offset by $3.5 million of recorded indemnification assets. The filing states that remediation estimates may change as information and circumstances develop.
- The FTC agreed to a $3.5 million civil-penalty settlement concerning delayed divestiture of nine sites by Circle K; Circle K indemnified the partnership, and the partnership anticipated Circle K would pay the penalty.
- Management stated that ordinary-course litigation was not expected to materially affect financial position, results or cash flows. Distributions remain at the Board’s discretion and are not required by the partnership agreement.
- The Topper Group controls the general partner and had beneficial ownership of 48.9% of limited-partner units as of July 31. The filing describes multiple related-party transactions, including the asset acquisition, leases and management services.
Important facts for investors to verify
- How much of first-half earnings and cash generation is recurring, excluding the $67.6 million CST Fuel Supply gain and other disposition gains?
- Whether fuel volumes continued recovering after June 30, and how COVID-19 affected dealer credit, store traffic and margins.
- Actual results and integration costs for the acquired company-operated stores, including the $8.1 million annual related-party lease commitment.
- Remaining Circle K exchange closings, final valuation adjustments and any related cash settlement.
- Current borrowing availability, covenant headroom, leverage and the partnership’s capacity to sustain distributions given low cash and current liabilities exceeding current assets.
- Environmental exposure at acquired and exchanged sites, and the enforceability and collectability of indemnities and reimbursement assets.
- Terms and governance of related-party arrangements, including the Topper Group’s control and ownership interests.