CrossAmerica Partners LP — Q3 2016 Form 10-Q
Business and period. This summary covers the quarter and nine months ended September 30, 2016. CrossAmerica distributes wholesale motor fuel, operates retail fuel and convenience businesses, and owns or leases retail sites. The business is seasonal, with historically higher volumes in the second and third quarters.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $488.0 million | $627.8 million | $1,368.3 million | $1,758.4 million |
| Gross profit | $39.1 million | $51.0 million | $116.8 million | $129.9 million |
| Operating income | $10.0 million | $14.8 million | $25.3 million | $18.1 million |
| Net income attributable to limited partners | $3.0 million | $10.2 million | $8.4 million | $7.2 million |
| Net income available to limited partners after IDRs | $2.1 million | $9.7 million | $5.9 million | $6.4 million |
| Diluted earnings per common unit | $0.06 | $0.29 | $0.18 | $0.23 |
| Adjusted EBITDA | $27.1 million | $31.0 million | $76.4 million | $65.6 million |
| Distributable cash flow | $21.3 million | $25.1 million | $59.7 million | $49.5 million |
| Distribution coverage | 1.06x | 1.35x | 1.00x | 1.08x |
Gross margin, calculated as gross profit divided by revenue, was approximately 8.0% in Q3 2016 versus 8.1% in Q3 2015, and 8.5% for the first nine months of 2016 versus 7.4% in 2015.
Cash flow and liquidity. Nine-month operating cash flow was $63.7 million, compared with $48.9 million in 2015. Investing cash outflow was $90.3 million, principally reflecting acquisitions; financing cash inflow was $28.3 million. Cash was $2.9 million at September 30. Debt and capital lease obligations totaled $513.1 million gross, including $454.5 million drawn on the revolving facility; the balance-sheet carrying amount, net of deferred financing fees, was $506.0 million. Facility availability after covenant constraints was $57.0 million at September 30 and approximately $53.0 million at November 4. The facility rate was 3.52%; reported leverage was 4.50x, and the Partnership was in compliance with its covenants.
Changes and operating drivers
- Q3 revenue fell 22% and gross profit fell 23% year over year. For the first nine months, revenue declined $390.1 million and gross profit declined $13.0 million.
- Management attributed lower reported revenue mainly to lower wholesale fuel prices and conversion of company-operated stores to dealer-operated sites. Q3 WTI averaged $44.85 per barrel, down 4% year over year; the nine-month average was $41.35, down 19%.
- Retail segment Adjusted EBITDA fell to $2.0 million in Q3 from $7.3 million and to $6.5 million for the nine months from $16.6 million. Lower retail fuel margins and fewer company-operated locations weighed on results; related operating expenses also declined.
- Wholesale segment Adjusted EBITDA was $27.0 million in Q3, down from $28.0 million, but increased to $77.0 million for the nine months from $63.3 million. Higher rent income and increased CST Fuel Supply equity earnings supported the year-to-date result.
- The Partnership acquired 31 franchised Holiday stores and three liquor stores for approximately $52.4 million in March, and State Oil assets and dealer accounts for approximately $41.8 million in September. It converted 72 company-operated stores to lessee-dealer status during the first nine months.
- All 7.525 million subordinated units converted into common units in February 2016. The quarterly distribution increased from $0.5625 per unit in Q3 2015 to $0.6025 paid for Q3 2016; a $0.6075 distribution was declared for the quarter, payable November 15, 2016.
Outlook, risks and unusual items
- Management expected full-year 2016 fuel volumes to exceed 2015 levels, citing acquisitions, and expected rent income to increase with acquisitions and further dealer conversions. It noted improved wholesale margins in Q2 and Q3 relative to Q1, but cautioned that fuel markets remain volatile. No numerical earnings or cash-flow guidance was provided.
- CST had agreed to be acquired by Circle K Stores Inc., a subsidiary of Alimentation Couche-Tard. The transaction, expected to close in early 2017 subject to CST shareholder and regulatory approvals, would transfer control of CrossAmerica’s general partner, CST’s 19.6% limited-partner interest, and the IDRs. The filing warns that merger restrictions, integration demands, possible severance costs, and future conflicts could affect CrossAmerica.
- Customer and counterparty concentration is material: DMS represented 16% of Q3 wholesale volume and 25% of Q3 rental income; CST represented 8% of wholesale volume and 21% of rental income. Related-party transactions include fuel sales, leases, management fees, and unit issuances for fees.
- The $18.2 million CST refund related to reduced CST Fuel Supply volumes after CST’s sale of California and Wyoming sites was recorded as an equity contribution; $17.5 million was cash and the remainder was common units.
- The Partnership cited exposure to fuel-price volatility, competition, weather, environmental and regulatory matters, financing access, integration of acquisitions, and distribution sustainability. A former employee lawsuit seeks approximately $1.6 million in severance-related damages; management intends to contest it. Management did not expect the disclosed legal proceedings, individually or together, to materially affect the company’s financial position, results, or cash flows.
- Operating cash flow exceeded distributions paid during the first nine months, but distribution coverage was 1.00x for that period and declined to 1.06x in Q3. Coverage and liquidity remain sensitive to operating performance, acquisitions, debt costs, and distributions.
Investor verification points
- Review the composition and sustainability of distributable cash flow and the 1.00x year-to-date distribution coverage, including the effect of unit distributions to CST for management fees.
- Assess leverage, covenant headroom, the December 2016 leverage-covenant step-down absent a material acquisition, and remaining revolving-credit availability.
- Verify the final purchase-price allocations and performance contribution of the Holiday and State Oil acquisitions, and progress converting company-operated stores to dealer sites.
- Monitor the CST/Circle K transaction, including closing conditions, operating restrictions, control changes, potential severance obligations, and related-party arrangements.
- Evaluate concentration in DMS and CST, fuel-margin exposure, and the potential outcome and costs of the former employee litigation.