CrossAmerica Partners LP — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Comparisons are with the corresponding 2015 periods unless noted. CrossAmerica distributes wholesale and retail motor fuel, leases fuel-site properties, and operates convenience stores.
Financial results and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $512.6 million | $650.1 million | $880.4 million | $1,130.6 million |
| Gross profit | $40.5 million | $41.2 million | $77.7 million | $78.9 million |
| Operating income | $9.4 million | $3.7 million | $15.3 million | $3.2 million |
| Consolidated net income (loss) | $3.6 million | $0.03 million | $5.4 million | $(2.9) million |
| Net income available to limited partners | $2.8 million | $(0.2) million | $3.8 million | $(3.3) million |
| Common-unit earnings | $0.08 | $(0.01) | $0.11 | $(0.13) |
| Adjusted EBITDA | $27.1 million | $19.1 million | $49.3 million | $34.6 million |
| Distributable cash flow (DCF) | $21.2 million | $14.3 million | $38.5 million | $24.4 million |
| DCF distribution coverage | 1.07x | 1.04x | 0.97x | 0.90x |
- Six-month operating cash flow was $37.0 million, versus $16.5 million in 2015. Investing used $60.5 million, principally for acquisitions; financing provided $25.5 million. Cash ended the period at $3.3 million.
- At June 30, 2016, total assets were $897.5 million and total liabilities were $663.4 million. Debt and lease financing obligations totaled $489.3 million, including $430.0 million drawn on the $550 million revolving facility. The reported debt balance after deferred financing fees was $481.9 million.
- Revolver availability, after covenant constraints, was $80.4 million at June 30 and approximately $101.4 million as of August 3. The partnership reported compliance with its leverage and interest-coverage covenants; its credit-agreement leverage ratio was 4.29x at June 30. Revolver interest was 3.46%.
- Cash distributions paid per unit were $0.5975 in Q2; the board declared $0.6025 per unit for Q2, payable August 15. The six-month distribution paid was $1.19 per unit.
Material changes and drivers
- Revenue fell 21% in Q2 and 22% for the first half, mainly because lower crude and wholesale fuel prices reduced reported fuel revenue. Gross profit declined only 2% in both comparisons, as lower fuel costs also reduced cost of sales.
- Management attributed the improvement in operating income and DCF largely to higher rent and other margin, increased income from the CST Fuel Supply investment, and lower operating and administrative expenses. Equity income from CST Fuel Supply rose to $4.2 million in Q2 and $8.3 million for the half, partly reflecting the additional interest acquired in 2015.
- Retail results weakened: six-month Retail segment Adjusted EBITDA was $4.5 million, down from $9.3 million. Management cited site conversions to dealer-operated locations, lower fuel volumes and merchandise gross profit, and a less favorable merchandise mix. Seventy company-operated stores were converted during the first half.
- Holiday Stationstores acquisition: CrossAmerica acquired 31 franchise stores and three liquor stores on March 29 for approximately $52.4 million, funded with revolver borrowings. It also paid CST $2.9 million for dealer and subwholesaler contracts.
- In February, 7,525,000 subordinated units converted one-for-one into common units after the subordination period ended. Common units outstanding were 33.3 million at June 30.
Outlook, risks and unusual items
- Management expected full-year 2016 fuel volumes to be slightly above 2015 after adjusting for 2015 asset divestitures, rent income to increase as sites convert to lessee-dealer operation, and continued volatility in fuel markets. It reported modest improvement in wholesale fuel margins during Q2 and said acquisitions would remain opportunistic and dependent on attractive targets and financing.
- On July 15, 2016, the partnership agreed to acquire certain State Oil Company assets in the Chicago area for approximately $45 million, subject to customary closing conditions and then expected to close in Q3.
- On July 7, CST paid CrossAmerica approximately $18.2 million to compensate for reduced CST Fuel Supply value following CST’s sale of California and Wyoming sites. This post-quarter receipt is not included in June 30 cash.
- The Rocky Top deferred site-purchase obligation was renegotiated in June: the purchase obligation was eliminated and replaced by a long-term triple-net lease, initially 15 years and 8 months, with starting annual rent of $1.8 million and 1.5% annual increases. The related liability remained on the balance sheet and was reclassified.
- Liquidity and distribution capacity remain sensitive to operating cash flow, acquisitions, financing access and debt service. Other key exposures include fuel-price volatility, competition, weather, environmental obligations, litigation and regulatory changes.
- Customer and related-party concentration is material: DMS represented approximately 17% of wholesale volume and 30% of rental income; CST accounted for 22% of rental income. CST controls the general partner and owns the incentive distribution rights. Management reported no material expected adverse effect from current litigation and no material change in risk factors.
- Management stated it believed available operating cash flow, borrowing capacity and other funding sources would meet commitments, debt service, anticipated capital spending and distributions; this is a forward-looking assessment, not a guarantee.
Investor verification priorities
- Reconcile DCF coverage of 0.97x for the first half with distributions paid, and assess the sustainability of the distribution against recurring cash generation.
- Verify post-quarter receipt and use of the $18.2 million CST refund, the closing and financing of the State Oil acquisition, and updated revolver availability.
- Track leverage against the covenant step-down to 4.50x scheduled for December 31, 2016 absent further material acquisitions, and assess interest-rate sensitivity.
- Evaluate whether site conversions and acquisitions can sustain rent and wholesale earnings while offsetting lower retail fuel and merchandise contribution.
- Review related-party terms, customer concentration, CST governance and IDR distributions, along with the final purchase-price allocation for Holiday.