CrossAmerica Partners LP — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. CrossAmerica is a fuel wholesaler and retailer, site lessor, and convenience-store operator. Amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $647.4 | $763.8 | $1,125.2 | $1,245.9 |
| Gross profit | $38.3 | $26.9 | $73.3 | $43.6 |
| Operating income | $3.7 | $1.6 | $3.2 | $7.1 |
| Net income (loss), consolidated | $0.03 | $1.9 | ($2.9) | $3.3 |
| Net income (loss) available to limited partners | ($0.2) | $1.9 | ($3.3) | $3.3 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $16.5 | $2.5 |
| Distributable cash flow (non-GAAP) | $14.3 | $13.5 | $24.4 | $21.0 |
| Distribution coverage | 1.04x | 1.40x | 0.90x | 1.10x |
- Gross margin rose to approximately 5.9% in Q2 and 6.5% for the first half, from 3.5% in both comparable 2014 periods. Operating margin was approximately 0.6% in Q2 (0.2% in 2014) and 0.3% for the first half (0.6% in 2014).
- First-half operating cash flow improved, while investing used $126.2 million, primarily for acquisitions; financing provided $99.1 million. Cash declined $10.6 million to $4.6 million.
- At June 30, assets were $737.8 million, current assets $75.1 million and current liabilities $86.0 million. Total debt and capital lease obligations were $274.3 million, including $186.9 million drawn on the revolving facility. The reported balance-sheet figures imply a current-liability excess of $10.9 million.
- Revolver availability was $139.5 million at June 30, after letters of credit and covenant constraints, and approximately $98.9 million after July transactions. The revolver rate was 3.44%; the partnership reported compliance with its leverage and interest-coverage covenants.
- Distributions were $0.5475 per unit for Q2 and $1.09 per unit for the first half, versus $0.5125 and $1.025, respectively, in 2014. First-half distributable cash flow was below distributions paid.
Material changes and business developments
- Revenue fell 15% in Q2 and 10% for the first half, mainly because lower wholesale fuel prices reduced reported sales. NY Harbor conventional gasoline averaged $1.91 per gallon in both 2015 comparison periods, versus $2.89 in Q2 2014 and $2.81 in the first half of 2014.
- Despite lower revenue, gross profit increased 42% in Q2 and 68% for the first half. Acquisitions lifted volumes and retail merchandise contributions; lower fuel prices also reduced cost of sales. Wholesale margins were pressured by reduced supplier discounts and incentives.
- Acquisition-related operating costs, depreciation and amortization increased. Interest expense rose to $4.7 million in Q2 and $9.0 million for the first half, reflecting borrowing to fund acquisitions.
- In January, CrossAmerica acquired a 5% interest in CST Fuel Supply for approximately $60.0 million in common units. It acquired the Landmark sites and fuel assets for $41.2 million and Erickson for $81.9 million net of cash acquired. The June common-unit offering generated $138.5 million net, used to reduce revolver borrowings.
- After quarter-end, CrossAmerica acquired a further 12.5% CST Fuel Supply interest, real property at 29 CST new-to-industry stores, and the One Stop network and related assets. These July transactions increased financing needs; the filing reports approximately $98.9 million of remaining revolver availability afterward.
Outlook, risks and unusual items
- Management expected total fuel volumes and rental income to increase in 2015, primarily due to acquisitions, and said it would continue to assess acquisitions. The filing gives no quantified earnings or distribution guidance and cautions that results are subject to risks and uncertainty.
- Management identifies fuel-price volatility, changing demand, competition, weather, acquisition financing and integration, regulation, environmental liabilities, and CST-related conflicts of interest as risks. A $10-per-barrel crude-price change was estimated to affect annual wholesale fuel gross profit by approximately $2.5 million; a one-percentage-point change in the borrowing rate would affect annual interest expense by approximately $1.9 million.
- Related-party exposure is material: DMS represented approximately 17% of wholesale distribution volume and 42% of rental income. CST fuel sales and leases are conducted under related-party agreements; certain management and other service costs are also allocated by CST or paid to related parties.
- Environmental liabilities for contributed sites remain the responsibility of predecessor entities under indemnification arrangements; related liabilities were $13.5 million and indemnification assets $11.6 million at June 30. Management said ordinary-course litigation was not expected to materially affect results, but noted estimates may prove inaccurate.
- CrossAmerica recorded a $1.8 million estimated cost for a retail workforce reduction, recognized over the required service period. It also reported $2.1 million of termination-benefit accruals at June 30. Management noted substantial seasonality, with historically higher fuel volumes in Q2 and Q3.
- The partnership reported effective disclosure controls. Erickson’s internal controls were still being assessed during integration; management anticipated excluding them from the formal year-end effectiveness evaluation because of integration timing.
Investor verification priorities
- Reconcile first-half distributable cash flow coverage of 0.90x with distributions paid, and assess the sustainability of the distribution given negative GAAP earnings available to limited partners.
- Review post-June acquisition funding, unit issuance and dilution, remaining revolver capacity, and covenant headroom.
- Assess whether acquired retail operations can generate sufficient incremental gross profit to offset higher operating costs, depreciation and interest expense.
- Evaluate dependence on DMS, CST and other related parties, including transaction terms, governance safeguards and CST’s conflicts of interest.
- Monitor environmental indemnification recoverability, acquisition accounting estimates, and Erickson control integration.