CrossAmerica Partners LP — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The partnership was then named Lehigh Gas Partners LP; it changed its name to CrossAmerica Partners LP effective October 1, 2014. Unless noted otherwise, financial amounts below are in millions of dollars.
Business context and results
The partnership distributes wholesale and retail motor fuel, owns and leases fuel sites, and—following its April 2014 acquisition of Petroleum Marketers, Inc. (PMI)—operates convenience stores and quick-service restaurants. It reported wholesale and retail segments. Results reflect major acquisitions, so reported growth is not solely organic.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $832.7 | $490.6 | $2,082.0 | $1,450.6 |
| Operating income | $8.4 | $7.5 | $15.5 | $24.1 |
| Net income | $4.2 | $4.9 | $7.5 | $14.2 |
| Net income per common and subordinated unit | $0.21 | $0.33 | $0.39 | $0.94 |
| Fuel gross margin | $21.6 | $11.7 | $48.0 | $33.6 |
| Fuel gross margin per gallon | $0.080 | $0.073 | $0.072 | $0.071 |
| Adjusted EBITDA (non-GAAP) | $18.7 | $14.2 | $39.7 | $41.7 |
| Distributable cash flow (non-GAAP) | $13.6 | $10.0 | $27.1 | $30.5 |
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $8.4 million, down from $27.3 million. Management attributed the decline mainly to lower net income and working-capital timing, including credit-card collections. Investing cash outflow was $106.4 million, principally reflecting acquisitions; financing cash inflow was $97.1 million, including the equity offering.
- Cash was $3.3 million at September 30. Debt totaled $172.7 million, including $145.6 million drawn on the revolving facility and $26.3 million of current debt, principally Rocky Top acquisition financing. The $135.0 million net equity offering proceeds were used to reduce revolver borrowings.
- The $550 million secured revolving facility matures March 2019; reported availability was $388.1 million, with a 3.5% weighted-average borrowing rate. The facility has leverage and interest-coverage covenants and restricts distributions in specified default or noncompliance circumstances.
- Nine-month distributions paid on common and subordinated units were $29.0 million, compared with distributable cash flow of $27.1 million. The partnership declared a November 2014 quarterly distribution of $0.5325 per unit, or $12.2 million in total. Distributions are discretionary and not contractually guaranteed.
Material changes and unusual items
- Revenue rose 69.7% in Q3 and 43.5% year to date, substantially reflecting acquired operations and greater fuel volumes. Fuel volume increased 67.9% in Q3 and 41.1% year to date; nine-month fuel margin per gallon was nearly flat year over year.
- Despite higher revenue and fuel gross margin, nine-month operating income fell 35.6% and net income attributable to partners fell 47.2%. Higher acquisition-related operating costs, depreciation and amortization, SG&A, and interest expense contributed. Nine-month SG&A included $6.1 million of acquisition costs; PMI purchase accounting included a one-time $1.6 million merchandise inventory fair-value charge.
- PMI added 87 convenience stores and nine co-located restaurants. The partnership also completed the Atlas acquisition for approximately $39.2 million, including notes receivable. Purchase price allocations for PMI and Atlas remained preliminary and could change.
- A $4.6 million deferred tax valuation allowance release contributed to the nine-month income tax benefit; management said further release of a remaining $1.9 million allowance was reasonably possible within twelve months.
- After quarter-end, CST acquired the general partner and incentive distribution rights; CST took control, and the partnership renamed itself and began trading as CAPL. The partnership also disclosed a $65 million Nice N Easy-related asset transaction funded with credit-facility borrowings, and a related-party sale of fuel supply rights and assignment of leases to DMI for $5.7 million plus a possible $0.8 million earn-out.
Outlook, risks and contingencies
- Management expected 2014 fuel volume to increase due to acquisitions, partly offset by market conditions; it expected fuel gross margin per gallon to remain consistent with historical results and rent income to rise with acquisitions. No numerical earnings or cash-flow guidance was provided.
- Key risks include fuel-price volatility and retail inventory exposure, demand and competition, acquisition integration and financing, interest rates, environmental liabilities, and CST’s control and potential conflicts of interest. Management noted that crude-oil price changes can affect margins, and the partnership did not hedge fuel inventory price risk.
- Environmental liabilities recorded by the partnership were $1.5 million; separate predecessor-entity environmental liabilities were $15.3 million, with related indemnification assets and contractual indemnities described in the filing. Management said pending ordinary-course litigation was not expected to have a material adverse effect.
- Required minimum fuel purchases total approximately 3.84 billion gallons over the disclosed contract periods; the associated dollar obligation could not be reasonably estimated. The partnership reported effective disclosure controls, while PMI’s controls were still being assessed and were excluded from the formal effectiveness evaluation.
Important facts for investors to verify
- Whether acquired businesses deliver durable cash flow after integration costs and whether fuel-volume and margin assumptions hold.
- Distribution coverage: compare recurring distributable cash flow with distributions, debt service, and maintenance capital needs; the nine-month figures show a shortfall on the company’s non-GAAP measure.
- Current covenant headroom, revolver availability, debt maturities and interest-rate sensitivity, particularly after post-quarter acquisition funding.
- Final PMI and Atlas purchase accounting, remaining tax valuation allowance, and the realization of environmental indemnities and reimbursements.
- Terms and economic effects of CST control, related-party arrangements, the DMI contract divestiture, and the post-quarter Nice N Easy transaction.