CrossAmerica Partners LP (then Lehigh Gas Partners LP) — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial amounts below are in millions of dollars unless otherwise noted. Results reflect major acquisitions completed during the period, so comparisons with 2013 are not fully like-for-like.
Business context
The partnership wholesales and retails motor fuels and owns or leases fuel-station sites. Following its April 30 acquisition of PMI, it also operated convenience stores and quick-service restaurants. It reported 1,092 fuel-supply sites at June 30. PMI added 87 convenience stores; the May Atlas acquisition added fuel-supply contracts and sites in the Chicago area.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $767.2 | $488.2 | $1,249.2 | $960.1 |
| Operating income | $1.6 | $9.1 | $7.1 | $16.6 |
| Net income | $1.9 | $5.5 | $3.3 | $9.2 |
| Net income per unit | $0.10 | $0.36 | $0.17 | $0.61 |
| Adjusted EBITDA | $10.0 | $14.9 | $21.0 | $27.5 |
| Distributable cash flow | $6.4 | $11.2 | $13.6 | $20.6 |
- Q2 revenue rose 57.1% and first-half revenue rose 30.1%, driven substantially by acquired businesses and higher fuel volumes. PMI contributed $173.8 million of revenue and Atlas $28.4 million since their respective closing dates.
- Fuel gross margin increased in aggregate, but margin per gallon declined: Q2 to $0.071 from $0.075; first half to $0.067 from $0.071. First-half fuel volume increased 27.3% to 395.1 million gallons.
- Lower operating income and net income reflected higher operating and administrative costs, including acquisition costs, as well as increased depreciation and interest. Q2 SG&A included $5.6 million of acquisition costs; first-half acquisition costs were $5.9 million.
- Food and merchandise sales began with PMI; reported margins were affected by a one-time $1.6 million purchase-accounting inventory charge.
Cash flow, debt and liquidity
- First-half operating cash flow was $2.5 million, versus $14.1 million a year earlier. Investing cash flow was negative $104.3 million, mainly reflecting acquisitions; financing cash flow was positive $98.5 million, largely from increased borrowings. Cash ended the period at $0.9 million.
- Debt was $299.7 million at June 30, up from $173.6 million at year-end 2013. The $450 million secured revolving facility had a 2.8% weighted-average borrowing rate and $160.3 million of stated availability, with $18.2 million of letters of credit outstanding.
- Current assets were $88.6 million and current liabilities $79.3 million. The partnership cited operating cash, facility capacity and potential securities issuances as liquidity sources, while noting that weaker cash flows could constrain borrowing and distributions.
- First-half distributions paid on common and subordinated units totaled $19.2 million, compared with $13.6 million of distributable cash flow. These figures are not a full-year coverage measure. The partnership declared a subsequent quarterly distribution of $0.5225 per unit.
Material changes, outlook and notable items
- Acquisitions and divestiture: PMI was acquired on April 30; Atlas assets were acquired on May 19 for total stated consideration of $40.2 million, subject to adjustments. PMI’s lubricants business was sold to Zimri for $14.0 million; the partnership may receive any profit on a later resale. Acquisition purchase-price allocations remained preliminary.
- Management outlook: Management expected 2014 fuel volume to increase, primarily from acquisitions, partly offset by market conditions; fuel margin per gallon to remain consistent with historical results; and rent income to rise from acquisitions. No numerical earnings guidance was provided.
- Distribution policy: Management stated an intention to make at least $0.4375 per unit quarterly, but distributions remain discretionary and subject to credit-agreement restrictions. The August 2014 declared distribution was $0.5225 per unit.
- Tax and other unusual items: A $5.2 million release of deferred-tax valuation allowance contributed to the first-half tax benefit of $3.8 million; the release depends on a preliminary acquisition allocation and could change materially. First-half asset-sale gains were $1.5 million.
- Subsequent transaction: The partnership announced an agreement to sell its general partner to a CST Brands subsidiary, subject to conditions and expected to close in early Q4 2014. Related contemplated transactions included transferring fuel supply for 78 locations and assigning 12 site subleases. The partnership said it would remain publicly traded and separately operated.
- Key risks and obligations: Fuel-price volatility can affect retail inventory margins; the partnership had $7.5 million of motor-fuel inventory and did not hedge that exposure. Other risks include competitive pressure, environmental remediation, fuel transport and storage hazards, convenience-store and food-related liabilities, and regulatory and litigation risks. The filing lists $145.2 million of future minimum lessee operating-lease payments and minimum fuel purchase commitments of approximately 3.9 billion gallons, whose dollar cost was not estimable.
Important facts for investors to verify
- Whether PMI and Atlas deliver the expected integration benefits and improved earnings after acquisition costs and other purchase-accounting effects.
- Whether cash generation and covenant compliance can support distributions as debt and interest costs rise; review the actual leverage and distribution coverage calculations.
- The final acquisition valuations, tax-allowance treatment, and any resulting changes to goodwill, intangible assets or reported tax benefits.
- The closing terms and financial effect of the CST general-partner sale and associated fuel-supply and sublease transfers.
- The extent of environmental exposure, fuel purchase obligations, and the ability to recover indemnified remediation costs.