Business context and reporting period
CrossAmerica Partners LP (CAPL) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. Its businesses include wholesale fuel distribution, retail fuel and convenience merchandise sales, and leasing retail properties. Results are seasonal, with fuel volumes historically highest in the second and third quarters.
Financial performance and liquidity
Amounts are in millions of dollars except per-unit data, margins, and ratios.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,274.4 | $985.1 | $3,842.7 | $2,501.7 |
| Gross profit | $114.7 | $75.7 | $282.5 | $195.7 |
| Gross margin | 9.0% | 7.7% | 7.4% | 7.8% |
| Operating income | $39.6 | $12.6 | $70.4 | $19.9 |
| Net income | $27.6 | $8.9 | $46.6 | $9.7 |
| Net income available to limited partners | $27.0 | $8.9 | $45.5 | $9.7 |
| Basic and diluted earnings per common unit | $0.71 | $0.23 | $1.20 | $0.26 |
| Adjusted EBITDA | $62.2 | $35.9 | $135.5 | $86.3 |
| Distributable cash flow | $50.9 | $30.4 | $107.5 | $71.2 |
| Distribution coverage ratio | 2.55x | 1.53x | 1.80x | 1.19x |
Operating cash flow for the first nine months was $126.5 million, up from $76.3 million. Investing used $24.2 million, versus $283.2 million in 2021, when acquisition spending was substantially higher. Financing used $98.2 million, compared with $214.7 million provided in the prior-year period; CAPL paid $59.7 million in common-unit distributions.
At September 30, cash was $11.8 million; total debt and finance lease obligations were $767.1 million, down from $829.8 million at December 31, 2021. Current assets were $122.6 million and current liabilities $176.2 million. Credit-facility availability, after covenant restrictions, was $152.9 million under the CAPL facility and $14.2 million under the JKM facility at September 30. The filing reports CAPL facility availability of $163.6 million as of November 3. CAPL’s effective facility rate, including swaps, was 3.9%; the JKM facility’s weighted-average rate was 5.2%. Management reported compliance with both facilities’ financial covenants.
Debt principal is heavily concentrated: $604.4 million is scheduled for 2024 and $128.7 million for 2026. Common-unit distributions remained $0.525 per quarter ($1.575 for the nine-month period).
Material changes versus prior comparable periods
- Q3 revenue rose 29% and gross profit rose 51%; nine-month revenue rose 54% and gross profit rose 44%. Higher wholesale and retail fuel prices were a major driver, so revenue growth does not by itself indicate comparable growth in volumes.
- Q3 operating income increased to $39.6 million from $12.6 million. Nine-month operating income increased to $70.4 million from $19.9 million. Growth reflected stronger fuel margins and the 7-Eleven sites acquired in 2021.
- Interest expense rose 69% in Q3 and 82% for the nine-month period, mainly due to higher LIBOR, borrowings associated with the 7-Eleven acquisition, and financing-cost amortization.
- Q3 wholesale gallons distributed fell 5% year over year, while retail gallons sold rose 15%; for the nine months, wholesale gallons increased 2% and retail gallons increased 33%. The company attributed retail growth largely to the acquired sites.
- Nine-month gross margin as a share of revenue declined to 7.4% from 7.8%, despite higher gross profit, reflecting the mix and price effects in this fuel-intensive business.
Outlook, risks, contingencies, and unusual items
- No numerical earnings or cash-flow guidance is provided. Management expected 2022 results to benefit from the 7-Eleven assets, with associated higher retail operating expenses, and anticipated higher interest expense than in 2021 because of rising LIBOR. It said it would continue to evaluate acquisitions opportunistically.
- CAPL agreed to acquire assets from Community Service Stations for $27.5 million plus working capital, including fuel supply contracts for 39 dealer-owned locations, 34 sub-wholesaler accounts, and two commission locations. Closing was expected in Q4 2022, subject to customary conditions; anticipated funding was cash on hand and/or CAPL facility borrowings.
- In March 2022, Holdings issued $25 million of Series A preferred interests to entities or persons affiliated with significant insiders. They carry a 9% annual preferred return, compounded quarterly; the return accumulates into the liquidation preference before October 2026. Exchange may require common units valued at $23.74 each or, at a holder’s election, cash. The proceeds were used to prepay JKM term debt. Preferred-interest accretion was $1.1 million for the nine months.
- Fuel revenue, costs, and margins are sensitive to volatile crude and wholesale fuel prices, competitive retail pricing, and timing of pump-price changes. Management also cited inflation in fuel, merchandise, labor, and other costs; it cautioned that cost increases may not always be passed through.
- Other risks include variable-rate debt and refinancing needs, acquisition execution and financing, supplier and carrier concentration, weather and seasonality, competition, environmental remediation, and litigation. Four suppliers represented approximately 81% of wholesale fuel purchases in the nine-month period; one supplier represented approximately 49% of merchandise purchases.
- Environmental liabilities recorded were $7.8 million at September 30, with $5.6 million of related indemnification assets. Management said ordinary-course legal proceedings were not reasonably expected to have a material adverse effect, while noting litigation outcomes remain uncertain. The filing reported no material risk-factor changes and no significant market-risk changes since year-end.
- Management stated that available cash flow and borrowing capacity should be sufficient for financial commitments, debt service, anticipated capital spending, contingencies, and distributions, but noted that weaker cash flow could impair borrowing capacity and the ability to maintain distributions. Distributions remain discretionary and are not guaranteed.
Important facts for investors to verify
- Whether improved margins and distributable cash flow persist as fuel prices, volatility, and base-business volumes change.
- How the 7-Eleven assets and the proposed Community Service Stations acquisition affect recurring cash generation, operating costs, and leverage.
- Debt refinancing and covenant capacity, particularly the scheduled 2024 principal payment, alongside rising borrowing costs.
- The preferred interests’ accumulated 9% return and potential cash repayment or common-unit dilution upon exchange.
- Whether distributable cash flow continues to cover the $0.525 quarterly distribution; coverage is a non-GAAP measure, and management changed its calculation methodology in 2022.
- Exposure to concentrated suppliers, environmental obligations, related-party transactions, and the assumptions underlying site-sale and remediation estimates.