CrossAmerica Partners LP — Q3 2017 Form 10-Q
Business context and reporting period
The filing covers the three and nine months ended September 30, 2017, compared with the same 2016 periods. CrossAmerica distributes motor fuels wholesale and at retail, leases retail sites, and operates some retail locations. On June 28, 2017, Circle K completed its acquisition of CST and gained control of CrossAmerica’s general partner; Circle K indirectly held 20.8% of CrossAmerica’s limited partner interests and all incentive distribution rights.
Financial results and liquidity
- Revenue: Q3 revenue was $544.1 million, up 11.5%; nine-month revenue was $1.542 billion, up 12.7%. Management attributed much of the increase to higher crude oil and wholesale fuel prices.
- Gross profit and margins: Q3 gross profit rose 6.2% to $41.6 million; nine-month gross profit rose 3.3% to $120.6 million. Calculated gross margin was approximately 7.6% for Q3 (versus 8.0%) and 7.8% for nine months (versus 8.5%).
- Profit: Q3 operating income was $12.3 million versus $10.0 million; net income available to limited partners was $3.2 million, or $0.09 per unit, versus $2.1 million, or $0.06. For nine months, operating income fell to $20.6 million from $25.3 million, and limited partners had a $1.1 million loss available to them, or $(0.03) per unit, versus income of $5.9 million, or $0.18.
- Cash flow and distributions: Nine-month operating cash flow was $66.4 million, versus $63.7 million. Distributable cash flow, a non-GAAP measure, was $59.5 million versus $59.7 million; distribution coverage was 0.95x versus 1.00x. The declared Q3 distribution was $0.6275 per unit, up from $0.6075.
- Debt and liquidity: Total debt and capital lease obligations were $460.0 million, including $431.5 million drawn on the $550 million revolving facility. Facility availability was $53.7 million at September 30; the reported leverage ratio was 4.03x, and the Partnership was in covenant compliance. Cash was $1.6 million and current liabilities exceeded current assets.
- Other metrics: Adjusted EBITDA, a non-GAAP measure, was $29.0 million for Q3 versus $27.1 million, and $80.5 million for nine months versus $76.4 million. Interest expense increased to $7.1 million for Q3 and $20.6 million for nine months.
Material changes versus prior periods
- Fuel-price increases lifted reported revenue and cost of sales; wholesale fuel margin per gallon improved, while retail segment gross profit declined over nine months, including weaker merchandise gross profit and lower retail fuel margins.
- Nine-month earnings were pressured by higher interest expense and approximately $6.8 million of merger-related severance and retention charges, as well as a $1.7 million court award and associated legal costs. Asset-sale gains partly offset these expenses.
- Nine-month cash investing activity improved substantially versus 2016, reflecting $23.9 million of asset-sale proceeds and fewer acquisition outlays; 2016 included significant acquisition spending.
Outlook, risks, contingencies and unusual items
- Management expected rental income to increase in 2017, citing acquisitions and continued conversion of company-operated sites to lessee-dealer sites. Acquisitions would remain opportunistic; no quantified earnings or distribution guidance was provided.
- The planned Jet-Pep transaction would acquire Alabama fuel-supply operations and interests in retail sites for $72.3 million, subject to adjustments and closing conditions. CrossAmerica paid a $2.8 million deposit; closing was expected in Q4 2017 and was mutually conditioned on Circle K’s related purchase.
- Fuel prices and margins are volatile, and the business is seasonal. A one-percentage-point change in interest rates was estimated to affect annual interest expense by about $4.3 million. Management estimated a $10-per-barrel crude-oil change would affect annual wholesale gross profit by about $2.2 million through supplier discounts.
- Customer, supplier and related-party concentration is material: DMS and affiliates accounted for 14% of wholesale volume and 23% of rental income in the nine-month period; CST accounted for 22% of rental income. ExxonMobil, BP and Motiva supplied 28%, 27% and 17% of wholesale fuel purchases, respectively.
- A jury awarded a former executive $1.7 million in a benefits dispute; the charge was recorded in Q3. The Partnership also recorded merger-related separation and retention costs. Management said ordinary-course litigation was not expected to materially affect results overall. The Board may change or discontinue distributions; payment is not guaranteed.
- Management expected the new lease accounting standard to materially affect the balance sheet through recognition of operating-lease assets and liabilities. Revenue recognition adoption was expected to affect disclosures, with no material financial-statement impact identified to date.
Important facts for investors to verify
- Whether the Jet-Pep acquisition closed on the anticipated terms and how it affects borrowing capacity and leverage.
- Whether distributable cash flow can sustainably cover distributions, given nine-month coverage below 1.0x and the Partnership’s limited cash balance.
- Progress in reducing debt and maintaining covenant headroom, particularly with floating-rate borrowing and acquisition needs.
- Ongoing performance of wholesale and retail margins, site conversions, and exposure to major customers, suppliers and related parties.
- Final costs and any further developments related to the executive litigation, merger-related compensation, and required or related-party property sales.