CrossAmerica Partners LP — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. CrossAmerica distributes wholesale motor fuel, owns or leases fuel retail sites, and operates retail fuel and convenience stores. Results reflect continued recovery from COVID-19 and the full-period impact of acquisitions completed in 2020; the prior-year comparisons are therefore not wholly like-for-like.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $859.3 million | $398.4 million | $1,516.6 million | $790.1 million |
| Gross profit | $65.1 million | $57.6 million | $120.0 million | $93.4 million |
| Operating income | $8.2 million | $6.3 million | $7.3 million | $83.8 million |
| Net income | $4.8 million | $5.2 million | $0.8 million | $77.3 million |
| Basic and diluted earnings per unit | $0.13 | $0.14 | $0.02 | $2.09 |
| Operating cash flow | Not provided here | Not provided here | $41.0 million | $61.6 million |
| Distributable cash flow (non-GAAP) | $25.0 million | $26.0 million | $40.8 million | $46.5 million |
| Distribution coverage ratio (non-GAAP) | 1.26x | 1.31x | 1.02x | 1.20x |
Q2 gross margin, calculated as gross profit divided by revenue, was approximately 7.6%, versus 14.5% a year earlier; first-half gross margin was approximately 7.9%, versus 11.8%. Revenue growth largely reflects higher fuel prices and greater volumes, rather than equivalent growth in gross profit. Management reported Q2 wholesale volume up 27% and retail volume up 42%; first-half wholesale volume rose 30% and retail volume rose 83%.
At June 30, cash was $0.6 million and current assets were $81.6 million, compared with current liabilities of $156.8 million. Debt and finance lease obligations totaled $552.2 million, including $533.8 million outstanding under the CAPL Credit Facility. The facility’s covenant-adjusted availability was $135.0 million at June 30. Operating cash flow declined by $20.6 million year over year, while capital expenditures were $21.9 million and distributions paid were $39.8 million in the first half.
Material changes and unusual items
- First-half 2020 net income included a $67.6 million gain on the sale of the partnership’s CST Fuel Supply investment. That gain, along with other disposition gains, explains much of the sharp decline in reported first-half 2021 operating income and net income. The CST exchange also ended the partnership’s income from that equity investment.
- Q2 2021 operating revenue increased 116% and gross profit increased 13% year over year. Management attributed growth to acquired sites and contracts, recovering volumes, and higher fuel prices; higher crude prices and changing wholesale fuel costs also pressured variable-priced fuel margins.
- Depreciation, amortization and accretion included $5.2 million of impairment charges in the first half, primarily tied to sites in the ongoing real estate rationalization program. The partnership recorded a net $1.1 million gain on site sales in the first half.
- On April 28, 2021, the partnership agreed to acquire 106 7-Eleven-operated sites for $263.0 million, subject to adjustments. Two sites closed by June 30 for $4.2 million; by August 5, 32 sites had closed for $106.2 million. Management expected completion early in Q4 2021.
Outlook, risks and contingencies
Management expected the Circle K exchanges, CST Fuel Supply Exchange, prior retail and wholesale acquisitions, and the 7-Eleven acquisition to contribute fuel volume and gross profit. It provided no specific earnings or revenue guidance. The Board approved a Q2 distribution of $0.525 per unit, payable August 10, 2021; future distributions remain discretionary and are not guaranteed.
In July 2021, the partnership established a separate $200 million JKM secured facility to help fund the 7-Eleven acquisition; $64.4 million was drawn by August 5. It also amended the CAPL Credit Facility, including temporarily relaxed leverage limits. At June 30, the partnership was in compliance with its existing debt covenants. Fuel-price volatility, demand and margin changes, COVID-19 effects, acquisition execution and financing, debt covenant compliance, environmental remediation, and related-party conflicts are significant risks. Recorded environmental liabilities were $5.7 million at June 30, partly offset by $4.2 million of recorded indemnification assets. Management said ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the 7-Eleven site acquisition completed on schedule and at the expected aggregate cost, and how the sites perform after rebranding.
- Post-amendment leverage, facility draws, covenant headroom and financing costs, including the effect of the new JKM facility.
- Whether operating cash flow and distributable cash flow support the $0.525-per-unit quarterly distribution; first-half coverage was 1.02x.
- How fuel volumes and margins respond to crude-price volatility and the ongoing recovery from COVID-19.
- Progress and cash costs of site rationalization, impairments and environmental remediation, and the terms and oversight of material related-party arrangements.