Business context and reporting period
CrossAmerica Partners LP filed this unaudited Form 10-Q for the quarter ended March 31, 2020. Its business includes wholesale fuel distribution, retail fuel sales through commission-operated sites, and ownership or leasing of fuel retail properties. Results exclude the retail and wholesale assets acquired on April 14, 2020.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $391.7 million | $471.8 million; down 17% |
| Gross profit | $35.7 million | $37.1 million; down 4% |
| Gross margin | 9.1% | 7.9% (calculated as gross profit divided by revenue) |
| Operating income | $77.4 million | $7.6 million |
| Net income | $72.1 million; $2.00 per common unit | $0.2 million; $0.00 per common unit |
| Adjusted EBITDA | $25.3 million | $21.4 million |
| Distributable cash flow / coverage | $20.4 million / 1.08x | $13.3 million / 0.73x |
| Operating cash flow | $17.8 million | $11.0 million |
Q1 2020 net income included a $67.6 million gain from exchanging the Partnership’s 17.5% interest in CST Fuel Supply and a $1.8 million gain on property dispositions. The gains are excluded from Adjusted EBITDA; net income therefore substantially overstates recurring operating performance for the quarter.
Cash and cash equivalents were $8.9 million at March 31, 2020, versus $1.8 million at December 31, 2019. Current assets were $65.2 million and current liabilities $100.5 million. Debt and finance lease obligations totaled $533.5 million, including $511.5 million outstanding on the revolving facility. Facility availability, after covenant restrictions, was $163.6 million at quarter-end and $152.6 million at May 1. The Partnership reported compliance with its financial covenants at March 31.
Common-unit distributions remained $0.525 per unit for the quarter; $18.1 million was paid during the quarter. The Board approved the same rate for Q1, payable May 12, 2020. The Partnership Agreement does not require distributions, and the Board may change or suspend them.
Material changes versus the prior comparable period
- Revenue fell $80.1 million, mainly from lower fuel prices and reduced volumes, the exit from company-operated retail sites during 2019, and lower merchandise sales. WTI averaged $45.34 per barrel, down 17% from $54.82 a year earlier.
- Wholesale fuel gross profit rose $5.1 million, supported by stronger DTW margins as crude prices declined and by Circle K asset exchanges. Wholesale distribution volume nevertheless fell 5%, with COVID-19-related weakness partly offset by acquired sites.
- Retail gross profit decreased $5.8 million as company-operated sites and merchandise operations had been exited; operating expenses in that segment fell $5.6 million. The Partnership had no company-operated sites during Q1 before the April acquisition.
- Interest expense declined $1.8 million, primarily reflecting lower average borrowing rates. Depreciation, amortization and accretion increased $4.2 million, including a $5.2 million impairment charge associated mainly with sites classified as held for sale.
- Operating cash flow increased $6.8 million year over year. Investing cash flow included $15.9 million received from Circle K in the CST exchange and $5.0 million from asset sales; capital expenditures were $5.4 million. Financing cash outflow was $26.3 million, including distributions and net revolver repayments.
Transactions, outlook and risks
- On March 25, 2020, CrossAmerica exchanged its CST Fuel Supply interest for 33 properties and wholesale fuel contracts covering 333 additional sites, subject to adjustments. Circle K paid approximately $13.4 million in lieu of removed properties. The recorded fair value of assets received was $69.0 million; CrossAmerica recognized the $67.6 million gain. It has no continuing involvement with CST Fuel Supply.
- On April 14, CrossAmerica completed a $36 million asset acquisition from parties including Topper Group affiliates: retail operations at 169 sites, wholesale distribution to 110 sites, and leasehold interests in 62 sites. Consideration included approximately $21 million cash, funded by facility borrowings, and 842,891 newly issued units valued at $15 million. Related ten-year triple-net leases carry aggregate annual rent of $8.1 million. DMS ceased to be a customer and lessee after closing.
- The Topper Group controls the general partner and, as of May 1, beneficially owned 48.9% of limited partner interests. The April acquisition and other arrangements with Topper affiliates are related-party matters; the filing says the transactions were approved by the independent conflicts committee.
- Management expected Circle K asset exchanges, the CST exchange, and the April acquisition to increase fuel volumes and gross profit. No quantitative full-year earnings or distribution guidance is provided. Management also cited fuel contract cost reductions and anticipated continued benefits from Alabama site upgrades and rebranding. Remaining Circle K exchanges were expected in the second half of 2020.
- COVID-19 had no material reported Q1 impact, but fuel volumes decreased from mid-to-late March and continued to be affected through April. Management said lower volumes were initially offset by higher DTW margins from falling crude prices. Sustained volume declines or margin erosion could materially harm cash flow and distribution capacity; staffing, supply-chain, dealer-credit and additional safety costs were also identified as risks.
- Interest-rate exposure remains: the March 26 swap hedged $150 million at a 0.495% fixed rate through April 2024; two further $75 million swaps were entered into April 15 at 0.38%. Management said these swaps effectively fixed approximately 60% of variable-rate borrowings. Commodity purchases are not hedged; management estimated a $10-per-barrel crude-price change would affect annual wholesale gross profit by about $2 million through supplier discounts.
- Environmental liabilities recorded were $4.1 million at March 31, with $3.6 million of related indemnification assets. For the CST exchange and April acquisition, CrossAmerica assumed certain unknown environmental conditions, while sellers retained responsibility for specified known conditions. Management said pending legal proceedings were not expected to have a material adverse effect; Circle K agreed to indemnify the Partnership for potential FTC divestiture penalties related to specified sites.
Important facts for investors to verify
- How much of reported profit and cash flow is recurring after excluding the CST exchange and disposition gains, acquisition costs, and impairment charges.
- Post-acquisition fuel volumes, margins, operating costs, and integration results, including the impact of COVID-19 and the $8.1 million annual related-party lease commitment.
- Revolver availability, covenant headroom, borrowing needs, and the effect of acquisition financing and interest rates on debt service.
- Whether distributable cash flow can sustain the $0.525 quarterly distribution as operating conditions and acquired-site performance develop; payment is discretionary.
- Completion and final economics of remaining Circle K exchanges, post-closing acquisition adjustments, and exposure to unknown environmental liabilities.