CrossAmerica Partners LP — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2015, compared with the same periods in 2014. CrossAmerica wholesales and retails motor fuel, operates convenience stores, and earns rental income from fuel sites. Results reflect substantial acquisitions and a shift of some company-operated stores to dealer-operated sites. CST controls the general partner.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $625.6 million | $827.8 million | $1,750.8 million | $2,073.6 million |
| Gross profit | $47.8 million | $36.3 million | $121.1 million | $79.9 million |
| Operating income | $14.8 million | $8.4 million | $18.1 million | $15.5 million |
| Net income | $10.2 million | $4.2 million | $7.2 million | $7.5 million |
| Net income per limited partner unit | $0.29 | $0.21 | $0.23 | $0.39 |
| Gross margin | 7.6% | 4.4% | 6.9% | 3.9% |
Cash flow and liquidity. Operating cash flow for the first nine months was $48.9 million, versus $8.4 million a year earlier. Investing activities used $310.9 million, principally for acquisitions; financing activities provided $248.7 million. Cash fell to $1.9 million from $15.2 million at year-end 2014. Current assets were $70.6 million and current liabilities $86.2 million. Revolver availability, after letters of credit and covenant limits, was $125.4 million.
Debt. Revolver borrowings were $350.0 million at a 2.70% rate; total debt excluding capital leases was $377.1 million. Reported debt and capital lease obligations totaled $436.7 million. The revolving facility is secured by substantially all company assets. CrossAmerica reported compliance with its leverage and interest-coverage covenants. A one-percentage-point change in the average borrowing rate would affect annual interest expense by approximately $3.5 million.
Distributions and coverage. The quarterly distribution rose to $0.5775 per unit for Q3 2015, a 2.7% increase from the prior quarter. Management-reported distributable cash flow was $49.5 million for the first nine months; coverage was 1.08x, compared with 1.18x in 2014. These are non-GAAP measures, and distributions are discretionary.
Material changes and drivers
- Revenue declined 24% in Q3 and 16% year to date, largely because lower wholesale fuel prices reduced reported sales dollars. Management cited average NY Harbor gasoline spot prices of $1.65 per gallon in Q3 2015 versus $2.74 in Q3 2014, and $1.70 versus $2.79 for the nine-month periods.
- Despite lower revenue, gross profit increased 32% in Q3 and 52% year to date. Acquisitions, increased fuel volumes, merchandise and rental income contributed; lower payment discounts and incentives partly offset wholesale gains.
- Acquisitions included Erickson (64 retail sites), One Stop (41 company-operated stores plus related sites and agreements), 22 Landmark sites, 29 CST new-to-industry properties, and additional interests in CST Fuel Supply. The partnership reported a 17.5% CST Fuel Supply interest as of November 4, 2015.
- Acquisitions increased operating costs and depreciation/amortization. They were funded through cash, revolver borrowings and equity issuance. Common units outstanding increased materially during the period.
- Q3 net income improved, while nine-month net income per unit fell to $0.23 from $0.39. The prior-year tax benefit included a $5.2 million partial release of a valuation allowance, affecting comparability.
Outlook, commentary and risks
- Management expected fuel volumes to continue increasing versus 2014, mainly due to acquisitions, and expected rental income to rise. It planned to pursue acquisitions opportunistically, subject to attractive targets, financing and market conditions. No specific earnings or distribution guidance was provided.
- The business is seasonal, with historically higher volumes in the second and third quarters. Fuel prices are volatile; management estimated that a $10-per-barrel crude-price change could affect annual wholesale fuel gross profit by about $2.5 million through discounts and incentives.
- Key risks include fuel-price and demand changes, competition, acquisition financing and integration, debt and liquidity, weather, environmental exposure, regulation and litigation. Management said existing litigation was not expected to have a material adverse effect. Certain pre-IPO environmental liabilities are indemnified by predecessor entities; related liabilities and indemnification assets were $11.9 million and $10.1 million, respectively.
- Related-party exposure is significant: DMS accounted for approximately 17% of wholesale distribution volume for Q3 and 33%/38% of rental income for the quarter/nine months. CST transactions, management charges and CST’s control create potential conflicts of interest. Management reported disclosure controls were effective, while integration of Erickson and One Stop controls remained underway.
- After quarter-end, the general partner approved a unit repurchase program of up to $25 million, and CST continued its separate unit-purchase program. The partnership’s repurchases would be funded from available cash.
Investor verification points
- Assess whether acquisition-driven volume and gross-profit gains can offset lower fuel-price-linked revenue and higher operating and financing costs.
- Verify distribution sustainability against cash flow, 1.08x year-to-date coverage, limited cash on hand and discretionary distribution policy.
- Track revolver availability, debt covenants, interest-rate exposure and the funding needs of future acquisitions or repurchases.
- Review acquisition integration, provisional purchase accounting, store conversions, and the resulting unit dilution and depreciation burden.
- Examine related-party transaction terms, CST’s influence and the concentration of DMS and key fuel suppliers.
- Monitor environmental indemnification recoverability, ongoing legal matters and the planned integration of acquired-company financial controls.