CROSSAMERICA PARTNERS LP CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, credit ratings, distribution growth, potential growth opportunities, potential operating performance improvements, potential improvements in return on capital employed, the effects of competition and the effects of future legislation or regulations. You can identify our forward-looking statements by the words "anticipate," "estimate," "believe," "continue," "could," "intend," "may," "plan," "potential," "predict," "seek," "should," "will," "would," "expect," "objective," "projection," "forecast," "guidance," "outlook," "effort," "target" and similar expressions. Such statements are based on our current plans and expectations and involve risks and uncertainties that could potentially affect actual results. These forward-looking statements include, among other things, statements regarding:
• future retail and wholesale gross profits, including gasoline, diesel and
convenience store merchandise gross profits;
• our anticipated level of capital investments, primarily through
acquisitions, and the effect of these capital investments on our results
of operations;
• anticipated trends in the demand for, and volumes sold of, gasoline and
diesel in the regions where we operate;
• volatility in the equity and credit markets limiting access to capital
markets;
• our ability to integrate acquired businesses;
• expectations regarding environmental, tax and other regulatory
initiatives; and
• the effect of general economic and other conditions on our business.
In general, we based the forward-looking statements included in this report on our current expectations, estimates and projections about our company and the industry in which we operate. We caution you that these statements are not guarantees of future performance and involve risks and uncertainties we cannot predict. We anticipate that subsequent events and market developments will cause our estimates to change. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecasted in the forward-looking statements. Any differences could result from a variety of factors, including the following:
• the Topper Group's business strategy and operations and the Topper Group's
conflicts of interest with us;
• availability of cash flow to pay the current quarterly distributions on
our common units;
• the availability and cost of competing motor fuels;
• motor fuel price volatility or a reduction in demand for motor fuels,
including as a result of the COVID-19 Pandemic;
• competition in the industries and geographical areas in which we operate;
• the consummation of financing, acquisition or disposition transactions and
the effect thereof on our business;
• environmental compliance and remediation costs;
• our existing or future indebtedness and the related interest expense and
our ability to comply with debt covenants;
• our liquidity, results of operations and financial condition;
• failure to comply with applicable tax and other regulations or
governmental policies;
• future legislation and changes in regulations, governmental policies,
immigration laws and restrictions or changes in enforcement or
interpretations thereof;
• future regulations and actions that could expand the non-exempt status of
employees under the Fair Labor Standards Act;
• future income tax legislation;
• changes in energy policy;
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• increases in energy conservation efforts;
• technological advances;
• the impact of worldwide economic and political conditions;
• the impact of wars and acts of terrorism;
• weather conditions or catastrophic weather-related damage;
• earthquakes and other natural disasters;
• hazards and risks associated with transporting and storing motor fuel;
• unexpected environmental liabilities;
• the outcome of pending or future litigation; and
• our ability to comply with federal and state laws and regulations,
including those related to environmental matters, the sale of alcohol,
cigarettes and fresh foods, employment and health benefits, including the
Affordable Care Act, immigration and international trade.
You should consider the risks and uncertainties described above and elsewhere in
this report, including under Part I. Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Part II. Item 1A
"Risk Factors," included in our Form 10-K filed with the
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following MD&A is intended to help the reader understand our results of operations and financial condition. This section is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to these financial statements contained elsewhere in this report, and the MD&A section and the consolidated financial statements and accompanying notes to those financial statements in our Form 10-K. Our Form 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates and contractual obligations.
MD&A is organized as follows:
• Recent Developments-This section describes significant recent developments.
• Significant Factors Affecting our Profitability-This section describes the
significant impact on our results of operations caused by crude oil
commodity price volatility, seasonality and acquisition and financing
activities.
• Results of Operations-This section provides an analysis of our results of
operations, including the results of operations of our business segments,
for the three and six months ended June 30, 2020 and 2019 and non-GAAP
financial measures.
• Liquidity and Capital Resources-This section provides a discussion of our
financial condition and cash flows. It also includes a discussion of our
debt, capital requirements, other matters impacting our liquidity and
capital resources and an outlook for our business.
• New Accounting Policies-This section describes new accounting
pronouncements that we have already adopted, those that we are required to
adopt in the future and those that became applicable in the current year
as a result of new circumstances.
• Critical Accounting Policies Involving Critical Accounting Estimates-This
section describes the accounting policies and estimates that we consider
most important for our business and that require significant judgment.
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Recent Developments
Equity Restructuring
On
Pursuant to the Equity Restructuring Agreement, all of the outstanding IDRs of
the Partnership, all of which were held by
This transaction closed on
Simultaneously with the closing of the equity restructuring, the General Partner executed and delivered the Second Amended and Restated Agreement of Limited Partnership of the Partnership (the "Second Amended and Restated Partnership Agreement") to give effect to the Equity Restructuring Agreement.
The Second Amended and Restated Partnership Agreement amended and restated the
First Amended and Restated Agreement of Limited Partnership of the Partnership,
dated as of
The terms of the Equity Restructuring Agreement were approved by the independent conflicts committee of the Board.
Asset Exchange Transactions with
We continue to close on the asset exchanges under the Asset Exchange Agreement,
entered into with
In the third asset exchange, which closed
In the fourth asset exchange, which closed
In the fifth asset exchange, which closed
In connection with the closing of these asset exchanges, the stores transferred
by
We accounted for the first two tranches of the asset exchange (that closed in
2019) as transactions between entities under common control as our General
Partner was owned by
Since our General Partner was acquired by the
There are 23
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See Note 2 to the financial statements for additional information.
CST Fuel Supply Exchange Agreement
Effective
The assets exchanged by
The Partnership and
In connection with the execution of the CST Fuel Supply Exchange Agreement, the
Partnership and
The terms of the CST Fuel Supply Exchange Agreement were approved by the independent conflicts committee of the Board.
In connection with closing on the CST Fuel Supply Exchange, on
The fair value of our investment in CST Fuel Supply that was divested and the
Assets acquired was
See Note 3 to the financial statements for additional information.
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Retail and Wholesale Acquisition
On
The Asset Purchase Agreement provides for an aggregate consideration of
In connection with the closing of the transactions contemplated under the Asset
Purchase Agreement, we assumed certain contracts with third parties and
affiliates necessary for the continued operation of the sites, including
agreements with dealers and franchise agreements. Further, we have entered into
customary triple-net ten-year master leases as lessee with certain affiliates of
the
In connection with the consummation of the transactions contemplated by the
Asset Purchase Agreement, our contracts with one of the Sellers, DMS, were
terminated and DMS is no longer a customer or lessee of the Partnership. As a
result,
In addition, the parties performed Phase I environmental site assessments with respect to certain sites. The Sellers agreed to retain liability for known environmental contamination or non-compliance at certain sites, and the Partnership agreed to assume liability for unknown environmental contamination and non-compliance at certain sites.
Further, the Asset Purchase Agreement contains customary representations and
warranties of the parties as well as indemnification obligations by Sellers and
the Partnership, respectively, to each other. The indemnification obligations
must be asserted within 18 months of the closing and are limited to an aggregate
of
The terms of the Asset Purchase Agreement were approved by the independent conflicts committee of the Board.
With this transaction, we not only added wholesale fuel contracts to our portfolio but added retail assets and reestablished a retail capability that enables us to pursue a broader range of acquisition opportunities and provides greater flexibility for optimizing the class of trade for each asset in our portfolio.
See Note 4 to the financial statements for additional information.
Interest Rate Swap Contracts
On
On
As a result of entering into these interest rate swap contracts, we have effectively converted approximately 60% of our variable rate borrowings under our credit facility to a fixed rate.
See Note 10 to the financial statements for additional information.
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Topper Group Omnibus Agreement
On
Pursuant to the Topper Group Omnibus Agreement, DMI agreed, among other things,
to provide, or cause to be provided, to the General Partner for the benefit of
the Partnership, at cost without markup, certain management, administrative and
operating services, which services were previously provided by
The Topper Group Omnibus Agreement will continue in effect until terminated in
accordance with its terms.
See Note 12 to the financial statements for additional information.
COVID-19 Pandemic
During the first quarter of 2020, an outbreak of a novel strain of coronavirus
spread worldwide, including to the
We do not have fleet operations but rely on common carriers to distribute and deliver our products. If these distribution channels were adversely impacted by the COVID-19 Pandemic, delivery of our products could be jeopardized. Also, sustained volume decreases and less foot-traffic resulting from the COVID-19 Pandemic may lead to cash flow constraints at our dealer-operated locations potentially posing increased credit risk and leading to a default on their fuel supply or lease agreements with us.
We may incur additional costs related to the implementation prescribed safety
protocols related to the COVID-19 Pandemic. With the
We experienced a sharp decrease in fuel volume in mid-to-late March. Although
fuel volumes have begun to recover during the second quarter of 2020, they
remain below historical levels. For the six months ended
As a result of the implications of COVID-19, we assessed property and equipment,
other long-lived assets and goodwill for impairment and concluded no assets were
impaired as of
We cannot predict the scope and severity with which COVID-19 will impact our business, financial condition, results of operations and cash flows. Sustained decreases in fuel volume or erosion of margin could have a material adverse effect on our results of operations, cash flow, financial position and ultimately our ability to pay distributions.
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Significant Factors Affecting our Profitability
The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit
Wholesale segment
The prices paid to our motor fuel suppliers for wholesale motor fuel (which affects our cost of sales) are highly correlated to the price of crude oil. The crude oil commodity markets are highly volatile, and the market prices of crude oil, and, correspondingly, the market prices of wholesale motor fuel, experience significant and rapid fluctuations. We receive a fixed mark-up per gallon on approximately 72% of gallons sold to our customers. The remaining gallons are primarily DTW priced contracts with our customers. These contracts provide for variable, market-based pricing that results in motor fuel gross profit effects similar to retail motor fuel gross profits (as crude oil prices decline, motor fuel gross profit generally increases, as discussed in our Retail segment below). The increase in DTW gross profit results from the cost of wholesale motor fuel declining at a faster rate as compared to the rate that retail motor fuel prices decline. Conversely, our DTW motor fuel gross profit declines when the cost of wholesale motor fuel increases at a faster rate as compared to the rate that retail motor fuel prices increase.
Regarding our supplier relationships, a majority of our total gallons purchased are subject to Terms Discounts. The dollar value of these discounts increases and decreases corresponding to motor fuel prices. Therefore, in periods of lower wholesale motor fuel prices, our gross profit is negatively affected, and, in periods of higher wholesale motor fuel prices, our gross profit is positively affected (as it relates to these discounts).
Retail segment
We attempt to pass along wholesale motor fuel price changes to our retail customers through "at the pump" retail price changes; however, market conditions do not always allow us to do so immediately. The timing of any related increase or decrease in "at the pump" retail prices is affected by competitive conditions in each geographic market in which we operate. As such, the prices we charge our customers for motor fuel and the gross profit we receive on our motor fuel sales can increase or decrease significantly over short periods of time.
Changes in our average motor fuel selling price per gallon and gross profit per gallon are directly related to the changes in crude oil and wholesale motor fuel prices. Variations in our reported revenues and cost of sales are, therefore, primarily related to the price of crude oil and wholesale motor fuel prices and generally not as a result of changes in motor fuel sales volumes, unless otherwise indicated and discussed below.
We typically experience lower retail motor fuel gross profit per gallon in periods when the wholesale cost of motor fuel increases, and higher retail motor fuel gross profit per gallon in periods when the wholesale cost of motor fuel declines.
As previously reported, we converted 46 company operated sites to dealer
operated sites in the third quarter of 2019. As a result of this transition, we
did not have any company operated sites for the period from
Seasonality Effects on Volumes
Our business is subject to seasonality due to our wholesale and retail sites being located in certain geographic areas that are affected by seasonal weather and temperature trends and associated changes in retail customer activity during different seasons. Historically, sales volumes have been highest in the second and third quarters (during the summer months) and lowest during the winter months in the first and fourth quarters.
Impact of Inflation
Inflation affects our financial performance by increasing certain of our operating expenses and cost of goods sold. Operating expenses include labor costs, leases, and general and administrative expenses. While our Wholesale segment benefits from higher Terms Discounts as a result of higher fuel costs, inflation could negatively impact our operating expenses. Although we have historically been able to pass on increased costs through price increases, there can be no assurance that we will be able to do so in the future.
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Acquisition and Financing Activity
Our results of operations and financial condition are also impacted by our acquisition and financing activities as summarized below.
• On April 1, 2019 , we entered into a new credit facility as disclosed in
our Form 10-K.
• We completed five tranches of the asset exchange with Circle K on May 21,
2019 , September 5, 2019 , February 25, 2020 , April 7, 2020 and May 5, 2020 ,
as further described in Note 2 to the financial statements.
• On February 6, 2020 , we closed on the Equity Restructuring Agreement that
eliminated the IDRs as further discussed in Note 17 to the financial
statements.
• Effective March 25, 2020 , we closed on the CST Fuel Supply Exchange as
further described in Note 3 to the financial statements.
• On April 14, 2020 , we closed on the acquisition of retail and wholesale
assets as further described in Note 4 to the financial statements.© Edgar Online, source
