Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2014 Earnings Conference Call for CrossAmerica Partners. [Operator Instructions].

This conference call may contain forward-looking statements relating to the partnership's future business expectations and predictions, financial condition and results of operations. These forward-looking statements involve certain risks and uncertainties.

The partnership has listed some of the important factors that may cause actual results to differ materially from those discussed in such forward-looking statements, which are referred to as cautionary statements in the third quarter 2014 earnings release.

The earnings release may be viewed on the CrossAmerica Partners' website at www.crossamericapartners.com. All subsequent written and oral forward-looking statements attributed both through partnerships or persons acting on their behalf are expressly qualified in their entirety by such cautionary statements..

In addition, the certain non-GAAP financial measures will be discussed on this call. The partnership has provided a description of these measures, as well as a discussion of why they believe this information is useful to management in its Form 8-K furnished to the SEC yesterday.

For the Form 8-K may be accessed through a link on the partnership's website at www.crossamericapartners.com. As a reminder, this conference call is being recorded..

I would now turn the conference over to the host, Joe Topper, the President and CEO of CrossAmerica Partners. .

Thank you, and good morning. Welcome to CrossAmerica Partners' Third Quarter 2014 Earnings Call. Joining me on the call today are Mark Miller, Chief Financial Officer; and Dave Hrinak, Chief Operating Officer..

This is our first earnings call since the completion of the acquisition of the partnership's general partner by CST, and our first with our new name, CrossAmerica Partners. So today, call represents the start of a new period in the partnership's growth.

We are excited by the new opportunities available to the partnership and look forward to discussing them in more detail with you in the coming quarters. .

For the call today, I will provide a brief overview and some initial commentary on our third quarter results, followed by a review of our third quarter distribution increase, and then review the acquisition that we announced earlier this week with CST, our first joint acquisition with CST.

Once we've concluded our prepared remarks, we will open the session to your questions. .

Net income for the third quarter of 2014 totaled $4.2 million or $0.21 per basic common unit. For the quarter, EBITDA totaled $16.9 million. Adjusted EBITDA totaled $18.7 million and distributable cash flow amounts to $13.6 million or $0.70 per common unit. Our wholesale gross margin for the quarter was $0.078 per gallon..

The wholesale fuel environment for the quarter was generally very strong due to the strong declining trend in oil and rack fuel prices for the quarter. As we have discussed before, our variable-priced fuel supply contracts, our margin typically improved as oil and rack fuel prices decline..

One important note to realize on our wholesale fuel margin for the quarter is that the partnership's supply agreement with LGO provides for a variable rate pricing. During the quarter, the partnership effectively charged fixed rate pricing under the agreement.

And as previously announced, subsequent to the quarter end, the partnership amended the supply agreement with LGO to convert the pricing from variable to fixed rate pricing going forward. .

As a result, the partnership expects that its wholesale fuel margin will be less variable than it has historically been due to the change in pricing with LGO under the supply agreement.

We expect to see the benefit of this change during the upcoming fourth and first quarters of the year, when historically have been the weakest fuel margin quarters for our variable-priced supply contracts. .

For the quarter, approximately 16 million gallons of the partnership's wholesale fuel supply gallons were under variable rate pricing, excluding the gallons supplied by LGO. The partnership declared a third quarter distribution of $0.5325 per unit based upon our distributable cash flow of $0.70 per basic common unit..

The coverage ratio on the declared third quarter distribution is approximately 1.3x based on the weighted average units for the quarter. Based upon outstanding units at the quarter end and pro forma for the equity raised as it occurred at the beginning of the quarter, the coverage ratio was approximately 1.2x. .

The distribution increase represents our sixth increase in the 7 quarters, which we have been public. As we have stated many times before, our objective is to return cash to our unit holders in a prudent, sustainable manner and to grow that distribution over time. Our declared distribution this quarter is proof of our commitment to that goal..

Moving on to acquisitions. The partnership announced earlier this week, our first joint third-party acquisition with CST. The partnership acquired 23 fee sites in connection with CST's previously announced acquisition of Nice N Easy..

In addition to the real estates, the partnership also acquired certain wholesale fuel supply-related assets. The partnership entered into a long-term rent agreement with CST for the acquired real estate and long-term fuel supply agreement with 24 Nice N Easy sites.

The 24 locations that the partnership will supply distributed approximately 40 million gallons in 2013. The total consideration paid for the assets was $65 million..

CST purchased the retail operations and certain other assets of Nice N Easy concurrently with the partnership's acquisition. It's important to note that the total consideration as well as the rental wholesale fuel supply agreement is subject to review and adjustment by the Conflicts Committee of the partnership and the executive committee of CST.

Given that this is the first joint transaction between CST and the partnership, we are being very deliberate in our process to ensure that both equity holders of the partnership and CST are treated fairly in the transaction..

For the partnership, the transaction provides an additional source of stable income in the form of wholesale fuel margin and rental income, which will allow CST to do what they do best, namely run the retail operations at the site. The transaction is also indicative of the ability of the Partnership and CST to do joint third-party acquisitions.

The combination of the 2 entities together provide a significant degree of financial and operational flexibility with which to pursue acquisitions, which is exactly what we intend to do in the addition to executing the asset dropdowns from CST..

I'll now turn it over to Mark for a more detailed review of the financial results of the quarter. .

Thank you, Joe. During the third quarter 2014, we distributed on a wholesale basis, 244.6 million gallons in motor fuels, resulting in a $2.83 average selling price per gallon and a $0.078 average wholesale margin per gallon..

Wholesale gross profit from motor fuel sales for the quarter totaled $19.2 million. Our retail segment, which represents our commission agent sites, and much of our PMI operations, distributed 46.5 million gallons, resulting in a $3.41 average selling price per gallon and a $0.053 average retail margin per gallon.

Retail gross profit margin for motor fuel sales for the quarter totaled $2.5 million..

The total gallons distributed for the quarter was 269.4 million gallons. The total gross profit margin from fuel sales was $21.6 million, representing a margin of $0.08 per gallon..

For the same period of 2013, the partnership wholesale distributed 160.5 million gallons at an average selling price of approximately $2.98 per gallon and a $0.071 average margin per gallon. Gross profit from motor fuel sales for the third quarter 2013 totaled $11.4 million.

Relative to the results for the third quarter 2013, our wholesale fuel volume increased approximately 52%, and our wholesale gross profit from fuel sales increased 68% for the third quarter of 2014. The increase in gross profit was driven by higher margin and volume for the third quarter compared to last year..

On the retail side, the partnership retail distributed 46.5 million gallons in the quarter at an average selling price of $3.41 and a $0.053 average margin per gallon. The partnership began retail fuel operations late in the third quarter 2013. Accordingly, it had minimum retail fuel sales during the same period last year..

Net income, which is rental income less rent expense, totaled $5.6 million for the quarter. For the same period in 2013, the partnership recorded $6.4 million in net rental income..

Overall, net rental income decreased relative to the third quarter of 2013, primarily due to increased lease expense of leasehold sites acquired in the PMI portfolio, which was not offset by increased rental income from the sites..

The partnership operates these sites directly as company operations and does not lease the sites to third parties as it has done in previous acquisitions..

On the expense side, operating expenses for the third quarter 2014 totaled $11.2 million and SG&A expenses totaled $7 million. Included in SG&A expenses for the quarter was approximately $100,000 of acquisition expenses. For the same period in 2013, operating expenses totaled $1.3 million and SG&A expenses totaled $4.6 million.

Operating expenses increased by $9.9 million for the quarter relative to 2013, primarily due to direct store operations of PMI that are now included in the partnership and into the lesser extent, the overall increase in the number of sites in the portfolio relative to last year..

SG&A expenses increased in the third quarter 2014 relative to 2013, primarily due to the previously announced change in the partnership's management fee structure under the Omnibus Agreement and an increase in equity-based compensation expense..

This quarter continued the trend of decreasing oil and rack motor fuel prices that began in the second quarter. On a sequential basis, our wholesale fuel margins went from $0.066 per gallon in the second quarter to $0.078 per gallon in the third quarter..

During the quarter, our conversion of the LGO to a fixed-rate pricing from a variable pricing mitigated the overall impact on the quarter's declining price environment.

Had LGO remained at variable rate pricing for the quarter, our wholesale fuel margin for the quarter would have likely been higher than the already robust wholesale margin recorded for the quarter. .

The benefit to the partnership of the switch to a fixed-rate pricing going forward is that we expect our margins to be less volatile. We would expect to see this benefit as we enter the fourth and first quarters, which are typically the weakest of the year, with regard to fuel supply agreements with variable pricing..

On the financing side, the partnership completed 2 capital raising events during the quarter. First, we raised a net $135 million in equities through a follow-on equity offering that closed September 19. We issued a total of 4,140,000 units, which is inclusive of the full exercise of the underwriters' overallotment option.

The entire proceeds of the offering were used to pay down the debt on the partnership's credit facility. We were very pleased with the execution of the transaction. The reduction of debt reduced our leverage and positioned the partnership's balance sheet to support future acquisitions..

Second, we completed an amendment to the partnership's credit facility in conjunction with the acquisition of general partner by CST. The amendment increased the size of the partnership's credit facility by $100 million to $550 million. In addition, the amendment modified the facility to allow for contemplated assets, acquisitions from CST.

The amendment also adjusted certain baskets and provisions to make them less restrictive, and provided the partnership additional capital structure flexibility should we decide to add senior notes to our capital structure..

As with the equity transaction, we were pleased with the execution of the amendment. We appreciate the increased commitments from our existing lenders and the support from new lenders that we brought into the facility as part of the process..

At September 30, 2014, the partnership had $145.6 million in outstanding borrowings under the credit facility. The partnership had a nominal $388.1 million available for borrowing, net of outstanding borrowings and letters of credit..

Turning to the balance sheet. The biggest change in the balance sheet from the quarter is the reduction of long-term debt and the increasing Partners' capital in support [ph] of the equity raise. Also of note is the $26.3 million of debt associated with our Rocky Top acquisition that is now classified as short term..

If you recall from our Rocky Top acquisition that was completed in the third quarter of last year, this debt is actually a lease with a purchase obligation, which is why it's classified as debt on the balance sheet.

Under the terms of the lease, the seller can require the partnership to purchase old sites in the third quarter of next year or the partnership will repurchase the sites over the following years. Either way, the partnership has ample financial capacity to meet its obligations under the lease..

At this time, I will turn the call back over to Joe. .

Thank you, Mark. That concludes our prepared remarks. Operator, I would like to open the line up for questions. Thank you. .

[Operator Instructions] And our first question comes from Ethan Bellamy from Robert W. Baird. .

Joe... .

Ethan, hold on for a moment, I just want to let you know that Kim Lovell is on the phone and Clay Killinger from CST, and they're listening in. If there are questions that would be addressed to them, they're welcome to speak and talk on behalf of their -- it's been a great partnership. .

Excellent. Good. That was one of my questions. We can go ahead and cross off. I've been operating under the assumption that your margins in the fourth quarter ought to be widening substantially right now, and the fourth quarter ought to be pretty solid.

Is that accurate? And if so, how are we are tracking so far?.

Well, as you know, Ethan, we don't really give guidance, but I would tell you -- reiterate 2 things. One is, as prices fall, they have always been good for our margins and nothing in the quarter would indicate anything less than that. The other part was the comment with that LGO has gone to a fixed price margin, a rack plus.

And so what that will do, that will stabilize margins on a predictable basis. So we have less variance from the norm. But yes, we're going to have a good fourth quarter from a margin standpoint of view. .

Okay.

How do you see and what are the gating factors from moving assets from CST into CAPL? And why not just move as much as you can, as fast as you can and stair step the distribution upward?.

Well, first of all, that's not under my control. That's under CTS's control and their board from that standpoint of view. The second is, I think, we like the long runway that their dropdowns will provide, and we will blend it in with the acquisitions that we intend to do. As you know, we have a pretty good track record of acquisitions.

And I think it's a great complement to do the 2 of them together to give our unit holders a very good long runway of dividend increases. .

Okay. And then lastly, based on what we see as pretty robust growth opportunities for the distribution both in terms of dropdowns and third-party M&A, I think CAPL ought to be trading a lot better here.

What do you think investors need to see, is it just execution and actually posting increased distributions for you to get a better value on CAPL?.

I think it's just execution, and I think people want to see the effects of the dropdown. And once the dropdowns are in place, I think you -- I agree with you, we should be trading at a lot higher multiple. .

And our next question comes from Praneeth Satish from Wells Fargo. .

Stepping in for Sharon Lui today. Just 2 quick questions.

I guess the first is from a high level, if fuel pricing remains at these levels, I guess, what's the potential impact on fuel demand? And have you seen a change in customer demand at the pump yet?.

I think we are -- I would tell you that in some areas, where we've had modest declines in demand in the past, we've seen that being mitigated and being less. I don't think we've seen the real effect of it because it's only been going around for 30 days that we've seen a real change in the buying habits.

I think once it's sustained under $3, I think we will have a very good driving season, and hopefully I would tell you that I think demand will pick up next year from these lower prices. But I wouldn't say that people have changed their buying patterns over the last 60 days yet. .

Got it.

And then the other question I had on the joint acquisition of the Nice N Easy assets, have you disclosed what the EBITDA multiple looks like on that deal?.

We have not. And we have not in the past as that is -- I did that in my first earnings call, last 2 years ago, and that became the multiple by which everyone else bid against us. And so we've not -- we don't disclose the actual EBITDA, but what we do is, it shows up in the results in the first quarter that we're in business. .

[Operator Instructions] And our next question comes from Ben Brownlow from Raymond James. .

Can you give any insight into what that -- exactly the fixed fuel margin is going forward and how that compares to that -- the variable margin on that same volume in the fourth quarter last year?.

I would tell you that it is -- approximates the 3-year average of our margins around $0.066, $0.067. And so -- and that is in line with what the trailing 12-month was for those same gallons.

Over the 12-month period, it was -- have a nominal effect on the gallons, but what we -- it will do is it will kind of normalize the variability over the 12-month period. .

Absolutely.

And did I hear correctly that, that was -- that would be -- that change is going to impact 16 million gallons?.

No, 16 million gallons is the gallons that are left a quarter under the variable, so about 80 million gallons is still variable priced to third parties. .

Okay, great.

And then how much on the Nice N Easy distribution -- that agreement, is that a fixed or variable margin?.

That's going to be a fixed margin. .

Can you tell us what that is? Is that similar to the $0.066?.

That I think is the -- we talked about it, that has not been approved yet by the Conflicts Committee of CrossAmerica or CST yet. And so we expect that to be finalized within the next 30 days. .

Okay.

And then on the Nice N Easy as well, can you give us some color on what your rental income will be for those 23 sites?.

Again, that falls in with the Conflicts Committee approval. We have a target rate, but right now because of the timing of everything, the Conflicts Committee on both CST and CrossAmerica are doing their work and coming up with that number, then I would expect to be -- I know we will know it in the next 30 to 45 days. .

Okay, great. And just one last one from me.

Kim and Clay, if -- do you guys have any insight or updates on the timing of a dropdown for fuel contracts?.

We're -- Ben, this is Clay. We're currently evaluating that.

And so we are evaluating the portfolio of assets that we can drop, especially taking into effect the tax matters agreement that we have with Valero, but there are assets that we can, and that we believe that does include real property assets and fuel supply associated with assets that we've built subsequent to the spin.

So I can't -- at this point, I can't say whether that's going to be fourth quarter or first quarter or early, but I can tell you that we are actively working on it now. .

Thank you. And we have no further questions at this time. I would now turn the call over to Mr. Joe Topper for closing remarks. .

Thank you all for calling and listening to the earnings call. We at CrossAmerica and CST are very, very excited about our future and how we're going to grow these partnerships together. And I look forward to much more exciting phone calls and earnings calls in the future. Thank you for your time. .

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..