The following discussion should be read in conjunction with the consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, or this Quarterly Report, and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, or our Annual Report. Unless indicated otherwise, amounts are in thousands of dollars, shares of common stock or gallons, as applicable.
Company overview
TravelCenters of America Inc. is a Maryland corporation. As of March 31, 2023, we operated or franchised 286 travel centers, three standalone truck service facilities and one standalone restaurant. Our customers include trucking fleets and their drivers, independent truck drivers, highway and local motorists and casual diners. We also collect rents, royalties and other fees from our tenants and franchisees. We make specific disclosures concerning fuel and nonfuel products and services because they facilitate our discussion of trends and operational initiatives within our business and industry.
Recent relevant events
The proposed Merger
On February 15, 2023, we entered into an Agreement and Plan of Merger, or the
Merger Agreement, with BP Products North America Inc., or BP, Bluestar RTM Inc.,
a Maryland corporation and an indirect wholly-owned subsidiary of BP, or Merger
Subsidiary, pursuant to which Merger Subsidiary will merge with and into the
Company, or the Merger, with the Company surviving the Merger.
As a result of the Merger, at the effective time of the Merger, or the Effective
Time, each share of our common stock, par value $0.001 per share, outstanding
immediately prior to the Effective Time (other than shares of our common stock
(i) owned by BP or Merger Subsidiary immediately prior to the Effective Time, or
(ii) held by any Subsidiary (as defined in the Merger Agreement) of the Company
or BP (other than Merger Subsidiary) immediately prior to the Effective Time),
will be converted into the right to receive $86.00 in cash, without interest, or
the Merger Consideration.
Immediately prior to the Effective Time, each then-outstanding share of our
common stock granted subject to vesting or other lapse restrictions under any TA
stock plan that is outstanding immediately prior to the Effective Time will vest
in full and become free of such restrictions and will be converted into the
right to receive the Merger Consideration under the same terms and conditions as
apply to the receipt of the Merger Consideration by holders of our common stock
generally.
The closing of the Merger is subject to the satisfaction or waiver of certain
conditions, including, among other things, (i) receipt by us of the affirmative
vote of the holders of a majority of the outstanding shares of our common stock,
or the Company Stockholder Approval, (ii) that there is no temporary restraining
order, preliminary or permanent injunction or other judgment issued by any court
of competent jurisdiction in effect enjoining or otherwise prohibiting the
consummation of the Merger, (iii) the expiration or termination of any
applicable waiting period (or extension thereof) under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, or the HSR Act, which occurred
April 10, 2023, and all other approvals under antitrust laws, (iv) the accuracy
of the representations and warranties contained in the Merger Agreement (subject
to specified materiality qualifiers), (v) compliance with the covenants and
obligations under the Merger Agreement in all material respects; (vi) the
absence of a material adverse effect with respect to the Company; and (vii) the
execution, release and delivery of the Consent and Amendment Agreement, dated as
of February 15, 2023, by and among us, our subsidiary TA Operating LLC, BP,
Service Properties Trust, or SVC, and certain of SVC's subsidiaries, and all
agreements entered into pursuant thereto.
We made customary representations and warranties in the Merger Agreement and
agreed to customary covenants regarding the operation of our business and the
business of our subsidiaries prior to the Effective Time.
The Merger Agreement also includes a covenant requiring us not to solicit any
acquisition proposal, and, subject to certain exceptions, not to enter into or
participate or engage in any discussions or negotiations with, related to an
acquisition proposal or enter into any letter of intent, acquisition agreement
or other similar agreement relating to an acquisition proposal. Further, our
Board of Directors will not withhold, withdraw, amend or modify, or publicly
propose to do any of the foregoing, its recommendation in a manner adverse to
BP, adopt, approve or recommend to our stockholders an acquisition proposal,
fail to reaffirm its recommendation within ten business days following BP's
written request, fail to recommend against acceptance of a tender or exchange
offer for shares of our common stock within ten business days after the
commencement thereof, nor fail to include its recommendation in the proxy
statement that will be prepared in connection with the company stockholder
meeting,
15
————————————————– ——————————
Table of contents
or the Proxy Statement. Notwithstanding these restrictions, at any time prior to obtaining the Company Stockholder Approval, if we have received a written, bona fide, unsolicited acquisition proposal from any third party (or a group of third parties) that our board of directors determines in good faith, after consultation with its financial advisor and outside legal counsel, constitutes or could reasonably be expected to lead to a superior proposal, and the failure to take the following actions would reasonably be expected to be inconsistent with its duties under applicable law, then we, directly or indirectly through certain specified representatives, may, subject to certain conditions, engage in discussions with such third party and furnish to such third party non-public information relating to TA or any of its subsidiaries pursuant to an acceptable confidentiality agreement. Further, at any time prior to obtaining the Company Stockholder Approval, in respect to a superior proposal we receive after the date of the Merger Agreement on an unsolicited basis, if our board of directors determines in good faith, after consultation with its financial advisors and outside legal counsel, that the failure to take such action would be reasonably expected to be inconsistent with its duties under applicable law, the board of directors may, subject to compliance with certain conditions, (i) make an Adverse Recommendation Change (as defined in the Merger Agreement) or (ii) cause us to terminate the Merger Agreement in compliance with the terms of the Merger Agreement in order to enter into a binding written definitive agreement providing for such superior proposal. Subject to the satisfaction of the remaining conditions to the closing of the Merger, we expect the closing of the transactions contemplated by the Merger Agreement to occur by May 15, 2023. The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which was filed as Exhibit 2.1 to a Current Report on Form 8-K we filed with the Securities and Exchange Commission, or SEC, on February 16, 2023.
Economic conditions
The United States economy has experienced high inflation since the beginning of 2022 and there are market expectations that inflation may remain at elevated levels for a sustained period. Labor availability has continued to be constrained and market labor costs have continued to increase and may further increase. The U.S. Federal Reserve Board also increased interest rates multiple times since early 2022, with the most recent increase occurring in March 2023. Recent developments in the financial markets has also added another element of uncertainty. These conditions may give rise to an economic slowdown, and perhaps a recession, and could further increase our costs and/or impact our revenues. It is unclear whether the current economic conditions and government responses to these conditions, including inflation, increasing or sustained high interest rates, the continuing war between Russia and Ukraine and high fuel prices, will result in an economic slowdown or recession in the United States. If that occurs, demand for the transporting of products across the United States by trucks may decline, which may significantly adversely impact our business, results of operations and financial position.
Executive summary of financial results
We generated a loss before income taxes of $9,059 during the three months ended March 31, 2023 and income before taxes of $21,153 during the three months ended March 31, 2022. The change in (loss) income before income taxes of $30,212 compared to the prior year was primarily due to decreased fuel margins as a result of lower fuel market volatility in comparison to particularly favorable market conditions in the prior year, inflationary pressures in several areas of our business, including higher labor costs due to wage increases, higher product costs and other operating expenses, higher selling, general and administrative expense, primarily due to increased compensation costs, costs incurred by us with respect to the Merger Agreement and higher depreciation and amortization expense primarily due to the growth from increased capital expenditures and acquisitions.
The above factors were partially offset by higher non-fuel revenues, primarily due to inflation-driven price increases, along with the opening of our new restaurants and the reopening of certain existing restaurants and recent acquisitions.
Effects of fuel prices and supply and demand factors
Our fuel revenues and fuel gross margin are subject to fluctuations, sometimes
material, as a result of market prices and the availability of, and demand for,
diesel fuel and gasoline. These factors are subject to the worldwide petroleum
products supply chain, which historically has experienced price and supply
volatility as a result of, among other things, severe weather, terrorism,
political crises, military actions and variations in demand and perceived and/or
real impacts on supply that are often the result of changes in the macroeconomic
environment. Also, concerted efforts by major oil producing countries and
cartels to influence oil supply, as well as other actions by governments
regarding trade policies, may impact fuel wholesale and retail prices. Further,
there have been reports of reduced investment in oil exploration and production
as a result of concerns about
16
————————————————– ——————————
Table of contents
decreased demand for oil in response to market and governmental factors, including increased demand for alternative energy sources in response to global climate change. These and other factors, for example the ongoing war between Russia and Ukraine and various countries' actions in response to that war, are believed to have contributed to recent fears of supply constraint and, as a result, increases in the cost of oil and other fossil energy sources. While the unprecedented fuel price volatility we experienced throughout 2022 has begun to stabilize, albeit not to typical historic levels, the lower volatility during the three months ended March 31, 2023 has put downward pressure on our fuel margins. Although there are several components that comprise and impact our fuel product costs, including the cost of fuel, freight and mix, the cost of fuel is the primary factor. Over the past several years there have been significant changes in the cost of fuel. During the three months ended March 31, 2023, average fuel prices trended downward, decreasing 17.7% as compared to the beginning of the period, though still higher than typical historic levels. The average fuel price during the three months ended March 31, 2023, was 7.6% lower than the average fuel price during the three months ended March 31, 2022. These decreases in fuel prices were primarily due to milder weather conditions and softer demand during the first quarter of 2023, which contributed to higher inventory levels in the industry. Uncertainty in fuel supply still exists, however, in light of the continuing war between Russia and Ukraine and the various economic sanctions and other punitive measures the United States and other countries have taken against Russia in response, including with respect to Russian oil exports and further cuts in Russia's oil production and other factors. In the aggregate, we generally are able to pass changes in our cost for fuel products to our customers, but typically with timing differences associated with on-hand inventory, such that during periods of volatile and rising fuel commodity prices, fuel gross margin per gallon tends to be higher than it otherwise may have been and during periods of static and falling fuel commodity prices, fuel gross margin per gallon tends to be lower than it otherwise may have been. For example, steadily rising fuel prices typically improve short-term fuel margins due to the sell-through of lower cost inventory at current market prices. Increases in the prices we pay for fuel can increase our working capital requirements. Due to the volatility of our fuel costs and our methods of pricing fuel to our customers, we believe that fuel revenues are not a reliable metric for analyzing our results of operations from period to period. As a result solely of changes in fuel prices, our fuel revenues may materially increase or decrease, in both absolute amounts and on a percentage basis, without a comparable change in fuel sales volume or in fuel gross margin. We therefore consider fuel sales volume and fuel gross margin to be better measures of our performance. We experienced slightly lower fuel sales volumes during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. These decreases primarily resulted from a decline in market conditions within the freight industry in addition to the initial stabilization of the unprecedented fuel price volatility we experienced throughout 2022. Despite experiencing that decline in fuel sales volume, we believe that future demand for fuel by trucking companies and motorists for a constant level of miles driven will remain relatively unchanged in the near-term, subject to a possible economic recession or substantial economic downturn, but could decline over time because of changes in trucking industry trends or consumer behavior due to inflationary pressures, technological innovations that improve fuel efficiency of motor vehicle engines, other fuel conservation practices and alternative fuels and technologies as well as possible further government regulation. We believe these factors, combined with competitive pressures, impact the level of fuel sales volume we realize. In addition, we believe that to some degree higher fuel prices and inflationary pressures resulted in less disposable income for our customers to purchase our nonfuel products and services. While nonfuel revenues and nonfuel margins increased 5.9% and 9.7%, respectively, during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, continuing inflationary pressures may temper certain nonfuel transaction volumes.
Other factors affecting comparability
Growth strategies
We continue to prioritize and focus on key initiatives across our organization
including top-line growth through high return capital investments, bottom-line
growth through process improvement and cost discipline, continued introduction
of efficient technology and systems and defining the future of on-highway
mobility through a commitment to energy alternatives, all in support of our core
mission to return every traveler to the road better than they came. The growth
strategies and plans discussed in this section are subject to change if the
Merger is completed.
Acquiring high quality existing travel centers and viable truck services
facilities are key aspects of our strategic network growth plan. Our acquisition
pipeline may enable us to add independent and franchised sites along active
corridors to strengthen the geographic coverage of our network and expand our
scope of products and services and customer segments through investments of
capital and human resources in our truck service business.
17
————————————————– ——————————
Table of contents
Our growth strategy also includes adding franchised travel centers to our network. Since the beginning of 2020, we have entered into franchise agreements covering 68 travel centers to be operated under our travel center brand names. Five of these franchised travel centers began operations during 2020, two began operations during 2021, three began operations during 2022, and five began operations during the first quarter of 2023. We expect the remaining 53 to open by the second quarter of 2025. Our capital expenditures plan for 2023 contemplates aggregate investments in the range of $135,000 to $150,000 and includes projects to enhance the guest experience through significant upgrades at our travel centers, the expansion of restaurants and food offerings and improvements to our technology systems infrastructure. Approximately 40% of our capital expenditures in 2023 are focused on growth initiatives that we expect to meet or exceed our 15% to 20% cash on cash return hurdle. We are committed to embracing environmentally friendly energy sources through our eTA division, which seeks to deliver sustainable and alternative energy to the marketplace by working with the public sector and private companies to facilitate this initiative. Recent accomplishments expanding of our biodiesel and renewable diesel blending capabilities, increasing the availability of DEF at all diesel pumps nationwide and installing electric vehicle charging stations. We are also exploring ultra-high power truck charging and hydrogen fuel dispensing to provide energy alternatives as the transportation sector transitions to a lighter carbon footprint. We believe our large, well-located sites along highways will allow us to make EV charging and non-fossil fuel dispensing easily available to travelers.
seasonality
Our sales volumes are generally lower in the first and fourth quarters than the
second and third quarters of each year. In the first quarter, the movement of
freight by professional truck drivers as well as motorist travel are usually at
their lowest levels of the calendar year. In the fourth quarter, freight
movement is typically lower due to the holiday season. While our revenues are
modestly seasonal, quarterly variations in our operating results may reflect
greater seasonal differences as our rent expense and certain other costs do not
vary seasonally.
Results of Operations
We present our results of operations on a consolidated basis. Currently all of
our company operated locations are same site locations with the exception of
recently acquired travel centers and truck service facilities and the travel
center located in Canada that we stopped operating during the second quarter of
2022. Same site operating results would not provide materially different
information from our consolidated results and are not presented as part of this
discussion and analysis.
18
————————————————– ——————————
Table of contents
Consolidated financial results
The following table presents changes in our operating results for the three
months ended March 31, 2023, as compared to the three months ended March 31,
2022.
Three Months Ended
March 31,
2023 2022 $ Change % Change
Revenues:
Fuel $ 1,720,057 $ 1,806,114 $ (86,057) (4.8) %
Nonfuel 515,674 487,082 28,592 5.9 %
Rent and royalties from franchisees 3,287 3,877 (590) (15.2) %
Total revenues 2,239,018 2,297,073 (58,055) (2.5) %
Gross margin:
Fuel 95,255 112,919 (17,664) (15.6) %
Nonfuel 324,078 295,297 28,781 9.7 %
Rent and royalties from franchisees 3,287 3,877 (590) (15.2) %
Total gross margin 422,620 412,093 10,527 2.6 %
Site level operating expense 278,917 252,044 26,873 10.7 %
Selling, general and administrative expense 51,559 41,309 10,250 24.8 %
Real estate rent expense 64,701 64,646 55 0.1 %
Depreciation and amortization expense 27,099 24,231 2,868 11.8 %
Other operating (expense) income, net 698 (2,182) 2,880 132.0 %
(Loss) Income from operations (354) 32,045 (32,399) (101.1) %
Interest expense, net 9,611 11,530 (1,919) (16.6) %
Other income, net (906) (638) (268) (42.0) %
(Loss) Income before income taxes (9,059) 21,153 (30,212) (142.8) %
Benefit (provision) for income taxes 2,761 (4,849) 7,610 156.9 %
Net income (losses) attributable to common
stockholders $ (6,298) $ 16,304 $ (22,602) (138.6) %
19
————————————————– ——————————
Table of contents
Three months ended March 31, 2023, compared to three months ended March 31, 2022
Fuel Revenues. Fuel revenues for the three months ended March 31, 2023 decreased
by $86,057, or 4.8%, as compared to the three months ended March 31, 2022. The
decrease in fuel revenues was primarily due to a decrease in fuel sales volume
and lower market prices for fuel. The table below presents the factors causing
the changes in total fuel sales volume and revenues between periods. See
"Effects of Fuel Prices and Supply and Demand Factors" for more information
regarding the impact market prices for fuel has on our financial results.
Gallons Sold Fuel Revenues
Results for the three months ended March 31, 2022 555,261 $
1,806,114
Decrease due to petroleum products price changes
(49,381)
Decrease due to volume changes (13,096)
(41,979)
Increase in wholesale fuel sales volume 2,095
5.303
Net change from prior year period (11,001)
(86,057)
Results for the three months ended March 31, 2023 $544,260
1,720,057
Nonfuel Revenues. Nonfuel revenues for the three months ended March 31, 2023
increased by $28,592, or 5.9%, as compared to the three months ended March 31,
2022, primarily as a result of increases in our truck services, restaurants and
diesel exhaust fluid, or DEF, revenue due to inflation-driven price increases,
the opening of our new and reopening of certain existing restaurants and recent
acquisitions. These increases were partially offset by lower overall transaction
volumes.
Rent and Royalties from Franchisees. Rent and royalties from franchisees for the
three months ended March 31, 2023 decreased by $590, or 15.2%, as compared to
the three months ended March 31, 2022, primarily as a result of the elimination
of rent and royalties due to the acquisitions of franchised travel centers
during 2022, partially offset by franchised travel centers that began operations
after March 31, 2022.
Fuel Gross Margin. Fuel gross margin for the three months ended March 31, 2023
decreased by $17,664, or 15.6%, as compared to the three months ended March 31,
2022, primarily as a result of the comparison against particularly favorable
market conditions in the prior year and a decrease in fuel sales volume.
Nonfuel Gross Margin. Nonfuel gross margin for the three months ended March 31,
2023 increased by $28,781, or 9.7%, as compared to the three months ended
March 31, 2022, primarily as a result of the increase in total nonfuel revenues.
Nonfuel gross margin percentage for the three months ended March 31, 2023,
increased 220 basis points to 62.8% from 60.6% for the three months ended
March 31, 2022, primarily due to price increases and higher value work orders in
Truck Service, improved DEF margins and efficiency improvements in restaurants
associated with longer operating hours.
Site Level Operating Expense. Site level operating expense for the three months
ended March 31, 2023 increased by $26,873, or 10.7%, as compared to the three
months ended March 31, 2022, primarily as a result of inflationary pressures on
labor costs and other operating expenses during the three months ended March 31,
2023. Site level operating expense as a percentage of nonfuel revenues increased
240 basis points to 54.1% for the three months ended March 31, 2023, from 51.7%
for the three months ended March 31, 2022, primarily as a result of the above
factors.
Selling, General and Administrative Expense. Selling, general and administrative
expense for the three months ended March 31, 2023 increased by $10,250, or
24.8%, as compared to the three months ended March 31, 2022, primarily as a
result of increased compensation costs, costs incurred by us with respect to the
Merger Agreement, and other inflationary pressures on general corporate
expenses.
Real Estate Rent Expense. Real estate rent expense for the three months ended
March 31, 2023 increased by $55, or 0.1%, as compared to the three months ended
March 31, 2022, primarily due to an increase in percentage rent payable on
increased total nonfuel revenues at our applicable travel centers.
Depreciation and Amortization Expense. Depreciation and amortization expense
for the three months ended March 31, 2023 increased by $2,868, or 11.8%, as
compared to the three months ended March 31, 2022, primarily as a result of the
growth in capital expenditures and acquisitions.
Interest Expense, Net. Interest expense, net for the three months ended
March 31, 2023 decreased by $1,919, or 16.6%, as compared to the three months
ended March 31, 2022 primarily as a result of higher interest income earned on
money market investments due to higher short-term investment interest rates.
20
————————————————– ——————————
Table of contents
Benefit (provision) for Income Taxes. Benefit (provision) for income taxes for the three months ended March 31, 2023 was a benefit of $2,761 as compared to a provision of $4,849 for the three months ended March 31, 2022. The effective income tax rates were 27.5% and 22.4% for the three months ended March 31, 2023 and 2022, respectively, and were higher than the U.S. federal income tax rate of 21.0% primarily due to the impact of state income taxes and additional tax expense related to compensation, partially offset by federal tax credits.
Liquidity and capital resources
Our principal liquidity requirements are to meet our operating and financing costs and to fund our capital expenditures, acquisitions and working capital requirements. Our principal sources of liquidity to meet these requirements are our: •cash balance; •operating cash flow;
•our line of credit (as defined below) with a current maximum availability of $200,000 subject to limits based on our qualified collateral;
• potential issues of new debt securities and variable income;
•possible financing or sale of unencumbered real estate we own; i
•potential sales to SVC of improvements we make to the sites we lease to SVC.
We believe that the primary risks we currently face with respect to our operating cash flow are: •inflationary pressures; •recessionary pressures; •increasing labor costs; •labor availability;
•adverse impacts of supply chain challenges;
•decreased demand for our fuel products resulting from regulatory and market efforts for improved engine fuel efficiency, fuel conservation and alternative fuels and technologies;
•decrease in demand for our products and services that we may experience as a result of competition, the economic slowdown or others;
• the fixed nature of a significant portion of our expenses, which may restrict our ability to achieve a reduction in our expenses sufficient to offset a reduction in our revenues;
• the costs and financing that may be required to execute our growth initiatives;
• the possible inability of the properties acquired or developed to generate the stabilized financial results we expected at the time of acquisition or development;
• increased cost of fleet card fees;
• increased costs of non-fuel products that we may not be able to pass on to our customers;
• increases in our cost of capital due to rising market interest rates and credit spreads; i
•the negative impacts on our gross margins and working capital requirements due
to increasing or sustained high cost of our fuel or nonfuel products resulting
from inflation generally.
21
————————————————– ——————————
Table of contents
Our business requires substantial amounts of working capital, including cash liquidity, and our working capital requirements can be especially large because of the volatility of fuel prices. Selectively acquiring additional properties and businesses and developing new sites requires us to expend substantial capital for any such properties, businesses or developments. In addition, our properties are high traffic sites with many customers and large trucks entering and exiting our properties daily, requiring us to expend capital to maintain, repair and improve our properties. Although we had a cash balance of $385,903 at March 31, 2023, and net cash provided by operating activities of $8,821 for the three months ended March 31, 2023, we cannot be sure that we will maintain sufficient amounts of cash, that we will generate future profits or positive cash flows or that we will be able to obtain additional financing, if and when it becomes necessary or desirable to pursue business opportunities. As of March 31, 2023, we had no off balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We believe we have sufficient financial resources to fund operating and financing costs and required capital expenditures for greater than 12 months.
Merger Agreement
We have agreed to customary covenants regarding the operation of our business and the business of our subsidiaries prior to the Effective Time. The Merger Agreement restricts us from entering into certain corporate transactions, entering into certain material contracts, making certain changes to our capital budget, incurring certain indebtedness and taking other specified actions without the consent of BP, and generally requires us to continue our operations in the ordinary course of business during the pendency of the Merger. Until the Merger is consummated or the Merger Agreement is terminated, if earlier, without BP's consent (not to be unreasonably withheld), we may not (i) repurchase, prepay, assume, endorse, guarantee or incur, or otherwise become liable for, any indebtedness for borrowed money, including by way of a guarantee or an issuance or sale of debt securities, or issue or sell options, warrants, calls or other rights to acquire any debt securities of the Company or any of its subsidiaries, enter into any "keep well" or other contract to maintain any financial statement or similar condition of another person, or enter into any arrangement having the economic effect of any of the foregoing (other than (A) in connection with the financing of ordinary course trade payables or (B) accounts payable in the ordinary course of business) or (ii) make any loans, advances, capital commitments or capital contributions to, or investments in (other than (A) to ourself or our wholly-owned subsidiaries in the ordinary course of business or (B) accounts receivable and extensions of credit in the ordinary course of business). These restrictions may prevent us from pursuing attractive business opportunities or adjusting our capital plan prior to the completion of the Merger. In addition, the Merger Agreement contains certain termination rights for us and BP. Upon termination of the Merger Agreement in accordance with its terms, under certain specified circumstances, we will be required to pay BP a termination fee in an amount equal to $51,900, including if the Merger Agreement is terminated due to our acceptance of an unsolicited superior proposal or due to our Board of Directors changing its recommendation to our stockholders to vote to approve the Merger Agreement. If we are required to pay the termination fee, it may adversely impact our ability to finance our operations or to invest in anticipated capital expenditure and other initiatives, and may have an adverse impact on the value of common stock, which could constrain our ability to raise funds through equity offerings. The Merger Agreement further provides that BP will be required to pay us a termination fee in an amount equal to $90,900 in the event the Merger Agreement is terminated under certain specified circumstances and receipt of antitrust approval has not been obtained by such time. Subject to certain exceptions and limitations, either party may terminate the Merger Agreement if the Merger is not consummated by November 15, 2023, subject to (x) an automatic 90-day extension and (y) an additional 90-day extension under certain circumstances.
Our liquidity and investment and financing resources
Revolving credit service
We and certain of our subsidiaries are parties to an Amended and Restated Loan
and Security Agreement, or the Credit Facility, that matures on July 19, 2024.
Under the Credit Facility, a maximum of $200,000 may be drawn, repaid and
redrawn until maturity. The availability of this maximum amount is subject to
limits based on qualified collateral. Subject to available collateral and lender
participation, the maximum amount of this Credit Facility may be increased to
$300,000. The Credit Facility may be used for general business purposes and
allows for the issuance of letters of credit. Generally, no principal payments
are due until maturity. Under the terms of the Credit Facility, interest is
payable on outstanding borrowings at a rate based on, at our option, LIBOR
through June 30, 2023 or a base rate thereafter, plus a premium (which premium
is subject to adjustment based upon facility availability, utilization and other
matters). At March 31, 2023, based on our qualified collateral, a total of
$172,100 was available to us for loans and letters of credit under the Credit
Facility. At March 31, 2023, there were no borrowings outstanding under the
Credit Facility and $13,928 of letters of credit issued under that facility,
which reduced the amount available for borrowing under the Credit Facility,
leaving $158,172 available for our use as of that date. As of
22
————————————————– ——————————
Table of contents
March 31, 2023, we were in compliance with all covenants of the Credit Facility. As of April 20, 2023, there were no borrowings outstanding under the Credit Facility and approximately $158,172 available under the Credit Facility for our use as of that date. Term Loan Facility We have a $200,000 Term Loan Facility, or the Term Loan Facility, which is secured by a pledge of all the equity interests of substantially all of our wholly-owned subsidiaries, a pledge, subject to the prior interest of the lenders under our Credit Facility, of substantially all of our other assets and the assets of such wholly-owned subsidiaries and mortgages on certain of our fee owned real properties. We used the net proceeds of $190,062 from our Term Loan Facility for general business purposes, including the funding of capital expenditures, updates to key information technology infrastructure and growth initiatives. Interest on amounts outstanding under the Term Loan Facility are calculated at LIBOR, with a LIBOR floor of 100 basis points, plus 600 basis points, and the Term Loan Facility matures on December 14, 2027. In the absence of LIBOR, the Term Loan Facility provides an alternative base rate option for interest, which utilizes either the federal funds rate or the prime rate as the base. Our Term Loan Facility requires periodic interest payments based on the interest period selected and quarterly principal payments of $500, or 1.0% of the original principal amount annually. In addition, for each twelve month calendar year period (each considered an "Excess Cash Flow Period", as defined), we are required to calculate Excess Cash Flow, as defined, and prepay an amount equal to Excess Cash Flow less other specified adjustments. The prepayment, as calculated, is due 95 days after the end of the respective Excess Cash Flow Period. There was no required prepayment due for the Excess Cash Flow Period ended December 31, 2022. We may prepay the remaining principal amounts outstanding under the Term Loan Facility without penalty. The Term Loan Facility contains various covenants that we believe are usual and customary. These covenants include a maximum allowed leverage ratio. As of March 31, 2023, we were in compliance with all covenants of the Term Loan Facility.
West Greenwich Loan
We have a term loan for $16,600 with The Washington Trust Company, or the West Greenwich Loan. The West Greenwich Loan matures on February 7, 2030, and is secured by a mortgage encumbering our travel center located in West Greenwich, Rhode Island. The annual interest rate is fixed at 3.85% through February 7, 2025, and resets thereafter, based on the five year Federal Home Loan Bank rate plus 198 basis points. The West Greenwich Loan requires us to make principal and interest payments monthly. The proceeds from the West Greenwich Loan were used for general business purposes.
Sources and uses of cash
The following is a summary of our sources and uses of cash for the three months
ended March 31, 2023 and 2022, as reflected in our consolidated statements of
cash flows:
Three Months Ended
March 31,
(dollars in thousands) 2023 2022 $ Change
Cash and cash equivalents at the beginning of the
period $ 416,012 $ 536,002 $ (119,990)
Net cash provided by (used in):
Operating activities 8,821 59,119 (50,298)
Investing activities (36,861) (49,220) 12,359
Financing activities (2,069) (1,784) (285)
Effect of exchange rate changes on cash - 36 (36)
Cash and cash equivalents at the end of the period $ 385,903 $ 544,153 $ (158,250)
Cash flows from operating activities. The change in net cash inflows from operating activities of $50,298 was primarily due to a decrease in earnings and the effect of changes in working capital primarily due to a decrease in accounts payable, partially offset due to the decrease in accounts receivable and stocks.
Cash flows from investing activities. The change in net cash outflows from investing activities of $12,359 was primarily due to a decrease in capital expenditures.
Cash flows from financing activities. The change in net cash outflows from financing activities of $285 was primarily the result of an increase in finance lease principal payments.
23
————————————————– ——————————
Table of Contents Related Party Transactions We have relationships and historical and continuing transactions with SVC, The RMR Group LLC, or RMR, and others related to them. For further information about these and other such relationships and related party transactions, see Notes 4, 5 and 6 to the Consolidated Financial Statements included in Item 1. of this Quarterly Report, our Annual Report, and our other filings with the SEC. In addition, see Item 1A. "Risk Factors" in our Annual Report for a description of risks that may arise as a result of these and other related party transactions and relationships. We may engage in additional transactions with related parties, including businesses to which RMR or its subsidiaries provide management services.
Environmental affairs and climate change
Governmental actions, including legislation, regulations, treaties and commitments, such as those seeking to reduce greenhouse gas emissions, and market actions in response to concerns about climate change, may decrease the demand for our major product, diesel fuel, and may require us to make significant capital or other expenditures related to alternative energy distribution or other changing fuel conservation practices. Federal and state governments require manufacturers to limit emissions from trucks and other motor vehicles, such as the U.S. Environmental Protection Agency, or EPA, gasoline and diesel sulfur control requirements that limit the concentration of sulfur in motor fuel. Further, legislative and regulatory initiatives requiring increased truck fuel efficiency have accelerated in the United States and these mandates have and may continue to result in decreased demand for diesel fuel. For example, in April 2022, the National Highway Traffic Safety Administration announced more stringent fuel efficiency standards for passenger cars and light-duty trucks and has indicated its intent to develop new fuel efficiency standards for medium and heavy-duty trucks. In addition, the California Air Resources Board and other similar state government agencies routinely consider rulemaking activity to improve fuel efficiency and limit pollution from vehicles. In April 2023, the EPA proposed stricter emission standards to drive new light duty electric vehicle sales, or EV Sales, to 67% of total sales of light duty vehicles and medium and heavy duty EV Sales to 46% of medium and heavy duty vehicles by 2032. Moreover, market concerns regarding climate change may result in decreased demand for fossil fuels and increased adoption of higher-efficiency fuel technologies and alternative energy sources. Regulations that limit or market demands to reduce carbon emissions may cause our costs at our locations to significantly increase, make some sites obsolete or completely disadvantaged, or require us to make material investments in our properties. For example, we have installed electric charging capacity at four of our travel centers, provide Tesla superchargers at three other locations, and expect to install light-duty charging at sites in Texas, Ohio and additional travel centers of ours nationwide. We are also preparing to offer hydrogen dispensing as another alternative fuel at specific travel centers. Some observers believe severe weather activities in different parts of the country over the last few years are evidence of global climate change. Such severe weather may have an adverse effect on our and our franchisees' sites or the volume of business at our locations. We mitigate these risks by owning, leasing and operating a geographically diversified portfolio of properties, by procuring insurance coverage we believe adequately protects us from material damages and losses and by attempting to monitor and be prepared for such events. However, we cannot be certain that our mitigation efforts will be sufficient or that future weather-related events or other climate changes that may occur will not have an adverse effect on our business. For further information about these and other environmental and climate change matters, and the related risks that may arise, see the disclosure under the heading "Environmental Contingencies" in Note 7 to the Consolidated Financial Statements included in Item 1 of this Quarterly Report, which disclosure is incorporated herein by reference.
© Edgar Online, source Glimpses
