CrossAmerica Partners LP — Q1 2019 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2019. CrossAmerica distributes wholesale and retail motor fuel, operates or leases fuel and convenience sites, and earns rental income. Results are seasonal, with sales volumes typically lowest in the first and fourth quarters. Unless otherwise noted, dollar amounts below are in millions.
Financial and operating results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $471.8 | $554.6 |
| Gross profit | $37.1 | $40.0 |
| Operating income | $7.6 | $7.4 |
| Net income (loss) | $0.2 | $(0.8) |
| Net income (loss) available to limited partners | $0.1 | $(2.0) |
| Cash from operating activities | $11.0 | $18.1 |
| Adjusted EBITDA (non-GAAP) | $21.4 | $26.0 |
| Distributable Cash Flow (non-GAAP) | $13.3 | $16.7 |
| Distribution coverage ratio (non-GAAP) | 0.73x | 0.78x |
Gross margin was approximately 7.9% of revenue, versus 7.2% a year earlier. Wholesale fuel margin averaged $0.064 per gallon, up from $0.057. Retail segment Adjusted EBITDA fell to $0.6 million from $1.3 million; Wholesale segment Adjusted EBITDA declined to $24.3 million from $26.2 million.
At March 31, cash was $6.3 million; total current assets were $60.4 million and current liabilities $115.2 million. Revolver borrowings were $516.5 million, with $24.4 million of finance lease obligations. Operating lease liabilities recognized under the new lease standard totaled $131.6 million. Total partners’ capital was $121.8 million. Capital expenditures were $7.1 million, including $6.8 million of growth spending.
Changes versus the prior period
- Revenue declined 15%, principally reflecting lower fuel prices and lower sales volumes. Wholesale volume fell 7%; retail volume fell 16%. FTC-mandated site divestitures, contract terminations or conversions, and winter weather also contributed.
- Gross profit declined 7%, while operating income increased slightly as operating expenses, depreciation and interest expense fell. Net income improved from a loss to a small profit.
- Operating cash flow decreased $7.1 million. Management cited 2018 settlement of $3.3 million in omnibus fees with units rather than cash, as well as increased receivables.
- Adjusted EBITDA and distributable cash flow decreased; distributions paid per unit were $0.5250 versus $0.6275 a year earlier. Coverage remained below 1.0x.
Outlook, financing, risks and unusual items
- Lease-accounting change: ASC 842 adoption on January 1, 2019 added operating right-of-use assets and lease liabilities and changed the classification of former failed sale-leaseback payments from principal and interest to rent. This makes 2019 and prior-period operating results and non-GAAP measures not directly comparable; management provided an adjusted 2018 comparison for certain measures.
- Circle K asset exchange: The parties agreed to exchange CrossAmerica properties valued at approximately $184.5 million for Circle K properties of approximately equal value. Closings are expected in tranches over up to 24 months; the first was anticipated in Q2 2019, subject to conditions and committee approval. Management estimated a positive annual EBITDA impact of $6–$7 million after all tranches close.
- New credit agreement: Effective April 1, 2019, the $750 million revolving facility replaced the prior agreement, extended maturity from April 2020 to April 2024, reduced pricing generally, and allows up to $300 million of additional commitments subject to conditions. Availability after covenant restrictions was $20.8 million at May 2, 2019. Financial covenants include leverage and interest-coverage tests; distributions are restricted upon an event of default.
- Distribution and liquidity: The board approved a $0.5250 per-unit distribution for Q1, payable May 13, 2019. Distributions remain at board discretion and are not required by the partnership agreement. Q1 distributable cash flow was below the cash distribution amount.
- Management outlook: The partnership anticipated improved fuel volume and margins from the asset exchange, a planned Circle K subjobber agreement supplying approximately 400 sites, and Jet-Pep fuel pricing and rebranding initiatives. These are expectations, not guaranteed outcomes; the filing gives no quantified full-year earnings guidance.
- Related-party changes: DMS amendments effective April 1 reduce annual rent by $0.5 million and fuel markup by $0.01 per gallon, with a further $0.005 reduction scheduled for January 2020. CrossAmerica also committed $1.25 million of site capital expenditures and DMS may sever certain sites under the amended terms.
- Risks and contingencies: Exposure includes volatile fuel prices and margins, variable-rate debt, covenant and liquidity constraints, weather, competition, environmental remediation, and dependence on major suppliers and related parties. A 1 percentage-point change in borrowing rates would affect annual interest expense by about $5.2 million. Recorded environmental liabilities were $3.4 million, partly offset by $3.0 million of indemnification assets. Management did not expect ordinary-course litigation to materially affect results; Circle K agreed to bear potential FTC penalties associated with late divestitures.
- The partnership recorded $0.4 million of separation costs as it planned to exit company-operated retail operations and dealerize remaining sites. Management stated disclosure controls were effective and reported no material change in risk factors.
Most important facts for investors to verify
- Whether the Circle K exchange closes on schedule and delivers the estimated $6–$7 million annual EBITDA benefit, including the effects of assumed liabilities and environmental obligations.
- Whether cash generation can support distributions: Q1 coverage was 0.73x, and the distribution exceeded reported distributable cash flow.
- Available borrowing capacity and covenant headroom under the new facility; reported availability was $20.8 million after covenant restrictions.
- Actual effects of the DMS amendments, site conversions, and planned Circle K subjobber arrangement on fuel volumes, margins, and rental income.
- Comparability of reported performance after ASC 842 adoption, and the impact of fuel-price volatility, interest rates, and environmental exposures.