CrossAmerica Partners LP — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. CrossAmerica is a publicly traded partnership focused on wholesale motor-fuel distribution, real-estate leasing and retail-site operations.
Business context and reporting period
At year-end, the Partnership distributed fuel to nearly 1,200 sites across 29 states and reported 886 owned or leased sites, excluding 403 independent-dealer sites. Wholesale distribution accounted for most activity. During 2016, it acquired Franchised Holiday Stores and State Oil assets, converted 77 company-operated stores to lessee-dealer sites, and held a 17.5% interest in CST Fuel Supply.
CST, then owner of the general partner, had agreed to be acquired by Circle K Stores’ parent, Alimentation Couche-Tard. The transaction had received CST stockholder approval but remained subject to U.S. and Canadian regulatory approvals; closing was expected in the second quarter of 2017.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $1.870 billion | $2.226 billion |
| Gross profit | $155.6 million | $169.5 million |
| Operating income | $32.2 million | $26.0 million |
| Net income attributable to partners | $10.7 million | $11.4 million |
| Net income available to limited partners after IDR distributions | $7.3 million | $10.1 million |
| Net income per unit | $0.22 | $0.35 |
| Net cash from operating activities | $79.4 million | $64.5 million |
| Adjusted EBITDA (non-GAAP) | $103.6 million | $90.3 million |
| Distributable Cash Flow (non-GAAP) | $81.6 million | $69.7 million |
| Distribution coverage ratio (non-GAAP) | 1.02x | 1.08x |
Margins and volume: Wholesale motor-fuel gross margin was $54.1 million, or $0.052 per gallon, versus $58.6 million, or $0.056 per gallon. Retail motor-fuel gross profit was $8.5 million; retail margin after card fees and commissions fell to $0.053 per gallon from $0.092. Retail merchandise and services gross profit was $30.1 million, down from $41.7 million. Wholesale gallons distributed declined to 1.035 billion from 1.051 billion.
Balance sheet and liquidity: At December 31, 2016, cash was $1.4 million; current assets were $65.4 million and current liabilities $75.1 million. Revolver borrowings were $441.5 million, with $94.1 million available under the facility after letters of credit and covenant constraints. Total debt and capital-lease obligations were $470.8 million gross; the balance-sheet carrying amount for debt and capital-lease obligations, net of deferred financing fees, was $467.2 million. The Partnership reported compliance with its financial covenants, including a 4.16x leverage ratio against a 4.50x limit.
Distributions: Cash distributions paid were $2.40 per unit in 2016, up from $2.23 in 2015. The Board declared a $0.6125-per-unit distribution in January 2017 for the fourth quarter of 2016. Distributions are discretionary and subject to cash availability and credit-facility restrictions.
Material changes versus the prior comparable period
- Revenue declined 16% and gross profit declined 8%. Management attributed lower revenue principally to lower wholesale fuel prices; WTI averaged $43.29 per barrel, down 11% from 2015.
- Operating income increased to $32.2 million, but net income attributable to partners fell to $10.7 million. Higher interest expense, depreciation and IDR distributions contributed to the lower limited-partner income available.
- Wholesale gross profit benefited from higher rent and other gross profit and increased CST Fuel Supply equity income, partly offsetting weaker fuel margins. Equity income from CST Fuel Supply rose to $16.0 million from $10.5 million.
- Retail gross profit fell $22.5 million, reflecting lower fuel volumes and margins and reduced merchandise profit as stores were converted to lessee-dealer operations. Retail operating expenses also fell $11.0 million.
- Operating cash flow increased $15.0 million. Investing cash outflow was $96.9 million, versus $311.5 million in 2015, when acquisition spending was substantially higher. Financing activities included $83.1 million in net revolver borrowings and $83.6 million in distributions paid.
- Debt and capital-lease obligations increased, while equity declined to $220.8 million from $268.9 million. Common units outstanding rose to 33.5 million from 25.6 million, in part reflecting unit issuances and conversion of subordinated units.
Outlook, risks, contingencies and unusual items
- Management outlook: The Partnership expected 2017 fuel volumes to exceed 2016 levels, citing recent acquisitions, and expected rent income to rise as acquisitions and site conversions contributed. It planned to pursue acquisitions opportunistically, subject to suitable targets, financing and accretive terms. The outlook expressly did not account for the proposed CST merger.
- Merger and related-party exposure: Couche-Tard was expected to gain control of the general partner, CST’s 19.8% limited-partner interest and all IDRs upon closing. Management noted potential restrictions on growth and operating decisions before closing, possible severance costs, conflicts of interest, and the risk that CST Fuel Supply distributions could change; those distributions are not contractually guaranteed.
- Leverage and refinancing: The $550 million secured revolving credit facility matured March 4, 2019. A one-percentage-point change in the borrowing rate was estimated to change annual interest expense by approximately $4.4 million. The facility can restrict distributions and acquisitions, and requires at least $20 million of borrowing availability and unrestricted cash after an acquisition.
- Fuel, customer and supplier concentration: ExxonMobil, BP and Motiva supplied approximately 79% of 2016 fuel purchases. DMS accounted for 16% of wholesale volumes and 26% of rent income; CST accounted for 8% of wholesale volumes and 21% of rent income. Commodity-price volatility, seasonality, competition and disruptions to supply or trade credit could affect margins and cash available for distributions.
- Environmental and legal matters: Recorded environmental reserves were $4.2 million and asset-retirement obligations were $27.8 million. The filing identifies approximately $1.0 million in predecessor-site environmental liabilities not covered by escrow, state funds or insurance, for which indemnification is expected from DMI. A former CST employee sought approximately $1.6 million in severance-related damages; the Partnership intended to contest the case and may be responsible for the plaintiff’s reasonable legal expenses. Management did not expect the disclosed proceedings, individually or collectively, to have a material adverse effect.
- Unusual financing and accounting matters: A $25.0 million sale-leaseback of 17 sites generated proceeds used to repay revolver borrowings; due to continuing involvement, it was accounted for as a financing transaction rather than a completed sale. The Rocky Top seller-financing obligation was renegotiated into a long-term lease. Management reported no goodwill impairment. Adoption of the new lease standard was expected to have a material balance-sheet impact.
Important facts for investors to verify
- Whether the CST/Couche-Tard merger closed, and how control changes affected the general partner, IDRs, management arrangements and strategic flexibility.
- Whether operating cash flow and distributable cash flow support the distribution: 2016 coverage was 1.02x, with distributions dependent on Board discretion and lender covenants.
- Debt maturity and refinancing plans ahead of the March 2019 revolver maturity, covenant headroom, borrowing availability and sensitivity to interest rates.
- Whether acquisition integration and store conversions deliver expected fuel volumes, rental income, margins and cost savings without further dilution or excessive leverage.
- The sustainability and terms of related-party revenues, CST Fuel Supply distributions and management fees, including the effect of customer and supplier concentration.
- Developments in environmental remediation, indemnification recoveries and the former employee’s litigation, including amounts ultimately payable.