CrossAmerica Partners LP (formerly Lehigh Gas Partners LP) — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 27, 2015. Financial amounts below are in U.S. dollars. FY 2013 is the principal comparable period, though acquisitions and changes in business mix limit comparability.
Business context and reporting period
CrossAmerica distributes motor fuels wholesale, owns and leases fuel-station real estate, and, following its April 2014 acquisition of Petroleum Marketers, operates convenience stores and quick-service restaurants. At year-end it served 1,074 sites, owned or leased 658 sites, and had distributed 906.2 million gallons during 2014. CST acquired the general partner on October 1, 2014; the partnership changed its name and ticker to CrossAmerica Partners LP (CAPL) in October.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $2,669.3 million | $1,936.1 million |
| Operating income | $8.6 million | $30.2 million |
| Net income (loss) attributable to partners | $(6.2) million | $18.1 million |
| Fuel gross margin | $68.6 million | $44.5 million |
| Fuel volume | 906.2 million gallons | 637.8 million gallons |
| Fuel margin per gallon | $0.076 | $0.070 |
| Operating cash flow | $28.5 million | $29.6 million |
| Distributable Cash Flow (non-GAAP) | $35.0 million | $39.3 million |
| Distribution per unit | $2.1100 | $1.9450 |
| Distribution coverage (diluted) | 0.8x | 1.3x |
Revenue increased 37.9%, driven chiefly by acquired businesses and a 42.1% increase in gallons; lower fuel prices reduced sales dollars per gallon. Fuel gross margin grew 54.2%, but operating income fell 71.4% and the partnership moved to a net loss. Higher operating and SG&A costs, depreciation, interest, acquisition expenses, and equity-compensation charges contributed. 2014 included $7.5 million of acquisition costs, $11.4 million of equity-based incentive compensation expense (including accelerated vesting after the change in control), and a $2.4 million severance accrual. PMI’s acquired inventory also generated a one-time $1.6 million fair-value charge.
Fourth quarter: Revenue was $587.4 million, versus $485.4 million in Q4 2013. Operating loss was $6.9 million and net loss was $13.7 million, compared with operating income of $6.1 million and net income of $3.9 million a year earlier. The filing attributes the sequential revenue decline primarily to lower selling prices and the Q4 earnings decline primarily to equity compensation and termination benefits.
Cash, liquidity, and debt: Year-end cash was $15.2 million; current assets were $76.1 million and current liabilities $94.0 million. Cash used in investing was $156.2 million, largely reflecting acquisitions; financing provided $138.7 million. Total debt was $227.6 million, including $200.4 million outstanding on a $550 million secured revolving facility and $26.3 million of Rocky Top financing and other debt. The facility had stated availability of $333.2 million and matures in March 2019; the revolving borrowing rate averaged 2.7%. The facility includes leverage and interest-coverage covenants and can restrict distributions. A one-percentage-point rate increase would raise annual interest expense by approximately $2.0 million.
Maintenance capital expenditures were $3.1 million and expansion capital expenditures were $174.4 million. The recorded asset retirement obligation for underground storage tank removal rose to $19.1 million from $2.2 million, largely following a change in accounting policy to align with CST’s practice.
Material changes, outlook, and risks
- Acquisitions and growth: 2014 additions included PMI, Atlas assets and contracts, and Nice N Easy-related real estate and fuel rights. PMI added 87 convenience stores and nine co-located restaurants. Acquisitions materially increased revenue, assets, volume, and operating costs, so reported growth is not purely organic.
- Post-year-end transactions: In January 2015, CrossAmerica acquired a 5% interest in CST Fuel Supply LP in exchange for 1,497,946 newly issued common units, and acquired real estate and fuel assets associated with 22 Landmark stores for $43.5 million. In February 2015, it acquired Erickson Oil Products for $85 million. These transactions were not part of 2014 results and were funded or partly funded through the credit facility or unit issuance.
- Management outlook: Management expected 2015 fuel volume and rent income to increase, reflecting full-year contributions from 2014 acquisitions and the 2015 Landmark and Erickson acquisitions. It expected fuel gross margins to remain consistent with historical results under then-current market conditions, while noting market-related volume pressure. Further CST asset or fuel drops were anticipated; no quantitative earnings or cash-flow guidance was provided.
- Distribution: The partnership increased its quarterly distribution to $0.5425 per unit for Q4 2014, or $2.17 annualized. The board retains discretion to change or suspend distributions; the partnership agreement does not require payment. 2014 DCF coverage was below 1.0x, and management’s distribution policy is subject to cash reserves, debt service, capital needs, and credit-agreement restrictions.
- Concentration and governance: ExxonMobil, BP, and Motiva supplied approximately 87% of 2014 wholesale fuel purchases. CST controls the general partner and holds incentive distribution rights; CST-related management fees, transactions, and conflicts may affect unitholder economics. The fixed and variable management-fee structure includes a $670,000 monthly base fee plus per-gallon fees.
- Other risks and unusual items: Risks include fuel-price and demand volatility, competition, acquisition integration and financing, environmental remediation, variable-rate debt, and minimum-volume purchase commitments. The 2014 purchase-price allocations remained preliminary for several acquisitions. PMI represented about 23% of revenue; its internal controls were excluded from management’s and the auditor’s year-end ICFR evaluation while integration continued. The auditor reported an unqualified opinion on the financial statements and on the controls that were included in the audit.
Most important facts for investors to verify
- Whether post-acquisition operating performance and integration improve earnings and cash generation, rather than revenue growth reflecting only added volume.
- How the 0.8x 2014 distribution coverage, ongoing distribution rate, and subsequent unit issuance affect per-unit cash available and dilution.
- Current debt, covenant headroom, facility availability, and financing required for the 2015 acquisitions.
- Final purchase-price allocations, goodwill and intangible values, and any resulting impairment or tax adjustments.
- PMI control integration progress and the status, funding, and recoverability of environmental indemnities, escrows, and insurance.
- Terms and realized economics of CST-related fuel supply, leases, management fees, and any further dropdowns.