CrossAmerica Partners LP — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. CrossAmerica wholesales and retails motor fuel, operates retail sites, and leases retail real estate. Results include the November 2017 Jet-Pep acquisition. Following the 2017 CST merger, Circle K indirectly controls the general partner and owns a 21.4% limited partner interest and all IDRs.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Operating revenue | $554.6 million | $469.3 million; up 18% |
| Gross profit | $40.0 million | $37.4 million; up 7% |
| Gross margin | 7.2% | 8.0% (calculated as gross profit divided by revenue) |
| Operating income | $7.4 million | $5.6 million |
| Net income (loss) | $(0.8) million | $1.7 million |
| Net income (loss) available to limited partners; diluted EPS | $(2.0) million; $(0.06) | $0.7 million; $0.02 |
| Adjusted EBITDA (non-GAAP) | $26.0 million | $23.7 million |
| Distributable Cash Flow (non-GAAP) | $16.7 million | $16.9 million |
| Distribution coverage ratio (non-GAAP) | 0.78x | 0.82x |
| Operating cash flow | $18.1 million | $21.8 million |
| Capital expenditures | $2.1 million | $2.5 million |
| Interest expense | $8.1 million | $6.7 million |
At March 31, 2018, cash was $1.7 million, total current assets $75.2 million and current liabilities $92.7 million. Debt and capital lease obligations totaled $538.3 million, including $511.0 million drawn on the revolving facility; leverage ratio was 4.21x and the Partnership reported covenant compliance. Facility availability after covenant restrictions was $33.6 million at quarter-end. The facility was amended on April 25: capacity rose from $550 million to $650 million, maturity extended to April 25, 2020, and borrowing margins and fees were reduced. Availability was $98.9 million as of May 3.
Material changes and management commentary
- Revenue growth reflected higher motor-fuel prices and the Jet-Pep acquisition. Average WTI price increased 22% year over year; wholesale volume rose 5%, while retail fuel volume increased 41%, primarily due to Jet-Pep.
- Gross profit rose more slowly than revenue. Management cited acquisition contributions, higher wholesale margins and discounts, and stronger retail fuel margins; Jet-Pep experienced weaker-than-normal regional fuel margins in Q1.
- Interest expense increased $1.4 million, reflecting higher average borrowing rates and a $66.3 million increase in average debt balance, primarily to fund Jet-Pep. Management expected interest expense to rise in 2018, partly offset by the later facility amendment.
- General and administrative expense declined $1.1 million, mainly from lower management-agreement personnel charges and equity compensation, partly offset by severance and acquisition costs.
- The Board declared a Q1 distribution of $0.5250 per unit, down from $0.6175 for Q1 2017. It was payable May 25, 2018. The Partnership states distributions are discretionary and may be modified or discontinued.
- Management expected rental income to increase in 2018, citing acquisitions and planned conversions of company-operated sites to lessee dealers. It said acquisitions would be pursued opportunistically; no specific earnings or distribution guidance was provided.
Risks, contingencies and unusual items
- Results are seasonal, with historically higher sales volumes in Q2 and Q3 and lower volumes in Q1 and Q4. Fuel prices and rapid price movements can affect revenue, margins and discounts; the company does not generally hedge fuel purchases.
- Interest-rate exposure is material: a one-percentage-point change in the average borrowing rate would affect annual interest expense by approximately $5.1 million. The revolving facility is secured by substantially all assets.
- Customer and related-party concentration includes DMS, which represented 12% of wholesale volume and 20% of rental income in Q1 2018; Circle K accounted for 19% of rental income. Circle K controls the general partner, and the filing reports significant fuel purchases, leases, management charges and other related-party transactions.
- Twelve sites were classified as held for sale; 11 were subject to FTC-required divestiture and were expected to be sold in 2018. A $1.2 million impairment charge was recorded for Jet-Pep sites required to be divested.
- Environmental liabilities recorded were $3.7 million at March 31, 2018, with $3.2 million of related indemnification assets. The filing describes ongoing environmental and litigation exposures but says the disclosed legal proceedings were not expected to have a material adverse effect.
- Adoption of the new lease standard was expected to materially increase recognized balance-sheet lease assets and liabilities beginning in 2019. Q1 adoption of the revenue standard had no material financial-statement impact.
- Amended Omnibus Agreement expenses were partly settled in newly issued units; the Partnership said it expected to fund these expenses primarily with operating cash going forward because unit issuance had become an expensive funding source.
Key facts for investors to verify
- Whether the reduced distribution is sustainable given Q1 distributable cash flow of $16.7 million and 0.78x coverage.
- Post-amendment borrowing availability, leverage covenant headroom, interest costs and the ability to refinance before the April 2020 facility maturity.
- Jet-Pep site performance, integration results and completion and proceeds of FTC-required divestitures.
- Fuel-margin sensitivity, particularly for Jet-Pep supply arrangements, and the effects of commodity-price and interest-rate changes.
- Related-party transaction terms, management-agreement costs and the operational implications of Circle K’s control.
- Environmental remediation estimates, indemnification recoveries and the materialization of any legal or regulatory exposures.