CrossAmerica Partners LP — 2018 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. CrossAmerica distributes motor fuel wholesale and retail, operates retail sites, and leases real estate. Amounts below are in millions of dollars unless stated otherwise. Comparisons are with the corresponding 2017 period.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $673.3 | $528.8 | $1,227.9 | $998.1 |
| Gross profit | $44.0 | $41.6 | $83.9 | $79.1 |
| Gross margin | 6.5% | 7.9% | 6.8% | 7.9% |
| Operating income (loss) | $(1.6) | $2.7 | $5.9 | $8.3 |
| Net loss | $(6.9) | $(4.0) | $(7.7) | $(2.3) |
| Net loss per limited partner unit | $(0.21) | $(0.15) | $(0.26) | $(0.13) |
| Adjusted EBITDA (non-GAAP) | $28.2 | $27.8 | $54.2 | $51.5 |
| Distributable cash flow (non-GAAP) | $20.0 | $21.2 | $36.6 | $38.0 |
| Distribution coverage ratio | 1.11x | 1.01x | 0.93x | 0.92x |
Six-month operating cash flow was $37.2, down from $49.4; investing cash outflow was $6.0, and financing cash outflow was $32.7. Cash at June 30 was $2.5, versus $3.9 at December 31, 2017.
At June 30, total debt and capital lease obligations were $543.3, including $516.5 drawn on the revolving facility; availability after covenant restrictions was $76.9. The facility’s stated capacity is $650, and its maturity was extended to April 25, 2020. Borrowings carried a 4.55% effective rate. The partnership reported compliance with its financial covenants. A one-percentage-point change in the average interest rate was estimated to change annual interest expense by approximately $5.2.
Current assets were $80.2 and current liabilities $103.8. Total assets were $920.4 and total liabilities $790.7 at June 30.
Material changes and drivers
- Q2 revenue rose 27% and gross profit rose 6%; for the first half, revenue rose 23% and gross profit rose 6%. Management attributed revenue growth mainly to higher fuel prices and the November 2017 Jet-Pep acquisition. Q2 WTI averaged $68.07 per barrel, up 42% year over year; first-half WTI averaged $65.55, up 31%.
- Wholesale fuel volume increased 2% in Q2 and 3% for the first half, primarily from Jet-Pep. Wholesale motor-fuel gross profit increased, supported by higher margins and supplier discounts. Retail results also benefited from Jet-Pep, while merchandise gross profit declined.
- Despite higher gross profit, Q2 operating results turned to a loss. Depreciation, amortization and accretion rose $7.7 in Q2, including $7.6 of impairment charges tied to FTC-required divestitures. Interest expense rose 20% to $8.2 in Q2, reflecting higher average borrowings and rates.
- General and administrative expense fell year over year, primarily because 2017 included merger-related separation costs. The comparison is also affected by acquisition-related items and changes in equity-funded expenses.
- The common-unit distribution was reduced to $0.5250 for Q2 2018 from $0.6225 for Q2 2017. The Board declared $0.5250 per unit for Q2 2018, payable August 13, 2018.
Outlook, risks and unusual items
- Management expected rental income to increase in 2018, citing acquisitions and conversions of company-operated sites to lessee dealers. It also expected interest expense to increase because of acquisition-related borrowings and higher rates, partially offset by lower facility pricing under the April amendment. No specific full-year earnings or cash-flow guidance was provided.
- In June, CrossAmerica agreed to transition 43 Florida sites from related party DMS to a third-party operator during Q3 and Q4 2018 under 10-year master fuel-supply and lease agreements, with four five-year renewal options. It accrued a $3.8 cash termination payment to DMS and recorded a $2.2 write-off of deferred rent income.
- FTC-related asset divestitures generated impairment charges of $8.9 for the first half. Eleven sites were classified as held for sale at June 30 in connection with FTC divestiture requirements. For the Upper Midwest sites, Circle K agreed to compensate CrossAmerica for the difference between site value and sale proceeds; the amount was undetermined, and payment depended on FTC approval. Management anticipated completion and payment in 2018.
- Fuel-price volatility affects reported revenue, margins and supplier discounts; the partnership generally does not hedge fuel purchases. It identified added price exposure on fuel purchased from Circle K for Jet-Pep sites. Other risks include floating-rate debt, seasonality, environmental obligations, competition, acquisition financing and reliance on related parties.
- Circle K indirectly controls the general partner and owns 21.7% of the limited partner interest and all IDRs. Related-party transactions include fuel supply, leases, management services and settlement of fees with newly issued common units. The filing states distributions remain discretionary and are not guaranteed.
- Management said adoption of the new lease standard, effective January 1, 2019, would materially increase reported balance-sheet assets and liabilities. Disclosure controls were assessed as effective; no material risk-factor changes were reported.
Investor verification points
- Confirm the sustainability of distributable cash flow and unit distributions, particularly against first-half coverage below 1.0x and the lower declared per-unit distribution.
- Track revolver availability, covenant headroom, refinancing needs and sensitivity to floating interest rates.
- Verify the timing, proceeds and Circle K compensation for FTC-required divestitures, as well as execution and economics of the 43-site Florida transition.
- Assess whether acquisition-driven volume and revenue growth translates into durable gross profit and cash flow after interest, depreciation and unusual charges.
- Review related-party governance and exposure to major counterparties, including DMS, Circle K and key fuel suppliers.
Adjusted EBITDA, distributable cash flow and distribution coverage are non-GAAP measures as defined by the partnership and should not be treated as substitutes for GAAP results or liquidity measures.