Crossamerica Partners LP annual report, FY2012

Business context and reporting period

The filing is for Lehigh Gas Partners LP, a wholesale motor-fuel distributor and owner/lessor of fuel-station properties. Although the request identifies CrossAmerica Partners LP, the supplied 2012 Form 10-K names Lehigh Gas Partners LP as the registrant. The Partnership began trading in October 2012 after its IPO.

Fiscal year ended December 31, 2012. Results combine the Predecessor’s January 1–October 30, 2012 results with the Partnership’s October 31–December 31, 2012 results. The Partnership’s own reported period is therefore a two-month post-IPO stub, not a standalone calendar fourth quarter.

Key financial metrics

For the Partnership’s October 31–December 31 stub, revenue was $311.7 million, operating income $0.8 million, net loss $1.4 million, and operating cash flow $3.2 million. The reported loss per common and subordinated unit was $0.09.

Material changes versus prior comparable period

• Combined fuel-sales revenue increased 16.3% to $1,862.9 million. Fuel volume rose 14.1% to 605.2 million gallons, while average selling price rose 2.0%; fuel gross profit increased 11.5%, partly offset by a slightly lower margin per gallon.
• Volume gains included wholesale supply to LGO and newly leased Getty sites, while losses included the Ohio Turnpike contract expiration, terminated dealer agreements, competition, site divestitures and closures.
• Combined net income fell to $1.8 million from $9.9 million. Selling, general and administrative expense rose $6.8 million, including $6.3 million of IPO-related costs; depreciation and amortization rose $4.3 million, and interest expense rose $1.2 million.
• Operating cash flow declined $4.2 million. Investing cash outflow increased with acquisitions; the filing reports $75.5 million paid for acquisitions, net of cash acquired, during 2012.
• Year-over-year comparisons are affected by the IPO, contribution of predecessor assets, new wholesale sales to LGO, rent arrangements with LGO, acquisitions, and changes in which entities and sites are included.

Outlook, management commentary, risks and unusual items

• Management’s stated objective is to make quarterly cash distributions and, over time, increase them. The intended minimum is $0.4375 per unit quarterly ($1.75 annualized), subject to available cash, reserves, expenses, debt terms and board discretion; distributions are not guaranteed. A prorated $0.2948-per-unit distribution was declared in January 2013 and paid in February.
• Growth strategy emphasizes acquisitions, urban/high-traffic locations, fuel-volume growth and supply relationships. The Dunmore acquisition cost $29.0 million and added 24 stations; Express Lane cost approximately $45.4 million and expanded operations into Florida. Associated expected net annual rent from LGO was approximately $1.7 million and $4.6 million, respectively.
• Liquidity: the $249 million secured revolving facility matures October 30, 2015, with potential capacity increases of up to $75 million subject to conditions. At year-end, borrowings were $183.8 million and letters of credit were $13.9 million; the filing states $51.3 million was available. Distributions are restricted under specified default, covenant or tax-status conditions. The Partnership reported compliance with financial covenants at December 31, 2012.
• Interest-rate exposure is material: a one-percentage-point change in the average rate on year-end borrowings would affect annual interest expense by approximately $1.8 million. The credit agreement requires a leverage ratio no greater than 4.40:1.00, tightening to 4.25:1.00 after December 31, 2013, and interest coverage of at least 3.00:1.00.
• Significant risks include dependence on four suppliers for most fuel purchases, volatile fuel prices and thin margins, seasonal demand, reliance on third-party fuel carriers and supplier trade credit, geographic concentration, acquisition and integration risks, environmental liabilities, and affiliate conflicts. Fuel supply minimum-purchase commitments total about 3.7 billion gallons over the stated contract periods; the related dollar amount is not estimable because prices vary.
• Environmental exposure includes $21.9 million of predecessor environmental liabilities at year-end, offset by $18.1 million of indemnification assets. The Partnership also recorded $1.2 million of environmental liabilities for Express Lane sites, with identified escrow, state-fund or insurance support. Coverage and recoveries may be insufficient.
• Management concluded disclosure controls and procedures were not effective at year-end because of material weaknesses involving accounting staffing, technical expertise and management review. Remediation was ongoing; management stated the financial statements fairly present results, and the auditor did not opine on control effectiveness.
• Unusual items include a $0.6 million debt-extinguishment loss, held-for-sale impairment charges, acquisition costs, and IPO costs. Hurricane Sandy caused temporary outages at approximately 90 locations and minor damage at two; the filing says the operating impact was not significant.

Most important facts for investors to verify

• Confirm the registrant and security being analyzed: the supplied filing is for Lehigh Gas Partners LP, not a filing under the CrossAmerica Partners LP name.
• Reconcile the combined 2012 figures to the separate predecessor and post-IPO periods, and assess comparability adjustments and affiliate-related revenue.
• Test whether operating cash flow and available revolver capacity support the intended distributions after debt service, lease commitments, management fees and required capital spending.
• Review covenant headroom, variable-rate exposure, the 2015 credit-facility maturity and the substantial financing and operating-lease obligations.
• Assess acquisition valuations and integration, including provisional purchase-price allocations, post-closing adjustments and environmental conditions at acquired properties.
• Track remediation of disclosed internal-control material weaknesses and the adequacy and collectability of environmental indemnities, escrow funds and insurance.
• Examine related-party arrangements, including LGO leases and fuel supply, the LGC management fee, and governance and distribution conflicts described in the filing.