CrossAmerica Partners LP (NYSE: CAPL) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Comparisons are with fiscal 2018 unless noted. Amounts are in U.S. dollars; financial amounts below are rounded to millions.
Business context
CrossAmerica distributes motor fuel wholesale and owns or leases fuel-retail properties. At year-end it distributed fuel to approximately 1,300 sites in 31 states. Wholesale accounted for approximately $2.0 billion of 2019 segment revenue and Retail for $455.6 million before intersegment eliminations. The company dealerized its remaining company-operated sites during 2019 and had none after September 30, shifting toward wholesale distribution and rental income.
On November 19, 2019, the Topper Group acquired control of the General Partner, IDRs and 7.49 million common units from Circle K affiliates. The Topper Group held approximately 47.7% of the common units as of February 21, 2020.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $2,149.4 million | $2,445.9 million |
| Gross profit | $154.6 million | $172.8 million |
| Operating income | $43.3 million | $35.0 million |
| Net income | $18.1 million | $5.2 million |
| Net income per common unit | $0.51 | $0.11 |
| Adjusted EBITDA (non-GAAP) | $103.7 million | $113.4 million |
| Distributable Cash Flow (non-GAAP) | $80.1 million | $78.0 million |
| Distribution coverage (non-GAAP) | 1.11x | 1.03x reported; 1.01x on an ASC 842-adjusted basis |
| Cash from operating activities | $72.3 million | $89.8 million |
Revenue fell 12% and gross profit fell about 11%; the decline largely reflected lower fuel prices and the reduction or reclassification of retail activity as sites were divested or dealerized. Average WTI crude fell 13% to $56.98 per barrel. Wholesale fuel volume decreased 4% to 1.004 billion gallons, while wholesale fuel margin increased to $0.072 per gallon from $0.067. Retail segment Adjusted EBITDA fell to $3.2 million from $8.4 million, reflecting reduced sites, retail fuel margin and merchandise activity.
Operating income improved 24%, and net income rose, while Adjusted EBITDA declined. The filing attributes the net-income improvement in part to lower interest expense and a smaller income-tax benefit than in 2018; results also included $4.5 million of impairment charges in 2019. Gross margin was approximately 7.2% of revenue, versus 7.1% in 2018; operating margin was approximately 2.0%, versus 1.4%.
Year-end cash was $1.8 million. Current assets were $63.5 million and current liabilities $112.6 million. Revolver borrowings were $519.0 million, plus $22.6 million of finance-lease obligations; total debt and finance-lease obligations were $541.6 million. Revolver availability, after covenant restrictions, was $92.0 million at year-end and $79.0 million as of February 21, 2020. The revolver matures in April 2024; its year-end weighted-average rate was 3.73%. The partnership reported compliance with its financial covenants at year-end.
Capital expenditures were $24.6 million, including $22.2 million of growth spending. Cash distributions paid were $73.0 million. The quarterly distribution remained $0.525 per unit throughout 2019; the Q4 distribution was paid in February 2020.
Material changes and unusual items
- Revenue decreased by approximately $296 million year over year, reflecting lower wholesale fuel prices and lower retail activity following divestitures, site conversions and dealerization. Lower crude prices also reduced supplier payment discounts.
- ASC 842 lease accounting was adopted on January 1, 2019. Among other changes, former failed sale-leaseback financing obligations were treated as operating leases; 2019 rent expense and operating income are therefore not directly comparable with prior periods. The adoption produced a $28.9 million increase to equity at transition.
- Two Circle K asset-exchange tranches closed in 2019: CrossAmerica received 116 company-operated stores, which were dealerized, in exchange for properties. The exchanges were accounted for as common-control transactions, with a $7.4 million net charge to equity. A further tranche closed February 25, 2020.
- The 17.5% CST Fuel Supply investment was subject to an agreed exchange for 45 Circle K properties and related assets plus wholesale fuel contracts covering 387 additional sites. At the report date, closing was expected in Q1 2020 and remained subject to conditions.
- A January 2020 agreement proposed buying retail operations at 172 sites, wholesale distribution to 114 sites and leasehold interests in at least 53 sites for $21 million cash, 842,891 newly issued units valued at $15 million, and cash for inventory. Closing was expected by the end of Q2 2020. The transaction includes ten-year affiliate master leases with $6.5 million aggregate annual rent; DMS contracts would terminate upon closing.
- On February 6, 2020, the IDRs were cancelled in exchange for 2,528,673 newly issued common units, based on a stated $45 million value. This post-year-end transaction increases common units outstanding and removes the IDR structure.
Outlook, commentary and risks
Management expected 2020 fuel volume and gross profit to benefit from the Circle K asset exchange, the CST Fuel Supply Exchange and the proposed retail and wholesale acquisition. It also anticipated benefits from amended fuel-purchase contracts and continued volume effects from Alabama site rebranding. These are expectations, not earnings guidance; the filing provides no specific 2020 earnings or cash-flow forecast.
- Fuel-price volatility affects revenue and margins. Approximately 82% of wholesale gallons had fixed per-gallon markups; the remainder was primarily market-based. Management estimated that a $10-per-barrel crude-price change could affect annual wholesale gross profit by about $2 million through supplier payment discounts.
- Four suppliers—ExxonMobil, BP, Circle K and Motiva—provided approximately 75% of 2019 fuel purchases. Disruptions, pricing changes or loss of supplier credit could affect operations and liquidity.
- Leverage, variable interest rates and credit-facility covenants constrain flexibility. A one-percentage-point change in borrowing rates was estimated to change annual interest expense by about $5.2 million.
- Environmental remediation, underground storage tanks and unknown contamination assumed in certain asset exchanges create potential liabilities. Environmental reserves were $3.4 million at year-end; asset-retirement obligations were $35.8 million.
- Control rests with the Topper Group, and the filing describes potential conflicts involving affiliate transactions, management services, leases and acquisitions. The proposed acquisition involves DMS and Topper Group affiliates and includes related-party leases.
- Distributions are discretionary, are not required by the partnership agreement and may be restricted by the credit facility. The filing cautions that cash flow, not accounting profit alone, determines distribution capacity.
Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the CST Fuel Supply Exchange and remaining Circle K asset-exchange tranches closed as expected, and their realized contribution to volume, gross profit and cash flow.
- Whether the proposed affiliate retail acquisition closed on its stated terms, including the unit issuance, inventory cost, $6.5 million annual lease commitment and termination of DMS contracts.
- The effect of the IDR cancellation and new-unit issuance on per-unit cash flow, distribution coverage and total dilution.
- Current revolver availability, leverage and covenant headroom, particularly after subsequent transactions and borrowings.
- Whether operating cash flow and distributable cash flow support the quarterly distribution, given 2019 operating cash flow of $72.3 million and distributions paid of $73.0 million.
- Environmental exposures and the adequacy and collectability of indemnities for acquired or exchanged sites, especially for unknown contamination.