CrossAmerica Partners LP — Q3 2018 Form 10-Q
Business and period: The partnership distributes motor fuel wholesale and retail, operates retail sites, and earns rental income from fuel-related properties. This unaudited report covers the three and nine months ended September 30, 2018, compared with the same 2017 periods. The business is seasonal, with historically higher volumes in the second and third quarters.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $670.8 million | $544.1 million | $1,898.7 million | $1,542.2 million |
| Gross profit | $43.8 million | $41.6 million | $127.7 million | $120.6 million |
| Operating income | $13.7 million | $12.3 million | $19.5 million | $20.6 million |
| Net income (loss) | $5.3 million | $4.3 million | $(2.4) million | $2.0 million |
| Net income (loss) per limited partner unit | $0.15 | $0.09 | $(0.11) | $(0.03) |
| Operating cash flow | Not separately reported for the quarter | $57.3 million | $66.4 million |
- Revenue growth was driven mainly by higher fuel prices and the November 2017 Jet-Pep acquisition. Q3 revenue rose 23%, while gross profit rose 5%; nine-month revenue rose 23%, while gross profit rose 6%.
- Q3 interest expense increased to $8.1 million from $7.1 million; nine-month interest expense increased to $24.4 million from $20.6 million, reflecting higher rates and borrowing balances.
- At September 30, cash was $3.8 million and current liabilities exceeded current assets: $94.7 million versus $67.4 million. Debt and capital lease obligations totaled $542.0 million, including $516.5 million drawn on the revolving facility. Facility availability, after covenant restrictions, was $45.7 million at quarter-end and $49.2 million on November 1.
- Operating cash flow declined $9.2 million year over year for the nine months. Investing activities used $4.9 million, while financing activities used $52.4 million. Net revolver borrowings were $10.5 million.
- Management’s non-GAAP distributable cash flow was $20.0 million in Q3 and $56.6 million for nine months. Distribution coverage was 1.10x and 0.98x, respectively. The declared Q3 distribution was $0.525 per unit, down from $0.6275 for Q3 2017; the board retains discretion to change or suspend distributions.
Material changes and unusual items
- The Jet-Pep acquisition increased site count and volumes, particularly in retail and intersegment fuel sales. Wholesale gallons distributed increased 2% in Q3 and 3% for nine months; retail system sites increased to 238 from 153 a year earlier.
- Q3 wholesale motor-fuel gross profit increased 21%, supported by higher margins and volume. Retail segment Adjusted EBITDA decreased to $2.1 million from $2.4 million in Q3, partly reflecting a greater mix of lower-margin commission-agent sites.
- Nine-month earnings included $8.9 million of impairment charges related to FTC-mandated divestitures. The partnership also recorded $3.8 million for terminating DMS arrangements and $2.2 million to write off deferred rent income when 43 Florida sites transitioned to a new operator; these charges contributed to a $6.7 million net loss on dispositions and lease terminations.
- Following the FTC-required sale of nine Upper Midwest sites after the specified deadline, Circle K agreed to pay the partnership $6.3 million, expected in Q4 2018 and to be recorded as a contribution to partners’ capital. Potential FTC civil penalties were not accrued; Circle K agreed to be solely responsible for them.
Outlook, risks, and contingencies
- Management expects 2018 interest expense to remain pressured by acquisition-related borrowings and rising rates, partly offset by lower facility pricing under the April 2018 amendment. No specific earnings or revenue guidance is provided.
- The credit facility was expanded to $650 million and its maturity extended to April 25, 2020. The partnership reported compliance with covenants at September 30; the applicable maximum leverage ratio was 5.00x following the Jet-Pep acquisition. Substantially all assets secure the facility.
- Fuel prices and gross profit are exposed to volatile crude-oil and wholesale fuel markets. Management reported that a one-percentage-point change in average borrowing rates would affect annual interest expense by approximately $5.2 million. The Jet-Pep fuel pricing contract was amended effective November 1, 2018 to reduce price exposure; management also anticipates rebranding substantially all those sites, with a potential positive effect on volumes and margins.
- Customer and related-party concentration remains relevant: DMS represented 12% of wholesale volume and 17% of rental income for the nine months; Circle K represented 20% of rental income. Circle K controls the general partner and holds 21.7% of limited partner interests and all IDRs.
- Management expects adoption of lease accounting guidance in 2019 to materially increase reported balance-sheet assets and liabilities. The partnership also disclosed environmental remediation liabilities of $3.5 million, partly offset by $3.1 million of indemnification and reimbursement assets.
- The board declared a Q3 distribution of $0.525 per unit, payable November 13, 2018. The partnership agreement does not require distributions, and management cautions that continued payments are not assured.
Investor verification priorities
- Track distributable cash flow and coverage against the distribution; nine-month coverage was below 1.0x.
- Verify the receipt and accounting treatment of Circle K’s expected $6.3 million payment, and monitor any FTC penalties despite Circle K’s commitment to bear them.
- Assess revolver availability, covenant headroom, refinancing needs ahead of the April 2020 maturity, and sensitivity to interest-rate increases.
- Monitor whether the new Florida operator and Jet-Pep rebranding deliver the forecast operating improvements, and review ongoing dependence on related parties and concentrated customers.
- Evaluate the impact of lease-accounting adoption and the adequacy of environmental reserves and related reimbursement assets.