CrossAmerica Partners LP — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. CrossAmerica is a motor-fuel wholesaler and real-estate lessor, with a smaller retail business, operating in 31 states.
Key financial results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2,445.9 million | $2,094.8 million | +17% |
| Gross profit | $172.8 million | $160.8 million | +7% |
| Operating income | $35.0 million | $32.4 million | +8% |
| Net income | $5.2 million | $23.2 million | Down $17.9 million |
| Net income per unit | $0.11 | $0.56 | Down $0.45 |
| Operating cash flow | $89.8 million | $89.0 million | Up $0.8 million |
| Adjusted EBITDA | $113.4 million | $109.1 million | +4% |
| Distributable Cash Flow | $78.0 million | $81.2 million | Down $3.2 million |
| Distribution coverage | 1.03x | 0.97x | Improved |
Gross margin was approximately 7.1% of revenue, compared with 7.7% in 2017; the increase in gross profit was smaller than revenue growth. Wholesale fuel distribution gross profit rose to $70.0 million from $58.8 million, with margin per gallon increasing to $0.067 from $0.057. Retail segment Adjusted EBITDA increased to $8.4 million from $5.7 million.
Fuel-price increases and the November 2017 Jet-Pep acquisition drove much of the revenue growth. Average WTI crude oil prices rose 28% in 2018. Net income fell primarily because 2017 included a $13.2 million tax benefit from the Tax Cuts and Jobs Act and a $3.7 million deferred-tax valuation allowance release; 2018 also had higher interest expense and disposition-related charges.
Cash, debt and distributions
- Cash was $3.2 million at year-end; current assets were $50.9 million and current liabilities were $88.4 million.
- Year-end borrowings under the $650 million revolving credit facility were $498.0 million; capital lease obligations were $24.9 million. The facility’s weighted-average interest rate was 5.17%.
- Facility availability after covenant restrictions was $53.6 million at year-end and $37.1 million on February 20, 2019. The leverage ratio was 4.53x at year-end; the Partnership reported compliance with its covenants.
- The credit facility matures April 25, 2020, with $498 million due then. Management said it had begun negotiating a replacement five-year facility and expected completion in the first half of 2019.
- Cash distributions paid per unit totaled $2.2025 in 2018, including $0.6275 for the quarter ended December 31, 2017 and $0.5250 for each of the next three 2018 quarters. The Board declared $0.5250 per unit for the fourth quarter of 2018, paid in February 2019. The Partnership does not guarantee future distributions.
- Operating cash flow of $89.8 million was largely offset by $77.2 million of distributions and net credit-facility repayments. Capital expenditures were $13.7 million; investing cash outflow was $6.8 million.
Material changes, outlook and unusual items
- On December 17, 2018, CrossAmerica agreed to exchange assets valued at approximately $184.5 million with Circle K: assets associated with 73 CrossAmerica stores for assets associated with 192 Circle K stores. Closings are staged over up to 24 months; the first was expected in the first half of 2019. Management estimated a positive annual EBITDA impact of $6–$7 million after all tranches close.
- CrossAmerica transitioned 43 Florida sites from related-party operator DMS to a third-party operator under 10-year agreements. It recorded a $3.8 million termination payment and a $2.4 million deferred-rent write-off.
- FTC-required divestitures of 11 properties resulted in $8.9 million of impairment charges. Circle K paid CrossAmerica $6.3 million to compensate for the required sale of nine Upper Midwest sites. The sites were divested after the FTC deadline; Circle K accepted responsibility for any civil penalties, and CrossAmerica accrued none.
- Management’s 2019 outlook cited anticipated benefits from the asset exchange, a planned Circle K subjobber agreement covering about 400 sites, and revised Jet-Pep fuel pricing and rebranding. No consolidated 2019 revenue, earnings or cash-flow guidance was provided.
- Lease accounting guidance adopted January 1, 2019 will change presentation of sale-leaseback payments and reduce comparability with prior periods. The transition removed $42.0 million of net property and equipment and $76.1 million of sale-leaseback obligations, and recorded operating-lease right-of-use assets of $133.3 million and liabilities of $135.9 million.
- Key risks include volatile fuel prices and margins, reliance on three suppliers for about 65% of fuel purchases, substantial debt and refinancing needs, seasonal demand, environmental and UST obligations, and dependence on Circle K. Circle K controls the General Partner, owns the IDRs and held a 21.7% limited-partner interest; related-party arrangements and conflicts are material considerations.
- Environmental reserves were $3.6 million; asset-retirement obligations for UST removal were $32.7 million. Ordinary-course litigation was not expected by management to materially affect consolidated results, though outcomes remain uncertain.
Investor verification priorities
- Track progress, conditions, valuation adjustments and realized economics of the Circle K asset exchange against the stated $6–$7 million annual EBITDA estimate.
- Confirm completion and terms of the replacement credit facility before the April 2020 maturity, and monitor borrowing availability, interest costs and covenant headroom.
- Assess the sustainability of the $0.5250 quarterly distribution in light of DCF, 1.03x coverage, debt service and the Board’s discretion to change or suspend distributions.
- Test whether planned Circle K supply arrangements, Jet-Pep rebranding and site conversions improve fuel margins and cash generation as management expects.
- Review FTC-related penalties or claims, environmental exposures and the assumptions underlying reserves and indemnification coverage.
- Consider related-party concentration, Circle K’s control and IDRs, and the effect of related-party fees and transactions on unitholders.
Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective at December 31, 2018.