CrossAmerica Partners LP — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017, with fourth-quarter results also presented. CrossAmerica distributes motor fuel wholesale, owns and leases retail fuel properties, and operates retail sites. It served more than 1,200 wholesale distribution sites across 31 states. The June 2017 CST merger placed the general partner, a 21.1% limited-partner interest and all incentive distribution rights under Circle K’s indirect ownership and control.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $2.095 billion | $1.870 billion |
| Gross profit | $160.8 million | $155.6 million |
| Operating income | $32.4 million | $32.2 million |
| Income before taxes | $4.9 million | $10.3 million |
| Net income attributable to limited partners | $23.2 million | $10.7 million |
| Basic and diluted earnings per unit | $0.56 | $0.22 |
| Net cash from operating activities | $89.0 million | $79.4 million |
| Adjusted EBITDA (non-GAAP) | $109.1 million | $103.6 million |
| Distributable Cash Flow (non-GAAP) | $81.2 million | $81.6 million |
| Distribution coverage (non-GAAP) | 0.97x | 1.02x |
| Total debt and capital lease obligations, year-end | $534.0 million | $470.8 million |
Wholesale motor-fuel gross margin increased to $0.057 per gallon from $0.052; total wholesale gallons distributed were nearly flat at 1,032.0 million. Rental income rose to $86.3 million from $80.6 million. Retail-segment gross profit declined to $37.7 million from $42.7 million; retail motor-fuel margin fell to $0.045 per gallon from $0.053, and merchandise and services gross profit declined to $25.4 million from $30.1 million.
Year-end cash was $3.9 million; current assets were $80.5 million and current liabilities $93.5 million. The $550 million revolving facility had $506.0 million drawn and $37.3 million of availability at year-end; reported availability was $17.6 million on February 21, 2018. The year-end leverage ratio was 4.14x, within covenant limits. The facility matures March 4, 2019, with $506 million of revolver borrowings contractually due in 2019.
Cash distributions paid were $2.48 per unit for 2017; the fourth-quarter distribution was $0.6275 per unit. The Board declared the same quarterly amount for the fourth quarter, payable in February 2018. Distribution coverage below 1.0x indicates reported DCF did not cover distributions under the Partnership’s stated non-GAAP calculation.
Material changes versus 2016
- Revenue increased 12%, mainly because higher crude-oil prices lifted wholesale fuel prices; the average WTI spot price rose 17%. Cost of sales rose 13%, so revenue growth translated into only 3.3% gross-profit growth.
- Operating income was nearly unchanged, while interest expense increased $5.2 million to $27.9 million due to higher average borrowing rates and acquisition-related debt.
- Net income increased substantially despite lower pretax income, primarily because the $18.2 million income-tax benefit included a $13.2 million benefit from the Tax Cuts and Jobs Act and release of a $3.7 million deferred-tax valuation allowance.
- Operating cash flow increased $9.5 million. DCF was nearly flat, and coverage fell from 1.02x to 0.97x as distributions rose.
- Debt and capital lease obligations increased by approximately $63 million. In November, CrossAmerica acquired Jet-Pep assets for $75.6 million, including real property and fuel supply businesses serving 101 commission-operated sites.
- Retail operations continued to shift toward lessee-dealer arrangements, reducing retail operating costs but also lowering merchandise and retail fuel gross profit. CrossAmerica sold properties for $27.6 million in aggregate proceeds, including related-party sales.
Outlook, commentary, risks and unusual items
- Management expected rental income to increase in 2018, citing recent acquisitions and anticipated conversions of company-operated sites to lessee dealers. It planned to pursue acquisitions opportunistically; no quantified earnings or distribution guidance was provided.
- Fuel-price volatility affects revenue, margins and supplier discounts. Approximately 85% of wholesale gallons were sold under fixed-markup arrangements; the balance was primarily market-based DTW pricing. Management estimated a $10-per-barrel crude-price change could affect annual wholesale fuel gross profit by about $2 million through payment discounts.
- ExxonMobil, BP and Motiva supplied approximately 71% of 2017 fuel purchases. Variable-rate debt exposed the Partnership to higher interest costs; management estimated a one-percentage-point rate change would affect annual interest expense by about $5.1 million.
- Key risks include debt refinancing and covenant capacity, dependence on major suppliers and third-party fuel transporters, acquisition execution, seasonality, competitive margins, environmental liabilities, and the possibility that cash flows will not support distributions. The distribution policy is discretionary and the partnership agreement does not require distributions.
- Circle K controls the general partner and IDRs, provides management services under a related-party agreement, and can influence distributions and strategic decisions. The filing also reports material related-party relationships involving DMS and property transactions; management states such related-party terms were not the result of arm’s-length negotiations.
- Unusual 2017 charges included $5.4 million of merger-related severance and benefits, $1.7 million from a jury award to a former executive, and retention-related expenses. The Partnership also incurred $0.8 million in legal fees related to the lawsuit. It expected $0.9 million of additional retention charges over the remaining period, mostly in 2018.
- At year-end, 11 sites were classified as held for sale for FTC-related divestitures expected in 2018. Environmental reserves were $3.5 million; asset retirement obligations for underground storage tanks were $31.5 million. Management did not expect ordinary-course litigation, individually or in aggregate, to materially affect results, but acknowledged uncertainty.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management expected adoption of the new lease standard to have a material effect on the balance sheet.
Important facts for investors to verify
- Reconcile DCF and the 0.97x coverage ratio to cash distributions, including the effects of sustaining capital, interest and adjustments excluded from non-GAAP measures.
- Confirm the refinancing plan for the $506 million revolver maturity in March 2019, current borrowing availability, and ongoing compliance with leverage and interest-coverage covenants.
- Assess whether recurring operating cash flow can sustain distributions and whether acquisitions can add cash flow without further weakening coverage or liquidity.
- Review the tax benefit’s nonrecurring components and the continuing tax, deduction and entity-level implications of the Tax Cuts and Jobs Act.
- Evaluate Circle K’s control, management fees, IDR economics and related-party transactions, including the sale of 29 properties to an affiliate of a director.
- Track FTC-mandated site dispositions, remediation exposures, and the outcome and remaining costs of the former-executive litigation.