10-Q 1 capl-10q_20180630.htm 10-Q capl-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                         to                   

 

Commission File No. 001-35711

 

CROSSAMERICA PARTNERS LP

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

45-4165414

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

 

600 Hamilton Street, Suite 500

Allentown, PA

 

18101

(Zip Code)

(610) 625-8000

(Address of Principal Executive Offices)

 

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     Yes      No  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 2, 2018, the registrant had outstanding 34,433,574 common units.

 


 

TABLE OF CONTENTS

 

 

 

PAGE

 

 

 

Commonly Used Defined Terms

 

i

PART I - FINANCIAL INFORMATION

 

1

Item 1. Financial Statements

 

1

Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017

 

1

Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2018 and 2017

 

2

Consolidated Statements of Cash Flows (unaudited) for the Three and Six Months Ended June 30, 2018 and 2017

 

3

Condensed Notes to Consolidated Financial Statements

 

4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

35

Item 4. Controls and Procedures

 

35

PART II - OTHER INFORMATION

 

36

Item 1. Legal Proceedings

 

36

Item 1A. Risk Factors

 

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 6. Exhibits

 

36

SIGNATURE

 

37

 

 

 

 


 

COMMONLY USED DEFINED TERMS

 

The following is a list of certain acronyms and terms generally used in the industry and throughout this document:

 

 

CrossAmerica Partners LP and subsidiaries:

 

CrossAmerica Partners LP

 

CrossAmerica, the Partnership, we, us, our

 

 

 

LGP Operations LLC

 

a wholly owned subsidiary of the Partnership

 

 

 

LGW

 

Lehigh Gas Wholesale LLC

 

 

 

LGPR

 

LGP Realty Holdings LP

 

 

 

LGWS

 

Lehigh Gas Wholesale Services, Inc. and subsidiaries

 

 

 

CrossAmerica Partners LP related parties:

 

Circle K

 

Circle K Stores Inc., a Texas corporation, and a wholly owned subsidiary of Couche-Tard

 

 

 

Couche-Tard

 

Alimentation Couche-Tard Inc. (TSX: ATD.A ATD.B)

 

 

 

Couche-Tard Board

 

the Board of Directors of Couche-Tard

 

 

 

CST

 

CST Brands, LLC and subsidiaries, indirectly owned by Circle K.

 

 

 

DMI

 

Dunne Manning Inc., an entity affiliated with Joseph V. Topper, Jr., a member of the Board, a related party and large holder of our common units

 

 

 

DMR

 

Dunne Manning Realty LP, an entity affiliated with Joseph V. Topper, Jr., a member of the Board, a related party and large holder of our common units.

 

 

 

DMS

 

 

Dunne Manning Stores LLC (formerly known as Lehigh Gas-Ohio, LLC), an entity affiliated with the family of Joseph V. Topper, Jr., a member of the Board, a related party and large holder of our common units. DMS is an operator of retail motor fuel stations. DMS leases retail sites from us in accordance with a master lease agreement with us and DMS purchases substantially all of its motor fuel for these sites from us on a wholesale basis under rack plus pricing. The financial results of DMS are not consolidated with ours.

 

 

 

General Partner

 

CrossAmerica GP LLC, the General Partner of CrossAmerica, a Delaware limited liability company, indirectly owned by Circle K.

 

 

 

CST Fuel Supply

 

CST Fuel Supply LP is the parent of CST Marketing and Supply, indirectly owned by Circle K. As of June 30, 2018, our total limited partner interest in CST Fuel Supply was 17.5%.

 

 

 

CST Marketing and Supply

 

CST Marketing and Supply, LLC, indirectly owned by Circle K. It is CST’s wholesale motor fuel supply business, which provides wholesale fuel distribution to the majority of CST’s U.S. retail convenience stores on a fixed markup per gallon.

 

 

 

CST Services

 

CST Services, LLC, a wholly owned subsidiary of Circle K

 

 

 

Topstar

 

Topstar Enterprises, an entity affiliated with Joseph V. Topper, Jr. Topstar is an operator of convenience stores that leases retail sites from us, but does not purchase fuel from us.

 

 

 

Recent Acquisitions:

 

 

 

Franchised Holiday Stores

 

The franchised Holiday stores acquired in March 2016

 

 

 

Jet-Pep Assets

 

The assets acquired from Jet-Pep, Inc. in November 2017

 

 

 

Other Defined Terms:

 

 

 

 

 

Amended Omnibus Agreement

 

The Amended and Restated Omnibus Agreement, dated October 1, 2014, as amended on February 17, 2016 and May 7, 2018 by and among CrossAmerica, the General Partner, DMI, DMS, CST Services and Joseph V. Topper, Jr., which amends and restates the original omnibus agreement that was executed in connection with CrossAmerica’s initial public offering on October 30, 2012. The terms of the Amended Omnibus Agreement were approved by the conflicts committee of the Board. Pursuant to the Amended Omnibus Agreement, CST Services agrees, among other things, to provide, or cause to be provided, to the Partnership certain management services.

i


 

 

 

 

ASC

 

Accounting Standards Codification

 

 

 

ASU

 

Accounting Standards Update

 

 

 

Board

 

Board of Directors of our General Partner

 

 

 

BP

 

BP p.l.c.

 

 

 

Branded Motor Fuels

 

Motor fuels that are purchased from major integrated oil companies and refiners under supply agreements. We take legal title to the motor fuel when we receive it at the rack and generally arrange for a third-party transportation provider to take delivery of the motor fuel at the rack and deliver it to the appropriate sites in our network.

 

 

 

DTW

 

Dealer tank wagon contracts, which are variable cent per gallon priced wholesale motor fuel distribution or supply contracts. DTW also refers to the pricing methodology under such contracts

 

 

 

EBITDA

 

Earnings before interest, taxes, depreciation, amortization and accretion, a non-GAAP financial measure

 

 

 

EICP

 

The Partnership’s Lehigh Gas Partners LP Executive Income Continuity Plan, as amended

 

 

 

Exchange Act

 

Securities Exchange Act of 1934, as amended

 

 

 

ExxonMobil

 

ExxonMobil Corporation

 

 

 

FASB

 

Financial Accounting Standards Board

 

 

 

Form 10-K

 

CrossAmerica’s Annual Report on Form 10-K for the year ended December 31, 2017

 

 

 

FTC

 

U.S. Federal Trade Commission

 

 

 

Getty Lease

 

In May 2012, the Predecessor Entity, which represents the portion of the business of Dunne Manning Inc. and its subsidiaries and affiliates contributed to the Partnership in connection with the IPO, entered into a 15-year master lease agreement with renewal options of up to an additional 20 years with Getty Realty Corporation. The Partnership pays fixed rent, which increases 1.5% per year. In addition, the lease requires contingent rent payments based on gallons of motor fuel sold. The Partnership leases sites under the lease in Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Pennsylvania and Rhode Island.

 

 

 

IDRs

 

Incentive Distribution Rights represent the right to receive an increasing percentage of quarterly distributions after the target distribution levels have been achieved, as defined in our Partnership Agreement. Circle K is the indirect owner of 100% of the outstanding IDRs of CrossAmerica.

 

 

 

Internal Revenue Code

 

Internal Revenue Code of 1986, as amended

 

 

 

IPO

 

Initial public offering of CrossAmerica Partners LP on October 30, 2012

 

 

 

LIBOR

 

London Interbank Offered Rate

 

 

 

Merger

 

The merger of Ultra Acquisition Corp. with CST, with CST surviving the merger as a wholly owned subsidiary of Circle K, which closed on June 28, 2017. See Merger Agreement below.

 

 

 

Merger Agreement

 

CST’s Agreement and Plan of Merger entered into on August 21, 2016 with Circle K and Ultra Acquisition Corp., a Delaware corporation and an indirect, wholly owned subsidiary of Circle K (“Merger Sub”). Under and subject to the terms and conditions of the Merger Agreement, on June 28, 2017, Merger Sub was merged with and into CST, with CST surviving the Merger as a wholly owned subsidiary of Circle K.

 

 

 

MD&A

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Motiva

 

Motiva Enterprises LLC

 

 

 

NTI

 

CST’s new to industry stores opened after January 1, 2008, which is generally when CST began designing and operating its larger format stores that accommodate broader merchandise categories and food offerings and have more fuel dispensers than its legacy stores

 

 

 

ii


 

Partnership Agreement

 

The First Amended and Restated Agreement of Limited Partnership of CrossAmerica Partners LP, dated as of October 1, 2014, as amended

 

 

 

Plan

 

 

In connection with the IPO, the General Partner adopted the Lehigh Gas Partners LP 2012 Incentive

Award Plan, a long-term incentive plan for employees, officers, consultants and directors of the General Partner and any of its affiliates who perform services for the Partnership

 

 

 

Predecessor Entity

 

Wholesale distribution business of DMS and real property and leasehold interests contributed in connection with the IPO

 

 

 

Retail Site

 

A general term to refer to convenience stores, including those operated by commission agents, independent dealers, Circle K, DMS or lessee dealers, as well as company operated sites

 

 

 

RIN

 

Renewable identification number, an identifier used by governmental agencies to track a specific batch of renewable fuel

 

 

 

SEC

 

U.S. Securities and Exchange Commission

 

 

 

Tax Cuts and Jobs Act

 

On December 22, 2017, the U.S. government enacted tax legislation formally known as Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act

 

 

 

Terms Discounts

 

Discounts for prompt payment and other rebates and incentives from our suppliers for a majority of the gallons of motor fuel purchased by us, which are recorded within cost of sales. Prompt payment discounts are based on a percentage of the purchase price of motor fuel.

 

 

 

U.S. GAAP

 

United States Generally Accepted Accounting Principles

 

 

 

UST

 

Underground storage tanks

 

 

 

Valero

 

Valero Energy Corporation and, where appropriate in context, one or more of its subsidiaries, or all of them taken as a whole

 

 

 

WTI

 

West Texas Intermediate crude oil

 

 

iii


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CROSSAMERICA PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(Thousands of Dollars, except unit data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

2,475

 

 

$

3,897

 

Accounts receivable, net of allowances of $482 and $277, respectively

 

 

33,116

 

 

 

27,792

 

Accounts receivable from related parties

 

 

16,414

 

 

 

14,459

 

Inventories

 

 

16,405

 

 

 

15,122

 

Assets held for sale

 

 

5,222

 

 

 

11,708

 

Other current assets

 

 

6,613

 

 

 

7,528

 

Total current assets

 

 

80,245

 

 

 

80,506

 

Property and equipment, net

 

 

664,382

 

 

 

681,000

 

Intangible assets, net

 

 

67,052

 

 

 

76,063

 

Goodwill

 

 

88,764

 

 

 

89,109

 

Other assets

 

 

19,933

 

 

 

20,558

 

Total assets

 

$

920,376

 

 

$

947,236

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of debt and capital lease obligations

 

$

2,948

 

 

$

2,916

 

Accounts payable

 

 

43,103

 

 

 

35,789

 

Accounts payable to related parties

 

 

30,205

 

 

 

25,512

 

Accrued expenses and other current liabilities

 

 

15,569

 

 

 

17,015

 

Motor fuel taxes payable

 

 

11,987

 

 

 

12,241

 

Total current liabilities

 

 

103,812

 

 

 

93,473

 

Debt and capital lease obligations, less current portion

 

 

538,384

 

 

 

529,147

 

Deferred tax liabilities, net

 

 

20,758

 

 

 

24,069

 

Asset retirement obligations

 

 

32,126

 

 

 

31,467

 

Other long-term liabilities

 

 

95,666

 

 

 

98,061

 

Total liabilities

 

 

790,746

 

 

 

776,217

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Partners’ Capital

 

 

 

 

 

 

 

 

Common units—(34,433,574 and 34,111,461 units issued and

   outstanding at June 30, 2018 and December 31, 2017,

   respectively)

 

 

129,971

 

 

 

171,337

 

General Partner’s interest

 

 

 

 

 

 

Total Partners’ Capital

 

 

129,971

 

 

 

171,337

 

Noncontrolling interests

 

 

(341

)

 

 

(318

)

Total equity

 

 

129,630

 

 

 

171,019

 

Total liabilities and equity

 

$

920,376

 

 

$

947,236

 

 

See Condensed Notes to Consolidated Financial Statements.

1


CROSSAMERICA PARTNERS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Thousands of Dollars, Except Unit and Per Unit Amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating revenues(a)

 

$

673,295

 

 

$

528,789

 

 

$

1,227,865

 

 

$

998,075

 

Costs of sales(b)

 

 

629,323

 

 

 

487,167

 

 

 

1,143,942

 

 

 

919,007

 

Gross profit

 

 

43,972

 

 

 

41,622

 

 

 

83,923

 

 

 

79,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from CST Fuel Supply equity interests

 

 

3,740

 

 

 

3,830

 

 

 

7,545

 

 

 

7,433

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

15,691

 

 

 

16,222

 

 

 

32,033

 

 

 

31,482

 

General and administrative expenses

 

 

4,810

 

 

 

11,920

 

 

 

9,530

 

 

 

17,737

 

Depreciation, amortization and accretion expense

 

 

21,932

 

 

 

14,278

 

 

 

37,432

 

 

 

28,626

 

Total operating expenses

 

 

42,433

 

 

 

42,420

 

 

 

78,995

 

 

 

77,845

 

Loss on dispositions and lease terminations, net

 

 

(6,847

)

 

 

(314

)

 

 

(6,617

)

 

 

(358

)

Operating (loss) income

 

 

(1,568

)

 

 

2,718

 

 

 

5,856

 

 

 

8,298

 

Other income (expense), net

 

 

89

 

 

 

127

 

 

 

183

 

 

 

245

 

Interest expense

 

 

(8,157

)

 

 

(6,795

)

 

 

(16,209

)

 

 

(13,497

)

Loss before income taxes

 

 

(9,636

)

 

 

(3,950

)

 

 

(10,170

)

 

 

(4,954

)

Income tax (benefit) expense

 

 

(2,698

)

 

 

49

 

 

 

(2,425

)

 

 

(2,652

)

Net loss

 

 

(6,938

)

 

 

(3,999

)

 

 

(7,745

)

 

 

(2,302

)

Less: net loss attributable to noncontrolling interests

 

 

(3

)

 

 

(6

)

 

 

(5

)

 

 

(5

)

Net loss attributable to limited partners

 

 

(6,935

)

 

 

(3,993

)

 

 

(7,740

)

 

 

(2,297

)

IDR distributions

 

 

(133

)

 

 

(1,055

)

 

 

(1,313

)

 

 

(2,047

)

Net loss available to limited partners

 

$

(7,068

)

 

$

(5,048

)

 

$

(9,053

)

 

$

(4,344

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per limited partner unit

 

$

(0.21

)

 

$

(0.15

)

 

$

(0.26

)

 

$

(0.13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average limited partner units:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic common units

 

 

34,336,386

 

 

 

33,798,905

 

 

 

34,247,232

 

 

 

33,694,116

 

Diluted common units(c)

 

 

34,346,097

 

 

 

33,806,925

 

 

 

34,257,559

 

 

 

33,717,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution paid per common unit

 

$

0.5250

 

 

$

0.6175

 

 

$

1.1525

 

 

$

1.2300

 

Distribution declared (with respect to each respective

   period) per common unit

 

$

0.5250

 

 

$

0.6225

 

 

$

1.0500

 

 

$

1.2400

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Includes excise taxes of:

 

$

25,450

 

 

$

20,094

 

 

$

49,808

 

 

$

38,647

 

(a) Includes revenues from fuel sales to and rental

      income from related parties of:

 

 

124,550

 

 

 

104,759

 

 

 

228,071

 

 

 

198,976

 

(a) Includes rental income of:

 

 

21,461

 

 

 

22,005

 

 

 

43,182

 

 

 

43,446

 

(b) Includes rental expense of:

 

 

4,980

 

 

 

4,926

 

 

 

9,795

 

 

 

9,717

 

(c) Diluted common units were not used in the calculation of diluted earnings per common unit for the three and six

      months ended June 30, 2018 and 2017 because to do so would have been antidilutive.

 

 

See Condensed Notes to Consolidated Financial Statements.

 

 

2


CROSSAMERICA PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of Dollars)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,745

)

 

$

(2,302

)

Adjustments to reconcile net loss to net cash flows provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion expense

 

 

37,432

 

 

 

28,626

 

Amortization of deferred financing costs

 

 

921

 

 

 

852

 

Amortization of (above) below market leases, net

 

 

(6

)

 

 

42

 

Provision for losses on doubtful accounts

 

 

206

 

 

 

10

 

Deferred income taxes

 

 

(3,311

)

 

 

(2,893

)

Equity-based employee and director compensation expense

 

 

173

 

 

 

1,710

 

Amended Omnibus Agreement fees settled in common units

 

 

3,300

 

 

 

6,600

 

Loss on dispositions and lease terminations, net

 

 

6,617

 

 

 

358

 

Changes in operating assets and liabilities, net of acquisitions

 

 

(358

)

 

 

16,384

 

Net cash provided by operating activities

 

 

37,229

 

 

 

49,387

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Principal payments received on notes receivable

 

 

641

 

 

 

180

 

Proceeds from sale of property and equipment

 

 

107

 

 

 

564

 

Capital expenditures

 

 

(6,250

)

 

 

(8,179

)

Cash paid to Circle K in connection with acquisitions

 

 

(485

)

 

 

 

Net cash used in investing activities

 

 

(5,987

)

 

 

(7,435

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under the revolving credit facility

 

 

72,895

 

 

 

51,716

 

Repayments on the revolving credit facility

 

 

(62,395

)

 

 

(46,716

)

Payments of long-term debt and capital lease obligations

 

 

(1,040

)

 

 

(993

)

Payments of sale leaseback obligations

 

 

(489

)

 

 

(413

)

Payment of deferred financing fees

 

 

(887

)

 

 

(5

)

Distributions paid on distribution equivalent rights

 

 

(16

)

 

 

(13

)

Distributions paid to holders of the IDRs

 

 

(1,313

)

 

 

(2,047

)

Distributions paid to noncontrolling interests

 

 

(18

)

 

 

(42

)

Distributions paid on common units

 

 

(39,401

)

 

 

(41,360

)

Net cash used in financing activities

 

 

(32,664

)

 

 

(39,873

)

Net (decrease) increase in cash

 

 

(1,422

)

 

 

2,079

 

Cash at beginning of period

 

 

3,897

 

 

 

1,350

 

Cash at end of period

 

$

2,475

 

 

$

3,429

 

 

See Condensed Notes to Consolidated Financial Statements.

 

 

3


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.DESCRIPTION OF BUSINESS AND OTHER DISCLOSURES

Couche-Tard and CST Merger

On June 28, 2017, a wholly owned subsidiary of Circle K, merged with and into CST, with CST surviving the Merger as an indirect, wholly owned subsidiary of Circle K. Circle K is a wholly owned subsidiary of Couche-Tard. 

As a result of the Merger, Circle K indirectly owns all of the membership interests in the sole member of our General Partner, as well as a 21.7% limited partner interest in the Partnership and all of the IDRs of the Partnership. Circle K, through its indirect ownership interest in the sole member of our General Partner, has the ability to appoint all of the members of the Board and to control and manage our operations and activities. 

Description of Business

Our business consists of:

 

the wholesale distribution of motor fuels;

 

the retail distribution of motor fuels to end customers at retail sites operated by commission agents or us;

 

generating revenues through leasing or subleasing our real estate used in the retail distribution of motor fuels; and

 

the operation of retail sites.

The financial statements reflect the consolidated results of the Partnership and its wholly owned subsidiaries. Our primary operations are conducted by the following consolidated wholly owned subsidiaries:

 

LGW, which distributes motor fuels on a wholesale basis and generates qualified income under Section 7704(d) of the Internal Revenue Code;

 

LGPR, which functions as the real estate holding company and holds assets that generate qualified rental income under Section 7704(d) of the Internal Revenue Code; and

 

LGWS, which owns and leases (or leases and sub-leases) real estate and personal property used in the retail distribution of motor fuels, as well as provides maintenance and other services to its customers. In addition, LGWS distributes motor fuels on a retail basis and sells convenience merchandise items to end customers at company operated retail sites and sells motor fuel on a retail basis at sites operated by commission agents. Income from LGWS generally is not qualifying income under Section 7704(d) of the Internal Revenue Code.

Interim Financial Statements

These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and the Exchange Act. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Management believes that the disclosures made are adequate to keep the information presented from being misleading. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K. Financial information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 included in the consolidated financial statements has been derived from our unaudited financial statements. Financial information as of December 31, 2017 has been derived from our audited financial statements and notes thereto as of that date.

Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. Our business exhibits seasonality due to our wholesale and retail sites being located in certain geographic areas that are affected by seasonal weather and temperature trends and associated changes in retail customer activity during different seasons. Historically, sales volumes have been highest in the second and third quarters (during the summer activity months) and lowest during the winter months in the first and fourth quarters.

4


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results and outcomes could differ from those estimates and assumptions. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances could result in revised estimates and assumptions.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09–Revenue from Contracts with Customers (Topic 606), which results in comprehensive new revenue accounting guidance, requires enhanced disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized, and develops a common revenue standard under U.S. GAAP and International Financial Reporting Standards. Specifically, the core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This guidance was effective January 1, 2018 and we applied the modified retrospective method of adoption. There was no material impact on the financial statements other than disclosures. This guidance applies to over 90% of our revenues as the only primary revenue stream outside the scope of this guidance is rental income.

Revenues from the delivery of motor fuel are recorded at the time of delivery to our customers, by which time the price is fixed, title to the products has transferred and payment has either been received or collection is reasonably assured, net of applicable discounts and allowances.

Revenues from the sale of convenience store products are recognized at the time of sale to the customer.

Revenues from leasing arrangements for which we are the lessor are recognized ratably over the term of the underlying lease.

See Note 13 for additional information on our revenues and related receivables.

Motor Fuel Taxes

LGW collects motor fuel taxes, which consist of various pass through taxes collected from customers on behalf of taxing authorities, and remits such taxes directly to those taxing authorities. LGW’s accounting policy is to exclude the taxes collected and remitted from wholesale revenues and cost of sales and account for them as liabilities. LGWS’s retail sales and cost of sales include motor fuel taxes as the taxes are included in the cost paid for motor fuel and LGWS has no direct responsibility to collect or remit such taxes to the taxing authorities. This accounting policy is consistent with that used in prior periods.

Investment in CST Fuel Supply

ASU 2016-15–Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) was effective January 1, 2018. This ASU provides guidance on cash flow presentation of various specific transactions. We apply the cumulative earnings approach in presenting our cash flows from our investment in CST Fuel Supply. Distributions received are considered returns on investment and classified as cash inflows from operating activities.

Significant Accounting Policies

There have been no other material changes to the significant accounting policies described in our Form 10-K.

New Accounting Guidance Pending Adoption

In February 2016, the FASB issued ASU 2016-02–Leases (Topic 842). This standard modifies existing guidance for reporting organizations that enter into leases to increase transparency by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and requires a modified retrospective approach to adoption. This guidance will be effective January 1, 2019. Management continues to evaluate the impact of this new guidance, but the adoption will have a material impact on our balance sheet as we will be required to recognize right-of-use assets and lease liabilities for operating leases. We have performed certain system upgrades and further validated the completeness and accuracy of our lease data. We intend to apply each of the practical expedients in adopting this new guidance.

5


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Certain other new financial accounting pronouncements have become effective for our financial statements but the adoption of these pronouncements did not materially impact our financial position, results of operations or disclosures.

Concentration Risk

For the six months ended June 30, 2018, we distributed 12% of our total wholesale distribution volumes to DMS and DMS accounted for 18% of our rental income. For the six months ended June 30, 2017, we distributed 14% of our total wholesale distribution volumes to DMS and DMS accounted for 23% of our rental income.  

In June 2018, we executed master fuel supply and master lease agreements with a third party multi-site operator of retail motor fuel stations, to which we will transition 43 sites in Florida from DMS in the third and fourth quarters of 2018. The master fuel supply and master lease agreements have an initial 10-year term with four 5-year renewal options. See Note 7 for information relating to our recapture of these sites from the master lease agreement with DMS.

For the six months ended June 30, 2018, we distributed 6% of our total wholesale distribution volume to Circle K retail sites that are not supplied by CST Fuel Supply and received 19% of our rental income from Circle K. For the six months ended June 30, 2017, we distributed 8% of our total wholesale distribution volume to CST retail sites that are not supplied by CST Fuel Supply and received 20% of our rental income from CST.

For more information regarding transactions with DMS and Circle K, see Note 7.

For the six months ended June 30, 2018, our wholesale business purchased approximately 26%, 26%, 12% and 10% of its motor fuel from ExxonMobil, BP, Motiva and Circle K, respectively. For the six months ended June 30, 2017, our wholesale business purchased approximately 28%, 27% and 18% of its motor fuel from ExxonMobil, BP and Motiva, respectively. No other fuel suppliers accounted for 10% or more of our motor fuel purchases during the six months ended June 30, 2018 and 2017.

Valero supplied substantially all of the motor fuel purchased by CST Fuel Supply during all periods presented. 

Note 2. ASSETS HELD FOR SALE

We classified 13 sites and 12 sites as held for sale at June 30, 2018 and December 31, 2017, respectively. Of the sites held for sale at June 30, 2018, 11 were required to be divested per FTC orders in connection with Circle K’s acquisition of Holiday Stationstores, Inc. (Holiday) and the joint acquisition of Jet-Pep Assets by Circle K and us. These assets are expected to be sold in 2018. Assets held for sale were as follows (in thousands): 

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Land

 

$

2,814

 

 

$

4,946

 

Buildings and site improvements

 

 

2,568

 

 

 

5,785

 

Equipment

 

 

1,590

 

 

 

2,485

 

Total

 

 

6,972

 

 

 

13,216

 

Less accumulated depreciation

 

 

(1,750

)

 

 

(1,508

)

Assets held for sale

 

$

5,222

 

 

$

11,708

 

 

We recorded impairment charges totaling $7.6 million and $8.9 million during the three and six months ended June 30, 2018 related to the FTC-required divestitures, included within depreciation, amortization and accretion expense on the statement of operations. The impairment charges for the three and six months ended June 30, 2018 include $1.2 million of wholesale fuel distribution rights and $0.3 million of goodwill, most of which relates to the Retail segment.

As part of Circle K’s acquisition of Holiday, the FTC issued a decree in which nine sites were required to be divested to FTC approved third-party buyers (“Upper Midwest Sites”). As of today, these potential third-party buyers have not been approved by the FTC. Since this is a forced divestiture of assets for us, Circle K has agreed to compensate us with an amount to be determined representing the difference between the value of the Upper Midwest Sites and the proceeds of the sale to FTC approved third-party buyers. We anticipate Circle K’s payment to us will be made once the FTC has approved the proposed third-party buyers. This payment will be accounted for as a transaction between entities under common control and thus recorded as a contribution to partners’ capital. We currently anticipate FTC approval and the closing of the divestitures as well as the resulting payment by Circle K to occur in 2018.  

6


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3. INVENTORIES

Inventories consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Retail site merchandise

 

$

8,135

 

 

$

7,806

 

Motor fuel

 

 

8,270

 

 

 

7,316

 

Inventories

 

$

16,405

 

 

$

15,122

 

 

Note 4. PROPERTY AND EQUIPMENT

Property and equipment, net consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Land

 

$

284,445

 

 

$

285,682

 

Buildings and site improvements

 

 

362,692

 

 

 

362,207

 

Leasehold improvements

 

 

10,740

 

 

 

10,155

 

Equipment

 

 

186,564

 

 

 

185,733

 

Construction in progress

 

 

4,407

 

 

 

1,797

 

Property and equipment, at cost

 

 

848,848

 

 

 

845,574

 

Accumulated depreciation and amortization

 

 

(184,466

)

 

 

(164,574

)

Property and equipment, net

 

$

664,382

 

 

$

681,000

 

 

Note 5. INTANGIBLE ASSETS

Intangible assets consisted of the following (in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Gross

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Wholesale fuel supply contracts/rights

 

$

127,955

 

 

$

(64,505

)

 

$

63,450

 

 

$

127,955

 

 

$

(56,915

)

 

$

71,040

 

Trademarks

 

 

2,064

 

 

 

(1,041

)

 

 

1,023

 

 

 

2,064

 

 

 

(863

)

 

 

1,201

 

Covenant not to compete

 

 

4,581

 

 

 

(3,709

)

 

 

872

 

 

 

4,581

 

 

 

(3,300

)

 

 

1,281

 

Below market leases

 

 

11,177

 

 

 

(9,470

)

 

 

1,707

 

 

 

11,401

 

 

 

(8,860

)

 

 

2,541

 

Total intangible assets

 

$

145,777

 

 

$

(78,725

)

 

$

67,052

 

 

$

146,001

 

 

$

(69,938

)

 

$

76,063

 

 

Note 6. DEBT

Our balances for long-term debt and capital lease obligations are as follows (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

$650 million revolving credit facility

 

$

516,500

 

 

$

506,000

 

Capital lease obligations

 

 

26,017

 

 

 

27,220

 

Note payable

 

 

736

 

 

 

765

 

Total debt and capital lease obligations

 

 

543,253

 

 

 

533,985

 

Current portion

 

 

2,948

 

 

 

2,916

 

Noncurrent portion

 

 

540,305

 

 

 

531,069

 

Deferred financing costs, net

 

 

1,921

 

 

 

1,922

 

Noncurrent portion, net of deferred financing costs

 

$

538,384

 

 

$

529,147

 

 

7


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Our revolving credit facility is secured by substantially all of our assets. Letters of credit outstanding at June 30, 2018 and December 31, 2017 totaled $5.4 million and $6.7 million, respectively, which reduced availability under our credit facility. The amount of availability at June 30, 2018 under the revolving credit facility, after taking into account debt covenant restrictions, was $76.9 million. In connection with future acquisitions, the revolving credit facility requires, among other things, that we have, after giving effect to such acquisitions, at least $20.0 million in the aggregate of borrowing availability under the revolving credit facility and unrestricted cash on the balance sheet on the date of such acquisition.

Financial Covenants and Interest Rate

We are required to comply with certain financial covenants under the credit facility. We are required to maintain (i) a total leverage ratio (as defined in the revolving credit facility) for the most recently completed four fiscal quarters of less than or equal to 4.50 : 1.00, except for periods following a material acquisition, generally defined as an acquisition with a purchase price of at least $30.0 million and (ii) a consolidated interest coverage ratio (as defined in the revolving credit facility) of at least 2.75 : 1.00. The total leverage ratio shall not exceed 5.00 : 1.00 for the first four full fiscal quarters following the closing of a material acquisition. If we issued qualified senior notes (as defined in the revolving credit facility) in the aggregate principal amount of $175.0 million or greater, the ratio shall not exceed 5.50 : 1.00. If we issued qualified senior notes (as defined in the revolving credit facility) of $175.0 million or greater, we are also required to maintain a senior leverage ratio (as defined in the revolving credit facility) of less than or equal to 3.00 : 1.00. As of June 30, 2018, we were in compliance with these financial covenants.

At June 30, 2018, outstanding borrowings under the revolving credit facility bore interest at LIBOR plus a margin of 2.50%. Our borrowings had an effective interest rate of 4.55% as of June 30, 2018.

On April 25, 2018, the credit facility was amended to:

 

Extend the maturity date from March 4, 2019 to April 25, 2020;

 

Increase the capacity from $550 million to $650 million;

 

Extend the period during which the permitted total leverage ratio (as defined in the revolving credit facility) is increased from 4.50 : 1.00 to 5.00 : 1.00 after the closing of a material acquisition (as defined in the revolving credit facility) from three quarters to four quarters; and

 

Decrease the applicable margin and commitment fee (each as defined in the revolving credit facility), which vary based on our total leverage ratio, such that the applicable margin ranges from 1.50% to 2.75% for LIBOR rate loans (as defined in the revolving credit facility) and 0.50% to 1.75% for alternate base rate loans (as defined in the revolving credit facility), and the commitment fee ranges from 0.20% to 0.45%. In general, the applicable margin for LIBOR and alternate base rate loans was reduced by 0.5%.

Note 7. RELATED-PARTY TRANSACTIONS

Transactions with Circle K

Fuel Sales and Rental Income

We sell wholesale motor fuel under a master fuel distribution agreement to 47 Circle K retail sites and lease real property on 73 retail sites to Circle K under a master lease agreement, each having initial 10-year terms. The master fuel distribution agreement provides us with a fixed wholesale mark-up per gallon. The master lease agreement is a triple net lease.

Revenues from wholesale fuel sales and real property rental income from Circle K were as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues from motor fuel sales to Circle K

 

$

43,508

 

 

$

33,854

 

 

$

79,568

 

 

$

64,234

 

Rental income from Circle K

 

 

4,198

 

 

 

4,280

 

 

 

8,395

 

 

 

8,561

 

 

Accounts receivable from Circle K for fuel amounted to $4.5 million and $3.9 million at June 30, 2018 and December 31, 2017, respectively.

8


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

CST Fuel Supply Equity Interests

CST Fuel Supply provides wholesale motor fuel distribution to the majority of CST’s legacy U.S. retail sites at cost plus a fixed markup per gallon. We owned a 17.5% total interest in CST Fuel Supply at June 30, 2018 and 2017. We account for the income derived from our equity interest of CST Fuel Supply as “Income from CST Fuel Supply equity interests” on our statement of operations, which amounted to $3.7 million and $3.8 million for the three months ended June 30, 2018 and 2017 and $7.5 million and $7.4 million for the six months ended June 30, 2018 and 2017, respectively.

Purchase of Fuel from Circle K

We purchase the fuel supplied to 21 retail sites from CST Fuel Supply of which we own a 17.5% interest, and resell the wholesale motor fuel to independent dealers and sub-wholesalers. We purchased $5.4 million and $6.0 million of motor fuel from CST Fuel Supply for the three months ended June 30, 2018 and 2017 and $10.3 million and $11.7 million for the six months ended June 30, 2018 and 2017, respectively.

We also purchase the fuel supplied to 101 commission sites acquired in the Jet-Pep Assets acquisition from a terminal owned and operated by Circle K. We purchased $34.9 million and $65.8 million of motor fuel from Circle K for the three and six months ended June 30, 2018, respectively.

Circle K acquired Holiday on December 22, 2017. Prior to that acquisition, we were a franchisee of Holiday (Franchised Holiday Stores), purchased fuel from Holiday and paid a franchise fee to Holiday. As a result of Circle K’s acquisition, we now purchase fuel from Circle K to supply our Franchised Holiday Stores. These fuel purchases amounted to $13.4 million and $24.5 million for the three and six months ended June 30, 2018. We also pay a franchise fee to Circle K, which amounted to $0.4 million and $0.5 million for the three and six months ended June 30, 2018.

In March and May 2018, as approved by the independent conflicts committee of our Board, we purchased the leasehold interest in three retail sites from Circle K for $0.5 million. We purchase the fuel supplied to these retail sites from Circle K, which amounted to $0.7 million for the three and six months ended June 30, 2018.

Effective February 1, 2018, Couche-Tard began renegotiating fuel carrier agreements, including our wholesale transportation agreements, with third party carriers. On May 4, 2018, the independent conflicts committee of our Board approved an amendment to the Amended Omnibus Agreement providing for the payment by us to an affiliate of Couche-Tard of a 2.57% commission based on the payments made by us on the renegotiated wholesale transportation contracts to compensate such affiliate of Couche-Tard for its services in connection with the renegotiations of our fuel carrier agreements with third party carriers, which resulted in overall reductions in transportation costs to us. This commission amounted to $0.1 million and $0.2 million for the three and six months ended June 30, 2018, respectively. 

Amounts payable to Circle K related to these fuel purchases and freight commissions totaled $6.9 million and $7.0 million at June 30, 2018 and December 31, 2017, respectively.

Amended Omnibus Agreement and Management Fees

We incurred $2.9 million and $4.2 million for the three months ended June 30, 2018 and 2017, and $6.0 million and $8.6 million for the six months ended June 30, 2018 and 2017, respectively, including incentive compensation costs and non-cash stock-based compensation expense, under the Amended Omnibus Agreement, which are recorded as a component of operating expenses and general and administrative expenses in the statement of operations. The decrease was driven by personnel and salary reductions effective at the time of the Merger.  

In addition, during the three and six months ended June 30, 2017, the Partnership recognized a $6.5 million charge for severance, benefit, and retention costs allocated by CST upon consummation of the Merger. Such costs are included in general and administrative expenses.

Amounts payable to Circle K related to expenses incurred by Circle K on our behalf in accordance with the Amended Omnibus Agreement, including the separation benefits discussed above, totaled $18.9 million and $18.3 million at June 30, 2018 and December 31, 2017, respectively.

9


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Common Units Issued to Circle K as Consideration for Amounts Due Under the Amended Omnibus Agreement

As approved by the independent conflicts committee of the Board, the Partnership, Circle K mutually agreed to settle, from time to time, some or all of the amounts due under the terms of the Amended Omnibus Agreement in newly issued common units representing limited partner interests in the Partnership. As approved by the independent conflicts committee, the number of common units issued is based on the volume weighted average daily trading price of the common units for the 20 trading days prior to issuance. We issued the following common units to Circle K as consideration for amounts due under the terms of the Amended Omnibus Agreement:

 

Period

 

Date of Issuance

 

Number of

Common

Units Issued

 

Quarter ended December 31, 2017

 

March 1, 2018

 

 

136,882

 

Quarter ended March 31, 2018

 

May 21, 2018

 

 

155,236

 

 

IDR and Common Unit Distributions

We distributed $0.1 million and $1.1 million to Circle K related to its ownership of our IDRs and $3.8 million and $4.2 million related to its ownership of our common units during the three months ended June 30, 2018 and 2017, respectively. We distributed $1.3 million and $2.0 million to Circle K related to its ownership of our IDRs and $8.4 million and $8.3 million related to its ownership of our common units during the six months ended June 30, 2018 and 2017, respectively.

Wholesale Motor Fuel Sales and Real Estate Rentals

Revenues from motor fuel sales and rental income from DMS were as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues from motor fuel sales to DMS

 

$

73,375

 

 

$

61,738

 

 

$

132,296

 

 

$

116,187

 

Rental income from DMS

 

 

3,405

 

 

 

4,758

 

 

 

7,690

 

 

 

9,733

 

 

Accounts receivable from DMS totaled $10.5 million and $9.3 million at June 30, 2018 and December 31, 2017, respectively.

During the second quarter of 2018, in connection with the transition of 43 sites in Florida from DMS to a third party multi-site operator of retail motor fuel stations, we accrued a $3.8 million contract termination payment expected to be paid in cash to DMS during the third quarter of 2018, which is included in accounts payable to related parties at June 30, 2018. This payment was approved by the independent conflicts committee of our Board. Additionally, we recorded a $2.2 million charge to write off deferred rent income related to our recapture of these sites from the master lease agreement with DMS. These charges are included in loss on dispositions and lease terminations, net in the statement of operations. See Note 1 for additional information on the agreements entered into with the third party multi-site operator.

Revenues from rental income from Topstar Enterprises were $0.1 million for the three and six months ended June 30, 2018 and $0.1 million and $0.2 million for the three and six months ended June 30, 2017, respectively.

CrossAmerica leases real estate from certain other entities affiliated with Joseph V. Topper, Jr., a member of the Board. Rent expense paid to these entities was $0.2 million and $0.5 million for the three and six months ended June 30, 2018 and $0.2 million and $0.4 million for the three and six months ended June 30, 2017, respectively.

Maintenance and Environmental Costs

Certain maintenance and environmental monitoring and remediation activities are performed by an entity affiliated with Joseph V. Topper, Jr., a member of the Board, as approved by the independent conflicts committee of the Board. We incurred charges with this related party of $0.2 million and $0.7 million for the three months ended June 30, 2018 and 2017 and $0.4 million and $0.8 million for the six months ended June 30, 2018 and 2017, respectively. Accounts payable to this related party amounted to $0.5 million and $0.2 million at June 30, 2018 and December 31, 2017, respectively.

10


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Principal Executive Offices

Our principal executive offices are in Allentown, Pennsylvania. We sublease office space from Circle K that Circle K leases from an affiliate of John B. Reilly, III and Joseph V. Topper, Jr., members of our Board. The management fee charged by Circle K to us under the Amended Omnibus Agreement includes this rental expense, which amounted to $0.2 million and $0.4 million for the three and six months ended June 30, 2018 and $0.2 million and $0.3 million for the three and six months ended June 30, 2017, respectively. 

Public Relations and Website Consulting Services

We have engaged a company affiliated with John B. Reilly, III, a member of the Board, for public relations and website consulting services. The cost of these services was insignificant for the three and six months ended June 30, 2018 and 2017.

Note 8. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

We have minimum volume purchase requirements under our fuel supply agreements with a purchase price at prevailing market rates for wholesale distribution. In the event we fail to purchase the required minimum volume for a given contract year, the underlying third party’s exclusive remedies (depending on the magnitude of the failure) are either termination of the supply agreement and/or a financial penalty per gallon based on the volume shortfall for the given year. We did not incur any significant penalties in 2017 or 2018.

Litigation Matters

We are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damages, environmental damages, employment-related claims and damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we record a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In addition, we disclose matters for which management believes a material loss is at least reasonably possible. None of these proceedings, separately or in the aggregate, are expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows. In all instances, management has assessed the matter based on current information and made a judgment concerning its potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment may prove materially inaccurate, and such judgment is made subject to the known uncertainties of litigation. 

Environmental Matters

We currently own or lease retail sites where refined petroleum products are being or have been handled. These retail sites and the refined petroleum products handled thereon may be subject to federal and state environmental laws and regulations. Under such laws and regulations, we could be required to remove or remediate containerized hazardous liquids or associated generated wastes (including wastes disposed of or abandoned by prior owners or operators), to remediate contaminated property arising from the release of liquids or wastes into the environment, including contaminated groundwater, or to implement best management practices to prevent future contamination.

We maintain insurance of various types with varying levels of coverage that is considered adequate under the circumstances to cover operations and properties. The insurance policies are subject to deductibles that are considered reasonable and not excessive. In addition, we have entered into indemnification and escrow agreements with various sellers in conjunction with several of their respective acquisitions, as further described below. Financial responsibility for environmental remediation is negotiated in connection with each acquisition transaction. In each case, an assessment is made of potential environmental liability exposure based on available information. Based on that assessment and relevant economic and risk factors, a determination is made whether to, and the extent to which we will assume liability for existing environmental conditions.

Environmental liabilities recorded on the balance sheet within accrued expenses and other current liabilities and other long-term liabilities totaled $3.6 million and $3.5 million at June 30, 2018 and December 31, 2017, respectively. Indemnification assets related to third-party escrow funds, state funds or insurance recorded on the balance sheet within other current assets and other noncurrent assets totaled $3.7 million and $3.4 million at June 30, 2018 and December 31, 2017, respectively. State funds represent probable state reimbursement amounts. Reimbursement will depend upon the continued maintenance and solvency of the state. Insurance coverage represents amounts deemed probable of reimbursement under insurance policies.

11


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The estimates used in these reserves are based on all known facts at the time and an assessment of the ultimate remedial action outcomes. We will adjust loss accruals as further information becomes available or circumstances change. Among the many uncertainties that impact the estimates are the necessary regulatory approvals for, and potential modifications of remediation plans, the amount of data available upon initial assessment of the impact of soil or water contamination, changes in costs associated with environmental remediation services and equipment and the possibility of existing legal claims giving rise to additional claims.

Environmental liabilities related to the sites contributed to the Partnership in connection with our IPO have not been assigned to us, and are still the responsibility of the Predecessor Entity. Under the Amended Omnibus Agreement, the Predecessor Entity must indemnify us for any costs or expenses that it incurs for environmental liabilities and third-party claims, regardless of when a claim is made, that are based on environmental conditions in existence prior to the closing of the IPO for contributed sites. As such, these environmental liabilities and indemnification assets are recorded on the balance sheet of the Predecessor Entity rather than the balance sheet of the Partnership.

Note 9. FAIR VALUE MEASUREMENTS

General

We measure and report certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). U.S. GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the three hierarchy levels.

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2—Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in inactive markets.

Level 3—Unobservable inputs are not corroborated by market data. This category is comprised of financial and non-financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies using significant inputs that are generally less readily observable from objective sources.

Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers occurred. There were no transfers between any levels in 2018 or 2017.

As further discussed in Note 10, we have accrued for unvested phantom units and vested and unvested profits interests as a liability and adjust that liability on a recurring basis based on the market price of our common units each balance sheet date. Such fair value measurements are deemed Level 1 measurements.

Financial Instruments

The fair value of our accounts receivable, notes receivable, and accounts payable approximated their carrying values as of June 30, 2018 and December 31, 2017 due to the short-term maturity of these instruments. The fair value of the revolving credit facility approximated its carrying values of $516.5 million as of June 30, 2018 and $506.0 million as of December 31, 2017, due to the frequency with which interest rates are reset and the consistency of the market spread.

Note 10. EQUITY-BASED COMPENSATION

Overview

We record equity-based compensation as a component of general and administrative expenses in the statements of operations. Equity-based compensation expense was $0.1 million and $0.8 million for the three months ended June 30, 2018 and 2017, and $0.2 million and $1.7 million for the six months ended June 30, 2018 and 2017, respectively.

12


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Partnership Equity-Based Awards

Since we grant awards to employees of Circle K who provide services to us under the Amended Omnibus Agreement, and since the grants may be settled in cash, unvested phantom units and vested and unvested profits interests receive fair value variable accounting treatment. As such, they are measured at fair value at each balance sheet reporting date and the cumulative compensation cost recognized is classified as a liability, which is included in accrued expenses and other current liabilities on the consolidated balance sheet. The balance of the accrual is not significant at June 30, 2018 and $0.7 million at December 31, 2017.  

CST Equity-Based Awards

In February 2017, CST granted approximately 47,000 equity-based awards in the form of time vested restricted stock units of CST to certain employees for services rendered on our behalf. Upon completion of the Merger, these awards converted to cash awards and remained subject to the same vesting terms and payment schedule of three annual tranches as those set forth in the original award agreement; provided that, upon completion of the Merger, such awards will vest in full upon an involuntary termination of employment without cause, or termination for “Good Reason”, or termination due to death, “Disability” or Retirement. The expense associated with these awards that was charged to us under the Amended Omnibus Agreement was $0.1 million and $0.2 million for the three and six months ended June 30, 2018, respectively. Unrecognized compensation expense associated with these awards amounted to $0.5 million and $0.7 million as of June 30, 2018 and December 31, 2017, respectively, which will be recognized over the vesting term through January 2020.

For the three and six months ended June 30, 2017, the expense associated with CST equity-based awards in the form of time vested restricted stock units of CST, stock options of CST and market share units of CST, which was charged to us under the Amended Omnibus Agreement, was $0.8 million and $1.5 million, respectively.

Note 11. INCOME TAXES

As a limited partnership, we are not subject to federal and state income taxes, however our corporate subsidiaries are subject to income taxes. Income tax attributable to our taxable income, which may differ significantly from income for financial statement purposes, is assessed at the individual limited partner unit holder level. We are subject to a statutory requirement that non-qualifying income, as defined by the Internal Revenue Code, cannot exceed 10% of total gross income for the calendar year. If non-qualifying income exceeds this statutory limit, we would be taxed as a corporation. The non-qualifying income did not exceed the statutory limit in any period presented.

Certain activities that generate non-qualifying income are conducted through LGWS. LGWS is a tax paying corporate subsidiary of ours that is subject to federal and state income taxes. Current and deferred income taxes are recognized on the earnings of LGWS. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates.

We recorded an income tax benefit of $2.7 million and an insignificant amount for the three months ended June 30, 2018 and 2017, and an income tax benefit of $2.4 million and $2.7 million for the six months ended June 30, 2018 and 2017, respectively, as a result of the income generated (or losses incurred) by our corporate subsidiaries. The effective tax rate differs from the combined federal and state statutory rate primarily because only LGWS is subject to income tax.

Note 12. NET INCOME PER LIMITED PARTNER UNIT

In addition to the common units, we have identified the IDRs as participating securities and compute income per unit using the two-class method under which any excess of distributions declared over net income shall be allocated to the partners based on their respective sharing of income as specified in the Partnership Agreement. Net income per unit applicable to limited partners is computed by dividing the limited partners’ interest in net income (loss), after deducting the IDRs, by the weighted-average number of outstanding common units.

13


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables provide a reconciliation of net income (loss) and weighted-average units used in computing basic and diluted net income (loss) per limited partner unit for the following periods (in thousands, except unit and per unit amounts):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions paid(a)

 

$

18,002

 

 

$

20,826

 

 

$

39,417

 

 

$

41,360

 

Allocation of distributions in excess of net loss

 

 

(25,070

)

 

 

(25,874

)

 

 

(48,470

)

 

 

(45,704

)

Limited partners’ interest in net loss - basic and diluted

 

$

(7,068

)

 

$

(5,048

)

 

$

(9,053

)

 

$

(4,344

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average limited partnership units

   outstanding - basic

 

 

34,336,386

 

 

 

33,798,905

 

 

 

34,247,232

 

 

 

33,694,116

 

Adjustment for phantom units(b)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average limited partnership units

   outstanding - diluted

 

 

34,336,386

 

 

 

33,798,905

 

 

 

34,247,232

 

 

 

33,694,116

 

Net loss per limited partnership unit - basic and diluted

 

$

(0.21

)

 

$

(0.15

)

 

$

(0.26

)

 

$

(0.13

)

 

(a)

Distributions paid per unit were $0.5250 and $0.6175 during the three months ended June 30, 2018 and 2017, and $1.1525 and $1.23 during the six months ended June 30, 2018 and 2017, respectively.

(b)

Excludes 9,711 and 10,327 potentially dilutive securities from the calculation of diluted earnings per common unit because to do so would be antidilutive for the three and six months ended June 30, 2018, respectively. Excludes 8,020 and 23,496 potentially dilutive securities from the calculation of diluted earnings per common unit because to do so would be antidilutive for the three and six months ended June 30, 2017, respectively.

Distributions

Distribution activity for 2018 was as follows:

 

Quarter Ended

 

Record Date

 

Paym