ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We hereby incorporate by reference into this Item our disclosures made in Part II, Item 8 of this annual report included in Note 14 of the notes to the consolidated and combined financial statements under the caption “Litigation Matters.”
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
As of February 17, 2016, we had 75,615,939 shares of our common stock issued and outstanding and approximately 5,400 shareholders of record. Our common stock trades on the NYSE under the symbol “CST.”
The following table sets forth, for the periods indicated, the high and low sales prices for our common stock, as reported by the NYSE, and quarterly cash dividends declared per share. The last reported sales price of our common stock on the NYSE on February 17, 2016 was $33.62 per share.
We expect to continue the practice of paying quarterly cash dividends, though the timing, declaration, amount and payment of future dividends to stockholders will fall within the discretion of our Board of Directors. Our indebtedness also restricts our ability to pay dividends. As such, there can be no assurance we will continue to pay dividends in the future.
Unregistered Sales of Equity Securities and Use of Proceeds
We issued 2,044,490 shares of CST common stock in connection with the GP Purchase and the IDR Purchase. This issuance of shares was made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
On August 5, 2014, our Board of Directors approved a stock repurchase plan under which we are authorized to purchase shares of our common stock up to a maximum dollar amount of $200 million, until such authorization is exhausted or withdrawn by our Board of Directors. Under the stock repurchase program, we are authorized to repurchase, from time-to-time, shares of our outstanding common stock in the open market and in private transactions, at management’s discretion, based on market and business conditions, applicable legal requirements and other factors, or pursuant to an issuer repurchase plan or agreement that may be in effect. The repurchase program does not obligate us to acquire any specific amount of common stock and will continue until otherwise modified or terminated by our Board of Directors at any time at its sole discretion and without notice. We did not repurchase any shares under this program during the fourth quarter of 2015.
The following table contains information about CST’s shares withheld in connection with exercise proceeds and withholding taxes related to the exercise of stock options, the vesting of restricted stock and the vesting of restricted stock units during the three months ended December 31, 2015:
Through February 17, 2016, we have repurchased 2,094,227 shares totaling $85.6 million under this program.
CST Purchases of CrossAmerica Common Units
On September 21, 2015, CST announced that the independent executive committee of its Board of Directors approved a unit purchase program under Rule 10b-18 of the Exchange Act, authorizing CST to purchase up to an aggregate of $50 million of the common units representing limited partner interests in CrossAmerica. The unit purchase program does not have a fixed expiration date and may be modified, suspended or terminated at any time at CST’s discretion. The following table shows the purchases by CST of CrossAmerica common units registered pursuant to Section 12 of the Exchange Act during the quarter ended December 31, 2015:
Through February 17, 2016, CST had purchased $20 million, or 804,667 common units, at an average price of $24.64 per common unit.
Cumulative Stockholder Returns
The following performance graph is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference into any of CST’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, respectively.
This performance graph and the related textual information are based on historical data and are not indicative of future performance. The following line graph compares the cumulative total return on an investment in our common stock against the cumulative total return of the S&P 500 Index and an index of direct peer companies (that we selected) for the period commencing May 2, 2013 (the day our common stock began trading on the NYSE) and ending December 31, 2015.
The S&P 500 Index includes 500 United States companies in the industrial, transportation, utilities and financial sectors and is weighted by market capitalization. Our peer group consisted of the following six companies: Casey’s General Stores, Inc. (CASY), Alimentation Couche-Tard Inc. (ATD-B.TO), Murphy U.S.A., Inc. (MUSA), Travel Centers of America, L.L.C. (TA), Sunoco LP (SUN) and Global Partners LP (GLP). In 2013, we included Susser Holdings Corporation (SUSS) and Pantry, Inc. (PTRY) in our peer group. During 2014, SUSS was acquired and is no longer publicly traded and has been retroactively removed from our peer group. On December 18, 2014, ATD-B.TO and PTRY announced the signing of a definitive merger agreement. As such, PTRY has been retroactively removed from our peer group.
The graph and the following table depicts the results of investing $100 in our common stock, the S&P 500 Index and our peer group at closing prices on May 2, 2013, December 31, 2013, December 31, 2014 and December 31, 2015 and assumes the reinvestment of dividends.
ITEM 6.
ITEM 6. SELECTED HISTORICAL CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL DATA
The following selected financial data reflect the combined results of Valero’s retail business for periods prior to the spin-off and our consolidated results for periods after the spin-off, which include CrossAmerica effective October 1, 2014 as a result of the GP Purchase and the IDR Purchase. We derived the selected consolidated and combined income statement data for the years ended December 31, 2015, 2014 and 2013 and the selected consolidated balance sheet data as of December 31, 2015 and 2014, from the consolidated and combined financial statements included elsewhere in this annual report. We derived the selected combined income statement data for the year ended December 31, 2012 and 2011, and the selected consolidated and combined balance sheet data as of December 31, 2013, 2012 and 2011, from the consolidated and combined financial statements of CST, which are not included in this annual report.
To ensure a full understanding, you should read the selected financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and accompanying notes included elsewhere in this annual report.
The financial data below are presented in millions.
(a)
The spin-off resulted in material changes to our consolidated and combined financial statements as of and for the year ended December 31, 2013. See our annual report on Form 10-K for the year ended December 31, 2013 for further discussion of these changes.
(b)
The GP Purchase and IDR Purchase resulted in material changes to our consolidated financial statements. See Note 3 included elsewhere in this annual report for additional information.
(c)
Balances as of December 31, 2013, 2012 and 2011 were not retrospectively adjusted for the adoption of ASU 2015-17, which related to the presentation of deferred taxes.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This section is provided as a supplement to, and should be read in conjunction with, Items 1., 1A. and 8. (which includes our consolidated and combined financial statements) included elsewhere in this annual report.
MD&A is organized as follows:
•
Significant Factors Affecting Our Profitability-This section describes the significant impact on our results of operations caused by crude oil commodity price volatility and seasonality.
•
Recently Acquired Retail Sites-This section describes our operating model related to recently acquired convenience store operations.
•
Results of Operations-This section provides an analysis of our results of operations, including the results of operations of our business segments, for the years ended December 31, 2015, 2014 and 2013, an outlook for our business and non-GAAP measures.
•
Liquidity and Capital Resources-This section provides a discussion of our financial condition and cash flows. It also includes a discussion of our debt, capital requirements and other matters impacting our liquidity and capital resources.
•
New Accounting Policies-This section describes new accounting pronouncements that we have already adopted, those that we are required to adopt in the future, and those that became applicable in the current year as a result of new circumstances.
•
Critical Accounting Policies Involving Critical Accounting Estimates-This section describes the accounting policies and estimates that we consider most important for our business and that require significant judgment.
Significant Factors Affecting Our Profitability
The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit
CST
The prices paid to our motor fuel suppliers for wholesale motor fuel are closely correlated to the price of crude oil. The crude oil commodity markets are highly volatile, and the market prices of crude oil and wholesale motor fuel experience significant and rapid fluctuations. We attempt to pass along wholesale motor fuel price changes to our retail customers through “at the pump” retail price changes; however, market conditions do not always allow us to do so immediately. The timing of any related increase or decrease in “at the pump” retail prices is affected by competitive conditions in each geographic market in which we operate. As such, the prices we charge our customers for motor fuel and the gross profit we receive on our motor fuel sales can increase or decrease significantly and rapidly over short periods of time.
Changes in our average motor fuel selling price per gallon and gross margin over the three year period ended December 31, 2015 are directly related to the changes in crude oil and wholesale motor fuel prices over the same period. Variations in our reported revenues and cost of sales are, therefore, primarily related to the price of crude oil and wholesale motor fuel prices and generally not as a result of changes in motor fuel sales volumes, unless otherwise indicated and discussed below.
Approximately half of CST’s gross profit is derived from the sale of motor fuel. CST typically experiences lower motor fuel gross profits in periods when the wholesale cost of motor fuel increases, and higher motor fuel gross profits in periods when the wholesale cost of motor fuel declines rapidly or is more volatile.
Historically, the volatility of crude oil and wholesale motor fuel prices has significantly impacted CST’s motor fuel gross profits, and is further discussed in “Results of Operations” below. The following graph provides benchmark information for both crude oil and wholesale motor fuel prices for the two years ended December 31, 2015:
(a) Represents the average monthly spot price per barrel during the periods presented for West Texas Intermediate (“WTI”) and Brent crude oil. One barrel represents 42 gallons.
(b)
Represents the average monthly spot price per gallon during the periods presented for U.S. Gulf Coast conventional (“GCC”) gasoline and New York Harbor conventional gasoline (“NYHC”).
The following graph shows the volatility of wholesale motor fuel prices and the impact on our U.S. Retail and Canadian Retail segments’ gross profits for the two years ended December 31, 2015 (U.S. Retail and Canadian Retail cent per gallon (“CPG”) gross profits):
(a)
Represents the average monthly spot price per gallon during the periods presented for GCC gasoline and NYHC gasoline.
CrossAmerica
As discussed above, our U.S. Retail and Canadian Retail segments typically experience lower motor fuel gross profits in periods when the wholesale cost of motor fuel is increasing, and higher motor fuel gross profits in periods when the wholesale cost of motor fuel is decreasing. As it relates to its retail operations, CrossAmerica generally experiences similar effects on its revenues and gross profits from wholesale motor fuel price changes.
CrossAmerica receives a fixed mark-up per gallon on approximately 87% of its gallons sold. The fixed mark-up per gallon contracts are impacted by the discount for prompt payment and other rebates and incentives offered by CrossAmerica’s suppliers. Prompt payment discounts from suppliers are based on a percentage of the purchase price of motor fuel and the dollar value of these discounts varies with motor fuel prices. As such, in periods of lower wholesale motor fuel prices, CrossAmerica’s gross profit is negatively affected and, in periods of higher wholesale motor fuel prices, CrossAmerica’s gross profit is positively affected (as it relates to these discounts). We estimate a $10 per barrel change in the price of crude oil would impact CrossAmerica’s annual wholesale motor fuel gross profit derived from its fixed mark-up per gallon contracts by approximately $2.5 million related to these payment discounts. CrossAmerica also generates a portion of its wholesale gross profit through DTW priced contracts. These contracts provide for variable, market based pricing, which results in motor fuel gross profit effects similar to retail motor fuel gross profits (as crude oil prices decline, motor fuel gross profit generally increases). The increase in DTW gross profit results from the acquisition cost of wholesale motor fuel reducing at a faster rate as compared to the rate retail motor fuel prices decline. This spread can exist for a period of time, thus allowing CrossAmerica to collect a higher margin from its dealers.
Seasonality Effects on Volumes
Our business exhibits substantial 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 and operating income have been highest in the second and third quarters (during the summer months) and lowest during the winter months in the first and fourth quarters.
Impact of Inflation
Inflation in energy prices impacts our sales and cost of motor fuel products and working capital requirements. The impact of inflation has minimal impact on our results of operations, as we generally are able to pass along energy cost increases in the form of increased sales prices to our customers. Although we believe we have historically been able to pass on increased costs through price increases, there can be no assurance that we will be able to do so in the future.
Recently Acquired Retail Sites
When we acquire wholesale fuel and convenience store operations, we generally do not have a predetermined operating or ownership model for these businesses. Generally, wholesale fuel supply operations will be purchased (or subsequently acquired by CrossAmerica) and convenience store operations will be evaluated to determine long-term ownership and operations between our segments. Subsequent to an acquisition, we have an integration team that evaluates the eventual long-term operation of each convenience store acquired: (a) to be fully integrated into the existing core retail operations of CST, (b) to be converted into a dealer, or (c) other strategic alternatives, including divestiture or longer term operation by CrossAmerica. All retail convenience stores we acquire are first categorized as non-core and an evaluation process (which could take up to twelve months) is performed to determine if any of the acquired convenience stores are suitable to be converted and integrated into CST’s core store operating model. For the year ended December 31, 2015, CrossAmerica has converted 77 non-core company-operated convenience stores to third party dealers. As of December 31, 2015, CrossAmerica continues to operate 116 retail sites from its recent acquisitions as non-core convenience stores. We believe it is necessary to differentiate the operating performance between core and non-core stores when presenting our operating statistics because non-core stores are not necessarily reflective of our core business. Key differentiating factors include the following:
•
Non-core merchandising strategies are legacy strategies of the former owner, which are different from our core store merchandising strategies, including the offering of our proprietary products and food programs.
•
Non-core sites are independently managed by our integration team whereas our President of Retail Operations oversees all core store operations.
•
Non-core motor fuel pricing, merchandise supply and labor strategies are different from our core business.
Effective April 1, 2015, management classified the convenience store operations of the acquired Landmark stores as core stores. Effective July 1, 2015, management classified the convenience store operations of the acquired Nice N Easy stores as core stores.
Results of Operations
Consolidated and Combined Income Statement Analysis
Below is an analysis of our consolidated and combined income statements, which provides the primary reasons for significant increases and decreases in the various income statement line items from period to period. Our consolidated and combined income statements are as follows (in millions):
On October 1, 2014, we completed the GP Purchase and began consolidating the financial results of CrossAmerica and as such, full year comparable results are not presented herein. We have quantified the effects of CrossAmerica to specific income statement line items in our consolidated discussion of our results of operations, and any significant increase or decrease in the underlying income statement line items attributable solely to CST (before the consolidation of CrossAmerica) are then discussed.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Consolidated Results
Operating revenues increased $1.5 billion and gross profit increased $123 million from the acquisition of CrossAmerica, which was completed on October 1, 2014.
Excluding the effects of CrossAmerica, operating revenues declined $2.8 billion, or 23%, while gross profit declined $13 million, or 1%.
Operating revenues
Significant items impacting these results (excluding CrossAmerica) were:
•
A $1.5 billion, or 20%, decline in our U.S. Retail segment operating revenues primarily attributable to:
◦
A decrease in the retail price per gallon of motor fuel that we sold as a result of a decline in wholesale gasoline prices, as more fully described below under the heading “Segment Results-U.S. Retail.”
◦
Partially offsetting the decline was an increase in motor fuel gallons sold of 2% from our recent acquisitions and NTIs, as more fully described below under the heading “Segment Results-U.S. Retail.”
◦
Our merchandise and services revenues increased $120 million primarily from our recent acquisitions and NTIs, as more fully described below under the heading “Segment Results-U.S. Retail.”
•A $1.3 billion, or 28%, decline in our Canadian Retail segment operating revenues primarily attributable to:
◦
A decline of $452 million in operating revenues due to the foreign exchange effects of a weakening Canadian dollar relative to the U.S. dollar. On average, Canadian $1 was equal to U.S. $0.78 during 2015, and equal to U.S. $0.91 during 2014, representing a decrease in value of 14%.
•
Excluding the effects of foreign exchange rate changes, our operating revenues decreased $856 million. This decrease was primarily attributable to:
◦
A $743 million decrease in operating revenues primarily attributable to a decrease in the retail price of our motor fuel as a result of a decline in wholesale gasoline prices, as more fully described below under the heading “Segment Results-Canadian Retail.”
◦
A $49 million decline attributable to a 1% decrease in the volume of motor fuel we sold mainly related to the timing of certain marketing promotions, competition and reduced volumes associated with a weakening Canadian economy as more fully described below under the heading “Segment Results-Canadian Retail.”
◦
An increase in our merchandise sales of $26 million primarily from an increase in NTIs as more fully described below under the heading “Segment Results-Canadian Retail.”
◦
A decline of $101 million primarily related to our home heating business due to a decline in price as a result of a decline in crude oil prices.
Cost of sales
Cost of sales increased $1.4 billion from the acquisition of CrossAmerica.
Excluding the effects of CrossAmerica, cost of sales declined $2.8 billion or 26%.
Significant items impacting these results excluding CrossAmerica were:
•
The decline in crude oil and wholesale gasoline prices, as discussed above under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit” drove the remainder of the decline.
•
A $391 million decline from the foreign exchange effects of the weakening of the Canadian dollar relative to the U.S. dollar as discussed above.
Operating expenses
Operating expenses increased $34 million from the acquisition of CrossAmerica.
Excluding the effects of CrossAmerica, operating expenses increased by $20 million primarily due to an increase of $44 million related to our NTIs and the acquisitions of Nice N Easy and the Landmark convenience stores, which was partially offset by a $24 million decline in operating expenses primarily from the foreign exchange effects of the weakening of the Canadian dollar relative to the U.S. dollar.
General and administrative expenses
General and administrative expenses increased $23 million related primarily to the acquisition of CrossAmerica.
Excluding the effects of CrossAmerica, general and administrative expenses increased by $12 million primarily as a result of severance for certain CST executives and CST employees who were officers of CrossAmerica who have terminated their employment, acquisition costs related to our recent acquisitions, legal related expenditures, and salaries, incentive compensation and benefits due to an increase in employees.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense increased $55 million related primarily to the acquisition of CrossAmerica.
Excluding the effects of CrossAmerica, depreciation, amortization and accretion expense increased $7 million mainly due to our NTIs. We opened 31 NTIs in the U.S. and 11 NTIs in Canada in 2015.
Gain on sale of assets, net
During the year ended December 31, 2015, CrossAmerica recognized a gain of $3 million primarily related to the sale of individual sites. Additionally, we completed the sale of 25 convenience stores in our U.S. Retail segment in 2015 primarily related to our previously announced network optimization program and recognized a gain of $7 million.
Other income, net
Other income, net increased $12 million primarily related to gains on U.S. dollar denominated cash held in Canada.
Interest expense
Interest expense increased $13 million, primarily from the acquisition of CrossAmerica.
Income tax expense
Income tax expense, including CrossAmerica, declined $21 million, primarily as a result in the decline in income before income taxes. Our effective income tax rate was 39% for the year ended December 31, 2015 compared to an effective rate of 38% for the year ended December 31, 2014. CST’s effective tax rate, excluding CrossAmerica, was 39%, for the year ended December 31, 2015 compared to 35% for the year ended December 31, 2014. CST incurred a withholding tax of $18 million related to property distributed from its Canadian subsidiary to a U.S. subsidiary, which increased its effective tax rate for the year ended December 31, 2015.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Consolidated Results
Operating revenues increased $570 million and gross profit increased $36 million from the acquisition of CrossAmerica, which was completed on October 1, 2014.
Excluding the effects of CrossAmerica, operating revenues declined $593 million, or 5%, while gross profit increased $140 million, or 13%.
Operating revenues
Significant items impacting these results (excluding CrossAmerica) were:
•
A $279 million, or 4%, decline in our U.S. Retail segment operating revenues primarily attributable to:
◦
A decrease in the retail price per gallon of motor fuel that we sold as a result of a decline in wholesale gasoline prices, as more fully described below under the heading “Segment Results-U.S. Retail.”
◦
A decrease in motor fuel gallons sold of 2% as a result of a decline in demand, as more fully described below under the heading “Segment Results-U.S. Retail.”
◦
Our merchandise and services revenues increased $61 million primarily as a result of our NTIs and acquisitions.
•A $314 million, or 6%, decline in our Canadian Retail segment operating revenues primarily attributable to:
◦
A decline of $333 million in operating revenues due to the foreign exchange effects of a weakening Canadian dollar relative to the U.S. dollar. On average, Canadian $1 was equal to U.S. $0.91 during 2014, and equal to U.S. $0.97 during 2013, representing a decrease in value of 6%.
•
Excluding the effects of foreign exchange rate changes, our operating revenues increased $19 million. This increase was primarily attributable to:
◦
A $38 million increase in operating revenues, as more fully described below under the heading “Segment Results-Canadian Retail.”
◦
Partially offsetting this increase was a decline of $44 million due to competitive factors in our markets, as more fully described below under the heading “Segment Results-Canadian Retail.”
◦
Our heating oil revenues increased $12 million primarily due to an increase in the price of crude oil as discussed under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit.” Heating oil revenues also increased $1 million due to higher volume.
◦
An increase in our merchandise and services revenues of $12 million, primarily from an increase of 13 in the average number of company-operated convenience stores over the same period of 2013.
Cost of sales
Cost of sales increased $534 million from the acquisition of CrossAmerica.
Excluding the effects of CrossAmerica, cost of sales declined $733 million, or 6%.
Significant items impacting these results excluding CrossAmerica were:
•
A $304 million decline from the foreign exchange effects of a weakening Canadian dollar relative to the U.S. dollar.
•
The decline in crude oil and wholesale gasoline prices, as discussed above under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit” drove the remainder of the decline.
Operating expenses
Operating expenses increased $13 million from the acquisition of CrossAmerica.
Excluding the effects of CrossAmerica, operating expenses increased by $17 million primarily due to an increase of $24 million related to an increase in the average number of company-operated convenience stores during 2014 and an increase in employee health care costs in the U.S., which was partially offset by a $7 million decline primarily from the weakening of the Canadian dollar relative to the U.S. dollar.
General and administrative expenses
General and administrative expenses increased $18 million from the acquisition of CrossAmerica.
Excluding the effects of CrossAmerica, general and administrative expense increased $44 million as a result of a full year of higher actual expenses in 2014 as a stand-alone, publicly traded company, including personnel and associated benefits (including health care benefits), stock-based compensation, acquisition costs and legal related expenditures.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense increased $19 million from the acquisition of CrossAmerica.
Excluding the effects of CrossAmerica, depreciation, amortization and accretion expense increased $10 million from our NTIs.
Asset impairments
We recorded asset impairments of $3 million during 2014. These asset impairments were recorded as a result of changes in market demographics, traffic patterns, competition and other factors that impacted the overall operations of certain of our retail sites. Of the total asset impairments, $2 million related to stores classified as held for sale at September 30, 2014, which were written down in the third quarter of 2014 as the net book value exceeded the anticipated net sales proceeds.
Gain on sale of assets, net
During the year ended December 31, 2014, CST closed on the sale of 75 convenience stores in the U.S. Retail segment and recognized a gain of $32 million.
Other income, net
Other income, net, increased $2 million primarily as a result of rental income.
Interest expense
Interest expense increased $3 million from the acquisition of CrossAmerica.
Excluding the effects of CrossAmerica, interest expense increased $15 million, primarily as a result of a full year of outstanding debt issued in connection with the spin-off, which occurred on May 1, 2013.
Income tax expense
Income tax expense, including CrossAmerica, increased $33 million as a result of an increase in earnings before tax. Our effective income tax rate was 38% for the year ended December 31, 2014 compared to an effective rate of 35% for the year ended December 31, 2013. CST’s effective tax rate, excluding CrossAmerica, was 35%, which includes federal and state income tax expense and reflects the benefit of the Canadian earnings being taxed at lower than the U.S. tax rate, for the year ended December 31, 2014.
Segment Results
We present the results of operations of our segments consistent with how our management views the business. Therefore, the segments are presented before intercompany eliminations (which consist of motor fuel sold from our CrossAmerica segment to our U.S. Retail segment, CST Fuel Supply distributions and rent expense paid to our CrossAmerica segment) and before purchase accounting adjustments related to the acquisition of CrossAmerica (primarily depreciation and amortization).
U.S. Retail
The following tables highlight the results of operations and certain operating metrics of our U.S. Retail segment. The narrative following these tables provides an analysis of the results of operations of that segment (millions of dollars, except for the number of convenience stores, per site per day and per gallon amounts):
U.S. Retail (continued)
Notes to U.S. Retail Statistical Table
(a)
Includes the results from car wash sales and commissions from lottery, money orders, air/water/vacuum services, video and game rentals and access to ATMs.
(b)
Primarily consists of rental income.
(c)
Represents the portfolio of core retail sites and excludes recently acquired retail sites that are being integrated or are under performance evaluation to determine if: (a) to be fully integrated into the existing core retail operations of CST, (b) to be converted into a dealer, or (c) other strategic alternatives, including divestiture or longer term operation by CrossAmerica. All NTIs are core stores and accordingly are included in the core system operating statistics. All convenience store operations in the U.S Retail segment are classified as core-store and accordingly their operations are included in the core system operating statistics.
(d)
Includes $0.05 per gallon of wholesale fuel distribution profit.
(e)
Effective July 1, 2015, CrossAmerica owns 17.5% of our U.S. Retail segment’s wholesale fuel distribution profit as a result of its 17.5% limited partner equity interest in CST Fuel Supply.
(f)
The same store information consists of aggregated individual store results for all sites in operation substantially throughout both periods presented. Stores that were temporarily closed for a brief period of time during the periods being compared remain in the same store sales comparison. If a store is replaced, either at the same location or relocated to a new location, it is removed from the comparison until the new store has been in operation for substantially all of the periods being compared. NTIs are included in the core same store metrics when they meet this criteria.
(g)
NTIs are included in the core same store metrics when they meet the criteria for same store classification described in (f).
(h)
NTIs consist of all new stores opened after January 1, 2008, which is generally when we began operating our larger formatted stores that accommodate broader merchandise categories and food offerings and have more fuel dispensers than our legacy stores. This information is being presented to enable a comparison of the business metrics of our NTIs to our total core store operating statistics. As of December 31, 2015, approximately 55% of the total NTIs were opened in the last two years, which we generally consider to be a development period before the NTIs achieve their full potential. Prior year information is not comparable given the increase in the number of NTIs and the timing of when they were opened, and is therefore not presented.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Operating revenues declined $1.5 billion, or 20%, gross profit increased $15 million, or 2%, operating expenses increased $44 million, or 10% and operating income declined $58 million, or 17%.
The results were driven by:
Operating revenues
•
A decrease in the retail price per gallon of motor fuel that we sold, which contributed $1.8 billion of the decrease to our motor fuel operating revenues, and was attributable to the volatility in wholesale gasoline prices, as discussed above under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit.” The average daily spot price of GCC gasoline decreased to $1.55 per gallon during 2015 compared to $2.49 per gallon during 2014, representing a 38% decrease.
•
Partially offsetting the decline was an increase in motor fuel gallons sold of 2%, which increased motor fuel operating revenues by $134 million. The increase in motor fuel gallons sold resulted primarily from our NTIs and the acquisitions of Nice N Easy and the Landmark convenience stores. Partially offsetting this increase was a decline in volume attributable to our recently divested retail sites.
•
Our merchandise and services revenues increased $120 million primarily as a result of our NTIs and the acquisitions of Nice N Easy and the Landmark convenience stores as well as an overall increase in our same store merchandise sales. The increase in same store merchandise sales was the result of strategies designed to add business in the packaged beverage and dairy categories as well as continued development of our fresh food programs.
Gross profit
•
A decrease in motor fuel gross profit of $23 million primarily due to a moderate decline in our motor fuel gross profit per gallon of $0.01 per gallon. The decline in our motor fuel gross profit per gallon was driven by volatility in crude oil and wholesale motor fuel prices, as discussed under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit.”
•
Also contributing to the decrease to motor fuel gross profit was the effect of wholesale fuel mark-up payments to CrossAmerica. As discussed in Note 13 included elsewhere in this annual report, CST paid CrossAmerica $5 million related to fuel purchased under distribution agreements for Nice N Easy and Landmark convenience stores and $11 million to CrossAmerica related to its investment in CST Fuel Supply.
•
Our merchandise and services gross profit increased $37 million primarily from our acquisitions and an increase in our same store sales.
Operating expenses
Operating expenses increased $44 million, primarily as a result of our acquisitions and the impact on rent expense from the NTI sale and lease backs with CrossAmerica as discussed in Note 3 included elsewhere in this annual report.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense increased $6 million as a result of our NTIs.
Gain on sale of assets, net
We completed the sale of 25 convenience stores in 2015 primarily related to our previously announced network optimization program and recognized a gain of $7 million.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Operating revenues declined $279 million, or 4%, gross profit increased $145 million, or 21%, operating expenses increased $24 million, or 6% and operating income increased $147 million, or 74%.
The results were driven by:
Operating revenues
•
A decrease in the retail price per gallon of motor fuel that we sold, which contributed $244 million of the decrease to our motor fuel operating revenues, and was attributable to the volatility in wholesale gasoline prices, as discussed above under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit.” The average daily spot price of GCC gasoline decreased to $2.49 per gallon during 2014 compared to $2.70 per gallon during 2013, representing an 8% decrease.
•
A decrease in motor fuel gallons sold of 2%, which decreased motor fuel operating revenues by $96 million. The decrease in motor fuel gallons sold resulted primarily from an overall decrease in motor fuel demand caused by industry trends of lower motor fuel consumption from Corporate Average Fuel Economy (CAFE) standards, the high absolute price of motor fuel experienced in the first half of 2014 and competitive factors in our markets, such as discount retailers that priced their motor fuel to gain or retain market share.
•
Our merchandise and services revenues increased $61 million primarily as a result of our NTIs as well as an overall increase in our same store merchandise sales.
Gross profit
•
An increase in motor fuel gross profit of $121 million primarily due to a $0.06 increase in our motor fuel gross profit per gallon. The increase in our motor fuel gross profit per gallon was driven by volatility in crude oil and wholesale motor fuel prices, as discussed under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit.”
•
An increase of $24 million in our merchandise and services gross profit primarily from an increase in the average number of company operated convenience stores during 2014 as well as an increase in our merchandise gross profit percentage during 2014. The growth in our merchandise gross profit percentage was driven by the contribution of higher profit merchandise items sold at our NTIs (primarily food related items) and the positive trend in same store sales.
Operating expenses
Operating expenses increased $24 million, primarily as a result of an increase in the average number of company-operated convenience stores during 2014 and an increase in health care costs.
Depreciation, amortization and accretion
Depreciation, amortization and accretion increased $8 million as a result of our NTIs.
Asset impairments
We recorded asset impairments of $3 million in 2014 as a result of changes in market demographics, traffic patterns, competition and other factors that impacted the overall operations of certain of our retail sites.
Gain on sale of assets, net
We completed the sale of 75 convenience stores in 2014 primarily related to our previously announced network optimization program and recognized a gain of $32 million.
Canadian Retail
The following tables highlight the results of operations and certain operating metrics of our Canadian Retail segment, expressed in U.S. dollars, except for retail site counts and motor fuel gallons. The narrative following these tables provides an analysis of the results of operations of that segment (which are expressed in millions of U.S. dollars, except where indicated and except for the number of retail sites, per site per day and per gallon amounts):
Canadian Retail (continued)
Canadian Retail (continued)
Notes to Canadian Retail Statistical Table
(a)
Includes the results from car wash sales and commissions from lottery, air/water/vacuum services and access to ATMs.
(b)
Primarily consists of our Home Heat business.
(c)
Company-operated retail sites sell motor fuel and merchandise. The company sells only motor fuel at commission agent sites. We do not currently distinguish between core and non-core stores in our Canadian Retail segment. All sites in our Canadian Retail segment are core stores.
(d)
Conversions represent stores that have changed their classification from commission agents to company owned and operated or vice versa. Changes in classification result when we either take over the operations of commission agents or convert an existing company owned and operated store to commission agents.
(e)
All amounts presented are stated in Canadian dollars to remove the impact of foreign exchange and all fuel information excludes amounts related to cardlock operations.
(f)
The same store information consists of aggregated individual store results for all sites in operation substantially throughout both periods presented. Stores that were temporarily closed for a brief period of time during the periods being compared remain in the same store sales comparison. If a store is replaced, either at the same location or relocated to a new location, it is removed from the comparison until the new store has been in operation for substantially all of the periods being compared. NTIs are included in the same store metrics when they meet this criteria.
(g)
NTIs consist of all new stores opened after January 1, 2008, which is generally when we began operating our larger formatted stores that accommodate broader merchandise categories and food offerings and have more fuel dispensers than our legacy stores. NTIs exclude commission agents. This information is being presented to enable a comparison of the business metrics of our NTIs to our total core store operating statistics. As of December 31, 2015, approximately 48% of the total NTIs were opened in the last two years, which we generally consider to be a development period before the NTIs achieve their full potential. Prior year information is not comparable given the increase in the number of NTIs and the timing of when they were opened, and is therefore not presented.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Operating revenues declined $1.3 billion, or 28%, gross profit declined $28 million, or 7%, operating expenses declined $24 million, or 10%, and operating income declined $5 million, or 4%.
Significant items impacting these results included:
Operating revenues
•
A decline of $452 million in operating revenues due to the foreign exchange effects of a weakening Canadian dollar relative to the U.S. dollar. On average, Canadian $1 was equal to U.S. $0.78 during 2015, and equal to U.S. $0.91 during 2014, representing a decrease in value of 14%.
•
Excluding the effects of foreign exchange rate changes, our operating revenues decreased $856 million. This decrease was primarily attributable to:
◦
A $743 million decrease in operating revenues primarily attributable to a decrease in the retail price of our motor fuel. In terms of Canadian dollars, the average daily spot price of NYHC gasoline decreased to $2.06 per gallon during 2015, compared to $2.88 per gallon during 2014.
◦
A $49 million decline attributable to a 1% decrease in the volume of motor fuel we sold mainly related to the timing of certain marketing promotions, competition and reduced volumes associated with a weakening Canadian economy.
◦
An increase in merchandise revenues of $26 million, from an increase of 11 NTIs through 2015 compared to the same period of the prior year as well as an increase in same store sales. We have successfully implemented some of the strategies from our U.S. Retail segment, which has contributed to the increase in same store sales trends.
◦
A decline of $101 million primarily related to our home heating business due to a decline in price from a decline in crude oil prices.
Gross profit
•
The decrease in the value of the Canadian dollar relative to the U.S. dollar resulted in a $60 million gross profit decline.
•
Excluding the effects of foreign exchange, our motor fuel gross profit increased $24 million driven primarily by volatility in crude oil and wholesale motor fuel prices, as discussed under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit,” and our merchandise and services gross profit increase $6 million as a result of an increase in the number of company-operated convenience stores during 2015 resulting from NTI openings.
Operating expenses
Operating expenses declined $24 million primarily from the foreign exchange effects of a weakening Canadian dollar relative to the U.S. dollar. Excluding the effects of foreign exchange, operating expenses increased $10 million, primarily as a result of an increase in the number of company-operated convenience stores during 2015 compared to the same period of the prior year resulting from NTI openings.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Operating revenues declined $314 million, or 6%, gross profit declined $5 million, or 1%, operating expenses declined $7 million, or 3%, and operating income increased $1 million, or 1%.
Significant items impacting these results included:
Operating revenues
•
A decline of $333 million in operating revenues due to the foreign exchange effects of a weakening Canadian dollar relative to the U.S. dollar. On average, Canadian $1 was equal to U.S. $0.91 during 2014 and equal to U.S. $0.97 during 2013, representing a decrease in value of 6%.
•
Excluding the effects of foreign exchange rate changes, our operating revenues increased $19 million. This increase was primarily attributable to:
◦
A $38 million increase in operating revenues primarily attributable to an increase in the retail price of our motor fuel.
◦
Partially offsetting this increase was a decline of $44 million attributable to a decrease in the volume of motor fuel that we sold as a result of inclement weather and competitive factors in our markets, primarily Québec, such as discount retailers that priced their motor fuel to gain or retain market share.
◦
An increase in merchandise revenues of $12 million, primarily from an increase of 13 in the average number of NTIs through 2014 compared to 2013.
Gross profit
•
The decrease in the value of the Canadian dollar relative to the U.S. dollar resulted in a $28 million gross profit decline.
•
Excluding the effects of foreign exchange, our motor fuel gross profit increased $17 million driven by volatility in crude oil and wholesale motor fuel prices, as discussed under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit.” Our merchandise gross profit increased $2 million, driven by the increase in our average company-operated convenience store count.
Operating expenses
Operating expenses declined $7 million primarily from the foreign exchange effects of a weakening Canadian dollar relative to the U.S. dollar. Excluding the effects of foreign exchange, operating expenses increased $10 million, primarily as a result of an increase in the average number of company-operated convenience stores during 2014 compared to the prior year.
CrossAmerica
The following table highlights the results of operations and certain operating metrics of CrossAmerica. We completed the GP Purchase on October 1, 2014. CrossAmerica is presented excluding the accounting purchase price adjustments to be consistent with how our management reviews its results. The impact of these purchase accounting adjustments is to increase depreciation, amortization and accretion expense by $26 million for the year ended December 31, 2015. Approximately 89% of CrossAmerica’s operating results are attributable to noncontrolling interest for the year ended December 31, 2015. All transactions between our U.S. Retail segment and CrossAmerica are eliminated from our consolidated financial statements. CrossAmerica is a publicly traded Delaware limited partnership and its units are listed for trading on the New York Stock Exchange under the symbol “CAPL.” As a result, CrossAmerica is required to file reports with the SEC, where additional information about its results of operations can be found and should be read in conjunction with the table below (millions of dollars).
We have quantified the effects of CrossAmerica to specific income statement line items in our consolidated discussion of our results of operations, and any significant increase or decrease in the underlying income statement line items attributable to CST are then discussed.
As discussed above, we evaluate the performance of our CrossAmerica segment before the effects of purchase accounting. In applying purchase accounting, approximately $323 million of the fair value was allocated to goodwill. The aggregate fair value of CrossAmerica was based on its enterprise value on the date of acquisition as principally determined by the closing price of its common units trading on the New York Stock Exchange ($33.97 per share). Therefore, a future sustained decline in the enterprise value of CrossAmerica could result in an impairment to part or all of the associated goodwill.
All of the goodwill recorded from purchase accounting related to the GP Purchase was allocated among two reporting units that comprise the CrossAmerica segment. These reporting units are CrossAmerica’s retail and wholesale operations. Our annual test for impairment of goodwill has historically been performed as of October 1 of each year. However, beginning in the last half of 2014, there were severe disruptions in the crude oil commodities markets that contributed to a significant decline in CrossAmerica’s common unit price. As a result, during the third quarter of 2015, CrossAmerica’s equity market capitalization fell below its net asset value at the time of the GP Purchase. We deemed this to be an indicator that goodwill may be impaired, and accordingly, we performed a step one analysis pursuant to ASC 350 to evaluate the potential impairment of our goodwill within the CrossAmerica reporting units. As a result of this test, we determined the goodwill was not impaired during the interim testing period.
Our annual test for impairment of goodwill was performed as of October 1. For purposes of our annual goodwill impairment test, we considered all facts and circumstances arising since the date of our interim impairment test, specifically cash flow projections and discount rates. After performing our test, we determined that it was more likely than not that our goodwill was not impaired.
See Note 9 included elsewhere in this annual report for additional information regarding our impairment analysis.
Outlook
U.S. Retail
The global energy markets, including wholesale and retail motor fuel prices, are likely to continue to be volatile in the coming year. While we believe we are expert managers of the fuel logistics and pricing businesses, the volatility of the market can present short term impacts to the profitability of our business, which may impact our operating results in 2016. We anticipate that we will continue to see lower commodity prices in 2016, which generally translates to lower wholesale motor fuel prices. Lower wholesale motor fuel prices generally translate to lower retail motor fuel prices, which can be beneficial in at least two ways to our business. First, lower retail fuel prices leave our customers with more money to spend in other areas, including convenience merchandise items. Second, lower retail fuel prices can have the effect of encouraging more driving, which helps offset the fuel demand declines that the industry will experience from increasing fuel efficiency of the U.S. automotive fleet. Conversely, low commodity prices can have an adverse impact on economic conditions in the markets where we operate, particularly those markets that are more dependent on the energy industry.
While we continue to operate in a very competitive retail environment, with intense competition for market share from our industry peers, and high volume retailers, we believe that our model allows us to effectively compete in the markets in which we operate. Our scale, distribution capabilities, private label penetration and our highly trained and customer service oriented team members in our stores enable us to offer a delightful, convenient shopping experience favored by today’s consumer. Our systems and processes enable us to vary the merchandise offering and retail prices by location in order to better serve our local customers and maximize gross profit dollars. We plan to continue our ambitious NTI growth strategy by adding up to 50 new stores in 2016, expanding our network through acquisitions and growing our Corner Store brand. Additionally, during the next three years, we plan to roll out a refreshed and refined image and value proposition for the Corner Store brand, along with an advertising strategy, that will increase consumer awareness of our strengths and offerings, allowing us the opportunity to expand our consumer base and grow our retail sales.
We believe the industry will continue to consolidate, and we believe we are competitively positioned to capitalize on opportunistic acquisitions. Our recent acquisitions have allowed us to take advantage of best practices and processes discovered in the acquired companies, presenting opportunities for further strengthening our legacy store network. We have also placed ourselves in the position to build in the areas surrounding the acquired companies, adding value to the acquired assets.
We also believe that there is an opportunity to enhance our merchandise mix by expanding fill-in grocery items and continuing to improve our already robust food offering. Our ambitious NTI building strategy calls for the company to continue to build additional large format stores in the coming years. These larger, more efficient stores are expected to enable us to achieve our goal to increase the retail gross profit earned from non-fuel revenues from 55% to 70% by the year 2020.
Canadian Retail
Like our U.S. Retail segment, our Canadian Retail segment continues to operate in a very competitive environment. Certain non-traditional competitors, such as discount warehouse memberships and grocery chains, have continued to add motor fuel offerings and have expanded into new territories, however, at a slower pace than previous years.
In Canada, we also see an opportunity to better serve consumers by adding more grocery items and/or an expanded food service specific to each of our markets. We also intend to continue our NTI program by opening 10 to 12 NTIs during 2016. We believe that there continue to be significant synergies in processes, practices and knowledge that can be transferred between our Canadian and U.S. Business units.
CrossAmerica
As a result of our recent acquisitions, we expect CrossAmerica’s total fuel volume sold to continue to increase during 2016 as compared to 2015. Furthermore, based on available industry data, monthly gasoline consumption in the United States increased by 3% during the first ten months of 2015 compared with the same period of 2014. While the global energy markets, including wholesale and retail motor fuel prices, are likely to continue to be volatile in the coming year, low commodity prices in 2016, among other factors, could lead to continued growth in demand for motor fuel, which would positively impact CrossAmerica’s motor fuel gross margin as a result of an increase in demand from its customers. However, lower wholesale motor fuel prices have a negative impact on CrossAmerica’s motor fuel gross margin as it relates to the discounts it receives from its motor fuel suppliers.
CrossAmerica expects its rent income to increase in 2016 based on the expectation that it will continue to convert recently acquired company operated sites to lessee dealers. CrossAmerica will continue to evaluate acquisitions on an opportunistic basis. Additionally, it will pursue targets that fit into its strategy. Whether it will be able to execute acquisitions will depend on market
conditions, availability of suitable acquisition targets at attractive terms, which are expected to be accretive to CrossAmerica’s unitholders, and its ability to finance such acquisitions on favorable terms.
Non-GAAP Measures
Adjusted EBITDA is a non-U.S. GAAP financial measure that represents net income before income taxes, interest expense, depreciation, amortization and accretion expense and asset impairments. EBITDAR is a non-U.S. GAAP financial measure that further adjusts Adjusted EBITDA by excluding minimum rent expense. We believe that Adjusted EBITDA and EBITDAR are useful to investors and creditors in evaluating our operating performance because (a) they facilitate management’s ability to measure the operating performance of our business on a consistent basis by excluding the impact of items not directly resulting from our retail operations; and (b) securities analysts and other interested parties use such calculations as a measure of financial performance. Adjusted EBITDA and EBITDAR do not purport to be alternatives to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Adjusted EBITDA and EBITDAR have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results of operations as reported under U.S. GAAP.
The following tables present a reconciliation of net income to Adjusted EBITDA and EBITDAR (in millions):
(a) Minimum rent expense is defined in the CST Credit Facility as rent expense accrued during the period in accordance with U.S. GAAP, less contingent rentals.
Liquidity and Capital Resources
Capital Structure
As discussed above under the heading “Items 1., 1A., and 2. Business, Risk Factors and Properties-Overview,” CST is a publicly traded corporation (NYSE:CST) and CrossAmerica (NYSE:CAPL) is a publicly traded master limited partnership. CST consolidates CrossAmerica due to its 100% ownership of the membership interests of the General Partner of CrossAmerica. Each company was publicly traded before the GP Purchase and the IDR Purchase and each company continues to be publicly traded.
CST and CrossAmerica maintain separate debt and equity capital structures. As such, CST and CrossAmerica each maintain credit facilities with separate covenants and restrictions. In addition, CST has outstanding publicly registered 5% senior notes due 2023, the terms of which are covered by a bond indenture. CST’s subsidiary that owns 100% of the membership interests in the General Partner of CrossAmerica has been designated an “unrestricted” subsidiary under this bond indenture and there are no guarantees of outstanding debt between CST and CrossAmerica. However, the IDRs and any current and future limited partnership equity interests acquired and owned by CST are considered collateral under CST’s revolving credit agreement.
Consolidated Cash Flows
The following table summarizes cash flow activity (in millions):
For the Year Ended December 31, 2015
Net cash provided by operating activities for the year ended December 31, 2015 was $362 million compared to $355 million for the year ended December 31, 2014. The increase in cash provided by operating activities was the result of an increase in depreciation, amortization and accretion from our recent acquisitions and NTIs. Changes in cash provided by or used for working capital are shown in Note 21 included elsewhere in this annual report.
Net cash used in investing activities for the year ended December 31, 2015 was $525 million compared to $312 million for the years ended December 31, 2014. The increase in net cash used in investing activities for the year ended December 31, 2015 was related to our acquisitions. Cash used for acquisitions was $199 million during 2015 compared to $86 million during 2014.
Net cash provided by financing activities for the year ended December 31, 2015 was $151 million compared to net cash used in financing activities of $36 million for the year ended December 31, 2014. During the year ended December 31, 2015, we had net proceeds under the CrossAmerica revolving credit facility of $158 million, net proceeds under the CST revolving credit facility of $60 million, spent $69 million on our share repurchase program, $19 million for the payment of dividends on CST common stock, $55 million for the payment of CrossAmerica distributions and payments of $47 million on our term loan. Additionally, during the second and third quarters of 2015, CrossAmerica closed on the sale of 4.8 million common units for net proceeds of $145 million and used the net proceeds from this offering to reduce indebtedness outstanding under its revolving credit facility.
For the Year Ended December 31, 2014
Net cash provided by operating activities for the year ended December 31, 2014 was $355 million compared to $440 million for the year ended December 31, 2013. Changes in cash provided by or used for working capital are shown in Note 21 included elsewhere in this annual report.
Net cash used in investing activities for the year ended December 31, 2014 was $312 million compared to $206 million for the year ended December 31, 2013. In 2014, we increased our NTI build program with a resulting increase in capital expenditures, we purchased Nice N Easy for $24 million and paid cash of $17 million as part of the GP Purchase and IDR Purchase. CrossAmerica’s purchase of Nice N Easy for $54 million also contributed to the cash outflows. These cash outflows were partially offset by $58 million of cash received from our network optimization program.
Net cash used in financing activities for the year ended December 31, 2014 was $36 million compared to net cash provided by financing activities of $85 million for the year ended December 31, 2013. During 2014, we spent $22 million on our share repurchase program, $19 million for the payment of dividends on CST common stock, $12 million for the payment of CrossAmerica distributions and made payments of $34 million on our term loan. These cash outflows were partially offset by $55 million of borrowings by CrossAmerica on their revolving credit facility.
Cash flows for the year ended December 31, 2014 include the cash flows from CrossAmerica from October 1, 2014 (the date of the GP Purchase) through December 31, 2014. For the period from October 1, 2014 through December 31, 2014, CST consolidated net cash increased by $15 million related to CrossAmerica.
Consolidated Debt
As of December 31, 2015, our consolidated debt consisted of the following (in millions):
(a) The assets of CST can only be used to settle the obligations of CST and creditors of CST have no recourse to the assets or general credit of CrossAmerica. CST has pledged its equity ownership in CrossAmerica to secure the CST credit facility.
(b) The assets of CrossAmerica can only be used to settle the obligations of CrossAmerica and creditors of CrossAmerica have no recourse to the assets or general credit of CST.
Debt related to CST
On January 29, 2016, CST amended its credit facility to increase borrowing capacity from $300 million to $500 million and immediately drew $307 million under the amended credit facility to fund a portion of the Flash Foods acquisition and pay fees of $1 million associated with the amendment. The amended credit facility is secured by substantially all of the assets of CST and its subsidiaries. As of December 31, 2015, CST’s outstanding borrowings currently under this credit facility bear a weighted average interest of 1.74%. As of February 17, 2016, after taking into account letters of credit and amounts outstanding under the revolving credit facility, approximately $144 million was available for future borrowings. The amended credit facility contains certain customary representations and warranties, covenants and events of default. Our credit facility contains financial covenants (as defined in the credit agreement) consisting of (a) a maximum total lease adjusted leverage ratio initially set at 3.75 to 1.00, (b) a minimum fixed charge coverage ratio set at 1.30 to 1.00, and (c) limitations on expansion capital expenditures. As of December 31, 2015, we were in compliance with these financial covenant ratios.
See Note 12 included elsewhere in this annual report for additional information regarding CST’s debt.
Debt related to CrossAmerica
CrossAmerica maintains a revolving credit facility that provides for aggregate outstanding borrowings of up to $550 million. CrossAmerica’s borrowings had an interest rate of 3.06% (LIBOR plus 2.75%) as of December 31, 2015. The credit facility is secured by substantially all of the assets of CrossAmerica and its subsidiaries. The amount of availability under the revolving credit facility, after taking into account outstanding letters of credit and debt covenant constraints, was $100 million at February 17, 2016. In connection with future acquisitions, the revolving credit facility requires, among other things, that CrossAmerica has, after giving effect to such acquisition, at least $20 million of borrowing availability under its revolving credit facility and unrestricted
cash on the balance sheet on the date of such acquisition. CrossAmerica is required to maintain a total leverage ratio (as defined) for the most recently completed four fiscal quarters of less than or equal to 5.00 to 1.00 and a consolidated interest coverage ratio (as defined in the Credit Agreement) of greater than or equal to 2.75 to 1.00. As of December 31, 2015, CrossAmerica was in compliance with these financial covenant ratios.
See Note 12 included elsewhere in this annual report for additional information regarding CrossAmerica’s debt.
Consolidated Capital Requirements
Our capital expenditures and investments relate primarily to the acquisition of land and the construction of NTIs. We also spend capital to improve, renovate and remodel our existing retail sites, which we refer to as sustaining capital and, from time to time, we enter into strategic acquisitions. In 2015, our sustaining capital expenditures also include $22 million related to the improvement of our distribution warehouse and adjoining offices in San Antonio, Texas. We believe we have adequate liquidity from cash on hand and borrowing capacity under our revolving credit facilities to continue to operate and grow our business for the next twelve months.
We intend to utilize CrossAmerica’s capital structure (through debt and equity issuances) to help fund our NTI and acquisition growth activities. Subject to the approval of the independent conflicts committee of the board of directors of the General Partner and when market conditions permit, CST intends, from time to time, to sell a portion of its existing wholesale fuel supply business to CrossAmerica, by selling equity interests in the subsidiary that conducts this business. We expect that CrossAmerica will pay fair market value for these equity interests in cash and limited partnership units.
During 2015, we completed 31 NTIs in the U.S., which are located in Texas, Louisiana and Arizona. In Canada, we completed 11 NTIs, which are mostly located in the Greater Toronto area and Québec.
The following table outlines our consolidated capital expenditures and expenditures for acquisitions by segment for the years ended December 31, 2015, 2014 and 2013. The table includes the elimination of acquisitions between CST and CrossAmerica including the sale of fuel supply interest and NTI sales (in millions):
(a) Cash transactions between CST and CrossAmerica, including sales of CST Fuel Supply equity interest and sales of NTIs, are eliminated from the statements of cash flows.
(b)
Capital expenditures for 2015 include $15 million of accrued capital expenditures and $4 million of capitalized interest and overhead.
Contractual Obligations
Our contractual obligations as of December 31, 2015 are summarized below (in millions).
Interest Payments on Debt
Such amounts include estimates of interest expense related to the CST and CrossAmerica credit facilities assuming the interest rate in effect as of December 31, 2015.
Capital Lease and Financing Obligations
Both CST and CrossAmerica have land and certain convenience store properties under capital leases. Capital lease obligations in the table above include both principal and interest. The financing obligations of CrossAmerica consist of principal and interest payments due on sale-leaseback transactions for which the sale was not recognized because CrossAmerica’s predecessor retained continuing involvement in the underlying sites.
Operating Lease Obligations
The operating lease obligations include leases for land, office facilities and retail sites, including retail sites that CST leases from CrossAmerica. The lease income and lease expense associated with the retail sites that CST leases from CrossAmerica are eliminated in consolidation. Operating lease obligations reflected in the table above include all operating leases that have initial or remaining non-cancelable terms in excess of one year, and are not reduced by minimum rentals to be received by us under subleases. In addition, such amounts do not reflect contingent rentals that may be incurred in addition to minimum rentals.
In connection with the spin-off, we entered into an Office Lease Agreement with Valero, pursuant to which we lease approximately 83,000 square feet of office space at the Valero corporate campus in San Antonio, Texas. The term of the lease is five years, but we have the right to terminate the lease at any time without penalty upon 180 days’ prior notice to Valero. Therefore, the amounts to be paid in future periods are not included in the table of contractual obligations above. Rent and other charges to be paid by us under the lease are consistent with the rates charged for comparable office space in the San Antonio area.
We lease office space in two locations in Montreal totaling approximately 69,000 square feet. These two leases expire in September 2029 and December 2029, respectively, and have cancelable terms that are greater than one year. We also lease office space in one location in Nova Scotia totaling approximately 6,500 square feet. This lease will expire in May 2025 and has cancelable terms that are greater than one year. Therefore, the amounts to be paid in future periods have been included in the table of contractual obligations.
The CrossAmerica principal executive offices are in Allentown, Pennsylvania in approximately 15,200 square feet of office space leased from DMI as of December 31, 2015. Future lease payments on this office lease are included within operating lease obligations.
Other Liabilities
Other liabilities include certain accrued expenses, asset retirement obligations and all long-term liabilities that are described in Note 11 of the notes to the consolidated and combined financial statements included elsewhere in this annual report. For purposes of reflecting amounts for other liabilities in the table above, we have made our best estimate of expected payments for each type of liability based on information available as of December 31, 2015.
CrossAmerica Management Fees
The amounts related to the management fee have been excluded from the table above as they are intercompany payments. See Note 13 included elsewhere in this annual report for additional information.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Other Matters Impacting Liquidity and Capital Resources
Cash Held by Our Canadian Subsidiary
As of December 31, 2015, $247 million of cash was held in Canada, of which $168 million was held in U.S. dollar denominated bank accounts to help mitigate exposure to foreign currency fluctuations. On December 17, 2015, our Canadian subsidiary distributed property (a note receivable) worth $360 million to a CST subsidiary in the United States. CST incurred Canadian withholding taxes of $18 million on the value of the note receivable. On January 8, 2016, our Canadian subsidiary paid $185 million cash to the CST subsidiary in the United States as a partial repayment of the note receivable.
Cash Held by CrossAmerica
As of December 31, 2015, $1 million of cash was held by CrossAmerica.
Concentration of Suppliers
For the three years ended December 31, 2015, CST purchased substantially all of its motor fuel for resale from Valero.
For the year ended December 31, 2015, CrossAmerica purchased approximately 30%, 26% and 26% of its motor fuel from Exxon Mobil, BP, and Motiva, respectively.
Concentration of Customers
CST has no significant concentration of customers. For the year ended December 31, 2015 and the three months ended December 31, 2014, CrossAmerica distributed approximately 17% and 25%, respectively, of its total wholesale distribution volumes to DMS and received approximately 36% and 44% of its rent income from DMS. For the year ended December 31, 2015, CrossAmerica distributed 7% of its total wholesale distribution volume to CST and received 17% of its rent income from CST.
CrossAmerica Common Unit Offering
On June 19, 2015, CrossAmerica closed on the sale of 4.6 million common units for net proceeds of approximately $139 million. On July 16, 2015, CrossAmerica closed on the sale of an additional 0.2 million common units for net proceeds of approximately $6 million in accordance with the underwriters’ option to purchase additional common units associated with the June offering. See Note 15 included elsewhere in this annual report for additional information.
CST Dividends
We have paid regular quarterly cash dividends of $0.0625 per common share, or $5 million, each quarter, commencing with the quarter ended September 30, 2013. We expect to continue the practice of paying quarterly cash dividends, though the timing, declaration, amount and payment of future dividends to stockholders will fall within the discretion of our Board of Directors. Our indebtedness also restricts our ability to pay dividends. As such, there can be no assurance we will continue to pay dividends in the future. Quarterly dividend activity for 2015 was as follows:
CrossAmerica Limited Partnership Distributions
Since the closing of its initial public offering, CrossAmerica has increased its quarterly distribution from $0.4375 per unit to $0.5925 per unit. Quarterly distribution activity for 2015 was as follows:
The amount of any distribution is subject to the discretion of the Board of Directors of the General Partner, which may modify or revoke CrossAmerica’s cash distribution policy at any time. CrossAmerica’s partnership agreement does not require CrossAmerica to pay any distributions. As such, there can be no assurance CrossAmerica will continue to pay distributions in the future.
For the year ended December 31, 2015, CrossAmerica distributed $8 million to us with respect to our ownership of common units.
CrossAmerica IDR Distributions to CST
IDRs represent our right to receive an increasing percentage of CrossAmerica’s quarterly distributions from operating surplus (as defined by the partnership agreement) after the minimum quarterly distribution and the target distribution levels have been achieved. If cash distributions to CrossAmerica’s limited partner unitholders exceed $0.5031 per unit in any quarter, CrossAmerica’s unitholders and we, as the holder of CrossAmerica’s IDRs, will receive distributions according to the following percentage allocations:
For the year ended December 31, 2015, CrossAmerica distributed $1 million to us with respect to our investment in CrossAmerica’s IDRs.
CST Stock Repurchase Plan
On August 5, 2014, our Board of Directors approved a stock repurchase plan under which we are authorized to purchase shares of our common stock up to a maximum dollar amount of $200 million, until such authorization is exhausted or withdrawn by our Board of Directors. Under the stock repurchase program, we are authorized to repurchase, from time-to-time, shares of our outstanding common stock in the open market and in private transactions, at management’s discretion, based on market and business conditions, applicable legal requirements and other factors, or pursuant to an issuer repurchase plan or agreement that may be in effect. The repurchase program does not obligate us to acquire any specific amount of common stock and will continue until otherwise modified or terminated by our Board of Directors at any time at its sole discretion and without notice. For the year ended December 31, 2015, we purchased 1,592,477 common shares for approximately $64 million under our stock repurchase program. The following table shows our share repurchase activity since inception of the plan through December 31, 2015:
There have been no repurchases of CST stock under this stock repurchase program subsequent to December 31, 2015.
CST Purchases of CrossAmerica Common Units
On September 21, 2015, CST announced that the independent executive committee of its Board of Directors approved a unit purchase program under Rule 10b-18 of the Exchange Act, authorizing CST to purchase up to an aggregate of $50 million of the common units representing limited partner interests in CrossAmerica. The unit purchase program does not have a fixed expiration date and may be modified, suspended or terminated at any time at CST’s discretion. The following table shows the purchases by CST of CrossAmerica common units registered pursuant to Section 12 of the Exchange Act during the quarter ended December 31, 2015:
Through February 17, 2016, CST had purchased $20 million, or 804,667 common units, at an average price of $24.64 per common unit.
CrossAmerica Common Unit Repurchase Program
On November 2, 2015, the board of directors of CrossAmerica’s General Partner approved a common unit repurchase program under Rule 10b-18 of the Exchange Act authorizing CrossAmerica to repurchase up to an aggregate of $25 million of the common units representing limited partner interests in CrossAmerica. Under the program, CrossAmerica may make purchases in the open market after November 9, 2015 in accordance with Rule 10b-18 of the Exchange Act, or in privately negotiated transactions, pursuant to a trading plan under Rule 10b5-1 of the Exchange Act or otherwise. Any purchases will be funded from available cash on hand. The common unit repurchase program does not require CrossAmerica to acquire any specific number of common units and may be suspended or terminated by CrossAmerica at any time without prior notice. The purchases will not be made from any officer, director or control person of CrossAmerica or CST. The following table shows the purchases made during the year ended December 31, 2015:
CrossAmerica did not repurchase any common units from January 1, 2016 through the date of this filing.
Drop Down of CST Wholesale Fuel Supply Equity Interests and NTI Convenience Stores
In January 2015 and again in July 2015, we closed on the sales of a 5% and 12.5%, respectively, limited partner equity interest in CST Fuel Supply to CrossAmerica. We also closed on the sale and lease back of 29 NTIs to CrossAmerica in July 2015. See Note 3 included elsewhere in this annual report for additional information.
Acquisition of Landmark Assets
In January 2015, CST jointly purchased with CrossAmerica 22 convenience stores from Landmark. See Note 3 included elsewhere in this annual report for additional information.
Acquisition of Erickson
In February 2015, CrossAmerica closed on the purchase of all of the outstanding capital stock of Erickson and certain related assets. See Note 3 included elsewhere in this annual report for additional information.
Acquisition of One Stop
In July 2015, CrossAmerica closed on the purchase of 41 company-operated convenience stores from One Stop, along with four commission agent sites and certain related assets. See Note 3 included elsewhere in this annual report for additional information.
Subsequent Event-Acquisition of Flash Foods
On February 1, 2016, we closed on the purchase of all of the issued and outstanding equity interests in Flash Foods for an aggregate purchase price of approximately $425 million, plus working capital. See Note 3 included elsewhere in this annual report for additional information.
Subsequent Event-Acquisition of franchise Holiday Stationstores
On January 6, 2016, CrossAmerica announced it had entered into a definitive agreement to acquire 31 franchise Holiday Stationstores located in Wisconsin and Minnesota that are being sold by SSG Corporation for approximately $49 million. The acquisition is subject to customary conditions to closing and is expected to close in the first half of 2016.
See Note 3 included elsewhere in this annual report for additional information.
Contingencies
Legal Matters
See Note 14 included elsewhere in this annual report under the caption “Litigation Matters” for a discussion of our legal matters.
Environmental Matters
See Note 14 included elsewhere in this annual report under the caption “Environmental Matters” for a discussion of our environmental matters.
Quarterly Results of Operations
See Note 23 included elsewhere in this annual report for financial and operating quarterly data for each quarter of 2015 and 2014.
New Accounting Policies
For information on recent accounting pronouncements impacting our business, see Note 2 included elsewhere in this annual report.
Critical Accounting Policies Involving Critical Accounting Estimates
We prepare our financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note 2 included elsewhere in this annual report for a summary of our significant accounting policies.
Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and results, and require our most difficult, subjective or complex judgments, often because we must make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We believe the following policies to be the most critical in understanding the judgments that are involved in preparing our financial statements.
Business Combinations
We account for business combinations in accordance with the guidance under ASC 805-Business Combinations. Acquisitions of assets or entities that include inputs and processes and have the ability to create outputs are accounted for as business combinations. The purchase price is recorded for assets acquired and liabilities assumed based on fair value. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired is recorded as goodwill. The income statement includes the results of operations for each acquisition from their respective date of acquisition.
Determining the fair value of these items requires management’s judgment, the utilization of independent valuation experts and involves the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items. The judgments made in the determination of the estimated fair value assigned to the assets acquired, the liabilities assumed and any noncontrolling interest in the investee, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition, such as through depreciation and amortization. For more information on our acquisitions and application of the acquisition method, see Note 3 included elsewhere in this annual report.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. Goodwill is not amortized, but instead is tested for impairment at the reporting unit level at least annually, and more frequently if events and circumstances indicate that the goodwill might be impaired. The annual impairment test of goodwill is performed as of the first day of the fourth quarter of our fiscal year.
In performing our annual impairment analysis, ASC 350-20, Intangibles-Goodwill and Other, allows us to use qualitative factors to determine whether it is more likely than not (likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill.
If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further testing is necessary. However, if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform the first step of the two-step goodwill impairment test.
In the first step of the goodwill impairment test, the reporting unit’s carrying amount (including goodwill) and its fair value are compared. If the estimated fair value of a reporting unit is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of our “implied fair value” requires us to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value. If the “implied fair value” is less than the carrying value, an impairment charge would be recorded.
At December 31, 2015, we had $35 million of goodwill recorded in our U.S. Retail segment, $2 million in our Canada segment and $383 million from our CrossAmerica segment. See Note 9 included elsewhere in this annual report for additional information about our interim goodwill impairment test.
Our annual goodwill impairment test is performed October 1, and after assessing the totality of events and circumstances, we determined that it is more likely than not that the fair value of our reporting units exceed their carrying amounts and therefore goodwill was not impaired for any of our segments at December 31, 2015.
Asset Retirement Obligations
We recognize the estimated future cost to remove our USTs over their estimated useful lives. We record a discounted liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset at the time a UST is installed. We depreciate the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the remaining life of the UST.
We base our estimates of such future costs on our prior experience with removal and include normal and customary costs we expect to incur associated with UST removal. We compare our cost estimates with our actual removal cost experience on an annual basis, and when the actual costs we experience exceed our original estimates, we will recognize an additional liability for estimated future costs to remove the USTs. Because these estimates are subjective and are currently based on historical costs with adjustments for estimated future changes in the associated costs, the dollar amount of these obligations could change as more information is obtained.
As of December 31, 2015 and 2014, our liabilities related to the removal of USTs recorded in the consolidated and combined financial statements were $116 million and $105 million, respectively. A 10% change in our estimate of anticipated future costs for removal of USTs as of December 31, 2015 would change our asset retirement obligation by approximately $12 million. See also Note 11 under the caption “Asset Retirement Obligations” of the notes to the consolidated and combined financial statements included elsewhere in this annual report.
Environmental Liabilities
As of December 31, 2015 and 2014, our environmental reserves recorded in the consolidated and combined financial statements were $5 million and $5 million, respectively. These environmental reserves represent our estimates for future expenditures for remediation and related litigation associated with contaminated sites as a result of releases (e.g. overfills, spills and releases) and are based on current regulations, historical results and certain other factors.
Environmental liabilities that we have recorded are based on internal and external estimates of costs to remediate sites. Factors considered in the estimates of the liability are the expected cost and the estimated length of time to remediate each contaminated site. Estimated remediation costs are not discounted because the timing of payments cannot be reasonably estimated. Reimbursements under state trust fund programs are recognized when received because such amounts are insignificant. The adequacy of the liability is evaluated monthly and adjustments are made based on updated experience at existing sites, newly identified sites and changes in governmental policy. A 10% change in our estimate of future costs related to environmental liabilities recorded as of December 31, 2015 would change our environmental liabilities and operating expenses by less than $1 million. See also Note 14 under the caption “Environmental Matters” of the notes to the consolidated and combined financial statements included elsewhere in this annual report.
Tax Matters
We are subject to tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty, sales/use and gross receipts taxes), payroll taxes, franchise taxes, withholding taxes and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities that cannot be predicted at this time. Tax liabilities include potential assessments of penalty and interest amounts.
As a limited partnership, excluding earnings and losses of its wholly owned taxable subsidiary, CrossAmerica is not subject to federal and state income taxes. Income tax attributable to CrossAmerica’s taxable income, which may differ significantly from income for financial statement purposes, is assessed at the individual level of the limited partner unit holders. CrossAmerica is 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, CrossAmerica would be taxed as a corporation. The non-qualifying income did not exceed the statutory limit in any period.
We record tax liabilities based on our assessment of existing tax laws and regulations. A contingent loss related to a transactional tax claim is recorded if the loss is both probable and estimable. The recording of our tax liabilities requires significant judgments and estimates. Actual tax liabilities can vary from our estimates for a variety of reasons, including different interpretations of tax laws and regulations and different assessments of the amount of tax due. In addition, in determining our income tax provision, we must assess the likelihood that our deferred tax assets will be recovered through future taxable income. Significant judgment is required in estimating the amount of valuation allowance, if any, that should be recorded against those deferred income tax assets. If our actual results of operations differ from such estimates or our estimates of future taxable income change, the valuation allowance may need to be revised. However, an estimate of the sensitivity to earnings that would result from changes in the assumptions and estimates used in determining our tax liabilities is not practicable due to the number of assumptions and tax laws
involved, the various potential interpretations of the tax laws, and the wide range of possible outcomes. See Note 14 under the caption “Tax Matters” and Note 18 of the notes to the consolidated and combined financial statements included elsewhere in this annual report for a further discussion of our tax liabilities.
Stock-Based Compensation
Prior to the spin-off, our employees participated in Valero’s stock-based compensation plans, and Valero allocated stock-based compensation costs to us based on Valero’s determination of actual costs attributable to our employees.
Stock-based compensation cost is measured in accordance with the provisions of ASC 718 Compensation-Stock Compensation (“ASC 718”) at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. ASC 718 requires the use of a valuation model to calculate the fair value of certain stock-based awards. We have elected to use the Black-Scholes option pricing model, which incorporates various assumptions, including volatility, expected term, and risk-free interest rates, to value our stock options. Certain assumptions are based on a blend of our historical experience and an analysis of the common stock of our peers due to the short period of time our stock has been publicly traded. As the trading history of our stock lengthens, we will incorporate more of our history and less of our peers’ history. The expected term of an award is based on the terms and conditions of the stock awards granted to employees. The dividend yield is based on our intention to pay regular cash dividends. If different factors for volatility, expected term or dividend yield were utilized, it could significantly change the fair value assigned to stock-based awards at their grant date.
For the years ended December 31, 2015, 2014 and 2013, we recorded consolidated stock-based compensation expense of $17 million, $18 million and $4 million, respectively. Of the $18 million recorded for the year ended December 31, 2014, $8 million was related to CrossAmerica due to the accelerated vesting of awards upon the GP Purchase and a 2014 employee bonus plan to be paid in 2015 consisting of fully vested limited partner units. Approximately $1 million of the expense recorded during the year ended December 31, 2013 related to the accelerated vesting of certain stock-based awards under Valero’s plans in connection with the spin-off. See Note 16 for a further discussion of our stock-based compensation.
Legal Matters
A variety of claims have been made against us in various lawsuits. We record a liability related to a loss contingency attributable to such legal matters if we determine the loss to be both probable and estimable. The recording of such liabilities requires judgments and estimates, the results of which can vary significantly from actual litigation results due to differing interpretations of relevant law and differing opinions regarding the degree of potential liability and the assessment of reasonable damages. However, an estimate of the sensitivity to earnings if other assumptions were used in recording our legal liabilities is not practicable due to the number of contingencies that must be assessed and the wide range of reasonably possible outcomes, both in terms of the probability of loss and the estimates of such loss. See Note 14 under the caption “Litigation Matters” for a further discussion of our legal matters.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
CST’s debt includes a $406 million, five-year, amortizing term loan bearing interest at a variable rate. In addition, the CST revolving credit facility has a borrowing capacity of up to $500 million, and any borrowings would bear interest at variable rates. As of December 31, 2015, the weighted average interest rate on outstanding borrowings under the credit facility was 1.74%. A one percentage point change in the average interest rate would impact annual interest expense by approximately $4 million.
As of December 31, 2015, CrossAmerica had $358 million outstanding under its revolving credit facility. Outstanding borrowings bear interest at LIBOR plus a margin of 2.75%. These borrowings had an interest rate of 3.06%. A one percentage point change in CrossAmerica’s average rate would impact annual interest expense by approximately $4 million.
Commodity Price Risk
We have not historically hedged or managed our price risk with respect to our commodity inventories (gasoline and diesel fuel), as the time period between the purchases of our motor fuel inventory and the sales to our customers is very short.
Foreign Currency Risk
Our financial statements are reported in U.S. dollars. However, a substantial portion of our operations are located in Canada. As such, our reported results of operations, cash flows and financial position as they relate to our Canadian operations are impacted by fluctuations in the Canadian dollar exchange rate into U.S. dollars. We have not historically hedged our risk associated with our exposure to the Canadian dollar/U.S. dollar exchange rate. A one percentage decline in the 2015 weighted average exchange rate would have no material impact to our December 31, 2015 net income. As of December 31, 2015, $247 million of cash was held in Canada, of which $168 million is held in U.S. denominated bank accounts to mitigate exposure to foreign currency exchange rate changes.
The operations of CrossAmerica are located in the U.S., and therefore are not subject to foreign currency risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiring companies to file reports with the SEC to include a management report on such company’s internal control over financial reporting in its annual report. In addition, our independent registered public accounting firm must attest to our internal control over financial reporting.
The management of CST Brands, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system was designed to provide reasonable assurance to the company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. CST Brands, Inc. management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2015. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework, 2013 version. Based on our assessment, we believe that, as of December 31, 2015, the company’s internal control over financial reporting is effective based on those criteria.
As a public company, CrossAmerica’s management is required to report on its evaluation and conclusions regarding the effectiveness of its internal control over financial reporting in its separate Form 10-K annual report. CrossAmerica’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2015 using the criteria set forth by COSO in the 2013 Internal Control-Integrated Framework. CrossAmerica’s management believes that as of December 31, 2015, CrossAmerica’s internal control over financial reporting is effective based on those criteria.
Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting, which begins on page 81 of this report.
The independent public accounting firm for CrossAmerica has issued an attestation report on the effectiveness of CrossAmerica’s internal control over financial reporting and this report is included on page 82 of this report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
CST Brands, Inc.:
We have audited the accompanying consolidated balance sheets of CST Brands, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated and combined statements of income, comprehensive income, cash flows, and changes in shareholders’ equity / net investment for each of the years in the three-year period ended December 31, 2015. These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We did not audit the financial statements of CrossAmerica Partners LP, a consolidated variable interest entity, as of and for the year ended December 31, 2015, which statements reflect total assets constituting 22 percent of consolidated total assets at December 31, 2015 and total revenues constituting 18 percent in 2015 of the consolidated total revenues. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for CrossAmerica Partners LP, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and report of the other auditors, the consolidated and combined financial statements referred to above present fairly, in all material respects, the financial position of CST Brands, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CST Brands, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 18, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
San Antonio, Texas
February 18, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
General Partner and Limited Partners of CrossAmerica Partners LP
We have audited the accompanying consolidated balance sheets of CrossAmerica Partners LP (a Delaware Limited Partnership) and subsidiaries (the “Partnership”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in partners’ capital and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CrossAmerica Partners LP and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Partnership has adopted new accounting guidance in 2015 related to the balance sheet presentation of deferred financing costs and deferred tax assets and liabilities.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Partnership’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 18, 2016 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
February 18, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
CST Brands, Inc.:
We have audited CST Brands, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). CST Brands, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We did not audit the internal control over financial reporting of CrossAmerica Partners LP, a consolidated variable interest entity, whose financial statements reflect total assets and revenues constituting 22 and 18 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2015. CrossAmerica Partners LP’s internal control over financial reporting was audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to CrossAmerica Partners LP’s internal control over financial reporting, is based solely on the report of the other auditors.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, based on our audit and the report of the other auditors, CST Brands, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CST Brands, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated and combined statements of income, comprehensive income, cash flows, and changes in shareholders’ equity / net investment for each of the years in the three-year period ended December 31, 2015, and our report dated February 18, 2016 expressed an unqualified opinion on those consolidated and combined financial statements.
/s/ KPMG LLP
San Antonio, Texas
February 18, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
General Partner and Limited Partners of CrossAmerica Partners LP
We have audited the internal control over financial reporting of CrossAmerica Partners LP (a Delaware Partnership) and subsidiaries (the “Partnership”) as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit. Our audit of, and opinion on, the Partnership’s internal control over financial reporting does not include the internal control over financial reporting of Erickson Oil Products, Inc., and One-Stop, wholly-owned subsidiaries, whose combined financial statements reflect total assets and revenues constituting 15 and 13 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2015. As indicated in Management’s Report, Erickson Oil Products, Inc., and One-Stop were acquired during 2015. Management’s assertion on the effectiveness of the Partnership’s internal control over financial reporting excluded internal control over financial reporting of Erickson Oil Products, Inc., and One-Stop.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Partnership as of and for the year ended December 31, 2015, and our report dated February 18, 2016 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
February 18, 2016
CST BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
See Notes to Consolidated and Combined Financial Statements.
CST BRANDS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(Millions of Dollars, Except Share and per Share Amounts)
See Notes to Consolidated and Combined Financial Statements.
CST BRANDS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
See Notes to Consolidated and Combined Financial Statements.
CST BRANDS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
See Notes to Consolidated and Combined Financial Statements.
CST BRANDS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/ NET INVESTMENT
(Millions of Dollars and Shares)
See Notes to Consolidated and Combined Financial Statements.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 1.
DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND CONCENTRATION RISK
Description of Business
CST is a holding company and conducts substantially all of its operations through its subsidiaries. CST was incorporated in Delaware in 2012, formed solely in contemplation of the spin-off of the retail business of Valero and, prior to May 1, 2013, had not commenced operations and had no material assets, liabilities or commitments.
On October 1, 2014, CST completed the purchase of 100% of the membership interests in the General Partner and 100% of the IDRs of Lehigh Gas Partners LP for $17 million in cash and approximately 2.0 million shares of CST common stock for an aggregate consideration of approximately $90 million. After the purchase of the membership interest in its General Partner, the name of Lehigh Gas Partners LP was changed to CrossAmerica Partners LP. At December 31, 2015, after giving effect to the transactions discussed in the following notes, CST owns 18.7% of the limited partner interests in CrossAmerica. See Notes 3 and 13 for additional information.
CrossAmerica is a separate publicly traded Delaware master limited partnership primarily engaged in the wholesale distribution of motor fuel and the ownership and leasing of real estate used in the retail distribution of motor fuel. CST controls CrossAmerica’s General Partner and has the right to appoint all members of the Board of Directors of the General Partner. The General Partner is managed and operated by the executive officers of the General Partner, under the oversight of the Board of Directors of the General Partner. Therefore, we control the operations and activities of CrossAmerica even though we do not have a majority ownership of CrossAmerica’s outstanding limited partner units. As a result, under the guidance in ASC 810-Consolidation, CrossAmerica is a consolidated variable interest entity.
On a consolidated basis, we have three operating segments, U.S. Retail, Canadian Retail and CrossAmerica. The U.S. Retail, Canadian Retail and CrossAmerica segments are managed as individual strategic business units. Each segment experiences different operating income margins due to certain unique operating characteristics, geographic supply and demand attributes, specific country and local regulatory environments, and are exposed to variability in gross profit from the volatility of crude oil prices. Our Canadian Retail segment also experiences variability from the volatility of foreign exchange rates.
Our U.S. Retail segment operations are substantially a company owned and operated convenience store business. We generate profit on motor fuel sales and convenience merchandise and services (car wash, lottery, money orders, air/water/vacuum services, video and game rentals, and access to ATMs). Our retail sites are operated by company employees.
Our Canadian Retail segment includes company owned and operated convenience stores, commission agents, cardlocks and heating oil operations. We generate profit on motor fuel sales, and, at our company owned and operated convenience stores. Profit is also generated on convenience merchandise sales and other services (similar to our U.S. Retail segment). We use the term “retail site” as a general term to refer to convenience stores, commission agent sites or cardlocks.
CrossAmerica is engaged in the wholesale distribution of motor fuels, the operation of convenience stores and the ownership and leasing of real estate used in the retail distribution of motor fuels. CrossAmerica is also engaged in retail operations consisting of recently acquired convenience stores. CrossAmerica’s operations are conducted entirely within the U.S.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Basis of Presentation
The consolidated financial statements reflect our financial results for all periods subsequent to the spin-off. The consolidated financial statements also include the results of CrossAmerica subsequent to the GP Purchase on October 1, 2014 as CrossAmerica is considered a consolidated variable interest entity.
The combined financial statements reflect the combined historical results of operations and cash flows of Valero’s retail businesses in the U.S. and Canada prior to the spin-off, including an allocable portion of Valero’s corporate costs. These allocations were based primarily on specific identification of time and/or activities associated with CST’s operations, employee headcount or capital expenditures.
We believe the assumptions underlying the combined financial statements, including the assumptions regarding allocating general corporate expenses from Valero, are reasonable. Nevertheless, the combined financial statements may not include all of the actual expenses that would have been incurred had we operated as a stand-alone, publicly-traded company during the combined periods presented and may not reflect our combined results of operations and cash flows had we operated as a stand-alone, publicly-traded company during the combined periods presented. Actual costs that would have been incurred if we had operated as a stand-alone, publicly-traded company during the combined periods presented would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including IT and related infrastructure.
Prior to the spin-off, we transferred cash to Valero daily and Valero funded our operating and investing activities as needed through a centralized cash management process. We have reflected net transfers of cash to Valero as a financing activity in our combined statement of cash flows. We did not include any interest income on the net cash transfers to Valero.
Valero retained an ownership interest in us through November 14, 2013. We considered transactions with Valero to be with a related-party through this date.
Concentration Risk
Valero supplied substantially all of the motor fuel purchased by our U.S. Retail and Canadian Retail segments for resale during all periods presented. During the years ended December 31, 2015, 2014 and 2013, our U.S. Retail and Canadian Retail segments purchased $6.4 billion, $9.5 billion and $10.5 billion, respectively, of motor fuel from Valero.
CrossAmerica purchases a substantial amount of motor fuel from three suppliers. For the year ended December 31, 2015, CrossAmerica’s wholesale business purchased approximately 30%, 26% and 26% of its motor fuel from ExxonMobil, BP and Motiva, respectively. No other fuel suppliers accounted for 10% or more of CrossAmerica’s fuel purchases in 2015.
No customers are individually material to our U.S. Retail and Canadian Retail segment operations. For the year ended December 31, 2015, CrossAmerica distributed approximately 17% of its total wholesale distribution volumes to DMS and DMS accounted for approximately 36% of CrossAmerica’s rental income. For more information regarding transactions with DMS, see Note 13.
Note 2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Combination
These consolidated and combined financial statements were prepared in accordance with U.S. GAAP. These financial statements include the consolidated accounts of CST Brands, Inc. and subsidiaries for all periods after the spin-off. All intercompany accounts and transactions have been eliminated in consolidation.
For all periods prior to the spin-off, these financial statements include the combined accounts of direct and indirect wholly owned subsidiaries of Valero that held the assets and liabilities and reflect the operations of Valero’s retail business in the U.S. and Canada. Prior to the spin-off, these subsidiaries did not carry out any transactions with each other during the years presented; therefore, there were no transactions or accounts to be eliminated in connection with the combination.
CrossAmerica is a consolidated variable interest entity. The amounts shown in the parenthetical presentation on the consolidated balance sheet represent the assets of CrossAmerica that can only be used to settle the obligations of CrossAmerica and the liabilities of CrossAmerica for which creditors have no access to the assets or general credit of CST. CrossAmerica’s financial results are included in our results of operations from October 1, 2014 forward.
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
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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.
Receivables
Trade receivables represent amounts due from credit card companies, from our cardlock customers and from our heating oil customers (“trade receivables”). CrossAmerica’s trade receivables primarily relate to its wholesale motor fuel sales as credit is extended to customers based on evaluations of customers’ financial condition. Trade receivables are carried at original invoice amount. Other receivables consist primarily of amounts due from vendors related to vendor rebates (see “Merchandise Vendor Allowances and Rebates” for our policy regarding the accounting for vendor rebates). We maintain an allowance for doubtful accounts, which is adjusted based on management’s assessment of our customers’ historical collection experience, known credit risks and industry and economic conditions.
Inventories
Inventories are carried at the lower of cost or market. The cost of supplies and convenience store merchandise is determined principally under the weighted-average cost method. The cost of motor fuel inventories in our U.S. Retail segment is determined under the last-in, first-out (“LIFO”) method using the dollar-value LIFO method, with any increments valued based on average purchase prices for the year. The cost of motor fuel inventories in our Canadian Retail segment and our CrossAmerica segment is determined under the weighted-average cost method.
No provision for potentially slow moving or obsolete inventories has been made.
Property and Equipment
The cost of property and equipment purchased or constructed, including betterments of property assets, is capitalized. The cost of repairs and normal maintenance of property and equipment is expensed as incurred. Betterments of property and equipment are those which extend the useful lives of the property and equipment or improve the safety of our operations. Betterments also include additions to and enlargements of our retail sites. The cost of property and equipment constructed includes interest and certain overhead costs allocable to the construction activities.
When property and equipment are retired or replaced, the cost and related accumulated depreciation are eliminated, with any gain or loss reflected in depreciation, amortization and accretion expense, unless such amounts are reported separately due to materiality.
Depreciation of property and equipment is recorded on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements and assets acquired under capital leases are amortized using the straight-line method over the shorter of the lease terms or the estimated useful lives of the related assets.
Impairment of Assets
Long-lived assets, which include property and equipment and finite-lived intangible assets, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods. See Note 4 for our impairment analysis of our long-lived assets.
Business Combinations
We account for business combinations in accordance with the guidance under ASC 805-Business Combinations. Acquisitions of assets or entities that include inputs and processes and have the ability to create outputs are accounted for as business combinations. The purchase price is recorded for assets acquired and liabilities assumed based on fair value. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired is recorded as goodwill. The income statement includes the results of operations for each acquisition from their respective date of acquisition.
Determining the fair value of these items requires management’s judgment, the utilization of independent valuation experts and involves the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items. The judgments made in the determination of the estimated fair value assigned to the assets acquired, the liabilities assumed and any noncontrolling interest in the investee, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
acquisition, such as through depreciation and amortization. For more information on our acquisitions and application of the acquisition method, see Note 3.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. Goodwill is not amortized, but instead is tested for impairment at the reporting unit level at least annually, and tested for impairment more frequently if events and circumstances indicate that the goodwill might be impaired. The annual impairment test of goodwill is performed as of the October 1 of our fiscal year.
In our annual impairment analysis, we used qualitative factors to determine whether it is more likely than not (likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill.
If after assessing the totality of events or circumstances an entity determines that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step test is unnecessary. However, if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we then perform the first step of the two-step goodwill impairment test.
In the first step of the goodwill impairment test, the reporting unit’s carrying amount (including goodwill) and its fair value are compared. If the estimated fair value of a reporting unit is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of our “implied fair value” requires us to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value. If the “implied fair value” is less than the carrying value, an impairment charge would be recorded.
Beginning in the last half of 2014, there were severe disruptions in the crude oil commodities markets that contributed to a significant decline in CrossAmerica’s common unit price, which we deemed this to be an indicator that goodwill may be impaired, and accordingly, we performed a step one analysis during the third quarter of 2015. The impairment analysis performed in the third quarter of 2015 indicated that goodwill was not impaired. Additionally, we performed our annual goodwill impairment test during the fourth quarter of 2015, which indicated that goodwill was not impaired. See Note 9 for additional information regarding our impairment analysis.
Intangible Assets
Intangible assets are recorded at fair value at the date of acquisition and primarily relate to fuel supply agreements and distribution agreements in our CrossAmerica segment and customer lists in our Canadian Retail segment. Intangible assets with finite useful lives are amortized over their respective estimated useful lives and reviewed for impairment if we believe that changes or triggering events have occurred that could have caused the carrying value of the intangible assets to exceed its fair value. Intangible assets with indefinite lives are not amortized, but are tested for impairment annually or more frequently if events and circumstances indicate that the intangible assets might be impaired.
Environmental Matters
Liabilities for future remediation costs are recorded when environmental assessments from governmental regulatory agencies and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Environmental liabilities are based on best estimates of probable undiscounted future costs using currently available technology and applying current regulations, as well as our own internal environmental policies, without establishing a range of loss for these liabilities. Environmental liabilities are difficult to assess and estimate due to uncertainties related to the magnitude of possible remediation, the timing of such remediation and the determination of our obligation in proportion to other parties. Such estimates are subject to change due to many factors, including the identification of new sites requiring remediation, changes in environmental laws and regulations and their interpretation, additional information related to the extent and nature of remediation efforts and potential improvements in remediation technologies. Amounts recorded for environmental liabilities have not been reduced by possible recoveries from third parties.
Asset Retirement Obligations
We record a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to remove USTs used to store motor fuel at owned and leased retail sites at the time we incur that liability, which is generally when the UST is installed. We record a discounted liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset. We depreciate the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the estimated remaining life of the UST. Accretion expense is reflected
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
in depreciation, amortization and accretion expense. We base our estimates of the anticipated future costs for removal of a UST on our prior experience with removal. Removal costs include the cost to remove the USTs, soil remediation costs resulting from the spillage of small quantities of motor fuel in the normal operations of our business and other miscellaneous costs. We review our assumptions for computing the estimated liability for the removal of USTs on an annual basis. Any change in estimated cash flows is reflected as an adjustment to the liability and the associated asset.
Foreign Currency Translation
The functional currency of our Canadian operations is the Canadian dollar. Balance sheet accounts are translated into U.S. dollars using exchange rates in effect as of the balance sheet date. Revenue and expense accounts are translated using the weighted-average exchange rates during the year presented. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income.
Revenue Recognition
Revenues are recorded upon delivery of the products to our customers, which is the point at which title to the products is transferred, and when payment has either been received or collection is reasonably assured.
We present motor fuel excise taxes on sales on a gross basis with supplemental information regarding the amount of such taxes included in revenues provided in a footnote on the face of the statements of income.
Revenues from leasing arrangements for which CrossAmerica is the lessor are recognized ratably over the term of the underlying lease.
Shipping and Handling Costs
Costs incurred for the shipping and handling of motor fuel and convenience store merchandise are included in inventories, and therefore, reflected in cost of sales when the related items are sold.
Lease Accounting
We lease a portion of our properties under non-cancelable operating leases, whose initial terms are typically 10 to 20 years, along with options that permit renewals for additional periods. Minimum rent is expensed on a straight-line basis over the term of the lease including renewal periods that are reasonably assured at the inception of the lease. In addition to minimum rental payments, certain leases require additional payments based on our sales volumes. We are typically responsible for payment of real estate taxes, maintenance expenses and insurance related to leased properties.
CrossAmerica is the lessee in certain sale-leaseback transactions for certain sites, and as CrossAmerica has continuing involvement in the underlying sites, or the lease agreement has a repurchase feature, the sale-leaseback arrangements are accounted for as financing transactions.
Income Taxes
We and CrossAmerica’s wholly owned, taxable subsidiary account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred amounts are measured using enacted tax rates expected to apply to taxable income in the year those temporary differences are expected to be recovered or settled. Income taxes prior to the spin-off were accounted for and presented as if we were a separate taxpayer rather than a member of Valero’s consolidated income tax return.
Income taxes attributable to CrossAmerica’s earnings and losses, excluding the earnings and losses of its wholly owned taxable subsidiary, are assessed at the individual unit holder level.
We classify any interest expense and penalties related to the underpayment of income taxes in income tax expense.
Merchandise Vendor Allowances and Rebates
We receive payments for vendor allowances and volume rebates from various suppliers of convenience store merchandise. Our accounting practices are as follows:
•
Vendor allowances for price markdowns are credited to cost of sales during the period the related markdown is realized.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
•
Volume rebates of merchandise are recorded as reductions to cost of sales when the merchandise qualifying for the rebate is sold.
•
Slotting and stocking allowances received from a vendor are recorded as a reduction to cost of sales over the period covered by the agreement.
The aggregate amounts recorded as a reduction to cost of sales for vendor allowances and rebates for the years ended December 31, 2015, 2014 and 2013 were $69 million, $71 million and $71 million, respectively. The recording of vendor allowances and rebates does not require us to make any significant estimates.
Stock-Based Compensation
We have granted non-qualified stock options and restricted stock awards to certain employees. Stock-based compensation expense is based on the estimated grant-date fair value of the award. We recognize this compensation expense over the requisite service period of the award.
CrossAmerica has granted phantom units and other awards to certain of our employees who perform services for CrossAmerica. The value of these grants are remeasured at fair value at each balance sheet reporting date based on the fair market value of CrossAmerica’s common units, and the cumulative compensation cost related to that portion of the awards that have vested is recognized ratably over the vesting term. The liability for the future grant of common units is included in accrued expenses and other current liabilities on the balance sheet.
Cost of Sales
We include in our cost of sales all costs we incur to acquire motor fuel and merchandise, including the costs of purchasing, storing and transporting inventory prior to delivery to our customers. A component of our cost of sales is the discount for prompt payment and other volume rebates, discounts and incentives offered by our motor fuel suppliers. Prompt payment discounts from suppliers are based on a percentage of the purchase price of motor fuel and the dollar value of these discounts varies with motor fuel prices. Cost of sales does not include any depreciation of our property and equipment, as these amounts are included in depreciation, amortization and accretion expense on our statements of income.
Motor Fuel Taxes
We collect motor fuel taxes, which consist of various pass through taxes collected from customers on behalf of taxing authorities, and remit such taxes directly to those taxing authorities. Our accounting policy is to exclude such taxes collected and remitted from U.S. wholesale revenues and cost of sales and account for them as liabilities. All other motor fuel sales and cost of sales include motor fuel taxes as the taxes are included in the cost paid for the motor fuel.
Earnings per Common Share
Earnings per common share is computed by dividing net income attributable to CST by the weighted-average number of common shares outstanding for the year. Participating share-based payment awards, including shares of restricted stock and restricted stock units granted under our stock-based compensation plan, are included in the computation of basic earnings per share using the two-class method. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of EPS pursuant to the two-class method. Diluted earnings per common share reflects the potential dilution arising from our outstanding stock options, unvested restricted shares and unvested restricted units. Awards are excluded from the computation of diluted earnings per common share when the effect of including such shares would be anti-dilutive.
Financial Instruments
Our financial instruments include cash, accounts receivable, payables, our credit facilities, capital lease obligations, and trade payables. The estimated fair values of these financial instruments approximate their carrying amounts, except for certain debt as discussed in Note 5.
New Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17-Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective January 1, 2016; CST has chosen to early adopt. The guidance was applied retrospectively to all periods presented and resulted in a reclassification from current assets to noncurrent liabilities of $12 million for the years ending December 31, 2015 and 2014.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
In September 2015, the FASB issued ASU 2015-16-Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination. The guidance is to be applied on a prospective basis to adjustments to provisional amounts that occur after the effective date. This guidance is effective January 1, 2016, with early adoption permitted for financial statements that have not yet been made available for issuance. The company has elected early adoption of the updated accounting standard, noting that although management has made adjustments to provisional amounts recognized in prior business combinations, those adjustments have not been material and would not have resulted in retrospective application. As such, early adoption of this guidance does not have a significant impact on the financial statements.
In April 2015, the FASB issued ASU 2015-03-Interest-Imputation of Interest (Subtopic 835-30), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective January 1, 2016. CST has chosen to early adopt. The guidance was applied on a retrospective basis, wherein the balance sheet of each individual period presented was adjusted to reflect the period-specific effects of applying the new guidance which resulted in a reclassification from noncurrent assets to debt and capital lease obligations of $18 million and $23 million for the years ending December 31, 2015 and 2014, respectively.
In February 2015, the FASB issued ASU 2015-02-Consolidation (Topic 810): Amendments to the Consolidation Analysis. This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities, including limited partnerships and other similar entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a full retrospective or a modified retrospective approach to adoption. Early adoption is also permitted. The adoption of this guidance will not result in a change to our consolidated financial statements.
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. With the issuance of ASU 2015-14, which deferred the effective date by one year, this guidance is effective January 1, 2018. Early adoption is permitted, but no earlier than January 1, 2017. The guidance can be applied either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustment as of the date of adoption. Management is currently evaluating this new guidance, including how it will apply the guidance at the date of adoption, but does not expect it to have a material impact to our consolidated financial statements.
Certain other new financial accounting pronouncements have become effective for our financial statements but the adoption of these pronouncements will not affect our financial position or results of operations, nor will they require any additional disclosures.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 3.ACQUISITIONS AND DIVESTITURES
GP Purchase and IDR Purchase
During 2015, we finalized the valuation of CrossAmerica, which resulted in adjustments to certain property and equipment, goodwill, current liabilities, other liabilities and related deferred tax effects as follows (in millions):
During 2015, management reviewed the final information it needed to complete the fair market value appraisal of certain property and equipment of CrossAmerica, which resulted in an adjustment to goodwill of $110 million. The adjustment to property and equipment resulted from obtaining additional information for the fair value determination for certain retail sites. This adjustment to property and equipment resulted in an immaterial adjustment to previously recognized depreciation and amortization expense, which was recorded in the first nine months of 2015. In addition, in finalizing the acquisition accounting, we concluded that the $91 million paid by CST for the GP Purchase and IDR Purchase was more appropriately reflected as additional acquisition consideration instead of a separately identifiable indefinite-lived intangible asset. Accordingly, during the third quarter of 2015, we recorded an additional $91 million of goodwill allocable to our CrossAmerica segment and reduced the carrying value of our intangible assets by the same amount.
We engaged an independent third-party valuation services firm to assist in the calculation of the fair value of CrossAmerica’s assets and liabilities. The fair value of CrossAmerica was based on its enterprise value on the date of acquisition as principally determined by the closing price of its common units trading on the New York Stock Exchange ($33.97 per share on September 30, 2014), which resulted in a portion of the purchase price being allocated to goodwill. Therefore, a future, sustained decline in the enterprise value of CrossAmerica could result in an impairment to part or all of the associated goodwill. See Note 9 for additional discussion of our goodwill.
Acquisition of Nice N Easy
In November 2014, CST and CrossAmerica jointly purchased the assets of Nice N Easy Grocery Shoppes (“Nice N Easy”). CrossAmerica purchased the real property of 23 fee sites as well as certain wholesale fuel distribution assets. CST purchased the retail operations of 32 company-operated convenience stores and certain other assets, including certain personal property, inventory and working capital. All of the Nice N Easy sites are located in the state of New York. CrossAmerica entered into a lease agreement on the acquired real estate with CST at a “triple net” lease rate of 7.5% of the fair value of the property at inception of the lease and CrossAmerica provides wholesale fuel supply to certain of these sites under long term agreements with a fuel gross profit margin of approximately $0.06 per gallon. The aggregate purchase price paid by CST was $21 million, plus working capital, and the aggregate purchase price paid by CrossAmerica was $54 million.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The following table summarizes the fair values of the assets acquired at the acquisition date (in millions):
Acquisition of Landmark
In January 2015, CST and CrossAmerica jointly purchased 22 convenience stores from Landmark. CrossAmerica purchased the real property of the 22 fee sites for $41 million. CST purchased the personal property, working capital and the convenience store operations for $22 million. During the second quarter of 2015, we finalized the valuation of Landmark.
CrossAmerica leases the acquired real property to CST under triple net leases at a lease rate per annum of 7.5% of the fair value of the leased property on the acquisition date and CrossAmerica distributes wholesale motor fuel to CST under long term agreements with a fuel gross profit margin of approximately $0.05 per gallon.
The fair values of Landmark’s assets on the date of acquisition, January 8, 2015, were as follows (in millions):
The fair value of property and equipment, which consisted of land, buildings, building improvements, underground storage tanks and other equipment, was based on a cost approach. The buildings, equipment and underground storage tanks are being depreciated on a straight-line basis, with estimated useful lives of up to 20 years.
Acquisition of Erickson
In February 2015, CrossAmerica closed on the purchase of all of the outstanding capital stock of Erickson and separate purchases of certain related assets with an aggregate purchase price of $82 million, net of $3 million cash acquired, subject to certain post-closing adjustments. These transactions resulted in the acquisition of a total of 64 retail sites located in Minnesota, Michigan, Wisconsin and South Dakota. The convenience store operations of Erickson are classified as non-core and are included in the CrossAmerica segment.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date, February 12, 2015 (in millions):
The fair value of inventory was estimated at retail selling price less estimated costs to sell and a reasonable profit allowance for the selling effort.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The fair value of property and equipment, which consisted of land, buildings and equipment, was based on a cost approach. The buildings and equipment are being depreciated on a straight-line basis, with estimated remaining useful lives of 15 years for the buildings and 5 to 30 years for equipment.
The $12 million fair value of the wholesale fuel distribution rights included in intangibles was based on an income approach and management believes the level and timing of cash flows represent relevant market participant assumptions. The wholesale fuel distribution rights are being amortized on a straight-line basis over an estimated useful life of approximately 10 years.
Goodwill recorded is primarily attributable to the deferred tax liabilities arising from the application of purchase accounting.
Management continues to review the valuation and is confirming the result to determine the final purchase price allocation.
Drop Down of CST Fuel Supply Equity Interests
In January 2015 and July 2015, we closed on the sale of a 5% and 12.5%, respectively, limited partner equity interest in CST Fuel Supply to CrossAmerica in exchange for aggregate consideration of $171 million, including 4.8 million common units and cash in the amount of $18 million.
As of February 17, 2016, CrossAmerica’s total equity interest in CST Fuel Supply is 17.5%.
Because these transactions were between entities under common control, a gain on the sale of CST Fuel Supply and the NTIs discussed below is not reflected in our consolidated income statement and we eliminated our limited partner interest from our consolidated balance sheet.
See Note 13 for additional information.
Sale and Lease Back of NTIs
In July 2015, we completed the contribution and sale of 29 NTIs to CrossAmerica in exchange for an aggregate consideration of $134 million on the date of closing, including 0.3 million common units and cash in the amount of $124 million. CrossAmerica leased the real property associated with the NTIs back to us and we will continue to operate the sites pursuant to a triple net lease at a lease rate of 7.5%, per annum, of the fair value of the property at lease inception.
Based on our credit facility agreement, CST is required to use the cash proceeds from these transactions to repay debt or reinvest in our business through asset or business acquisitions or capital expenditures in the ordinary course of business. This transaction was approved by the independent conflicts committee of the Board of Directors of the General Partner and our independent executive committee and full Board of Directors. We accounted for the sale as entities under common control.
Acquisition of One Stop
In July 2015, CrossAmerica completed the purchase of the 41 company-operated One Stop convenience store network based in Charleston, West Virginia, along with four commission agent sites, nine dealer fuel supply agreements and one freestanding franchised quick service restaurant for approximately $45 million in cash.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date, July 1, 2015 (in millions):
The fair value of inventory was estimated at retail selling price less estimated costs to sell and a reasonable profit allowance for the selling effort.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The fair value of property and equipment, which consisted of land, buildings and equipment, was based on a cost approach. The buildings and equipment are being depreciated on a straight-line basis, with estimated remaining useful lives of 20 years for the buildings and 7 to 30 years for equipment.
The $4 million fair value of the wholesale fuel distribution rights included in intangibles was based on an income approach and management believes the level and timing of cash flows represent relevant market participant assumptions. The wholesale fuel distribution rights are being amortized on a straight-line basis over an estimated useful life of approximately 10 years.
The $1 million fair value of the wholesale fuel supply agreements was based on an income approach, and management believes the level and timing of cash flows represent relevant market participant assumptions. The wholesale fuel supply agreements are being amortized on an accelerated basis over an estimated useful life of approximately 10 years.
Management continues to review the valuation and is confirming the results to determine the final purchase price allocation.
Subsequent Event-Acquisition of Flash Foods
On February 1, 2016, we closed on the purchase of all of the issued and outstanding equity interests in Flash Foods for an aggregate purchase price of approximately $425 million, plus working capital. Flash Foods operates 165 convenience stores located in Georgia and Florida, which sell Flash Foods-branded fuel, 21 branded quick service restaurants, a land bank of 13 real estate sites to build NTIs, a merchandise distribution company with a 90,000 square foot distribution center in Georgia and a motor fuel supply company with access to the Colonial and Plantation Pipelines, leased storage and a company owned transportation fleet. This transaction gives us a market presence in the Southeast, where we can expand through NTIs and expanded food and grocery offerings in the existing Flash Food stores.
Subsequent Event-Acquisition of franchise Holiday Stationstores
On January 6, 2016, CrossAmerica announced it had entered into a definitive agreement to acquire 31 franchise Holiday Stationstores located in Wisconsin and Minnesota that are being sold by SSG Corporation for approximately $49 million. Of the 31 company-operated stores, 28 are located in Wisconsin and 3 are located in Minnesota. The acquisition is subject to customary conditions to closing and is expected to close in the first half of 2016.
Pro Forma Results (Unaudited)
Our pro forma results, giving effect to the CrossAmerica, Landmark, Erickson and One Stop acquisitions and assuming an acquisition date of January 1, 2014, would have been (in millions, except per share amounts):
Divestitures
During the fourth quarter of 2014, we closed on the sale of 71 convenience stores that were identified for divestiture as part of our network optimization plan and recognized a gain of $32 million in “Gain on sale of assets, net” on the consolidated statement of income.
During the year ended December 31, 2015, CST closed on the sale of 25 convenience stores related to our network optimization plan and recognized a gain of $7 million in “Gain on sale of assets, net” on the consolidated statements of income.
On November 4, 2015, we announced our decision to evaluate strategic options for our California market. The 76 stores included in this market have historically produced strong motor fuel volume sales but consistently fall below the average of our network on merchandise sales and merchandise gross profit dollars because their average square footage is half the average size of convenience stores in our U.S. Retail segment. The smaller store size significantly inhibits our ability to implement our grocery and food expansion programs. Moreover, the smaller average lot size effectively blocks our efforts to expand our store offering through raze and rebuild efforts on existing sites.
Our NTI growth strategy is focused in those markets where there is a significant new store growth opportunity. Increasing California real estate prices, coupled with a stringent permit and regulatory environment, preclude us from implementing our NTI growth
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
program in California. However, with above average gallons per store per day at many of these retail sites, the California market has been a solid contributor to our consolidated gross profit and, we believe, will provide us with the opportunity to evaluate several strategic options. One of these options is potentially doing a tax efficient like-kind exchange for the assets acquired in the Flash Foods acquisition. We have engaged a financial advisor and plan to complete our review of the strategic alternatives for the California market during the second quarter of 2016.
Note 4.
ASSET IMPAIRMENTS
Where applicable, our retail sites are the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of long-lived assets. Cash flows from each retail site vary from year to year and as a result, we identified and recorded asset impairments in 2015 and 2014 of $1 million and $3 million, respectively, as changes in market demographics, traffic patterns, competition and other factors impacted the overall operations of certain of our individual retail sites.
For each retail site where events or changes in circumstances indicated that the carrying amount of the assets might not be recoverable, we compared the retail site’s carrying amount to its estimated future undiscounted cash flows to determine recoverability. If the sum of the estimated undiscounted cash flows did not exceed the carrying value, we then estimated the fair value of these retail sites to measure the impairment. To estimate the fair value of our retail sites, we primarily used a discounted cash flow method that reflected internally developed cash flows that included, among other things, our expectations of future cash flows based on sales volume, gross profits, operating expenses, discount rates and an estimated fair value of the land.
In the third quarter of 2014, we wrote down the value of certain retail sites that were candidates for sale where the net book value exceeded the anticipated net sales proceeds. The anticipated sales proceeds were net of estimated selling costs including brokerage fees, commissions and environmental assessment costs. The total amount of these write downs was $2 million, and is included in “Asset impairments” on the consolidated statement of income.
Note 5.FAIR VALUE MEASUREMENTS
General
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 2015 or 2014.
The aggregate fair value and carrying amount of the CST senior notes, credit facility and term loan at December 31, 2015 and 2014 were $1.0 billion and $1.0 billion, respectively. The fair value of the CST term loan and credit facility approximate their carrying value due to the frequency with which interest rates are reset. The fair value of the CST senior notes is determined primarily using quoted prices of over the counter traded securities. These quoted prices are considered Level 1 inputs.
The fair value of CrossAmerica’s revolving credit facility approximated its carrying values of $358 million as of December 31, 2015 and $200 million as of December 31, 2014 due to the frequency with which interest rates are reset.
Nonfinancial assets, such as property and equipment, and nonfinancial liabilities are recognized at their carrying amounts in our balance sheets. U.S. GAAP does not permit nonfinancial assets and liabilities to be remeasured at their fair values on a recurring basis. However, U.S. GAAP requires the remeasurement of such assets and liabilities to their fair values upon the occurrence of
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
certain events, such as the impairment of property and equipment, intangible assets or goodwill. In addition, if such an event occurs, U.S. GAAP requires the disclosure of the fair value of the asset or liability along with other information, including the gain or loss recognized in income in the period the remeasurement occurred.
Nonrecurring Fair Value Measurements
As discussed in Notes 4 and 8, we have written certain of our U.S. Retail sites down to their fair value during 2014 and 2013. The fair value of the assets were derived using either an income approach or estimated net sales proceeds. The income approach reflects internally developed discounted cash flows that include, among other things, our expectations of future cash flows based on sales volumes, gross profits and operating expenses. We consider the inputs for this approach to be Level 3.
Assets classified as held for sale and written down to fair value at September 30, 2014 based on expected net sales proceeds were sold in the fourth quarter of 2014. We consider the inputs for this approach to be Level 2.
The following table displays valuation techniques for our nonfinancial assets measured at fair value on a nonrecurring basis as of December 31, 2015, 2014 and 2013 (in millions):
Note 6.
RECEIVABLES
Receivables consisted of the following (in millions):
Changes in the allowance for doubtful accounts consisted of the following (in millions):
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 7. INVENTORIES
Inventories consisted of the following (in millions):
The cost of convenience store merchandise and supplies is determined principally under the weighted-average cost method. We account for our motor fuel inventory in our U.S. Retail segment on the LIFO basis. As of December 31, 2015, the replacement cost (market value) of our U.S. motor fuel inventories equaled their LIFO carrying amount. As of December 31, 2014, the replacement cost (market value) of our U.S. motor fuel inventories exceeded their LIFO carrying amounts by approximately $2 million. We account for our motor fuel inventory in our Canadian Retail and CrossAmerica segments under the weighted-average cost method.
Note 8. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following (in millions):
Other property and equipment noted in the table above consists primarily of signage and other imaging assets and computer hardware and software.
Depreciation expense related to CST for the years ended December 31, 2015, 2014 and 2013 was $122 million, $114 million and $106 million, respectively. Depreciation expense related to CrossAmerica for the year ended December 31, 2015 and the three months ended December 31, 2014 was $42 million and $8 million, respectively.
CST had certain retail sites under capital leases totaling $18 million and $10 million as of December 31, 2015 and 2014, respectively. Accumulated depreciation on assets under capital leases was $5 million and $4 million as of December 31, 2015 and 2014, respectively.
CrossAmerica is the lessee in certain sale-leaseback transactions for certain sites, and because CrossAmerica has continuing involvement in the underlying sites, or the lease agreement has a repurchase feature, the sale-leaseback arrangements are accounted for as lease financing obligations. The table above includes these sites, as well as certain leases accounted for as capital leases. The total cost and accumulated amortization of property and equipment recorded by CrossAmerica under sale leaseback transactions and capital leases was $58 million and $17 million, respectively, at December 31, 2015 and $54 million and $13 million, respectively, at December 31, 2014.
See Note 14 for future minimum rental payments on capital lease obligations.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 9. GOODWILL
Changes in goodwill during the year ended December 31, 2015 consisted of the following (in millions):
See Note 3 under the heading “GP Purchase and IDR Purchase.”
All of the goodwill derived from the GP Purchase, which was $323 million, was allocated among two reporting units that comprise the CrossAmerica segment. These reporting units are CrossAmerica’s retail and wholesale operations.
Beginning in the last half of 2014, there were severe disruptions in the crude oil commodities markets that contributed to a significant decline in CrossAmerica’s common unit price. As a result, during the third quarter of 2015, CrossAmerica’s equity market capitalization fell below its net asset value at the time of the GP Purchase. We deemed this to be an indicator that goodwill may be impaired, and accordingly, we performed a step one analysis pursuant to ASC 350-Intangibles-Goodwill and Other (“ASC 350”) to evaluate the potential impairment of our goodwill within the CrossAmerica reporting units. The goodwill allocated to the wholesale and retail reporting units on October 1, 2015, the date of the analysis, was $317 million and $64 million, respectively. Based on this analysis, we determined that the fair value exceeded the carrying value of each of the CrossAmerica reporting units and accordingly, the goodwill was not impaired during the interim testing period.
The fair value of our wholesale reporting unit exceeded its carrying value by slightly less than 10%, while the fair value of our retail reporting unit exceeded its carrying value by slightly more than 10%. For purposes of our interim goodwill impairment test, the fair value of each reporting unit was estimated based on an income and market approach. The income approach estimated the fair value of each reporting unit based on the present value of expected future cash flows, with the present value determined using discount rates that reflected the risk inherent in the assets and risk premiums that reflected the volatility in our industry and the financial markets. Any change in estimated future cash flows or risk premiums could have a negative effect on these assumptions and the resulting estimated fair value of our reporting units. The market approach estimated fair value based on observable market transactions.
For purposes of our annual goodwill impairment test for our other segments, we performed a qualitative assessment. After assessing the totality of events and circumstances, we determined that it is more likely than not that the fair value of our reporting units exceed their carrying amounts and therefore goodwill was not impaired at December 31, 2015.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 10. INTANGIBLE ASSETS
Intangible assets consisted of the following (in millions):
(a)
In finalizing the acquisition accounting of CrossAmerica, we concluded that the $91 million paid by CST for the GP Purchase and IDR Purchase was more appropriately reflected as additional acquisition consideration instead of a separately identifiable indefinite-lived intangible asset. Accordingly, during the third quarter of 2015, we recorded an additional $91 million of goodwill allocable to our CrossAmerica segment and reduced the carrying value of our intangible assets by the same amount.
(b)
Our customer lists in our Canadian Retail segment are amortized on a straight-line basis over their remaining life. As these assets are recorded in the local currency, Canadian dollars, historical gross carrying amounts are translated at each balance sheet date, resulting in changes to historical amounts presented.
Finite lived intangible assets in our Canadian Retail segment primarily relate to customer lists, which are amortized on a straight-line basis over 15 years. As these assets are recorded in the local currency, Canadian dollars, historical gross carrying amounts are translated at each balance sheet date, resulting in changes to historical amounts presented.
Finite lived intangible assets in our CrossAmerica segment relate to wholesale fuel supply contracts/rights, trademarks, covenants not to compete and above and below market leases. Intangible assets associated with wholesale fuel supply contracts/rights are amortized over 10 years and trademarks are amortized over 5 years. Covenants not to compete are amortized over the shorter of the contract term or 5 years. Intangible assets associated with above and below market leases are amortized over the lease term, which approximates 5 years. As discussed in Note 3, the value of CrossAmerica’s intangibles were stepped up at the date of the GP Purchase. In general, the stepped up values of the intangibles are being amortized over 15 years.
Amortization expense related to CST intangible assets was $7 million, $8 million and $8 million for the years ended December 31, 2015, 2014 and 2013, respectively. Aggregate amortization expense for CST is expected to be $7 million, $7 million, $1 million, $1 million and $1 million for years ending December 31, 2016, 2017, 2018, 2019 and 2020, respectively.
Amortization expense related to CrossAmerica intangible assets was $31 million for the year ended December 31, 2015 and $10 million for the three months ended December 31, 2014. Aggregate amortization expense for CrossAmerica is expected to be $31 million, $31 million, $30 million, $28 million, and $27 million for the years ending December 31, 2016, 2017, 2018, 2019 and 2020, respectively.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 11. ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES
Accrued expenses consisted of the following (in millions):
Other long-term liabilities consisted of the following (in millions):
Other
Other accrued expenses include accrued liabilities for legal matters that are both probable and reasonably estimable, unearned revenue related to our Canadian heating oil operations and various other items, none of which are material.
Other long-term liabilities include security deposits, contingent liabilities related to legal matters that are both probable and reasonably estimable and various other items, none of which are material.
Asset Retirement Obligations
We have asset retirement obligations for the removal of USTs at owned and leased retail sites. There is no legal obligation to remove USTs while they remain in service. However, environmental laws in the U.S. and Canada require that USTs be removed within one to two years after the USTs are no longer in service, depending on the jurisdiction in which the USTs are located. We have estimated that USTs at our owned retail sites will remain in service approximately 30 years and that we will have an obligation to remove those USTs at that time. For our leased retail sites, our lease agreements generally require that we remove certain improvements, primarily USTs and signage, upon termination of the lease. There are no assets that are legally restricted for purposes of settling our asset retirement obligations.
Changes in our asset retirement obligations were as follows (in millions):
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 12. DEBT
Our balances for long-term debt and capital leases are as follows (in millions):
(a) The assets of CST can only be used to settle the obligations of CST and creditors of CST have no recourse to the assets or general credit of CrossAmerica. CST has pledged its equity ownership in CrossAmerica to secure the CST Credit Facility.
(b) The assets of CrossAmerica can only be used to settle the obligations of CrossAmerica and creditors of CrossAmerica have no recourse to the assets or general credit of CST.
The following table presents principal payments due for each of the next five years and thereafter (in millions):
CST 5% Senior Notes
The CST 5% senior notes are guaranteed, jointly and severally, on a senior unsecured basis by certain domestic subsidiaries. The notes and the guarantees are unsecured senior obligations of CST and the guarantor subsidiaries, respectively. Accordingly, they are: equal in right of payment with all of CST’s and the guarantors’ existing and future senior unsecured indebtedness; senior in right of payment to any of CST’s and the guarantors’ future subordinated indebtedness; effectively subordinated to all of CST’s and the guarantors’ existing and future secured indebtedness, including indebtedness under CST’s new credit facilities; and effectively subordinated to all future indebtedness and other liabilities, including trade payables, of CST’s non-guarantor
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
subsidiaries (other than indebtedness and other liabilities owed to CST). CrossAmerica is not a guarantor to these obligations and the subsidiary that owns CrossAmerica is an unrestricted subsidiary as defined in the indenture.
If CST sells certain assets (including drop downs to CrossAmerica) and does not repay certain debt or reinvest the proceeds of such sales (as defined in the indenture) within certain periods of time, CST will be required to use such proceeds to offer to repurchase the notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. Upon the occurrence of certain specific change of control events, CST will be required to offer to repurchase all outstanding notes at 101% of the aggregate principal amount of notes repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.
The indenture governing the notes, among other things, imposes limitations on CST’s ability to: borrow money or guarantee debt; create liens; pay dividends on or redeem or repurchase stock; make specified types of investments and acquisitions; enter into new lines of business; enter into transactions with affiliates; and sell assets or merge with other companies.
CST Amended Credit Facility
On January 29, 2016, CST amended its credit facility to increase borrowing capacity from $300 million to $500 million and immediately drew $307 million under the amended credit facility to fund a portion of the Flash Foods acquisition and pay fees of $1 million associated with the amendment.
CST’s amended credit facility provides for an initial aggregate amount of $1.0 billion in financing, with a final maturity date on September 30, 2019, consisting of the following:
•
a funded term loan in an initial aggregate principal amount of $500 million, which has amortized to $406 million as of December 31, 2015; and
•
a revolving credit facility with up to an aggregate principal amount of borrowings of $500 million.
This amended credit facility is guaranteed by CST’s domestic subsidiaries and secured by security interests and liens on substantially all of CST’s domestic subsidiaries’ assets, including 100% of the capital stock of CST’s domestic subsidiaries and 65% of the voting equity interests and 100% of the non-voting equity interests of material, first-tier, foreign subsidiaries, subject to certain customary exceptions. This amended credit facility has, among others, the following terms:
•
subject to exclusions, mandatory prepayments with the net cash proceeds of certain asset sales (including drop downs to CrossAmerica), insurance proceeds or condemnation awards, the incurrence of certain indebtedness and our excess cash flow (as defined in the credit agreement);
•
customary affirmative and negative covenants for credit agreements of this type, including limitations on CST and CST’s guarantor subsidiaries with respect to indebtedness, liens, fundamental changes, restrictive agreements, prepayments and amendments of certain indebtedness, dispositions of assets, acquisitions and other investments, sale leaseback transactions, conduct of business, transactions with affiliates and dividends and redemptions or repurchases of stock; and
•
financial covenants (as defined in the credit agreement) consisting of (a) a maximum total lease adjusted leverage ratio initially set at 3.75 to 1.00, (b) a minimum fixed charge coverage ratio set at 1.30 to 1.00, and (c) limitations on capital expenditures. As of December 31, 2015, CST was in compliance with these covenants.
Outstanding borrowings currently under this credit facility bear a weighted average interest of 1.74% as of December 31, 2015.
In connection with the GP Purchase and the IDR Purchase, CST amended this credit facility as of September 30, 2014 (the “Amendment”). The Amendment became effective concurrently with the closing of the GP Purchase and the IDR Purchase on October 1, 2014. CST capitalized $2 million in bank fees in the third quarter of 2014 as a result of the Amendment.
The Amendment, among other things:
•
extends the maturity of the loans and revolving commitments under the credit facility to September 30, 2019;
•
permits certain future transactions with CrossAmerica, including drop-down asset sales to CrossAmerica, subject to certain conditions;
•
provides for the designation of unrestricted subsidiaries (to be consistent with the 5% senior notes indenture), which includes the General Partner, CrossAmerica and subsidiaries of CrossAmerica, and amends covenants and events of default to exclude unrestricted subsidiaries;
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
•
increases CST’s ability to make certain investments and acquisitions, make distributions on or redeem or repurchase stock, and make certain payments on subordinated debt, in each case, subject to certain conditions;
•
amends the maximum total adjusted leverage ratio to permit CST to reduce indebtedness and rental expense in such calculation by unrestricted cash and cash equivalents in excess of a predetermined amount; and
•
replaces the Credit Agreement’s expansion capital expenditures covenant restrictions with a covenant that limits capital expenditures only if CST’s leverage ratio exceeds certain levels.
Borrowings under the Amendment (in addition to existing collateral) are secured by the IDRs and common units of CrossAmerica owned by CST and other credit parties.
Availability under this revolving credit facility (expires 2019) was as follows (in millions):
CrossAmerica Credit Facility
At the date of the GP Purchase, CrossAmerica entered into an amended and restated credit agreement. This credit facility is a senior secured revolving credit facility maturing on March 4, 2019, with a total borrowing capacity of $550 million, under which swing-line loans may be drawn up to $10 million and standby letters of credit may be issued up to an aggregate of $45 million. This credit facility may be increased, from time to time, upon CrossAmerica’s written request, subject to certain conditions, up to an additional $100 million. All obligations under the credit facility are secured by substantially all of the assets of CrossAmerica and its subsidiaries. The amount of availability at December 31, 2015 under the credit facility, after taking into account outstanding letters of credit and debt covenant constraints, was $100.0 million. The weighted-average interest rate on outstanding borrowings at December 31, 2015, was 3.06%.
CrossAmerica is required to maintain a total leverage ratio (as defined) for the most recently completed four fiscal quarters of less than or equal to 4.50 to 1.00, except for periods following a material acquisition. The total leverage ratio shall not exceed 5.00 to 1.00 for the first two full fiscal quarters following the closing of a material acquisition or 5.50 to 1.00 upon the issuance of Qualified Senior Notes (as defined) in the aggregate principal amount of $175 million or greater. CrossAmerica is also required to maintain a senior leverage ratio (as defined) after the issuance of qualified senior notes of $175 million or greater of less than or equal to 3.00 to 1.00 and a consolidated interest coverage ratio (as defined) of at least 2.75 to 1.00. CrossAmerica was in compliance with these covenants as of December 31, 2015.
CrossAmerica is prohibited from making distributions to its unitholders if any potential default or event of default occurs or would result from the distribution, or if CrossAmerica is not in compliance with its financial covenants. In addition, the CrossAmerica credit facility contains various covenants which may limit, among other things, CrossAmerica’s ability to grant liens; create, incur, assume, or suffer to exist other indebtedness; or make any material change to the nature of CrossAmerica’s business, including mergers, liquidations, and dissolutions; and make certain investments, acquisitions or dispositions.
CrossAmerica Other Debt
CrossAmerica entered into a lease for certain sites for which CrossAmerica is obligated to purchase these sites, at the election of the seller in approximately equal parts over a 5 year period for an average of $5 million per year beginning in 2016. Due to the obligation to purchase the sites under the lease, the lease is accounted for as a financing. CrossAmerica recorded $26 million of debt, which was determined to be its fair value, and the payments made until the purchase will be classified as interest expense.
CrossAmerica also issued a $1 million note payable in connection with a 2013 acquisition. The note matures July 1, 2018, at which time a balloon payment for all outstanding principal and any unpaid interest is due. The loan is secured by all the real and personal property at these sites.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 13. RELATED-PARTY TRANSACTIONS
We consider transactions with CrossAmerica to be with a related-party and account for these transactions as entities under common control.
Rent and Purchased Motor Fuel
CrossAmerica leases certain retail sites and sells motor fuel to the U.S. Retail segment under a master fuel distribution agreement and a master lease agreement having initial 10-year terms. The fuel distribution agreement provides CrossAmerica with a fixed wholesale mark-up per gallon and the lease agreement is a triple net lease with an annual lease rate of 7.5% of the fair value of the leased property at inception. The U.S. Retail segment purchased approximately 78 million gallons of motor fuel from CrossAmerica and incurred rent expense on retail sites leased from CrossAmerica of $9 million during the year ended December 31, 2015. The U.S. Retail segment purchased approximately 6 million gallons of motor fuel from CrossAmerica and incurred rent expense on retail sites leased from CrossAmerica of $1 million during the three months ended December 31, 2014. Amounts payable to CrossAmerica totaled $2 million and $2 million at December 31, 2015 and December 31, 2014, respectively, related to these transactions.
Sale of CST Fuel Supply Equity Interests to CrossAmerica
We accounted for the January and July 2015 sales of equity interests in CST Fuel Supply to CrossAmerica as entities under common control. Refer to Note 3 for additional discussion.
CST records the monthly distributions to CrossAmerica in cost of sales, which is eliminated upon consolidation of CrossAmerica.
CST distributed $11 million in cash to CrossAmerica during the year ended December 31, 2015 related to its equity ownership interests in CST Fuel Supply.
Sale and Lease Back of NTIs
In July 2015, we completed the sale and lease back of 29 NTIs with CrossAmerica. We accounted for the sale as entities under common control. The rental income and expense associated with the lease of the NTIs is eliminated in consolidation. Refer to Note 3 for additional discussion.
Amended Omnibus Agreement
We entered into the Amended and Restated Omnibus Agreement, dated October 1, 2014, by and among CrossAmerica, the General Partner, DMI, DMS, CST Services LLC and Joseph V. Topper, Jr., which amends and restates the original omnibus agreement, which was executed in connection with CrossAmerica’s initial public offering on October 30, 2012. CrossAmerica paid CST $4 million in cash for the fixed and variable fees for the first quarter of 2015. Additionally, CST allocated $5 million in non-cash stock-based compensation and incentive compensation costs to CrossAmerica for the year ended December 31, 2015. Receivables from CrossAmerica were $9 million and $0.1 million at December 31, 2015 and December 31, 2014, respectively. As approved by the independent conflicts committee of the General Partner and the executive committee of our Board of Directors, CrossAmerica and CST mutually agreed to settle the second, third and fourth quarter 2015 amounts due under the terms of the Amended Omnibus Agreement in newly issued common units representing limited partner interests in CrossAmerica. As a result, in July 2015, CST received from CrossAmerica 145,056 limited partner units valued at approximately $4 million related to the second quarter, in October 2015, CST received from CrossAmerica 114,256 limited partner units valued at approximately $3 million related to the third quarter. CST and CrossAmerica have not yet settled the fourth quarter management fee in limited partner units. Effective January 1, 2016, the fixed component of the management fee was increased to $856,000 per month, which was approved by the executive committee of the Board of Directors of CST and on behalf of CrossAmerica by the independent conflicts committee of the Board of Directors of the General Partner of CrossAmerica. CST and CrossAmerica have the right to negotiate the amount of the management fee on an annual basis, or more often as circumstances require.
IDR and Common Unit Distributions
CST received cash distributions of $1 million and $8 million related to its investment in CrossAmerica’s IDRs and common units, respectively, during the year ended December 31, 2015.
CrossAmerica Transactions with DMS
DMS is an entity affiliated with Joseph V. Topper, Jr., a member of our Board of Directors and the Board of Directors of the General Partner. DMS is an operator of convenience stores that purchases all of its motor fuel requirements from CrossAmerica on a wholesale basis. DMS also leases certain retail site real estate from CrossAmerica in accordance with a master lease agreement between DMS and CrossAmerica.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Revenues from fuel sales and rental income from DMS were as follows (in millions):
Motor fuel is sold to DMS at CrossAmerica’s cost plus a fixed mark-up per gallon. Receivables from DMS totaled $7 million and $10 million at December 31, 2015 and December 31, 2014, respectively.
Aircraft Usage Costs
From time to time, CST uses an aircraft owned by an entity that is jointly owned by Kimberly S. Lubel, our Chief Executive Officer, President and Chairman of the Board and her husband. CST incurred $0.2 million for the year ended December 31, 2015 for the use of this aircraft.
From time to time, CrossAmerica uses aircraft owned by a group of individuals that includes Joseph V. Topper, Jr. and another member of CrossAmerica’s Board of Directors as previously approved in August 2013 by the independent conflicts committee of the General Partner. CrossAmerica incurred $0.2 million, $0.3 million and $0.1 million for the years ended December 31, 2015, 2014 and 2013, respectively, for the use of these aircrafts.
CrossAmerica Principal Executive Offices
The CrossAmerica principal executive offices are in Allentown, Pennsylvania in office space leased from DMI as of December 31, 2015. Total rent expense for the office space was $0.3 million during the year ended 2015.
Zimri DM, LLC
In connection with CrossAmerica’s purchase of Petroleum Marketers, Incorporated (“PMI”) in May 2014, CrossAmerica divested the PMI lubricants business, which was subsequently purchased by a company affiliated with Joseph V. Topper, Jr. (“Zimri”). PMI provided certain services to Zimri pursuant to a transition services agreement. All services have been terminated and no amounts are outstanding.
Maintenance and Environmental Costs
Certain maintenance and environmental monitoring and remediation activities are undertaken by a related party of Joseph V. Topper, Jr. as approved by the independent conflicts committee of the Board. CrossAmerica incurred $1.3 million, $1.4 million and $0.3 million with this related party for the years ended December 31, 2015, 2014 and 2013, respectively.
Note 14. COMMITMENTS AND CONTINGENCIES
Leases
We have long-term operating lease commitments for land, office facilities, retail sites, retail site buildings and related equipment that generally contain renewal options for periods ranging from five to ten years. In addition to minimum rental payments, certain leases require additional contingent payments based on motor fuel volume sold. We also have capital lease commitments for certain retail sites as described in Note 8. In most cases, we expect that in the normal course of business, our leases will be renewed or replaced by other leases.
CrossAmerica is the lessee in certain sale-leaseback transactions for certain sites, and as CrossAmerica has continuing involvement in the underlying sites, or the lease agreement has a repurchase feature, the sale-leaseback arrangements are accounted for as lease financing obligations and are included in the table below. CrossAmerica also leases certain fuel stations and equipment under lease agreements accounted for as capital lease obligations.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
As of December 31, 2015, our consolidated future minimum lease payments for (i) operating leases having initial or remaining noncancelable lease terms in excess of one year and (ii) capital leases were as follows (in millions):
Rental expense was as follows (in millions):
Litigation Matters
We are from time to time party to various lawsuits, claims and other legal and administrative proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, environmental damages, infringement, indemnification, 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.
Canadian Price Fixing Claims-CST
Ultramar Ltd., Valero’s principal Canadian subsidiary (“Ultramar”), four of its then current and former employees and several competitors were named as defendants in four class actions alleging that Ultramar and the other named competitors engaged in illegal price fixing in four distinct markets in the province of Québec. The cases were filed in June 2008 following an investigation
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
by the Canadian Competition Bureau, which resulted in limited guilty pleas by Ultramar and two former employees and charges laid against several alleged co-conspirators. The guilty pleas followed an extensive government investigation and was confined to a limited time period and limited geographic area around Thetford Mines and Victoriaville in Québec.
As a result, four class actions were filed on the same day in the matters of (i) Simon Jacques vs. Ultramar et al in the Superior Court of Québec, District of Québec City, (ii) Daniel Thouin/ Marcel Lafontaine vs. Ultramar et al, Superior Court of Québec, District of Montreal, (iii) Michael Jeanson et al vs. Ultramar et al, Superior Court of Québec, District of Hull and (iv) Thibeau vs. Ultramar et al, Superior Court of Québec, District of Montreal. As required, pursuant to the civil procedure rules in effect, the first filed claim is given priority, and the others are suspended pending final judgment on the first filed claim. The plaintiffs’ lawsuits alleged the existence of a conspiracy beyond the scope of the time and geographic regions of the guilty pleas. Hearings on class suitability took place in September 2009, and in November 2009 and the court allowed plaintiffs to assert claims for a time range of 2002 to 2006, but limited the geographic area of the claims to the four limited markets, which were the subject of the investigation by the Competition Bureau. Plaintiffs amended their claims to assert claims, which include claims for 2001 and claims for interest and attorneys fees. During the fourth quarter of 2012, we concluded a loss was probable and reasonably estimable and as such, we recorded an immaterial loss contingency liability for the amount we believe could be assessed against Ultramar. Due to the inherent uncertainty of litigation, we believe it is reasonably possible that CST may suffer a loss in excess of the amount recorded that could have a material adverse effect on our results of operations, financial position or liquidity with respect to one or more of the lawsuits. Ultramar intends to vigorously contest the scope of alleged liability and damages.
On June 10, 2011, Ultramar and several other defendants were served with a “new” amended motion to institute a class action in the matter of Daniel Thouin v. Ultramar Ltd., et al., Superior Court of Québec, District of Québec. On September 6, 2012, the Superior Court of Québec authorized the class action to be extended to 14 additional cities/regions of the Province of Québec, which were beyond the scope of the Competition Bureau’s investigation and the guilty pleas referenced above. CST does not believe that a loss for this claim is either probable or estimable at this time and intends to vigorously defend these claims.
An estimate of the possible loss or range of loss from an adverse result in all or substantially all of these cases cannot be reasonably made due to a number of factors, the most significant of which is that no amount of damages has been specified by the plaintiffs.
Environmental Matters
We are subject to extensive federal, state, provincial and local environmental laws and regulations, including those relating to USTs, the release or discharge of materials into the air, water and soil, waste management, pollution prevention measures, the generation, storage, handling, use, transportation and disposal of hazardous materials, the exposure of persons to hazardous materials, greenhouse gas emissions and characteristics, composition, storage and sale of motor fuel, and the health and safety of our employees.
We are required to make financial expenditures to comply with regulations governing USTs adopted by federal, state, provincial and local regulatory agencies. Pursuant to the Resource Conservation and Recovery Act of 1976, as amended, the U.S. Environmental Protection Agency has established a comprehensive regulatory program for the detection, prevention, investigation and cleanup of leaking USTs. State or local agencies are often delegated the responsibility for implementing the federal program or developing and implementing equivalent state or local regulations. We have a comprehensive program in place for performing routine tank testing and other compliance activities which are intended to promptly detect and investigate any potential releases. In addition, the U.S. Federal Clean Air Act and similar state laws impose requirements on emissions to the air from motor fueling activities in certain areas of the country, including those that do not meet state or national ambient air quality standards. These laws may require the installation of vapor recovery systems to control emissions of volatile organic compounds to the air during the motor fueling process. We believe we are in compliance in all material respects with applicable environmental requirements, including those applicable to our USTs.
We are in the process of investigating and remediating contamination at a number of our sites as a result of recent or historic releases of motor fuel. In addition, we make routine applications to state trust funds for the sharing, recovering and reimbursement of certain cleanup costs and liabilities as a result of releases of motor fuel from storage systems.
As of December 31, 2015 and 2014, our environmental reserves recorded in the consolidated financial statements were $5 million and $5 million, respectively. These environmental reserves represent our estimates for future expenditures for remediation and related litigation associated with contaminated sites as a result of releases (e.g. overfills, spills and releases) and are based on current regulations, historical results and certain other factors.
Environmental liabilities that we have recorded are based on internal and external estimates of costs to remediate sites. Factors considered in the estimates of the liability are the expected cost and the estimated length of time to remediate each contaminated site. Estimated remediation costs are not discounted because the timing of payments cannot be reasonably estimated. Reimbursements under state trust fund programs are recognized when received because such amounts are insignificant. The
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
adequacy of the liability is evaluated quarterly and adjustments are made based on updated experience at existing sites, newly identified sites and changes in governmental policy.
Self-Insurance Matters
We are partially self-insured for our general liability insurance. We maintain insurance coverage at levels that are customary and consistent with industry standards for companies of similar size. All of our liability and property insurance policies contain retention and deductible clauses that limit our loss exposure. We are a nonsubscriber under the Texas Workers’ Compensation Act and maintain an employee injury plan in compliance with the Employee Retirement Income Security Act of 1974 in the U.S., which is self-insured. For our U.S. operations outside of Texas, we maintain statutory workers’ compensation insurance, which is partially self-insured. In Canada, we are a subscriber under the public system workers’ compensation of the provinces where we operate. As of December 31, 2015, there are a number of outstanding claims that are of a routine nature. The estimated incurred but unpaid liabilities relating to these claims are included in other accrued expenses. Additionally, there are open claims under previous policies that have not been resolved as of December 31, 2015. While the ultimate outcome of these claims cannot presently be determined, management believes that the accrued liability of $17 million will be sufficient to cover the related liability and that the ultimate disposition of these claims will have no material effect on our financial position, results of operations and cash flows. Valero has fully indemnified us for the portion of the liability relating to claims incurred up to the date of the separation and the distribution and we accordingly have an associated asset of $14 million related to these claims.
Tax Matters
We are subject to extensive tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty, sales/use and gross receipts taxes), payroll taxes, franchise taxes, withholding taxes and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Many of these liabilities are subject to periodic audits by the respective taxing authority. Subsequent changes to our tax liabilities as a result of these audits may subject us to interest and penalties.
Note 15. EQUITY
CST Share Activity
A total of 250 million shares of CST common stock, $0.01 par value, have been authorized of which, 77,749,964 were issued and 75,615,766 were outstanding as of December 31, 2015, and 77,674,450 were issued and 77,161,736 were outstanding as of December 31, 2014. Included in these amounts were 140,053 and 176,323 shares as of December 31, 2015 and December 31, 2014, respectively, which represent restricted shares that were not yet vested.
In connection with the GP Purchase and IDR Purchase, we issued 2,044,490 unregistered shares of our common stock on October 1, 2014.
Activity related to shares of CST’s common stock and treasury stock was as follows (in thousands):
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CST Treasury Stock
For the year ended December 31, 2015, we purchased 1,592,477 of our common shares for a total purchase price of $64 million as part of our publicly announced share repurchase program. During this period we also withheld 29,007 shares of our common stock with a total fair value of $1 million in connection with withholding taxes related to the exercise of stock options, the vesting of restricted stock and the vesting of restricted stock units.
CST Dividends
We paid regular quarterly cash dividends of $0.0625 per CST common share each quarter, commencing with the quarter ended September 30, 2013. The timing, declaration, amount and payment of future dividends to stockholders will fall within the discretion of our Board of Directors. Our indebtedness also restricts our ability to pay dividends. As such, there can be no assurance we will continue to pay dividends in the future. Quarterly dividend activity for 2015 was as follows:
CrossAmerica Distributions
Since the closing of its Initial Public Offering, CrossAmerica has increased its quarterly distribution from $0.4375 per unit to $0.5925 per unit. Quarterly distribution activity for 2015 was as follows:
The amount of any distribution is subject to the discretion of the Board of Directors of CrossAmerica’s General Partner, which may modify or revoke CrossAmerica’s cash distribution policy at any time. CrossAmerica’s partnership agreement does not require CrossAmerica to pay any distributions. As such, there can be no assurance CrossAmerica will continue to pay distributions in the future.
For the year ended December 31, 2015, CrossAmerica made distributions to CST of $1 million and $8 million with respect to our investment in the IDRs and common units, respectively.
CrossAmerica Unit Offering
On June 19, 2015, CrossAmerica closed on the sale of 4.6 million common units for net proceeds of approximately $139 million. CrossAmerica used the net proceeds from this offering to reduce indebtedness outstanding under its revolving credit facility. On July 1, 2015, CrossAmerica borrowed $184 million under its revolving credit facility to fund the purchase of the 12.5% equity interest in CST Fuel Supply, the acquisition of the 29 NTIs from CST and the One Stop acquisition.
On July 16, 2015, CrossAmerica closed on the sale of an additional 0.2 million common units for net proceeds of $6 million in accordance with the underwriters’ option to purchase additional common units associated with the June offering discussed above.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CST Stock Repurchase Plan
On August 5, 2014, our Board of Directors approved a stock repurchase plan under which we are authorized to purchase shares of our common stock up to a maximum dollar amount of $200 million, until such authorization is exhausted or withdrawn by our Board of Directors. Under the stock repurchase program, we are authorized to repurchase, from time-to-time, shares of our outstanding common stock in the open market and in private transactions, at management’s discretion, based on market and business conditions, applicable legal requirements and other factors, or pursuant to an issuer repurchase plan or agreement that may be in effect. The repurchase program does not obligate us to acquire any specific amount of common stock and will continue until otherwise modified or terminated by our Board of Directors at any time at its sole discretion and without notice. For the year ended December 31, 2015, we purchased 1,592,477 common shares for approximately $64 million under our stock repurchase program. The following table shows our share repurchase activity since inception of the plan through December 31, 2015:
There have been no repurchases of CST stock under this stock repurchase program subsequent to December 31, 2015.
CST Purchases of CrossAmerica Common Units
On September 21, 2015, CST announced that the independent executive committee of its Board of Directors approved a unit purchase program under Rule 10b-18 of the Exchange Act, authorizing CST to purchase up to an aggregate of $50 million of the common units representing limited partner interests in CrossAmerica. The unit purchase program does not have a fixed expiration date and may be modified, suspended or terminated at any time at CST’s discretion. The following table shows the purchases by CST of CrossAmerica common units registered pursuant to Section 12 of the Exchange Act during the quarter ended December 31, 2015:
Through February 17, 2016, CST had purchased $20 million, or 804,667 common units, at an average price of $24.64 per common unit.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CrossAmerica Common Unit Repurchase Program
On November 2, 2015, the board of directors of CrossAmerica’s General Partner approved a common unit repurchase program under Rule 10b-18 of the Exchange Act authorizing CrossAmerica to repurchase up to an aggregate of $25 million of the common units representing limited partner interests in the Partnership. Under the program, CrossAmerica may make purchases in the open market after November 9, 2015 in accordance with Rule 10b-18 of the Exchange Act, or in privately negotiated transactions, pursuant to a trading plan under Rule 10b5-1 of the Exchange Act or otherwise. Any purchases will be funded from available cash on hand. The common unit repurchase program does not require CrossAmerica to acquire any specific number of common units and may be suspended or terminated by CrossAmerica at any time without prior notice. The purchases will not be made from any officer, director or control person of CrossAmerica or CST. The following table shows the purchases during the quarter ended December 31, 2015:
CrossAmerica did not repurchase any common units from January 1, 2016 through the date of this filing.
Comprehensive Income (Loss)
Comprehensive income for a period encompasses net income and all other changes in equity other than from transactions with our stockholders. Foreign currency translation adjustments are the only component of our accumulated other comprehensive income. Our other comprehensive income or loss before reclassifications results from changes in the value of foreign currencies (the Canadian dollar) in relation to the U.S. dollar. Changes in foreign currency translation adjustments were as follows for the years ended December 31, 2015, 2014 and 2013 (in millions):
Noncontrolling Interest
Noncontrolling interest represents the limited partner equity in CrossAmerica owned by outside limited partners. As a result of the GP Purchase, we adjusted the noncontrolling interest to $767 million as a result of consolidating the net assets of CrossAmerica at their fair values. As discussed in Note 1, CST owns 18.7% of the limited partner interest in CrossAmerica.
Note 16. STOCK-BASED COMPENSATION
Overview of CST Plans
Prior to the spin-off, our employees participated in Valero’s stock-based compensation plans, and Valero allocated stock-based compensation costs to us based on Valero’s determination of actual costs attributable to our employees. No stock-based awards of CST were issued in exchange for either vested or non-vested Valero stock-based awards held by our employees prior to the spin-off.
Valero accelerated the vesting of all of its non-vested restricted stock awards held by CST employees, including its named executive officers, in connection with the spin-off. As a result, we were charged for the remaining unrecognized stock-based compensation related to those awards at that time, which was $1 million. Performance shares held by CST employees were forfeited pursuant to the provisions in the performance share agreements between Valero and the affected employees.
In anticipation of the spin-off, Valero, as sole stockholder of CST, and the CST Board of Directors approved the 2013 CST Brands, Inc. Omnibus Stock Incentive Plan (the “CST Plan”). The CST Plan permits us to grant stock options, stock appreciation rights,
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
restricted stock, restricted units, other stock-based awards and cash awards to CST officers, directors and certain other employees. The CST Plan provided for a pool of 7.5 million shares of our common stock, and as of December 31, 2015 there were 5.7 million shares available for grant under the CST Plan.
Compensation expense for CST’s stock-based awards is based on the fair values of the awards on the date of grant and is recognized on a straight-line basis over the vesting period of each vesting tranche. We record stock-based compensation as components of operating expenses and administrative expenses in the consolidated and combined statements of income.
CrossAmerica has granted phantom units and other awards to employees of CST who perform services for CrossAmerica. The value of these grants are remeasured at fair value at each balance sheet reporting date based on the fair market value of CrossAmerica’s common units, and the cumulative compensation cost related to that portion of the awards that have vested is recognized ratably over the vesting term.
Stock-based compensation expense was as follows (in millions):
During the year ended December 31, 2015, we recognized $4 million of stock-based compensation expense, of which $2 million related to CST and $2 million related to CrossAmerica, and during the year ended December 31, 2014, we recognized $2 million of stock-based compensation expense related to CST, from stock-based awards granted to employees who were retirement eligible at the date of grant.
CST Stock Options
Stock options granted under the CST Plan become exercisable in equal increments on the first, second and third anniversaries of their date of grant, and expire on the tenth anniversary of their date of grant. Exercise prices of these stock options are equal to the market value of the common stock on the date of grant. Market value is defined by the CST Plan as the mean of the highest and lowest prices per share of our stock on the NYSE on the date of grant. As of December 31, 2015, options to purchase 1.3 million shares were outstanding with exercise prices ranging from $29.53 to $44.34 per share.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The following summarizes all CST stock option activity, which includes the portion rebilled to CrossAmerica, during the years ended December 31, 2015 and 2014:
The aggregate intrinsic value at year end in the table above represents the total pre-tax intrinsic value that would have been received by the option holders if all of the in-the-money options were exercised on December 31, 2015. The pre-tax intrinsic value is the difference between the closing price of our common stock on December 31, 2015 and the exercise price for each in-the-money option. This value fluctuates with the changes in the price of our common stock.
The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions used for grants during 2015 and 2014:
Expected term was estimated using the simplified method, which takes into account vesting and contractual term. The simplified method is being used to calculate expected term due to the lack of prior grant history and a relatively small number of recent expected life assumptions available from our peers. Expected stock price volatility was based on the weighted-average of our peer group’s median implied volatility, our own mean reversion volatility, and the median of our peer group’s most recent volatilities over the expected term. The risk-free interest rate was based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term. The risk free rate was calculated by interpolating between the published 5-year and 7-year U.S. Treasury spot rates. The expected dividend yield was based on the market value of the common stock on the date of grant (as defined by the Plan) and assumed future annual dividends of $0.25 per share.
The weighted-average fair value of options granted under the CST Plan in 2015 was $10.80. As of December 31, 2015 there was $3 million of unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 1.4 years.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CST Restricted Stock Awards
Restricted stock awards granted under the CST Plan participate in dividends and vest under one of the following schedules:
•
in full on the first anniversary of their date of grant;
•
in full on the third anniversary of their date of grant;
•
in three equal increments on the first, second and third anniversaries of their date of grant.
The following summarizes all restricted stock activity during the years ended December 31, 2015 and 2014:
The fair value of each share of restricted stock is estimated on the date of grant as the mean of the highest and lowest prices per share of our stock price on the NYSE on the date of grant. As of December 31, 2015, there was $1 million of unrecognized compensation cost related to unvested restricted stock. This cost is expected to be recognized over a weighted-average period of approximately 0.3 years.
CST Restricted Stock Units
Restricted stock units granted under the CST Plan participate in dividends and vest in three equal increments on the first, second and third anniversaries of their date of grant.
The following summarizes all CST restricted stock unit activity, which includes the portion rebilled to CrossAmerica, during the years ended December 31, 2015 and 2014:
The fair value of each restricted stock units is estimated on the date of grant as the mean of the highest and lowest prices per share of CST’s stock price on the NYSE on the date of grant. As of December 31, 2015, there was $2 million of unrecognized compensation cost related to unvested restricted stock units. This cost is expected to be recognized over a weighted-average period of approximately 1.4 years.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CrossAmerica Equity-Based Awards
In connection with the initial public offering of CrossAmerica, the General Partner adopted the Lehigh Gas Partners LP 2012 Incentive Award Plan (the “CrossAmerica Plan”), a long-term incentive plan for employees, officers, consultants and directors of the General Partner of CrossAmerica and any of its affiliates who perform services for CrossAmerica. The maximum number of common units that may be delivered with respect to awards under the CrossAmerica Plan is 1,505,000. Generally, the CrossAmerica Plan provides for grants of restricted units, unit options, performance awards, phantom units, unit awards, unit appreciation rights, distribution equivalent rights, and other unit-based awards, with various limits and restrictions attached to these awards on a grant-by-grant basis. The CrossAmerica Plan is administered by the Board of Directors of the CrossAmerica’s General Partner or a committee thereof (the “Plan Administrator”).
The Plan Administrator may terminate or amend the CrossAmerica Plan at any time with respect to any common units for which a grant has not yet been made. The Plan Administrator also has the right to alter or amend the CrossAmerica Plan or any part of the CrossAmerica Plan from time to time, including increasing the number of common units that may be granted, subject to unitholder approval as required by the exchange upon which common units are listed at that time.
CrossAmerica has primarily granted phantom units under the CrossAmerica Plan. Phantom units generally vest in three equal increments on the first, second and third anniversaries of their date of grant. However, grants made in the fourth quarter of 2014 to the non-employee members of the current Board of Directors will vest in full on the first anniversary of their date of grant.
The following is a summary of phantom unit activity for the year ended December 31, 2015:
The fair value of the phantom units and other non-vested awards outstanding at December 31, 2015, based on the closing price of CrossAmerica’s common units, was $4 million. Unrecognized compensation expense related to the non-vested awards was $2 million at December 31, 2015 and is expected to be recognized over a weighted average period of 0.8 years.
In connection with the GP Purchase, all unvested awards held by covered persons and members of the former Board of Directors of the General Partner vested on October 1, 2014. As a result, 169,580 phantom units and certain other awards vested. The incremental charge recorded in the fourth quarter of 2014 associated with the accelerated vesting of these awards was approximately $5 million.
CrossAmerica granted units to certain members of management in March of 2015 representing annual incentive compensation for 2014. As these grants related to 2014 compensation and will have immediate vesting, CrossAmerica recognized expense for the entire $2 million value of these grants in the fourth quarter of 2014.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 17. EARNINGS PER COMMON SHARE
Earnings per common share are computed after adjustment for net income or loss attributable to noncontrolling interest; therefore, all earnings per common share information relates solely to CST common stockholders.
Earnings per common share were computed as follows (in millions, except shares outstanding, common equivalent shares and per share amounts):
The table below presents securities that have been excluded from the computation of diluted earnings per share because they would have been anti-dilutive for the periods presented:
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 18. INCOME TAXES
Income before income tax expense from our U.S. and Canadian operations was as follows (in millions):
The following is a reconciliation of the U.S. statutory federal income tax rate (35% for all years presented) to the consolidated effective income tax rate:
CrossAmerica historically has not been subject to federal and most state income tax, with the exception of operations conducted through certain corporate subsidiaries. Excluding CrossAmerica, our 2015 effective tax rate was 39.3% compared to 34.7% for 2014.
Components of income tax expense related to net income were as follows (in millions):
Excluding CrossAmerica, 2015 income tax expense was $97 million compared to $106 million in 2014.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows (in millions):
The change in the balance sheet deferred tax accounts reflects deferred income tax expense, the deferred tax impact of other comprehensive income items, adjustments related to the spin-off and certain deferred taxes resulting from purchase accounting associated with the GP Purchase and noncontrolling interest shifts.
As of December 31, 2015, we had no income tax credit carryforwards. We have $111 million of state net operating losses (“NOL”) available for carry forward. The losses expire within a period of five to fifteen years. CST recorded a state NOL valuation allowance of $5 million on the entire state NOLs due to uncertainties related to our ability to utilize the state net operating losses. At December 31, 2015, we had valuation allowances of $11 million, an increase of $4 million from 2014 primarily related to state NOL valuation allowances. The $11 million valuation is comprised of $5 million state net operating losses and $6 million associated with CrossAmerica’s valuation allowance that relates primarily to the uncertainty of the availability of future profits to realize the tax benefit of the existing deductible temporary difference.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Changes in the valuation allowance account consisted of the following (in millions):
(a) Amount relates to CrossAmerica acquisition in 2014.
In conjunction with CrossAmerica’s ongoing review of its actual results and anticipated future earnings, CrossAmerica continuously reassesses the possibility of releasing the valuation allowance on the deferred tax assets. The valuation allowance is based on our estimates of future taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable. It is reasonably possible that a significant portion of the valuation allowance will be released within the next twelve months. We believe the remaining deferred income taxes will be realized based on future taxable income and the reversal of existing temporary differences. Accordingly, we believe that no additional valuation allowances are necessary.
We provide tax reserves for federal, state, local and international uncertain tax positions. The development of these tax positions requires subjective, critical estimates and judgments about tax matters, potential outcomes and timing. Although the outcome of open tax examinations is uncertain, in management’s opinion, adequate provisions for income taxes have been made for potential liabilities resulting from these reviews. If actual outcomes differ materially from these estimates, they could have a material impact on our financial condition and results of operations. Differences between actual results and assumptions, or changes in assumptions in future periods, are recorded in the period they become known. To the extent additional information becomes available prior to resolution; such accruals are adjusted to reflect probable outcomes.
As of December 31, 2015 and 2014, we did not have any significant unrecognized tax benefits. Our practice is to recognize interest and penalties related to income tax matters in income tax expense. We had minimal interest and penalties for the years ended December 31, 2015, 2014 and 2013.
We operate in multiple tax jurisdictions, both inside and outside the United States and are routinely under audit by federal, state and foreign tax authorities. These reviews can involve complex matters that may require an extended period of time for resolution. Our U.S. federal income tax returns have been examined and settled through the tax year 2007. In addition, we are subject to ongoing audits in various state and local jurisdictions, as well as audits in various foreign jurisdictions. In general, the tax years January 1, 2008 through December 31, 2015, remain open in the major taxing jurisdictions, with some state and foreign jurisdictions remaining open longer, as the result of net operating losses and longer statutes of limitation periods.
The cumulative undistributed earnings of our foreign subsidiaries were approximately $1.1 billion. On December 17, 2015, our Canadian subsidiary distributed property (a note receivable) worth $360 million to a subsidiary in the United States. CST incurred withholding taxes on the value of the property distributed, which was deducted in the current year resulting in a net tax impact of $14 million. This repatriation did not cause us to record deferred taxes on our continuing Canadian operations because we have the intent and the ability to indefinitely reinvest the remainder of the accumulated and future foreign earnings. Accordingly, no provision for U.S. federal or state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to Canada. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
Income taxes attributable to CrossAmerica’s earnings and losses, excluding the earnings and losses of its wholly owned taxable subsidiary, are assessed at the individual unit holder level.
Income taxes paid, net of income tax refunds, were $107 million, $77 million and $26 million for the years ended December 31, 2015, 2014 and 2013, respectively. The 2015 taxes include $5 million for CrossAmerica. The CrossAmerica taxes for 2014 were immaterial. Our financial results prior to May 1, 2013, are included in the U.S. and Canadian consolidated tax returns of Valero prior to the spin-off. As such, with the exception of certain states, we did not make cash tax payments directly to taxing jurisdictions; rather, our share of Valero’s tax payments are reflected as changes in “net investment.” Direct cash payments for certain state income taxes and payments after the spin-off were $26 million.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 19. EMPLOYEE BENEFIT PLANS
CST sponsors defined contribution plans that cover employees in the U.S. and Canada. Employees are eligible to participate in the plans once they meet the respective plans’ eligibility requirements, which differ depending on employee level and location. Once eligible, employees participating in the plans are entitled to receive employer matching contributions. Under these plans, employees can contribute a portion of their eligible compensation and CST will match these contributions at rates of 50% to 100% up to 4% of eligible compensation depending on employee level and location. At CST’s discretion, it may also make profit-sharing contributions, which can range from 0% to 4% of eligible compensation, to the plans to be allocated to the participants. Under these plans, we recorded contribution expenses of $10 million, $9 million and $7 million for the years ended December 31, 2015, 2014 and 2013, respectively. These plans were put in place in 2013.
In addition, we recorded expenses related to Valero’s defined benefit and defined contribution plans of $5 million for the year ended December 31, 2013. Following the completion of the separation and the distribution, our active employees no longer participate in benefit plans sponsored or maintained by Valero, and instead participate in our benefit plans.
CrossAmerica’s General Partner manages operations and activities on their behalf. As of December 31, 2014, the majority of CrossAmerica’s management personnel were employees of DMI and related employee benefit costs were covered as part of a management fee. On January 1, 2015, all former employees of DMI associated with operating CrossAmerica became our employees with access to our employee benefit plans.
On September 10, 2015, our Board of Directors approved the terms of the CST Brands, Inc. Employee Stock Purchase Plan (the “Plan”) to be effective on January 1, 2016, subject to approval by the holders of a majority of the outstanding shares of common stock present and entitled to vote at the 2016 stockholders’ annual meeting. CST intends to submit a resolution seeking approval of the Plan to its stockholders at its 2016 stockholders’ annual meeting and to include such resolution in its definitive proxy statement for such meeting. CST permitted employees to participate in the Plan effective on January 1, 2016 provided that any participation rights (which are options to purchase CST stock in accordance with the Plan) granted under the Plan shall be contingent on receipt of stockholder approval and if stockholder approval is not obtained, any and all employee contributions shall be promptly refunded and no shares of common stock may be issued under the Plan.
Note 20. SEGMENT INFORMATION
We have three reportable segments: U.S. Retail, Canadian Retail and CrossAmerica. The U.S. Retail, Canadian Retail and CrossAmerica segments are managed as individual strategic business units. Each segment experiences different operating income margins due to certain unique operating characteristics, geographic supply and demand attributes, specific country and local regulatory environments, and is exposed to variability in gross profit from the volatility of crude oil prices. Operating revenues from our heating oil business were less than 5% of our operating revenues for each period presented and have been included within the Canadian Retail segment information.
Results that are not included in our reportable segments are included in the corporate category, which consist primarily of general and administrative costs. Management evaluates the performance of our CrossAmerica segment without considering the effects of the fair value adjustments to CrossAmerica’s historical account balances required under ASC 805-Business Combinations. As a result, we have included a fair value column to reconcile to our consolidated results. The elimination column represents wholesale fuel supplied to our U.S. Retail segment from CrossAmerica and rental income for retail sites owned by CrossAmerica and leased to our U.S. Retail segment.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The following table reflects activity related to our reportable segments (in millions):
Operating revenues for our principal products were as follows (in millions):
CST’s other operating revenues are primarily derived from our Canadian heating oil business. Merchandise and services include revenues from car wash and commissions from lottery, money orders, air/water/vacuum services, video and game rentals and access to ATMs. CrossAmerica’s other operating revenues primarily relate to rental income.
No single customer accounted for more than 10% of the operating revenues of CST.
For the year ended December 31, 2015, CrossAmerica distributed approximately 17% of its total wholesale distribution volumes to affiliated dealers.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Long-lived assets include property and equipment, goodwill and intangible assets. Geographic information by country for long-lived assets consisted of the following (in millions):
Total assets by reportable segment were as follows (in millions):
Corporate assets of $17 million and $109 million at December 31, 2015 and 2014, respectively, were not allocated to the reportable segments and primarily relate to intangible assets and the indemnification receivable from Valero discussed in Note 13. CrossAmerica’s assets in the table above include $6 million and $3 million at December 31, 2015 and 2014, respectively, of assets that are eliminated upon consolidation.
Note 21. SUPPLEMENTAL CASH FLOW INFORMATION
In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):
The above changes in current assets and current liabilities may differ from changes between amounts reflected in the applicable balance sheets for the respective periods for the following reasons:
•
acquisitions, including the consolidation of CrossAmerica;
•
amounts accrued for capital expenditures are reflected in investing activities when such amounts are paid; and
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
•
certain differences between balance sheet changes and the changes reflected above result from translating foreign currency denominated amounts at the applicable exchange rates as of each balance sheet date.
Additionally, cash transactions between CST and CrossAmerica, including sales of CST Fuel Supply equity interests, NTI sales, IDR and common unit distributions, are eliminated from the statements of cash flows.
Cash flows related to interest and income taxes were as follows (in millions):
For the second and third quarters of 2015, CST settled the CrossAmerica management fee in common units for approximately $7 million and received CrossAmerica common units in the amount of $163 million as partial consideration for the sale of equity interests in CST Fuel Supply and the NTIs to CrossAmerica.
In connection with the GP Purchase and IDR Purchase, CST issued 2,044,490 unregistered shares of CST common stock on October 1, 2014.
CST issued $550 million of 5% senior notes and 75,397,241 shares of CST common stock in 2013 in connection with the spin-off. As a result, CST did not receive cash proceeds related to the issuance of the 5% senior notes or CST common stock.
Note 22. TERMINATION BENEFITS
CST accrued $6 million of severance and benefit costs in 2015 related to certain CST executives and CST employees who were officers of CrossAmerica who have terminated their employment. Such costs are included in general and administrative expenses.
As a result of the continued integration of certain processes and systems of our recently acquired businesses, CrossAmerica committed to a workforce reduction affecting certain employees of CrossAmerica or its affiliates and is recognizing $3 million of estimated cost of severance and other benefits ratably over the required service period, included in general and administrative expenses.
In addition, at December 31, 2014, CrossAmerica had a $2 million accrual for severance and benefit costs related to certain officers who terminated their employment, of which $1 million was paid on April 14, 2015.
A rollforward of our liability for severance and other termination benefits is as follows (in millions):
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 23. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes quarterly financial data for the years ended December 31, 2015 and 2014 (in millions):
Earnings per common share amounts are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share amounts may not equal the annual earnings per share amounts.
The fourth quarter of 2014 and all quarters of 2015 include the consolidated accounts of CrossAmerica.
Note 24. GUARANTOR SUBSIDIARIES
CST’s 100% owned, domestic subsidiaries (the “Guarantor Subsidiaries”) fully and unconditionally guarantee, on a joint and several basis, CST’s 5% senior notes. CrossAmerica is not a guarantor under CST’s 5% senior notes. The following consolidating schedules present financial information on a consolidated basis in conformity with the SEC’s Regulation S-X Rule 3-10(f):
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEETS
(Millions of Dollars)
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Deferred taxes and noncontrolling interest for CrossAmerica include $11 million and $612 million, respectively, related to the fair value adjustments to CrossAmerica’s net assets as a result of the GP Purchase discussed in Note 3.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEETS
(Millions of Dollars)
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Deferred taxes and noncontrolling interest for CrossAmerica include $14 million and $551 million, respectively, related to the fair value adjustments to CrossAmerica’s net assets as a result of the GP Purchase discussed in Form 10-K for the year ended December 31, 2014.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Millions of Dollars)
(a) Depreciation, amortization and accretion expense for CrossAmerica includes $26 million of additional depreciation and amortization expense related to the fair value adjustments to CrossAmerica’s net assets as a result of the GP Purchase and related income tax effects discussed in Note 3.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(CONTINUED)
(Millions of Dollars)
(a) Depreciation, amortization and accretion expense for CrossAmerica includes $7 million of additional depreciation and amortization expense related to the fair value adjustments to CrossAmerica’s net assets as a result of the GP Purchase discussed in Note 3.
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING AND COMBINING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(CONTINUED)
(Millions of Dollars)
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF CASH FLOWS
(Millions of Dollars)
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF CASH FLOWS
(CONTINUED)
(Millions of Dollars)
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING AND COMBINING STATEMENTS OF CASH FLOWS
(CONTINUED)
(Millions of Dollars)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective as of December 31, 2015.
Internal Control over Financial Reporting
(a) Management’s Report on Internal Control over Financial Reporting
The management report on CST’s internal control over financial reporting appears in Item 8 on page 78 of this report, and is incorporated herein by reference.
(b) Attestation Report of the Independent Registered Public Accounting Firm
KPMG LLP’s report on CST’s internal control over financial reporting appears in Item 8 on page 81 of this report, and is incorporated herein by reference.
Grant Thornton LLP’s report on CrossAmerica’s internal control over financial reporting appears in Item 8 on page 82 of this report, and is incorporated herein by reference.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as noted below.
Management’s evaluation of and conclusion regarding the effectiveness of our internal control over financial reporting for the year ended December 31, 2015 does not exclude the internal control over financial reporting of any acquired entities.
As a public company, CrossAmerica’s management is required to report on its evaluation and conclusions regarding the effectiveness of its internal control. As noted in CrossAmerica’s Form 10-K for the year ended December 31, 2015, there were no changes in its internal control over financial reporting that occurred during the year ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting, except for its acquisition of Erickson effective February 12, 2015 and the acquisition of One Stop effective July 1, 2015. The internal controls over financial reporting of Erickson and One Stop are excluded from a formal evaluation of effectiveness of CrossAmerica’s disclosure controls and procedures as of December 31, 2015.
Item 9B.
Item 9B. Other Information
None.
PART III
Items 10-14.
The information required by Items 10 through 14 of Form 10-K is incorporated herein by reference to the definitive proxy statement for our 2016 annual meeting of stockholders. We will file our proxy statement within 120 days after our fiscal year end.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements. The following consolidated financial statements of CST Brands, Inc. are included in Part II, Item 8 of this Form 10-K:
2. Financial Statement Schedules and Other Financial Information. No financial statement schedules are submitted because either they are inapplicable or because the required information is included in the consolidated financial statements or notes thereto.
3. Exhibits. Filed as part of this Form 10-K are the following exhibits:
* Filed herewith.
** Furnished herewith.
+ Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchanges Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CST BRANDS, INC.
By: /s/ Kimberly S. Lubel
Kimberly S. Lubel
Chief Executive Officer, President and Chairman of the Board
Date: February 18, 2016
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Kimberly S. Lubel and Clayton E. Killinger, or any of them, each with power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for her or him and in her or his name, place and stead, in any and all capacities, to sign any or all subsequent amendments and supplements to this Annual Report on Form 10-K, and to file the same, or cause to be filed the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as she or he might or could do in person, hereby qualifying and confirming all that said attorney-in-fact and agent or her or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on February 18, 2016.
Signature
Name and Title
/s/ Kimberly S. Lubel
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
Kimberly S. Lubel
/s/ Clayton E. Killinger
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Clayton E. Killinger
/s/ Donna M. Boles
Director
Donna M. Boles
/s/ Roger G. Burton
Director
Roger G. Burton
/s/ Ruben M. Escobedo
Director
Ruben M. Escobedo
/s/ Denise Incandela
Director
Denise Incandela
/s/ William G. Moll
Director
William G. Moll
/s/ Joseph E. Reece
Director
Joseph E. Reece
/s/ Alan Schoenbaum
Director
Alan Schoenbaum
/s/ Stephen A. Smith
Director
Stephen A. Smith
/s/ Joseph V. Topper, Jr.
Director
Joseph V. Topper, Jr.
/s/ Michael H. Wargotz
Director
Michael H. Wargotz