Attached files
| file | filename |
|---|---|
| EX-23.1 - EXHIBIT 23.1 - CST BRANDS, INC. | exhibit231201410ka.htm |
| EX-32.2 - EXHIBIT 32.2 - CST BRANDS, INC. | exhibit322201410ka.htm |
| EX-31.1 - EXHIBIT 31.1 - CST BRANDS, INC. | exhibit311201410ka.htm |
| EX-31.2 - EXHIBIT 31.2 - CST BRANDS, INC. | exhibit312201410ka.htm |
| EX-32.1 - EXHIBIT 32.1 - CST BRANDS, INC. | exhibit321201410ka.htm |
FORM 10-K/A
(Amendment No. 1)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________ | |
Commission File No. 001-35743
CST BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) | 46-1365950 (I.R.S. Employer Identification No.) | |
One Valero Way Building D, Suite 200 San Antonio, Texas (Address of Principal Executive Offices) | 78249 (Zip Code) (210) 692-5000 (Registrant’s telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act: Common stock, $0.01 par value per share listed on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule12b-2 of the Exchange Act. Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $2.6 billion based on the last sales price quoted as of June 30, 2014 on the New York Stock Exchange, the last business day of the registrant’s most recently completed second fiscal quarter.
As of February 24, 2015, 77,138,003 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2015 Proxy Statement filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with our Annual Meeting of Stockholders held June 4, 2015 are incorporated by reference in Part III of this Form 10-K and are deemed to be a part of this report.
Explanatory Note
This Amendment No. 1 (“Amendment No. 1”) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2015 (the “Form 10-K”), is being filed for the purpose of providing a revised Report of Independent Registered Public Accounting Firm dated February 27, 2015. KPMG LLP (“KPMG”) incorrectly referred to the report of another auditor in their Report of Independent Registered Public Accounting Firm. KPMG has removed the reference to another auditor in its revised report included in this Amendment No. 1.
As required by the rules of the SEC, this Amendment No. 1 sets forth an amended “Item 8. Financial Statement and Supplementary Financial Data” in its entirety and includes the new Section 302 and 906 certifications pursuant to the Sarbanes-Oxley Act of 2002 from the Registrant’s chief executive officer and chief financial officer.
Except as expressly noted herein, this Amendment No. 1 is presented as of the original filing date of the Form 10-K, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the Form 10-K.
TABLE OF CONTENTS
PART II
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, 2014. 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, 2014, the company’s internal control over financial reporting is effective based on those criteria.
Management’s evaluation of and conclusion regarding the effectiveness of our internal control over financial reporting excludes the internal control over financial reporting of CrossAmerica GP LLC (formerly Lehigh Gas GP LLC) and its subsidiaries, which we acquired on October 1, 2014, and of Nice N Easy Grocery Shoppes (NNE), the operations of which we acquired on November 3, 2014, (as described in Note 3 of the notes to consolidated and combined financial statements). CrossAmerica GP LLC is the general partner of CrossAmerica Partners LP (formerly Lehigh Gas Partners LP), which is a consolidated variable interest entity of CST Brands, Inc. Our evaluation of and conclusion regarding the effectiveness of our internal control over financial reporting also excludes the internal control over financial reporting of CrossAmerica Partners LP. The CrossAmerica GP LLC, NNE and CrossAmerica Partners LP consolidation acquisitions contributed approximately 5 percent of our total operating revenues for the year ended December 31, 2014 and accounted for approximately 33 percent of our total assets as of December 31, 2014. We plan to fully integrate CrossAmerica GP LLC, NNE and CrossAmerica Partners LP into our internal control over financial reporting in 2015.
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, 2014 using the criteria set forth by COSO in the 2013 Internal Control-Integrated Framework. CrossAmerica’s management believes that as of December 31, 2014, 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 6 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 can be obtained from CrossAmerica’s Annual Report on Form 10-K as filed with the SEC.
4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
of CST Brands, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of CST Brands, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated and combined statements of income, comprehensive income, cash flows, and changes in stockholders’ equity / net investment for each of the years in the three‑year period ended December 31, 2014. 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 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 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, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2014, 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, 2014, 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 27, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
As discussed in Note 2 to the consolidated and combined financial statements, the Company has changed its method of accounting for discontinued operations in 2014 due to the adoption of Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.
/s/ KPMG LLP
San Antonio, Texas
February 27, 2015
5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
of CST Brands, Inc. and subsidiaries:
We have audited CST Brands, Inc.’s internal control over financial reporting as of December 31, 2014, 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 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 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, CST Brands, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, 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. acquired the General Partner (CrossAmerica GP) of CrossAmerica Partners LP (CrossAmerica) and Nice N Easy Grocery Shoppes (NNE) during 2014. CrossAmerica is a consolidated variable interest entity of CST Brands, Inc. Management excluded from its assessment of the effectiveness of CST Brands, Inc.’s internal control over financial reporting as of December 31, 2014, CrossAmerica GP’s, CrossAmerica’s and NNE’s internal control over financial reporting. The CrossAmerica GP, CrossAmerica, and NNE acquisitions contributed approximately 5 percent of total operating revenues for the year ended December 31, 2014 and accounted for approximately 33 percent of total assets as of December 31, 2014, included in the consolidated financial statements of CST Brands, Inc. and subsidiaries as of and for the year ended December 31, 2014. Our audit of internal control over financial reporting of CST Brands, Inc. also excluded an evaluation of the internal control over financial reporting of CrossAmerica GP, CrossAmerica, and NNE.
6
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, 2014 and 2013, and the related consolidated and combined statements of income, comprehensive income, cash flows, and changes in stockholders’ equity / net investment for each of the years in the three-year period ended December 31, 2014, and our report dated February 27, 2015 expressed an unqualified opinion on those consolidated and combined financial statements.
/s/ KPMG LLP
San Antonio, Texas
February 27, 2015
7
CST BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
December 31, | ||||||||
2014 | 2013 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash (CrossAmerica: $15 at December 31, 2014) | $ | 368 | $ | 378 | ||||
Receivables, net of allowances of $1 and $1, respectively (CrossAmerica: $35 at December 31, 2014) | 173 | 153 | ||||||
Inventories (CrossAmerica: $12 at December 31, 2014) | 221 | 217 | ||||||
Deferred income taxes (CrossAmerica: $1 as of December 31, 2014) | 12 | 7 | ||||||
Prepaid expenses and other (CrossAmerica: $10 at December 31, 2014) | 24 | 11 | ||||||
Total current assets | 798 | 766 | ||||||
Property and equipment, at cost (CrossAmerica: $490 at December 31, 2014) | 2,662 | 1,981 | ||||||
Accumulated depreciation (CrossAmerica: $8 at December 31, 2014) | (705 | ) | (655 | ) | ||||
Property and equipment, net (CrossAmerica: $482 at December 31, 2014) | 1,957 | 1,326 | ||||||
Intangible assets, net (CrossAmerica: $370 at December 31, 2014) | 486 | 31 | ||||||
Goodwill (CrossAmerica: $223 at December 31, 2014) | 242 | 18 | ||||||
Deferred income taxes | 79 | 93 | ||||||
Other assets, net (CrossAmerica: $19 at December 31, 2014) | 79 | 69 | ||||||
Total assets | $ | 3,641 | $ | 2,303 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of debt and capital lease obligations (CrossAmerica: $29 at December 31, 2014) | $ | 77 | $ | 36 | ||||
Accounts payable (CrossAmerica: $31 at December 31, 2014) | 157 | 99 | ||||||
Accounts payable to Valero | 179 | 253 | ||||||
Accrued expenses (CrossAmerica: $21 at December 31, 2014) | 79 | 43 | ||||||
Taxes other than income taxes (CrossAmerica: $10 at December 31, 2014) | 37 | 17 | ||||||
Income taxes payable | 16 | 10 | ||||||
Dividends payable | 5 | 5 | ||||||
Total current liabilities | 550 | 463 | ||||||
Debt and capital lease obligations, less current portion (CrossAmerica: $261 at December 31, 2014) | 1,227 | 1,006 | ||||||
Deferred income taxes (CrossAmerica: $38 at December 31, 2014) | 150 | 94 | ||||||
Asset retirement obligations (CrossAmerica: $19 at December 31, 2014) | 102 | 79 | ||||||
Other long-term liabilities (CrossAmerica: $16 at December 31, 2014) | 57 | 34 | ||||||
Total liabilities | 2,086 | 1,676 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
CST Brands, Inc. stockholders’ equity: | ||||||||
Common stock, 250,000,000 shares authorized at $0.01 par value; 77,674,450 and 75,599,944 shares issued as of December 31, 2014 and December 31, 2013, respectively | 1 | 1 | ||||||
Additional paid-in capital (APIC) | 488 | 406 | ||||||
Treasury stock, at cost; 512,714 common shares as of December 31, 2014 | (22 | ) | — | |||||
Retained earnings | 269 | 87 | ||||||
Accumulated other comprehensive income (AOCI) | 77 | 133 | ||||||
Total CST Brands, Inc. stockholders’ equity | 813 | 627 | ||||||
Noncontrolling interest | 742 | — | ||||||
Total stockholders’ equity | 1,555 | 627 | ||||||
Total liabilities and stockholders’ equity | $ | 3,641 | $ | 2,303 | ||||
See Notes to Consolidated and Combined Financial Statements.
8
CST BRANDS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(Millions of Dollars, Except per Share Amounts)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Operating revenues(a) | $ | 12,758 | $ | 12,777 | $ | 13,135 | ||||||
Cost of sales | 11,487 | 11,680 | 12,002 | |||||||||
Gross profit | 1,271 | 1,097 | 1,133 | |||||||||
Operating expenses: | ||||||||||||
Operating expenses | 685 | 657 | 644 | |||||||||
General and administrative expenses | 140 | 78 | 61 | |||||||||
Depreciation, amortization and accretion expense | 147 | 118 | 115 | |||||||||
Asset impairments | 3 | 6 | — | |||||||||
Total operating expenses | 975 | 859 | 820 | |||||||||
Gain on the sale of assets, net | 32 | — | — | |||||||||
Operating income | 328 | 238 | 313 | |||||||||
Other income, net | 6 | 4 | 1 | |||||||||
Interest expense | (45 | ) | (27 | ) | (1 | ) | ||||||
Income before income tax expense | 289 | 215 | 313 | |||||||||
Income tax expense | 109 | 76 | 105 | |||||||||
Consolidated net income | 180 | 139 | 208 | |||||||||
Net loss attributable to noncontrolling interest | 20 | — | — | |||||||||
Net income attributable to CST stockholders | $ | 200 | $ | 139 | $ | 208 | ||||||
Earnings per common share | ||||||||||||
Basic earnings per common share | $ | 2.63 | $ | 1.84 | $ | 2.76 | ||||||
Weighted-average common shares outstanding (in thousands) | 75,909 | 75,397 | 75,397 | |||||||||
Earnings per common share - assuming dilution | ||||||||||||
Diluted earnings per common share | $ | 2.63 | $ | 1.84 | $ | 2.76 | ||||||
Weighted-average common shares outstanding - assuming dilution (in thousands) | 76,086 | 75,425 | 75,397 | |||||||||
Dividends per common share | $ | 0.250 | $ | 0.125 | $ | — | ||||||
Supplemental information: | ||||||||||||
(a) Includes excise taxes | $ | 1,981 | $ | 2,027 | $ | 2,077 | ||||||
See Notes to Consolidated and Combined Financial Statements.
9
CST BRANDS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Consolidated net income | $ | 180 | $ | 139 | $ | 208 | ||||||
Other comprehensive income (loss): | ||||||||||||
Foreign currency translation adjustment | (56 | ) | (37 | ) | 10 | |||||||
Other comprehensive income (loss) before income taxes | (56 | ) | (37 | ) | 10 | |||||||
Income taxes related to items of other comprehensive income | — | — | — | |||||||||
Other comprehensive income (loss) | (56 | ) | (37 | ) | 10 | |||||||
Comprehensive income | 124 | 102 | 218 | |||||||||
Loss attributable to noncontrolling interests | (20 | ) | — | — | ||||||||
Comprehensive income attributable to CST stockholders | 144 | 102 | 218 | |||||||||
See Notes to Consolidated and Combined Financial Statements.
10
CST BRANDS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Consolidated net income | 180 | 139 | 208 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Stock-based compensation expense | 18 | 4 | 2 | |||||||||
Depreciation, amortization and accretion expense | 147 | 118 | 115 | |||||||||
Gain on the sale of assets, net | (32 | ) | — | — | ||||||||
Asset impairments | 3 | 6 | — | |||||||||
Deferred income tax expense (benefit) | 24 | 16 | (1 | ) | ||||||||
Changes in working capital | 15 | 157 | 43 | |||||||||
Other operating activities, net | — | — | (3 | ) | ||||||||
Net cash provided by operating activities | 355 | 440 | 364 | |||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures | (285 | ) | (200 | ) | (156 | ) | ||||||
Proceeds from the sale of assets held for sale | 58 | — | — | |||||||||
CST acquisition of Nice N Easy | (24 | ) | — | — | ||||||||
Acquisition of Crackerbox | — | — | (61 | ) | ||||||||
GP Purchase and IDR Purchase | (17 | ) | — | — | ||||||||
CrossAmerica acquisition of Nice N Easy | (54 | ) | — | — | ||||||||
CrossAmerica cash acquired | 9 | — | — | |||||||||
Other investing activities, net | 1 | (6 | ) | 2 | ||||||||
Net cash used in investing activities | (312 | ) | (206 | ) | (215 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from issuance of long-term debt | 55 | 500 | — | |||||||||
Payments of long-term debt | (34 | ) | (12 | ) | — | |||||||
Purchases of treasury shares | (22 | ) | — | — | ||||||||
Debt issuance and credit facility origination costs | (2 | ) | (19 | ) | — | |||||||
Payments of capital lease obligations | (2 | ) | (1 | ) | (1 | ) | ||||||
Dividends and distributions paid | (31 | ) | (5 | ) | — | |||||||
Net transfers to Valero | — | (378 | ) | (219 | ) | |||||||
Net cash provided by (used in) financing activities | (36 | ) | 85 | (220 | ) | |||||||
Effect of foreign exchange rate changes on cash | (17 | ) | (2 | ) | — | |||||||
Net increase (decrease) in cash | (10 | ) | 317 | (71 | ) | |||||||
Cash at beginning of year | 378 | 61 | 132 | |||||||||
Cash at end of year | $ | 368 | $ | 378 | $ | 61 | ||||||
See Notes to Consolidated and Combined Financial Statements.
11
CST BRANDS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/ NET INVESTMENT
(Millions of Dollars and Shares)
CST Brands, Inc. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
Common | Treasury | Net | Retained | Non-Controlling | Total | |||||||||||||||||||||||||||||||
Stock | APIC | Stock | Investment | Earnings | AOCI | Total | Interest | Equity | ||||||||||||||||||||||||||||
Balance as of December 31, 2011 | $ | — | $ | — | $ | — | $ | 1,114 | $ | — | $ | 160 | $ | 1,274 | $ | — | $ | 1,274 | ||||||||||||||||||
Net income | — | — | — | 208 | — | — | 208 | — | 208 | |||||||||||||||||||||||||||
Net transfers to Valero | — | — | — | (222 | ) | — | — | (222 | ) | — | (222 | ) | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 10 | 10 | — | 10 | |||||||||||||||||||||||||||
Balance as of December 31, 2012 | — | — | — | 1,100 | — | 170 | 1,270 | — | 1,270 | |||||||||||||||||||||||||||
Net income | — | — | — | 43 | 96 | — | 139 | — | 139 | |||||||||||||||||||||||||||
Net transfers to Valero | — | — | — | (739 | ) | — | — | (739 | ) | — | (739 | ) | ||||||||||||||||||||||||
Issuance of stock at the spin-off | 1 | (1 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Reclassification of net investment to APIC | — | 404 | — | (404 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Stock-based compensation expense | — | 3 | — | — | — | — | 3 | — | 3 | |||||||||||||||||||||||||||
Dividends | — | — | — | — | (9 | ) | — | (9 | ) | — | (9 | ) | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (37 | ) | (37 | ) | — | (37 | ) | ||||||||||||||||||||||||
Balance as of December 31, 2013 | 1 | 406 | — | — | 87 | 133 | 627 | — | 627 | |||||||||||||||||||||||||||
Recognition of noncontrolling interest due to GP Purchase | — | — | — | — | — | — | — | 771 | 771 | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | 200 | — | 200 | (20 | ) | 180 | ||||||||||||||||||||||||||
Stock-based compensation expense | — | 10 | — | — | — | — | 10 | 3 | 13 | |||||||||||||||||||||||||||
Dividends | — | — | — | — | (18 | ) | — | (18 | ) | — | (18 | ) | ||||||||||||||||||||||||
Shares issued in connection with the GP Purchase and IDR Purchase | — | 72 | — | — | — | — | 72 | — | 72 | |||||||||||||||||||||||||||
Stock repurchases under buyback program | — | — | (22 | ) | — | — | — | (22 | ) | — | (22 | ) | ||||||||||||||||||||||||
Distributions to noncontrolling interest | — | — | — | — | — | — | — | (12 | ) | (12 | ) | |||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (56 | ) | (56 | ) | — | (56 | ) | ||||||||||||||||||||||||
Balance as of December 31, 2014 | $ | 1 | $ | 488 | $ | (22 | ) | $ | — | $ | 269 | $ | 77 | $ | 813 | $ | 742 | $ | 1,555 | |||||||||||||||||
See Notes to Consolidated and Combined Financial Statements.
12
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 1. | DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, CONCENTRATION RISK AND DROP DOWN OF FUEL SUPPLY INTEREST |
Description of Business
We operate in the U.S. and Canada, and are one of the largest independent retailers of motor fuel and convenience merchandise items in North America. Our operations include (i) the sale of motor fuel at convenience stores, commission agent sites and cardlocks (which are unattended self-service fueling stations that provide motor fuel to fleet customers, such as trucking and other commercial customers), (ii) the sale of convenience merchandise items and other services (such as car wash operations, and commissions from lottery, money orders, air/water/vacuum services, video and game rentals and access to automated teller machines), and (iii) the sale of heating oil to residential customers and the sale of heating oil and motor fuel to small commercial customers. We use the term “retail site” as a general term to refer to convenience stores, commission agent sites or cardlocks.
On October 1, 2014, we completed the GP Purchase and IDR Purchase for $17 million in cash and approximately 2.0 million shares of our common stock. As a result, we control the operations of CrossAmerica, a publicly traded limited partnership. CrossAmerica is engaged in the wholesale distribution of motor fuels, consisting of gasoline and diesel fuel, and the ownership and leasing of real estate used in the retail distribution of motor fuels. CrossAmerica's operations are conducted entirely within the U.S.
CST represents the business operations of CST and its respective legal subsidiaries before the consolidation of CrossAmerica. CST includes the investment in CrossAmerica’s General Partnership interest and IDRs, and all income associated with those investments.
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, 2014, 2013 and 2012, our U.S. Retail and Canadian Retail segments purchased $9.5 billion, $10.5 billion and $10.8 billion, respectively, of motor fuel from Valero.
CrossAmerica purchases a substantial amount of motor oil from three suppliers. For the year ended December 31, 2014, CrossAmerica's wholesale business purchased approximately 37%, 28% and 22% 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 2014.
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Motor fuel purchases are recorded as a component of cost of sales based on price formulas that vary from terminal to terminal. The actual prices paid typically change daily, based on market fluctuations of wholesale motor fuel prices in the geographic locations where we purchase our motor fuel for resale.
No customers are individually material to our U.S. Retail and Canadian Retail segment operations.
For the year ended December 31, 2014, CrossAmerica distributed approximately 25% of its total wholesale distribution volumes to affiliated dealers.
Subsequent Event—Drop Down of CST Wholesale Fuel Supply Equity Interests
On January 1, 2015, we closed on our first drop down of wholesale fuel supply interests to CrossAmerica. Under the terms of the Contribution Agreement (the “Contribution Agreement”) between CST Services LLC (“CST Services”), an indirect wholly owned subsidiary of ours, and CrossAmerica, CST Services contributed (the “Contribution”) a 5% limited partner interest in CST Fuel Supply LP (“CST Fuel”) to CrossAmerica in exchange for consideration of approximately 1.5 million common units representing limited partner interests in CrossAmerica. The value of the consideration was approximately $60 million based on a price per common unit equal to the closing price of CrossAmerica’s common units on the NYSE on December 31, 2014.
CST Fuel and its subsidiaries own the fuel supply agreements that provide wholesale motor fuel to CST’s U.S. company operated convenience stores. The primary fuel supply contract within CST Fuel is with Valero.
As a condition to closing, CST Services, CST Marketing and Supply and certain subsidiaries of CST Services (“Purchasers”) entered into a fuel distribution agreement (the “Fuel Distribution Agreement”), pursuant to which CST Marketing and Supply will, on an annual basis, sell and deliver to the Purchasers for at least 10 years no less than 1.57 billion gallons of branded and unbranded motor fuels at a fixed net margin of approximately $0.05 per gallon for resale at retail sites operated by such Purchasers.
Note 2. | SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation and Combination
These consolidated and combined financial statements were prepared in accordance with U.S. generally accepted accounting principles (“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 hold 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 2014 results of operations as of October 1, 2014.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results and outcomes could differ from those estimates and assumptions. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances could result in revised estimates and assumptions.
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.
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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 Accounting Standards Codification (“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.
Goodwill
Goodwill represents the excess of cost over the fair value of 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 first day of the fourth quarter 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
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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.
The impairment analysis performed in the fourth quarter of 2014 indicated that goodwill was not impaired.
Intangible Assets
Intangible assets are recorded at fair value at the date of acquisition and primarily relate to fuel supply agreements, distribution agreements, the IDRs and customer lists in our Canadian Retail segment. Intangible assets with definite 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 underground storage tanks (“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 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.
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Revenue 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. |
• | 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, 2014, 2013 and 2012 were $71 million, $71 million and $70 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 employees of DMI 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.
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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. Cost of sales does not include any depreciation of our property and equipment, as any amounts attributed to cost of sales would not be significant.
Motor Fuel Taxes
In the U.S., 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 13.
New Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-08 (“ASU 2014-08”), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08, required to be applied prospectively for reporting periods beginning after December 15, 2014, limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on operations and financial results. The amendment requires expanded disclosures for discontinued operations and also requires additional disclosures regarding disposals of individually significant components that do not qualify as discontinued operations. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We early adopted ASU 2014-08 in 2014, and this adoption impacted the accounting treatment and disclosures related to stores we have been marketing for sale. We determined that certain of these stores met the criteria under ASU 2014-08 to be classified as held for sale, and in accordance with the guidance of ASU 2014-08, property and equipment, net and asset retirement obligations related to those stores was presented separately on the balance sheet at September 30, 2014. Due to materiality and changing circumstances, the remaining unsold stores have not been presented separately on the balance sheet at December 31, 2014. See additional disclosure regarding these stores in Note 8 of the consolidated and combined financial statements included elsewhere in this annual report.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 will become effective for us in the first quarter of 2017 and early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In February 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-02 (“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
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is also permitted. We are currently evaluating the potential impact of this standard on our consolidated financial statements, as well as the available transition methods.
Certain other new financial accounting pronouncements have become effective for our financial statements and the adoption of these pronouncements will not affect our financial position or results of operations, nor will they require any additional disclosures.
Note 3. | ACQUISITIONS |
GP Purchase and IDR Purchase
As discussed in Note 1, in October 2014 we completed the GP Purchase and IDR Purchase. The aggregate consideration paid for the General Partner interest and the IDRs was $17 million in cash and 2.0 million shares of our common stock. We made this strategic investment in CrossAmerica for the following reasons:
• | CrossAmerica provides access to the master limited partnership (“MLP”) capital markets to provide capital for our growth; |
• | We significantly increased our wholesale fuel supply business as this is the primary business of CrossAmerica; |
• | CrossAmerica has historically grown through acquisitions and we acquired additional business development expertise to assist us in accelerating acquisitions; |
• | CrossAmerica has multiple fuel supply relationships with major integrated energy companies, helping diversify CST’s available fuel supply; and |
• | Creates a “sponsored MLP” relationship whereby certain CST assets, such as its dedicated fuel supply business and real property assets, can be dropped down (sold) to CrossAmerica for cash and limited partner consideration. |
The execution of our business strategy, in concert with CrossAmerica, will enable CST to benefit from increasing cash flow streams from the IDRs and any limited partner interests it receives as consideration from the asset drops.
As a result of the GP Purchase, we control CrossAmerica’s General Partner and have the right to appoint all members of the Board of Directors of the General Partner. CrossAmerica is managed and operated by the Board of Directors and executive officers of the General Partner. Therefore, we control the operations and activities of CrossAmerica even though we do not have a controlling ownership of CrossAmerica’s outstanding limited partner units. Therefore, under the guidance in ASC 810–Consolidation, we consolidate the financial results of CrossAmerica.
The GP Purchase was considered a business combination under ASC 805–Business Combinations and required all of the assets and liabilities of CrossAmerica to be recorded at fair value on the date of acquisition. Therefore, U.S. GAAP requires the historical cost amounts for all of CrossAmerica’s assets and liabilities to be recorded at their respective fair values on the date of acquisition even though no consideration of any kind was paid by CST for these assets and liabilities.
We engaged a third party valuation services firm to assist in the calculation of the fair value of CrossAmerica’s assets and liabilities, and included these fair values in our consolidated financial statements. The fair value of CrossAmerica’s net assets were determined based on its enterprise value immediately preceding the GP Purchase, therefore a future decline in the enterprise value of CrossAmerica could result in an impairment to goodwill. Because CrossAmerica is a publicly traded company, the enterprise value was based on readily available market prices for its debt and equity securities. Once the property, equipment and definite-lived intangible assets were recorded at fair value, the residual amount was allocated to goodwill because the fair value of the remaining assets and liabilities approximated their book values. The tangible assets primarily consisted of buildings, USTs and equipment and the definite-lived intangible assets consisted of fuel supply and distribution agreements. The determination of fair values is preliminary, pending completion of the valuation of certain property, equipment, definite-lived intangibles and any related deferred tax effects, and is expected to be finalized during the first quarter of 2015.
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The fair values of CrossAmerica’s assets and liabilities on the date of acquisition were as follows (in millions):
Current assets (excluding inventories) | 74 | |||
Inventories | 14 | |||
Property and equipment | 436 | |||
Intangibles | 367 | |||
Goodwill | 213 | |||
Other assets | 18 | |||
Current liabilities | (65 | ) | ||
Long-term debt and capital leases | (236 | ) | ||
Deferred tax liabilities | (33 | ) | ||
Other liabilities | (17 | ) | ||
Non-controlling interest | (771 | ) | ||
Total consideration | $ | — | ||
Acquisition of Property 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% 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 final allocation of the purchase price was subject to certain adjustments, which were approved on December 15, 2014 by the executive committee of the Board of Directors of CST (“Executive Committee”) and on behalf of CrossAmerica by the conflicts committee (the “Conflicts Committee”) of the Board of Directors of the General Partner of CrossAmerica. The Executive Committee and the Conflicts Committee approved an adjustment to the allocation of the purchase price so that the aggregate purchase price paid by CST was $24 million and the aggregate purchase price paid by CrossAmerica was $54 million.
Subsequent Event—Acquisition of Landmark Industries Stores
In January 2015, CST and CrossAmerica jointly purchased 22 convenience stores from Landmark Industries. The stores operated under the Timewise brand name, offering Shell branded motor fuel. Of the 22 convenience stores, 20 are located in the San Antonio, Texas area and 2 are located in the greater Austin, Texas area. CrossAmerica purchased the real property of the 22 fee sites as well as certain wholesale fuel distribution assets for an initial payment of $44 million. CST purchased the personal property, working capital and the convenience store operations for an initial payment of $20 million. The amounts paid between CrossAmerica and CST are subject to adjustment following completion of independent appraisals. CrossAmerica is leasing the acquired real estate to CST at a “triple net” lease rate of 7.5% and will provide wholesale fuel supply to the 22 sites under long term agreements with a fuel gross profit margin of approximately $0.05 per gallon.
Subsequent Event—Acquisition of Erickson Oil Products
In February 2015, CrossAmerica closed on the purchase of all of the outstanding capital stock of Erickson Oil Products, Inc. and certain related assets for an aggregate purchase price of $85 million, subject to certain post-closing adjustments. The transactions resulted in the acquisition of a total of 64 retail sites located in Minnesota, Michigan, Wisconsin and South Dakota. The convenience store operations are currently under evaluation by our integration team to determine if they are suitable candidates for our U.S. Retail segment’s company owned convenience store operations.
Other Acquisitions
During 2014, we acquired four new company operated sites and purchased six commission agents, converting them to company operated sites, in our Canadian Retail segment for $7 million.
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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 2014 and 2013 of $3 million and $6 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 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.
As discussed in Note 8, 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
U.S. GAAP defines fair value as 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. U.S. GAAP requires the disclosure of the fair values of all financial instruments, regardless of whether they are recognized at their fair values or carrying amounts in our balance sheets.
U.S. GAAP provides a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes inputs to valuation techniques based on the degree to which objective prices in external active markets are available to measure fair value. Following is a description of each of the levels of the fair value hierarchy.
• | Level 1–Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities. |
• | Level 2–Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
• | Level 3–Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect our own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include occasional market quotes or sales of similar instruments or our own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant judgment. |
During the twelve months ended December 31, 2014, there were no transfers between the fair value hierarchy levels.
As discussed in Note 3, CST made two acquisitions in the fourth quarter of 2014. The purchase of the General Partner and IDRs of CrossAmerica were recorded at their fair value as indefinite lived intangibles. The purchase of the General Partner also required all of the assets and liabilities of CrossAmerica to be recorded at fair value on the date of acquisition on the consolidated balance sheet. The assets of Nice N Easy jointly purchased by CST and CrossAmerica were also recorded at fair value on the date of acquisition.
We do not have any other financial instruments measured at fair value on our balance sheets for any of the periods presented. Because of their maturities and/or variable interest rates, certain financial instruments have fair values approximating their carrying values. These instruments include cash, accounts receivable, our credit facilities and trade payables. The fair value disclosure related to our debt is located in Note 13.
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 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.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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.
There were no retail sites impaired for the year ended December 31, 2012.
The following table displays valuation techniques for our nonfinancial assets measured at fair value on a nonrecurring basis as of December 31, 2014, 2013 and 2012 (in millions):
Valuation Techniques | Fair Value | Net Book Value | Impairment | |||||||||||
Level 3 assets as of December 31, 2014: | ||||||||||||||
Property and equipment | Income approach | $ | 2 | $ | 3 | $ | 1 | |||||||
Level 3 assets as of December 31, 2013: | ||||||||||||||
Property and equipment | Income approach | $ | 4 | $ | 10 | $ | 6 | |||||||
Level 3 assets as of December 31, 2012 | ||||||||||||||
Property and equipment | Income approach | $ | — | $ | — | $ | — | |||||||
Note 6. | RECEIVABLES |
Receivables consisted of the following (in millions):
December 31, | ||||||||
2014 | 2013 | |||||||
Trade receivables (CrossAmerica:$35 as of December 31, 2014) | $ | 124 | $ | 123 | ||||
Other | 50 | 31 | ||||||
Total receivables | 174 | 154 | ||||||
Allowance for doubtful accounts | (1 | ) | (1 | ) | ||||
Receivables, net | $ | 173 | $ | 153 | ||||
Changes in the allowance for doubtful accounts consisted of the following (in millions):
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Balance as of beginning of year | $ | 1 | $ | 2 | $ | 2 | ||||||
Acquisitions | — | — | — | |||||||||
Increase in allowance charged to expense | — | — | — | |||||||||
Accounts charged against the allowance, net of recoveries | — | (1 | ) | — | ||||||||
Balance as of end of year | $ | 1 | $ | 1 | $ | 2 | ||||||
22
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 7. | INVENTORIES |
Inventories consisted of the following (in millions):
December 31, | ||||||||
2014 | 2013 | |||||||
Convenience store merchandise (CrossAmerica: $7 as of December 31, 2014) | $ | 128 | $ | 115 | ||||
Motor fuel (CrossAmerica: $5 as of December 31, 2014) | 92 | 101 | ||||||
Supplies | 1 | 1 | ||||||
Inventories | $ | 221 | $ | 217 | ||||
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, 2014 and 2013, the replacement cost (market value) of our U.S. motor fuel inventories exceeded their LIFO carrying amounts by approximately $2 million and $24 million, respectively. We account for our motor fuel inventory in our Canadian Retail and CrossAmerica segments under the weighted-average cost method.
Note 8. | NETWORK OPTIMIZATION |
In the first quarter of 2014, we conducted market reviews across our entire U.S. Retail system and, as a result, identified approximately 100 company operated convenience stores that were candidates for sale. Convenience stores were identified based on several criteria including fuel volumes, inside sales and operating cash flows. These convenience stores are smaller and less profitable than the average convenience stores in our network. In the second quarter of 2014, we engaged an outside consultant, NRC Realty & Capital Advisors, LLC, to market these properties.
There were 93 stores classified as held for sale on the consolidated balance sheet at September 30, 2014 in accordance with ASU 2014-08. We impaired the value of certain of these convenience stores during the third quarter of 2014 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.
During the fourth quarter of 2014, we closed on the sale of 71 of these convenience stores and recognized a gain of $32 million in “Gain on sale of assets, net” on the consolidated statement of income. Of the remaining 22 stores classified as held for sale at September 30, 2014, we have sold 8 in January and February of 2015. While management believes these stores met the criteria as being held for sale at December 31, 2014, they have not been presented separately on the balance sheet as the total net book value of these 8 stores is not considered material. Circumstances changed for the remaining stores and, although they continue to be marketed, management believes that these stores did not meet the criteria as being held for sale at December 31, 2014.
Note 9. PROPERTY AND EQUIPMENT
Major classes of property and equipment consisted of the following (in millions):
December 31, | ||||||||
2014 | 2013 | |||||||
Land (CrossAmerica: $154 as of December 31, 2014) | $ | 580 | $ | 403 | ||||
Buildings (CrossAmerica: $179 as of December 31, 2014) | 678 | 436 | ||||||
Equipment (CrossAmerica: $148 as of December 31, 2014) | 812 | 625 | ||||||
Leasehold improvements (CrossAmerica: $4 as of December 31, 2014) | 311 | 255 | ||||||
Other | 243 | 213 | ||||||
Construction in progress (CrossAmerica: $5 as of December 31, 2014) | 38 | 49 | ||||||
Property and equipment, at cost | 2,662 | 1,981 | ||||||
Accumulated depreciation (CrossAmerica: $8 as of December 31, 2014) | (705 | ) | (655 | ) | ||||
Property and equipment, net | $ | 1,957 | $ | 1,326 | ||||
Other in the table above consists primarily of the assets related to our asset retirement obligations and computer hardware and software.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Depreciation expense related to CST for the years ended December 31, 2014, 2013 and 2012 was $114 million, $106 million and $103 million, respectively. Depreciation expense related to CrossAmerica for the three months ended December 31, 2014 was $8 million.
CST had certain retail sites under capital leases totaling $10 million and $9 million as of December 31, 2014 and 2013, respectively. Accumulated depreciation on assets under capital leases was $4 million and $6 million as of December 31, 2014 and 2013, 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 $52 million and $1 million at December 31, 2014.
See Note 15 for future minimum rental payments on capital lease obligations.
Note 10. GOODWILL
Changes in goodwill consisted of the following (in millions):
U.S. Retail | CrossAmerica | Total | ||||||||||
Balance at December 31, 2012 | $ | — | $ | — | $ | — | ||||||
Goodwill from acquisitions | 18 | — | 18 | |||||||||
Balance at December 31, 2013 | 18 | — | 18 | |||||||||
Goodwill from acquisitions | 1 | 223 | 224 | |||||||||
Balance at December 31, 2014 | $ | 19 | $ | 223 | $ | 242 | ||||||
Goodwill represents the excess of cost over the fair value of 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.
At December 31, 2014, we had $19 million of goodwill recorded in our U.S.Retail segment and $223 million of goodwill recorded in our CrossAmerica segment. In accordance with ASC 350 Intangibles—Goodwill and Other, we have assessed the reporting unit definitions and determined that goodwill in our U.S. Retail segment is tested for impairment by three geographic regions based primarily on how our U.S. Retail segment is organized and managed. After assessing the totality of events and circumstances (primarily that our capital structure as an independent, publicly traded company was based on current market conditions and estimated fair values as of the date of the impairment assessment while our net assets retained the historical book basis of Valero’s retail business prior to the spin-off), we determined that it is more likely than not that the fair value of our reporting unit exceeds its carrying amount and therefore goodwill is not impaired at December 31, 2014.
Our CrossAmerica segment consists of two reporting units: wholesale and retail. As discussed in Note 3, our GP Purchase was considered a business combination requiring that CrossAmerica be recorded at fair value in our consolidation. In performing the partnership appraisal, our third party valuation experts utilized an enterprise value approach as of October 1, 2014. Once the tangible and amortizable intangible assets were written to fair value, the residual amount was allocated to goodwill.
No impairment losses were recorded to CrossAmerica’s goodwill in the fourth quarter of 2014. The fair value of CrossAmerica’s net assets were determined based on its enterprise value immediately preceding the GP Purchase, therefore a future decline in the enterprise value of CrossAmerica could result in an impairment to goodwill.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 11. INTANGIBLE ASSETS
Intangible assets consisted of the following (in millions):
Gross Carrying Amount | Accumulated Amortization | ||||||||||||||
December 31, | December 31, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Indefinite-lived intangible assets | $ | 92 | $ | — | $ | — | $ | — | |||||||
Finite-lived intangible assets (CrossAmerica: $370 net as of December 31, 2014) | 512 | 119 | (118 | ) | (88 | ) | |||||||||
Total | $ | 604 | $ | 119 | $ | (118 | ) | $ | (88 | ) | |||||
Indefinite lived intangible assets (acquired in the IDR Purchase), are not amortized, but instead are tested for impairment at least annually, and tested for impairment more frequently if events and circumstances indicate that the IDRs might be impaired.
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, wholesale fuel distribution rights, trademarks, covenants not to compete and above and below market leases. Intangible assets associated with wholesale fuel supply contracts, wholesale fuel distribution rights and trademarks are amortized over 10 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 $8 million, $8 million and $8 million for the years ended December 31, 2014, 2013 and 2012, respectively. Aggregate amortization expense for CST is expected to be $8 million, 8 million, $1 million, $1 million and $1 million for years ending December 31, 2015, 2016, 2017, 2018 and 2019, respectively.
Amortization expense related to CrossAmerica intangible assets was $10 million for the three months ended December 31, 2014. Aggregate amortization expense for CrossAmerica is expected to be $28 million, $27 million, $27 million, $26 million, and $25 million for the years ending December 31, 2015, 2016, 2017, 2018 and 2019, respectively.
Note 12. ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES
Accrued expenses and other long-term liabilities consisted of the following (in millions):
Accrued Expenses | ||||||||
December 31, | ||||||||
2014 | 2013 | |||||||
Wage and other employee-related liabilities (CrossAmerica: $8 as of December 31, 2014) | $ | 42 | $ | 25 | ||||
Environmental liabilities | 2 | 2 | ||||||
Self-insurance accruals (see Note 15) | 1 | 1 | ||||||
Asset retirement obligations | 3 | 3 | ||||||
Accrued Interest (CrossAmerica: $1 as of December 31, 2014) | 5 | 5 | ||||||
Other (CrossAmerica: $12 as of December 31, 2014) | 26 | 7 | ||||||
Total accrued expenses | $ | 79 | $ | 43 | ||||
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Other Long-Term Liabilities | ||||||||
December 31, | ||||||||
2014 | 2013 | |||||||
Environmental liabilities (CrossAmerica: $1 as of December 31, 2014) | $ | 3 | $ | 3 | ||||
Self-insurance accruals (see Note 15) | 17 | 16 | ||||||
Other (CrossAmerica: $15 as of December 31, 2014) | 37 | 15 | ||||||
Total other long-term liabilities | $ | 57 | $ | 34 | ||||
Other
Other accrued expenses include contingent lease accruals, unearned revenue related to our 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):
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Asset retirement obligations as of beginning of year | $ | 82 | $ | 79 | $ | 76 | ||||||
Acquisition of CrossAmerica | 19 | — | — | |||||||||
Additions to accrual | 7 | 1 | 2 | |||||||||
Accretion expense | 5 | 4 | 4 | |||||||||
Settlements | (6 | ) | (1 | ) | (4 | ) | ||||||
Foreign currency translation | (2 | ) | (1 | ) | 1 | |||||||
Asset retirement obligations as of end of year | $ | 105 | $ | 82 | $ | 79 | ||||||
Less current portion (included in accrued expenses) | (3 | ) | (3 | ) | (2 | ) | ||||||
Asset retirement obligations, less current portion | $ | 102 | $ | 79 | $ | 77 | ||||||
26
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 13. | DEBT |
Our balances for long-term debt and capital leases are as follows (in millions):
December 31, | December 31, | |||||||
2014 | 2013 | |||||||
CST debt and capital leases:(a) | ||||||||
5.00% senior notes due 2023 | $ | 550 | $ | 550 | ||||
Term loan due 2019 | 453 | 488 | ||||||
Capital leases | 11 | 4 | ||||||
Total CST debt and capital leases | 1,014 | 1,042 | ||||||
CrossAmerica debt and capital leases:(b) | ||||||||
Revolving credit facility | 200 | — | ||||||
Other debt | 27 | — | ||||||
Capital leases | 63 | — | ||||||
Total CrossAmerica debt and capital leases | 290 | — | ||||||
Total consolidated debt and capital lease obligations outstanding | 1,304 | 1,042 | ||||||
Less current portion of CST | (48 | ) | (36 | ) | ||||
Less current portion of CrossAmerica | (29 | ) | — | |||||
Consolidated debt and capital lease obligations, less current portion | $ | 1,227 | $ | 1,006 | ||||
(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):
Years Ending December 31, | CST | CrossAmerica | Total Consolidated Principal to be Repaid | |||||||||
2015 | $ | 47 | $ | 26 | $ | 73 | ||||||
2016 | 69 | — | 69 | |||||||||
2017 | 75 | — | 75 | |||||||||
2018 | 75 | 1 | 76 | |||||||||
2019 | 187 | 200 | 387 | |||||||||
Thereafter | 550 | — | 550 | |||||||||
Total | $ | 1,003 | $ | 227 | $ | 1,230 | ||||||
The aggregate fair value and carrying amount of the CST senior notes and term loan at December 31, 2014 were $1.0 billion and $1.0 billion, respectively. The fair value of the term loan approximates its carrying value due to the frequency with which interest rates are reset. The fair value of the senior notes is determined primarily using quoted prices of over the counter traded securities. These quoted prices are considered Level 1 inputs under the fair value hierarchy established by ASC 820, Fair Value Measurements and Disclosures.
The fair value of CrossAmerica's long-term debt approximated its carrying value as of December 31, 2014 due to the frequency with which interest rates are reset based on changes in prevailing interest rates.
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
27
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 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 asset drops 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.
The notes were issued in a private transaction that was not subject to the registration requirements of the Securities Act of 1933, as amended. In connection with the offering of the notes, CST entered into a registration rights agreement pursuant to which CST and the guarantors of the notes would register substantially identical exchange notes under the Securities Act of 1933 and permit holders to exchange the notes for the registered exchange notes. On November 8, 2013, CST commenced such an exchange offer pursuant to an effective registration statement. In the exchange offer, CST exchanged all outstanding notes that were validly tendered with new notes with substantially identical terms. The exchange offer expired on December 11, 2013.
CST Credit Facility
CST’s credit facility provides for an aggregate amount of $800 million in financing, with a final maturity date on September 30, 2019, consisting of the following:
• | a funded term loan in an aggregate principal amount of $500 million; and |
• | a revolving credit facility with up to an aggregate principal amount of borrowings of $300 million. |
This 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 credit facility has, among others, the following terms:
• | subject to exclusions, mandatory prepayments with the net cash proceeds of certain asset sales (including asset drops 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, 2014, CST’s lease adjusted leverage ratio and fixed charge coverage ratio applicable to this credit facility were 2.30 to 1.00 and 2.70 to 1.00, respectively. |
Borrowings under this credit facility bear interest at the London Interbank Offered Rate (“LIBOR”) plus a margin, or an alternate base rate as defined under the agreement, plus a margin. All LIBOR loans have an applicable interest rate margin of 1.75%, and all alternate base rate loans have an applicable interest rate margin of 0.75%. Future interest rate margins will increase or decrease based on CST’s leverage ratio as prescribed under the credit agreement governing the credit facilities and the revolving credit facility provides for customary fees, including commitment fees and other fees. Outstanding borrowings currently under this term loan facility are LIBOR loans bearing interest at 1.92% (effective 30 day LIBOR plus a spread of 1.75%) as of December 31, 2014.
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.
28
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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; |
• | 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) will be secured by the IDRs of CrossAmerica and, in the future, any common units of CrossAmerica owned by CST and other credit parties.
Availability under this revolving credit facility (expires 2019) was as follows (in millions):
December 31, | December 31, | |||||||
2014 | 2013 | |||||||
Total available credit facility limit | $ | 300 | $ | 300 | ||||
Letters of credit outstanding | (3 | ) | (3 | ) | ||||
Maximum leverage ratio constraint | — | (84 | ) | |||||
Total available and undrawn | $ | 297 | $ | 213 | ||||
CrossAmerica Credit Facility
At the date of the GP Purchase, CrossAmerica had 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. Letters of credit outstanding under this credit facility at December 31, 2014 totaled $17 million, reducing notional amount of availability at December 31, 2014 to $333 million. The assets of CST are not security under this credit facility.
Borrowings bear interest, at CrossAmerica’s option, at (1) a rate equal to LIBOR for interest periods of one week or one, two, three or six months, plus a margin of 2.00% to 3.25% per annum, depending on CrossAmerica’s total leverage ratio (as defined) or (2) (a) a base rate equal to the greatest of: (i) the federal funds rate, plus 0.5%, (ii) LIBOR for one month interest periods, plus 1.00% per annum or (iii) the rate of interest established by the agent, from time to time, as its prime rate, plus (b) a margin of 1.00% to 2.25% per annum depending on CrossAmerica’s total leverage ratio. In addition, CrossAmerica incurs a commitment fee based on the unused portion of the revolving credit facility at a rate of 0.35% to 0.50% per annum depending on CrossAmerica’s total leverage ratio. The weighted-average interest rate on outstanding borrowings at December 31, 2014, was 2.7%.
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 for periods after December 31, 2014, except for periods following a material acquisition. However, if an offering of Equity Interests (as defined) in CrossAmerica occurs after July 2, 2014, but prior to December 31, 2014, the total leverage ratio shall not exceed 4.50 to 1.00 for the fiscal quarter ending December 31, 2014; and 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.
29
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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, either (a) in whole on or about August 1, 2015, or (b) 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.
Note 14. RELATED-PARTY TRANSACTIONS
Related Party Transactions with Valero
As discussed in Note 1, Valero retained a 20% ownership interest in CST’s common stock through November 14, 2013. CST considered transactions with Valero to be with a related-party through this date.
Purchased Motor Fuel
As discussed in Note 1, Valero supplied substantially all of the motor fuel purchased by the U.S. Retail and Canadian Retail segments for resale during all years presented. Valero supplied less than 2% of CrossAmerica’s motor fuel purchased for the period from October 1, 2014 through December 31, 2014. For purposes of these financial statements, payables and receivables related to transactions between CST and Valero were included as a component of the net investment prior to the spin-off and as “Accounts payable to Valero” subsequent to the spin-off.
Medical insurance, life insurance, and employee benefit plan expenses
Valero allocated these costs to CST based on Valero’s determination of actual costs attributable to our employees, which CST recorded as components of operating expenses and general and administrative expenses for all periods presented. In connection with the spin-off, CST entered into an Employee Matters Agreement with Valero. The Employee Matters Agreement governs Valero’s and CST’s compensation and employee benefit obligations with respect to the current and former employees of each company, and generally allocates liabilities and responsibilities relating to employee compensation and benefit plans and programs. In connection with the spin-off, CST recognized a $15 million receivable from Valero in connection with Valero’s agreement to indemnify CST for self-insurance obligations that were incurred up to and including the distribution date.
Certain corporate functions
As discussed in Note 1, certain corporate functions performed by Valero on behalf of CST prior to the spin-off were charged to CST based primarily on specific identification of time and/or activities associated with CST, employee headcount or capital expenditures. CST recorded these corporate allocations as a component of general and administrative expenses in the combined statements of income.
The following table reflects significant transactions between CST and Valero during 2013 and 2012 (in millions):
Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
Cost of sales | $ | 10,460 | $ | 10,810 | ||||
Operating expenses(a) | 14 | 43 | ||||||
General and administrative expenses(a) | 14 | 36 | ||||||
(a) | Includes stock-based compensation and employee benefit plan expense allocations that are more fully described in Notes 17 and 20, respectively. |
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Net Investment
The following is a reconciliation of the amounts presented as “Net transfers to Valero” on the statements of changes in stockholders’ equity/net investment and the amounts presented as “Net transfers to Valero” on the statements of cash flows.
Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
Net transfers to Parent per statements of changes in net investment | $ | (739 | ) | $ | (222 | ) | ||
Non-cash transactions: | ||||||||
Net transfers of assets and liabilities with Valero | 361 | 3 | ||||||
Net transfers to Valero per statements of cash flows | $ | (378 | ) | $ | (219 | ) | ||
Certain adjustments were made subsequent to the spin-off to true-up the differences between the book basis and the tax basis of certain assets and liabilities, which resulted in a $9 million reduction in deferred income tax assets and an offsetting reduction to APIC in 2013.
Related Party Transactions with CrossAmerica
As discussed in Note 1, CST completed the GP Purchase and IDR Purchase in October 2014. CST considers transactions with CrossAmerica to be with a related-party and accounts for the transactions as entities under common control.
Rent and Purchased Motor Fuel
As discussed in Note 3, CrossAmerica leases certain retail sites and sells motor fuel to our U.S. Retail segment. The U.S. Retail segment incurred rent expense on these retail sites of less than $1 million and purchased approximately 6 million gallons of motor fuel from CrossAmerica during the three months ended December 31, 2014.
Amended and Restated Omnibus Agreement
Concurrent with the GP Purchase and IDR Purchase, CST, as General Partner, entered into an amended and restated omnibus agreement (“Amended Omnibus Agreement”) with CrossAmerica and various affiliated parties, which amends and restates the original omnibus agreement.
Pursuant to the Amended Omnibus Agreement, CST agrees, among other things, to provide, or cause to be provided, to CrossAmerica the management services previously provided by DMI to CrossAmerica on substantially the same terms and conditions as were applicable to DMI under the original omnibus agreement. Pursuant to the terms of a transition services agreement by and between DMI and CST, DMI provided the management services it provided under the original omnibus agreement to CrossAmerica on our behalf through December 31, 2014. The current fee for the management services provided by CST to CrossAmerica is $670,000 per month, plus a variable rate based on the wholesale motor fuel gallons distributed by CrossAmerica. These charges represent the general and administrative costs of managing CrossAmerica and have been adjusted at year end to actual costs incurred through December 31, 2014. The adjustment from the monthly charge was immaterial. CST and CrossAmerica have the right to negotiate the amount of the management fee on an annual basis, or more often as circumstances require. We expect to update the management fee to reflect current costs of providing management services in the first quarter of 2015.
The initial term of the Amended Omnibus Agreement is five years and will automatically renew for additional one year terms unless any party provides written notice to the other parties 180 days prior to the end of the then current term.
Note 15. 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 9. 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
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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.
As of December 31, 2014, 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):
Operating Leases | ||||||||||||
CST | CrossAmerica | Total | ||||||||||
2015 | $ | 30 | $ | 16 | $ | 46 | ||||||
2016 | 28 | 14 | 42 | |||||||||
2017 | 26 | 13 | 39 | |||||||||
2018 | 21 | 11 | 32 | |||||||||
2019 | 16 | 10 | 26 | |||||||||
Thereafter | 72 | 52 | 124 | |||||||||
Total minimum rental payments | $ | 193 | $ | 116 | $ | 309 | ||||||
Capital Leases | ||||||||||||
CST | CrossAmerica | Total | ||||||||||
2015 | $ | 3 | $ | 6 | $ | 9 | ||||||
2016 | 3 | 6 | 9 | |||||||||
2017 | 3 | 6 | 9 | |||||||||
2018 | 2 | 6 | 8 | |||||||||
2019 | 2 | 6 | 8 | |||||||||
Thereafter | 10 | 65 | 75 | |||||||||
Total minimum rental payments | 23 | 95 | $ | 118 | ||||||||
Less amount representing interest | (12 | ) | (32 | ) | (44 | ) | ||||||
Net minimum rental payments | $ | 11 | $ | 63 | $ | 74 | ||||||
Rental expense was as follows (in millions):
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Minimum rental expense (CrossAmerica: $5 for the year ended December 31, 2014) | $ | 33 | $ | 28 | $ | 25 | ||||||
Contingent rental expense | 20 | 22 | 23 | |||||||||
Total rental expense | $ | 53 | $ | 50 | $ | 48 | ||||||
Litigation Matters
We are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, environmental damages, employment-related claims and damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we record a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In addition, we disclose matters for which management believes a material loss is at least reasonably possible. Except as otherwise stated below, 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.
32
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
MTBE Litigation—CST
Prior to the spin-off, Valero was named in four cases alleging liability related to methyl-tertiary butyl ether (“MTBE”) contamination in groundwater. The plaintiffs are generally water providers, governmental authorities and private water companies alleging that refiners, marketers or retailers of MTBE and gasoline containing MTBE are liable for manufacturing or distributing a defective product. In July 2013, Valero reached an agreement in principle to settle these cases. The Separation and Distribution Agreement between Valero and CST provides that Valero will retain all third-party claims occurring prior to the spin-off relating to those MTBE cases; therefore we have not recorded a loss contingency related to these MTBE cases.
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 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. Recently, the court allowed the plaintiffs to amend 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.
UST Fund Reimbursement Litigation—CST
Colorado. On October 30, 2013, the State of Colorado filed a lawsuit against Valero and CST and several of their subsidiaries and affiliates claiming that, prior to the spin-off, Valero and its former retail subsidiaries filed claims with and recovered funds from Colorado’s Underground Storage Tank Fund and failed to disclose the existence of and/or recoveries from insurance policies, which are alleged to provide coverage for the same remediation activities. The case is subject to the accelerated “CAPP” rules of procedure in Colorado and a trial date is set for March 30, 2015. During the first quarter of 2014, the plaintiffs filed an amended complaint seeking forfeiture of amounts paid by the UST Fund or payment of amounts recovered from insurers for these sites, which they alleged to be in excess of $15 million. While Valero has and continues to maintain control over the historical insurance policies at issue, we are unaware of any insurance claims that were made, or proceeds received, for costs associated with UST remediation at sites in Colorado, other than a settlement in 2002, which was reported to the State. The State agreed to accept a portion of the proceeds from that settlement apportioned to retail sites in Colorado and to release all claims for the sites potentially involved in those insurance recovery actions. We believe that there is no factual basis for the State’s claims and that there are numerous legal defenses to these claims. Both Valero and CST have made demands on the other under the terms of the Separation and Distribution Agreement, which CST and Valero have agreed to resolve after the underlying matters is resolved if necessary. We are working jointly with Valero and intend to vigorously defend this litigation. CST believes that the claims advanced by the state, while unsupportable, are also covered by insurance and have made demands on insurers for defense of this litigation as well the defense of the litigation in Louisiana.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Louisiana. A lawsuit was filed on behalf of the State of Louisiana in the first quarter of 2014 in Louisiana state court against Valero and CST and several of their subsidiaries and affiliates making claims for pre-spin-off claims and recoveries by Valero and its former retail subsidiaries from Louisiana’s UST Fund. This case is in the very initial stages of litigation. Although the claims are similar to those alleged in the Colorado case previously discussed, this litigation involves only sites in Louisiana. We do not believe that these claims have any factual basis, and we believe that we have numerous legal defenses to these claims. Valero and CST are working jointly and we intend to vigorously defend this litigation.
Pennsylvania. A lawsuit was filed on behalf of the State of Pennsylvania in Pennsylvania state court against numerous fuel retailers, including Valero and CST and several of their subsidiaries and affiliates for pre-spin-off claims and recoveries by Valero and its former retail subsidiaries against the Pennsylvania UST Fund. CST’s business never operated sites in Pennsylvania and we do not believe that we are a proper party to this litigation. The state voluntarily dismissed this litigation without prejudice and it is uncertain whether CST will be named as a party to any future litigation the state may choose to pursue.
Telecommunications Consumer Protection Act Litigation—CST
CST has been named as a defendant in a purported class action filed in state court in Nevada alleging that it sent text message marketing communications to recipients who had not given appropriate authorization to receive such communications. This litigation was removed to federal court in Nevada and is in very early stages of litigation. It is too early to assess the likelihood of any potential loss; however, we intend to vigorously oppose class certification and will vigorously defend the claims.
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.
Because environmental laws and regulations are becoming more complex and stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental matters could increase. In addition, any major upgrades in any of our operating facilities could require material additional expenditures to comply with environmental laws and regulations.
Environmental exposures are difficult to assess and estimate for numerous reasons including the complexity and differing interpretations of governmental regulations, the lack of reliable data, the number of potentially responsible parties and their financial capabilities, the multiplicity of possible solutions and the duration of remedial and monitoring activity required. Accruals for environmental liabilities are recorded based on our best estimate using all information that is available at the time. Loss estimates are measured and liabilities are based on currently available facts, existing technology and presently enacted laws and regulations, taking into consideration the likely effects of inflation and other societal and economic factors. Also considered when measuring environmental liabilities are our prior experience in remediation of contaminated sites, other companies’ cleanup experience and data released by the relevant authority.
Legislative and regulatory initiatives regarding climate change and greenhouse gas emissions have accelerated recently in the U.S. and Canada. Greenhouse gases are certain gases, including carbon dioxide that may be contributing to global warming and other climatic changes. If governmental climate change or greenhouse gas reduction initiatives are enacted, they could have a material
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
adverse impact on our business, financial condition and results of operations by increasing our regulatory compliance expenses, increasing our motor fuel costs and/or decreasing customer demand for motor fuel sold at our locations. For example, the California Global Warming Solutions Act, also known as AB 32, directs the California Air Resources Board (“CARB”) to develop and issue regulations to reduce greenhouse gas (“GHG”) emissions in California to 1990 levels by 2020. CARB has promulgated a variety of regulations aimed at reaching this goal, including a regulation creating a statewide cap-and-trade program for the GHG emissions from large stationary sources and fuels suppliers. The cap-and-trade program began regulating the GHG emissions from refineries in 2013, and began covering the GHG emissions from fuels suppliers on January 1, 2015; i.e., fuels suppliers must obtain and hold allowances equivalent to the GHG emissions associated with combustion of all fuel they sell in California. This will mean that the price we pay to purchase motor fuel for resale will increase in California as refiners charge distributors more to cover their cap-and-trade compliance costs and, thereby, we will pass that cost on to our customers. In addition, the Canadian province of Québec enacted a regulation creating a cap-and-trade system that will apply to us starting on January 1, 2015. To the degree these programs or greenhouse gas regulations increase cost that we are unable to recover or otherwise adversely impact consumer demand, these matters could have a material adverse effect on our financial position, results of operations and liquidity.
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, 2014, 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, 2014. While the ultimate outcome of these claims cannot presently be determined, management believes that the accrued liability of $18 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, which is discussed in Note 14.
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 16. | EQUITY |
CST Share Activity
A total of 250 million shares of CST common stock, $0.01 par value, have been authorized of which, 77,674,450 were issued and 77,161,736 were outstanding as of December 31, 2014, and 75,599,944 were issued and outstanding as of December 31, 2013. Included in these amounts were 176,323 and 202,703 shares as of December 31, 2014 and December 31, 2013, 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.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Activity related to shares of CST’s common stock and treasury stock was a follows (in thousands):
Common Stock | Treasury Stock | |||||
Balance at May 1, 2013 | — | — | ||||
Issuance of stock at the spin-off | 75,397 | — | ||||
Transactions in connection with stock-based compensation plans: | ||||||
Stock issuances | 203 | — | ||||
Balance at December 31, 2013 | 75,600 | — | ||||
Transactions in connection with stock-based compensation plans: | ||||||
Stock issuances | 30 | — | ||||
Stock repurchases | — | (11 | ) | |||
Issuance of stock for the GP Purchase and IDR Purchase | 2,044 | — | ||||
Stock repurchases under buyback program | — | (502 | ) | |||
Balance at December 31, 2014 | 77,674 | (513 | ) | |||
CST Treasury Stock
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, 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. As of December 31, 2014 we have $178 million remaining authorization under the $200 million program.
We have purchased shares of our common stock under our publicly announced plan as described above. We have also purchased or plan to purchase shares of our common stock 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. As of December 31, 2014 we have repurchased 512,714 common shares for a total purchase price of $22 million.
CST Dividends
We have 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.
CrossAmerica Distributions
CrossAmerica’s quarterly distribution for the fourth quarter of 2014 was $0.5425 per CrossAmerica common unit.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Comprehensive Income
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, 2014, 2013 and 2012 (in millions):
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Balance at the beginning of the period | $ | 133 | $ | 170 | $ | 160 | ||||||
Other comprehensive (loss) income before reclassifications | (56 | ) | (37 | ) | 10 | |||||||
Amounts reclassified from other comprehensive income | — | — | — | |||||||||
Net other comprehensive (loss) income | (56 | ) | (37 | ) | 10 | |||||||
Balance at the end of the period | $ | 77 | $ | 133 | $ | 170 | ||||||
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 $771 million as a result of consolidating the net assets of CrossAmerica at their fair values. At December 31, 2014 we did not have any equity ownership in CrossAmerica. As discussed in Note 1, we received approximately 1.5 million common units representing limited partner interests in CrossAmerica on January 1, 2015 in connection with the drop down of wholesale fuel supply interests.
Note 17. 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. With respect to stock options to purchase Valero stock held by CST employees, Valero has adjusted the exercise prices and the number of shares subject thereto to reflect the impact of the distribution, as more particularly set forth in the Employee Matters Agreement.
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, 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, 2014 there were 6.6 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 DMI who performed 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.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Stock-based compensation expense was as follows (in millions):
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Stock-based compensation related to CST | $ | 10 | $ | 4 | $ | 2 | ||||||
Stock-based compensation related to CrossAmerica | 8 | — | — | |||||||||
Total stock-based compensation expense | $ | 18 | $ | 4 | $ | 2 | ||||||
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, 2014, options to purchase 0.6 million shares were outstanding with exercise prices ranging from $29.53 to $41.54 per share.
The following summarizes all CST stock option activity during the years ended December 31, 2014 and 2013:
Number of Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (Millions) | ||||||||||
Options outstanding at May 1, 2013 | — | ||||||||||||
Granted | 239,985 | $ | 29.87 | ||||||||||
Exercised | — | ||||||||||||
Unvested options forfeited | (2,125 | ) | $ | 29.53 | |||||||||
Options outstanding at December 31, 2013 | 237,860 | $ | 29.87 | 9.4 | $ | 2 | |||||||
Granted | 375,382 | $ | 31.45 | ||||||||||
Exercised | (929 | ) | $ | 29.53 | $ | — | |||||||
Unvested options forfeited | (5,974 | ) | $ | 29.62 | |||||||||
Vested options expired | (2,500 | ) | $ | 29.53 | |||||||||
Options outstanding at December 31, 2014 | 603,839 | $ | 30.86 | 8.9 | $ | 8 | |||||||
Options exercisable at December 31, 2014 | 75,659 | $ | 29.89 | 8.4 | $ | 1 | |||||||
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, 2014. The pre-tax intrinsic value is the difference between the closing price of our common stock on December 31, 2014 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 2014 and 2013:
Year Ended December 31, | ||||||
2014 | 2013 | |||||
Expected term (years) | 6.00 | 6.00 | ||||
Expected stock price volatility | 39.80 | % | 44.39 | % | ||
Risk-free interest rate | 1.94 | % | 1.04 | % | ||
Expected dividend yield | 0.80 | % | 0.84 | % | ||
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 2014 was $11.86. As of December 31, 2014 there was $2 million of unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 1.3 years.
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, 2014 and 2013:
Number of CST Shares | Weighted-Average Grant-Date Fair Value | ||||||
Restricted shares outstanding at May 1, 2013 | — | ||||||
Granted | 203,813 | $ | 29.73 | ||||
Vested | — | ||||||
Forfeited | (1,110 | ) | $ | 29.53 | |||
Restricted shares outstanding at December 31, 2013 | 202,703 | $ | 29.73 | ||||
Granted | 32,347 | $ | 31.22 | ||||
Vested | (55,467 | ) | $ | 29.69 | |||
Forfeited | (3,260 | ) | $ | 29.53 | |||
Restricted shares outstanding at December 31, 2014 | 176,323 | $ | 30.03 | ||||
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, 2014, there was $2 million of unrecognized compensation cost related to unvested restricted stock. This cost is expected to be recognized over a weighted-average period of approximately 1.2 years.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 during the year ended December 31, 2014:
Number of CST Restricted Stock Units | Weighted-Average Grant-Date Fair Value | ||||||
Restricted stock units outstanding at December 31, 2013 | — | ||||||
Granted | 141,375 | $ | 31.46 | ||||
Vested | — | ||||||
Forfeited | (123 | ) | $ | 31.12 | |||
Restricted stock units outstanding at December 31, 2014 | 141,252 | $ | 31.46 | ||||
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, 2014, 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.
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 three months ended December 31, 2014:
Number of CrossAmerica Units | |||
Phantom units outstanding at September 30, 2014 | 321,772 | ||
Granted | 103,184 | ||
Vested | (169,580 | ) | |
Forfeited | — | ||
Phantom units outstanding at December 31, 2014 | 255,376 | ||
The fair value of the phantom units and other non-vested awards outstanding at December 31, 2014, based on the closing price of CrossAmerica’s common units, was $11 million. Unrecognized compensation expense related to the non-vested awards was $8 million at December 31, 2014 and is expected to be recognized over a weighted average period of 1.7 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
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
incremental charge recorded in the fourth quarter of 2014 associated with the accelerated vesting of these awards was approximately $5 million.
CrossAmerica expects to grant units to certain members of management in March of 2015 representing annual incentive compensation for 2014. As these grants relate to 2014 compensation and will have immediate vesting, CrossAmerica has recognized expense for the entire $2 million value of these grants in the fourth quarter of 2014. The number of units that will ultimately be granted will be determined by the value of CrossAmerica’s common units on the date of grants.
Note 18. | EARNINGS PER COMMON SHARE |
On May 1, 2013, 75,397,241 shares of our common stock were distributed to Valero’s stockholders and Valero in conjunction with the spin-off. For comparative purposes and to provide a more meaningful calculation of earnings per share, we have assumed this amount to be outstanding as of the beginning of the years ended December 31, 2013 and 2012 in the calculation of weighted-average shares outstanding.
Earnings per common share are computed after adjustment for net income or loss attributable to noncontrolling interest. Therefore, all earnings per common share information solely relates to CST common stockholders.
Earnings per common share were computed as follows (in millions, except shares outstanding, common equivalent shares and per share amounts):
Year Ended December 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
Restricted Shares and Units | Common Stock | Restricted Shares and Units | Common Stock | Restricted Shares and Units | Common Stock | |||||||||||||||||||
Earnings per common share: | ||||||||||||||||||||||||
Net income attributable to CST stockholders | $ | 200 | $ | 139 | $ | 208 | ||||||||||||||||||
Less dividends declared: | ||||||||||||||||||||||||
Common stock | 19 | 9 | — | |||||||||||||||||||||
Undistributed earnings | $ | 181 | $ | 130 | $ | 208 | ||||||||||||||||||
Weighted-average common shares outstanding (in thousands) | 302 | 75,909 | 131 | 75,397 | — | 75,397 | ||||||||||||||||||
Earnings per common share | ||||||||||||||||||||||||
Distributed earnings | $ | 0.25 | $ | 0.25 | $ | 0.13 | $ | 0.13 | $ | — | $ | — | ||||||||||||
Undistributed earnings | 2.38 | 2.38 | 1.71 | 1.71 | — | 2.76 | ||||||||||||||||||
Total earnings per common share | $ | 2.63 | $ | 2.63 | $ | 1.84 | $ | 1.84 | $ | — | $ | 2.76 | ||||||||||||
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Year Ended December 31, | ||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||
Restricted Shares and Units | Common Stock | Restricted Shares and Units | Common Stock | Restricted Shares and Units | Common Stock | |||||||||||||
Earnings per common share - assuming dilution: | ||||||||||||||||||
Net income attributable to CST stockholders | $ | 200 | $ | 139 | $ | 208 | ||||||||||||
Weighted-average common shares outstanding (in thousands) | 75,909 | 75,397 | 75,397 | |||||||||||||||
Common equivalent shares: | ||||||||||||||||||
Stock options (in thousands) | 34 | — | — | |||||||||||||||
Restricted stock (in thousands) | 91 | 28 | — | |||||||||||||||
Restricted stock units (in thousands) | 52 | — | — | |||||||||||||||
Weighted-average common shares outstanding - assuming dilution (in thousands) | 76,086 | 75,425 | 75,397 | |||||||||||||||
Earnings per common share - assuming dilution | $ | 2.63 | $ | 1.84 | $ | 2.76 | ||||||||||||
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:
Year Ended December 31, | |||||||||
2014 | 2013 | 2012 | |||||||
Weighted-average anti-dilutive options (in thousands) | 245 | 151 | — | ||||||
No stock-based awards of CST common shares were issued in exchange for either vested or non-vested Valero stock-based awards held by our employees prior to the spin-off. Therefore, there are no stock-based awards included in the calculation of shares used in the diluted earnings per share prior to the spin-off.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 19. INCOME TAXES
Income before income tax expense from our U.S. and Canadian operations was as follows (in millions):
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
U.S. operations | $ | 188 | $ | 111 | $ | 201 | ||||||
Canadian operations | 101 | 104 | 112 | |||||||||
Income before income tax expense | $ | 289 | $ | 215 | $ | 313 | ||||||
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:
Year Ended December 31, | |||||||||
2014 | 2013 | 2012 | |||||||
Federal income tax expense at the U.S. statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
U.S. state income tax expense, net of U.S. federal income tax effect | 1.6 | 1.1 | 1.3 | ||||||
Canadian operations | (2.6 | ) | (3.8 | ) | (2.9 | ) | |||
CrossAmerica operations | 3.1 | — | — | ||||||
Credits | — | (0.4 | ) | — | |||||
State credit loss | — | 3.4 | — | ||||||
Other | 0.7 | — | 0.1 | ||||||
Income tax expense | 37.8 | % | 35.3 | % | 33.5 | % | |||
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 2014 effective tax rate was 34.7%.
Components of income tax expense related to net income were as follows (in millions):
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Current: | ||||||||||||
U.S. federal | $ | 59 | $ | 37 | $ | 67 | ||||||
U.S. state | 6 | 5 | 6 | |||||||||
Canada | 20 | 18 | 33 | |||||||||
Total current | 85 | 60 | 106 | |||||||||
Deferred: | ||||||||||||
U.S. federal | 14 | (4 | ) | 1 | ||||||||
U.S. state | 2 | 10 | — | |||||||||
Canada | 8 | 10 | (2 | ) | ||||||||
Total deferred | 24 | 16 | (1 | ) | ||||||||
Income tax expense | $ | 109 | $ | 76 | $ | 105 | ||||||
Excluding CrossAmerica, 2014 income tax expense was $106 million.
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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):
December 31, | ||||||||
2014 | 2013 | |||||||
Deferred income tax assets: | ||||||||
Tax credit carryforwards | $ | — | $ | — | ||||
Net operating losses (“NOLs”) | 1 | 1 | ||||||
Lease financing obligation (CrossAmerica: $25 as of December 31, 2014) | 25 | — | ||||||
Inventories | 3 | 4 | ||||||
Unpaid insurance reserve | 5 | 5 | ||||||
Accrued expenses | 12 | 6 | ||||||
Property and equipment | 17 | 23 | ||||||
Intangibles | 59 | 69 | ||||||
Other assets (CrossAmerica: $4 as of December 31, 2014) | 9 | 6 | ||||||
Total deferred income tax assets | 131 | 114 | ||||||
Less: Valuation allowance (CrossAmerica: $6 as of December 31, 2014) | (7 | ) | (1 | ) | ||||
Net deferred income tax assets | 124 | 113 | ||||||
Deferred income tax liabilities: | ||||||||
Property and equipment (CrossAmerica: $48 as of December 31, 2014) | (171 | ) | (106 | ) | ||||
Intangibles (CrossAmerica: $10 as of December 31, 2014) | (10 | ) | — | |||||
Other (CrossAmerica: $2 as of December 31, 2014) | (2 | ) | (1 | ) | ||||
Total deferred income tax liabilities | (183 | ) | (107 | ) | ||||
Net deferred income tax assets (liabilities) (CrossAmerica: $37 as of December 31, 2014) | (59 | ) | 6 | |||||
Less: Current deferred income tax assets (CrossAmerica: $1 as of December 31, 2014) | (12 | ) | (7 | ) | ||||
Less: Non-current deferred income tax asset | (79 | ) | (93 | ) | ||||
Non-current deferred income tax liability (CrossAmerica: $38 as of December 31, 2014) | $ | (150 | ) | $ | (94 | ) | ||
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. In 2014 we recorded net deferred tax liabilities of $37 million as a result of the GP purchase. Since the purchase price allocation is preliminary, it is subject to change and such change could be material.
As of December 31, 2014, we had no income tax credit carryforwards. We have $25 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 $1 million on the entire state NOLs due to uncertainties related to our ability to utilize the state net operating losses. At December 31, 2014, our valuation allowance increased by $6 million primarily related to the acquisition of CrossAmerica. CrossAmerica’s valuation allowance at December 31, 2014 relates primarily to the uncertainty of the availability of future profits to realize the tax benefit of the existing deductible temporary difference. In conjunction with the 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
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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, 2014 and 2013, we did not have any unrecognized tax benefits. Our practice is to recognize interest and penalties related to income tax matters in income tax expense. We had no interest and penalties for the years ended December 31, 2014, 2013 and 2012.
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 2001. 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, 2002 through December 31, 2014, 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 $965 million. These earnings are considered to be permanently reinvested in foreign operations and, 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.
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 approximately $77 million for CST and immaterial for CrossAmerica for the year ended December 31, 2014, $26 million for the year ended December 31, 2013 and $1 million for the year ended December 31, 2012.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Note 20. 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 $9 million and $7 million for the years ended December 31, 2014 and 2013, respectively. These plans were put in place in 2013 and therefore there was no expense during 2012.
In addition, we recorded expenses related to Valero’s defined benefit and defined contribution plans of $5 million and $15 million for the years ended December 31, 2013 and 2012, respectively. 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. However, neither CrossAmerica, nor their subsidiaries, nor their General Partner have employees as of December 31, 2014. 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.
Note 21. SEGMENT INFORMATION
Our operations include (i) the sale of motor fuel at convenience stores, commission agents and cardlocks, (ii) the sale of convenience merchandise items and services at convenience stores, (iii) the sale of heating oil to residential customers and heating oil and motor fuel to small commercial customers and (iv) through CrossAmerica, the wholesale distribution of motor fuel and the ownership and leasing of real estate used in the retail distribution of motor fuel.
We have three reportable segments: U.S. Retail, Canadian Retail and CrossAmerica. The U.S. Retail segment substantially consists of convenience store operations located in the United States. The Canadian Retail segment substantially consists of convenience stores, commission agents, cardlocks and heating oil operations located in Canada. CrossAmerica’s operations substantially consist of wholesale and retail distribution of motor fuel and convenience merchandise and the ownership and leasing of real estate used in the retail distribution of motor fuel in the U.S. Operating revenues from our heating oil business were less than 5% of total CST operating revenues for each of the years in the three-year period ended December 31, 2014 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 “step-up” to CrossAmerica’s historical account balances to fair value (see Note 3 for further discussion of these fair value adjustments). 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.
The reportable segments are strategic business units that experience different operating income margins due to geographic supply and demand attributes, the nature of the wholesale distribution as compared to the retail distribution of motor fuel and specific country and local regulatory environments. Performance is evaluated based on operating income. There was $13 million of intersegment revenues related to the sale of fuel from CrossAmerica to certain of our retail sites in the U.S. in the fourth quarter of 2014.
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The following table reflects activity related to our reportable segments (in millions):
U.S. Retail | Canada Retail | CrossAmerica | Corporate | Eliminations | Fair value adjustments | Consolidated | ||||||||||||||||||||||
Year ended December 31, 2014: | ||||||||||||||||||||||||||||
Operating revenues | $ | 7,482 | $ | 4,702 | $ | 587 | $ | — | $ | (13 | ) | $ | — | $ | 12,758 | |||||||||||||
Gross profit | 844 | 393 | 34 | — | — | — | 1,271 | |||||||||||||||||||||
Depreciation, amortization and accretion expense | 90 | 38 | 12 | — | — | 7 | 147 | |||||||||||||||||||||
Operating income (loss) | 345 | 119 | 11 | (140 | ) | — | (7 | ) | 328 | |||||||||||||||||||
Total expenditures for long-lived assets | 223 | 59 | 3 | — | — | — | 285 | |||||||||||||||||||||
Year ended December 31, 2013: | ||||||||||||||||||||||||||||
Operating revenues from external customers | $ | 7,761 | $ | 5,016 | $ | — | $ | — | $ | — | $ | — | $ | 12,777 | ||||||||||||||
Gross profit | 699 | 398 | — | — | — | — | 1,097 | |||||||||||||||||||||
Depreciation, amortization and accretion expense | 82 | 36 | — | — | — | — | 118 | |||||||||||||||||||||
Operating income (loss) | 198 | 118 | — | (78 | ) | — | — | 238 | ||||||||||||||||||||
Total expenditures for long-lived assets | 148 | 54 | — | — | — | — | 202 | |||||||||||||||||||||
Year ended December 31, 2012: | ||||||||||||||||||||||||||||
Operating revenues from external customers | $ | 7,907 | $ | 5,228 | $ | — | $ | — | $ | — | $ | — | $ | 13,135 | ||||||||||||||
Gross profit | 722 | 411 | — | — | — | — | 1,133 | |||||||||||||||||||||
Depreciation, amortization and accretion expense | 78 | 37 | — | — | — | — | 115 | |||||||||||||||||||||
Operating income (loss) | 246 | 128 | — | (61 | ) | — | — | 313 | ||||||||||||||||||||
Total expenditures for long-lived assets | 181 | 42 | — | — | — | — | 223 | |||||||||||||||||||||
Operating revenues for our principal products were as follows (in millions):
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Motor fuel sales (gasoline and diesel) (CrossAmerica: $551 as of December 31, 2014) | $ | 10,580 | $ | 10,667 | $ | 11,036 | ||||||
Merchandise sales (CrossAmerica: $25 as of December 31, 2014) | 1,617 | 1,538 | 1,496 | |||||||||
Other (CrossAmerica: $11 as of December 31, 2014) | 561 | 572 | 603 | |||||||||
Total operating revenues | $ | 12,758 | $ | 12,777 | $ | 13,135 | ||||||
CST’s other operating revenues are derived from our Canadian heating oil business as well as 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, 2014, CrossAmerica distributed approximately 25% of its total wholesale distribution volumes to affiliated dealers.
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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):
December 31, | ||||||||
2014 | 2013 | |||||||
U.S. (CrossAmerica: $1,075 as of December 31, 2014) | $ | 2,312 | $ | 1,003 | ||||
Canada | 373 | 372 | ||||||
Total long-lived assets | $ | 2,685 | $ | 1,375 | ||||
Total assets by reportable segment were as follows (in millions):
December 31, | ||||||||
2014 | 2013 | |||||||
U.S. Retail | $ | 1,544 | $ | 1,472 | ||||
Canadian Retail | 805 | 799 | ||||||
CrossAmerica | 1,170 | — | ||||||
Total reportable segment assets | $ | 3,519 | $ | 2,271 | ||||
Corporate assets of $125 million and $32 million at December 31, 2014 and 2013, respectively, were not allocated to the reportable segments and primarily relate to intangible assets associated with the GP Purchase and IDR Purchase, deferred debt issue costs and the indemnification receivable from Valero discussed in Note 14. CrossAmerica’s assets in the table above include $3 million of trade receivables from the U.S. Retail segment that are eliminated upon consolidation.
Note 22. 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):
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Decrease (increase): | ||||||||||||
Receivables, net | $ | 25 | $ | (26 | ) | $ | 41 | |||||
Inventories | 5 | (23 | ) | (4 | ) | |||||||
Prepaid expenses and other | (2 | ) | (2 | ) | 2 | |||||||
Increase (decrease): | ||||||||||||
Accounts payable | 15 | 18 | 4 | |||||||||
Accounts payable to Valero | (66 | ) | 253 | — | ||||||||
Accrued expenses | 17 | 4 | (3 | ) | ||||||||
Taxes other than income taxes | 10 | (77 | ) | 3 | ||||||||
Income taxes payable | 11 | 10 | — | |||||||||
Changes in working capital | $ | 15 | $ | 157 | $ | 43 | ||||||
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 |
• | 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. |
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Cash flows related to interest were as follows (in millions):
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Interest paid in excess of amount capitalized | $ | 41 | $ | 21 | $ | 1 | ||||||
In connection with the GP Purchase and IDR Purchase, CST issued 2,044,490 unregistered shares of CST common stock on October 1, 2014.
As discussed in Note 13 and Note 18, 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.
There were no significant noncash investing or financing activities for the year ended December 31, 2012.
Note 23. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes quarterly financial data for the years ended December 31, 2014 and 2013 (in millions):
2014 Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
Operating revenues | $ | 3,001 | $ | 3,261 | $ | 3,221 | $ | 3,275 | ||||||||
Gross profit | 245 | 280 | 340 | 406 | ||||||||||||
Operating income | 25 | 57 | 104 | 142 | ||||||||||||
Net income attributable to CST | 11 | 32 | 63 | 94 | ||||||||||||
Basic earnings per common share | $ | 0.14 | $ | 0.43 | $ | 0.83 | $ | 1.21 | ||||||||
Diluted earnings per common share | $ | 0.14 | $ | 0.43 | $ | 0.83 | $ | 1.21 | ||||||||
2013 Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
Operating revenues | $ | 3,188 | $ | 3,211 | $ | 3,316 | $ | 3,062 | ||||||||
Gross profit | 236 | 288 | 291 | 282 | ||||||||||||
Operating income | 32 | 77 | 69 | 60 | ||||||||||||
Net income attributable to CST | 23 | 40 | 42 | 34 | ||||||||||||
Basic earnings per common share | $ | 0.30 | $ | 0.54 | $ | 0.56 | $ | 0.44 | ||||||||
Diluted earnings per common share | $ | 0.30 | $ | 0.54 | $ | 0.56 | $ | 0.44 | ||||||||
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. For comparative purposes, and to provide a more meaningful calculation of earnings per share, we have assumed that the 75,397,241 shares of our common stock that were distributed in the spin-off to be outstanding as of the beginning of each period prior to the spin-off presented in the calculation of weighted-average shares outstanding.
The fourth quarter of 2014 includes 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, certain of the outstanding indebtedness of CST primarily as outlined under the heading “CST 5% Senior Notes” discussed in Note 13. CrossAmerica is not a guarantor under CST’s senior notes. CrossAmerica’s amounts in the consolidating statements of income and comprehensive income for the period ending December 31, 2014, represent CrossAmerica’s results from October 1, 2014, the date of the GP Purchase. The following consolidating and combining schedules present financial information on a consolidated and combined basis in conformity with the SEC’s Regulation S-X Rule 3-10(f):
49
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEETS
(Millions of Dollars)
December 31, 2014 | |||||||||||||||||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | CST Eliminations | Total CST | CrossAmerica | Eliminations | Total Consolidated | ||||||||||||||||||||||||
US | Canada | ||||||||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||||||||||
Cash | $ | — | $ | 148 | $ | 205 | $ | — | $ | 353 | $ | 15 | $ | — | $ | 368 | |||||||||||||||
Receivables, net | 3 | 62 | 73 | — | 138 | 38 | (3 | ) | 173 | ||||||||||||||||||||||
Inventories | — | 144 | 65 | — | 209 | 12 | — | 221 | |||||||||||||||||||||||
Deferred income taxes | — | 11 | — | — | 11 | 1 | — | 12 | |||||||||||||||||||||||
Prepaid expenses and other | — | 9 | 5 | — | 14 | 10 | — | 24 | |||||||||||||||||||||||
Total current assets | 3 | 374 | 348 | — | 725 | 76 | (3 | ) | 798 | ||||||||||||||||||||||
Property and equipment, at cost | 1 | 1,647 | 524 | — | 2,172 | 490 | — | 2,662 | |||||||||||||||||||||||
Accumulated depreciation | — | (527 | ) | (170 | ) | — | (697 | ) | (8 | ) | — | (705 | ) | ||||||||||||||||||
Property and equipment, net | 1 | 1,120 | 354 | — | 1,475 | 482 | — | 1,957 | |||||||||||||||||||||||
Intangible assets, net | — | 97 | 19 | — | 116 | 370 | — | 486 | |||||||||||||||||||||||
Goodwill | — | 19 | — | — | 19 | 223 | — | 242 | |||||||||||||||||||||||
Investment in subsidiaries | 2,029 | — | — | (2,029 | ) | — | — | — | — | ||||||||||||||||||||||
Deferred income taxes | — | — | 79 | — | 79 | — | — | 79 | |||||||||||||||||||||||
Other assets, net | 30 | 25 | 5 | — | 60 | 19 | — | 79 | |||||||||||||||||||||||
Total assets | $ | 2,063 | $ | 1,635 | $ | 805 | $ | (2,029 | ) | $ | 2,474 | $ | 1,170 | $ | (3 | ) | $ | 3,641 | |||||||||||||
Historical amounts for CrossAmerica were adjusted to their fair values as a result of the GP Purchase discussed in Note 3. These adjustments were as follows as of December 31, 2014: | |||||||||||||||||||||||||||||||
Property and equipment, net | $ | 90 | |||||||||||||||||||||||||||||
Intangibles, net | 292 | ||||||||||||||||||||||||||||||
Goodwill | 183 | ||||||||||||||||||||||||||||||
50
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 2014 | |||||||||||||||||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | CST Eliminations | Total CST | CrossAmerica | Eliminations | Total Consolidated | ||||||||||||||||||||||||
US | Canada | ||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLERS’ EQUITY | |||||||||||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||||||||||
Current portion of debt and capital lease obligations | $ | 47 | $ | 1 | $ | — | $ | — | $ | 48 | $ | 29 | $ | — | $ | 77 | |||||||||||||||
Accounts payable | 3 | 76 | 47 | — | 126 | 34 | (3 | ) | 157 | ||||||||||||||||||||||
Accounts payable to Valero | — | 104 | 75 | — | 179 | — | — | 179 | |||||||||||||||||||||||
Accrued expenses | 4 | 40 | 14 | — | 58 | 21 | — | 79 | |||||||||||||||||||||||
Taxes other than income taxes | — | 27 | — | — | 27 | 10 | — | 37 | |||||||||||||||||||||||
Income taxes payable | — | 1 | 15 | — | 16 | — | — | 16 | |||||||||||||||||||||||
Dividends payable | 5 | — | — | — | 5 | — | — | 5 | |||||||||||||||||||||||
Total current liabilities | 59 | 249 | 151 | — | 459 | 94 | (3 | ) | 550 | ||||||||||||||||||||||
Debt and capital lease obligations, less current portion | 956 | 6 | 4 | — | 966 | 261 | — | 1,227 | |||||||||||||||||||||||
Deferred income taxes | — | 112 | — | — | 112 | 38 | — | 150 | |||||||||||||||||||||||
Intercompany payables (receivables) | 220 | (221 | ) | 1 | — | — | — | — | — | ||||||||||||||||||||||
Asset retirement obligations | — | 66 | 17 | — | 83 | 19 | — | 102 | |||||||||||||||||||||||
Other long-term liabilities | 15 | 10 | 16 | — | 41 | 16 | — | 57 | |||||||||||||||||||||||
Total liabilities | 1,250 | 222 | 189 | — | 1,661 | 428 | (3 | ) | 2,086 | ||||||||||||||||||||||
Commitments and contingencies | |||||||||||||||||||||||||||||||
Stockholders’ equity: | |||||||||||||||||||||||||||||||
Common stock | 1 | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||
APIC | 488 | 1,154 | 502 | (1,656 | ) | 488 | — | — | 488 | ||||||||||||||||||||||
Treasury stock | (22 | ) | — | — | — | (22 | ) | — | — | (22 | ) | ||||||||||||||||||||
Retained earnings | 269 | 259 | 114 | (373 | ) | 269 | — | — | 269 | ||||||||||||||||||||||
AOCI | 77 | — | — | — | 77 | — | — | 77 | |||||||||||||||||||||||
Noncontrolling interest | — | — | — | — | — | 742 | — | 742 | |||||||||||||||||||||||
Total stockholders’ equity | 813 | 1,413 | 616 | (2,029 | ) | 813 | 742 | — | 1,555 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 2,063 | $ | 1,635 | $ | 805 | $ | (2,029 | ) | $ | 2,474 | $ | 1,170 | $ | (3 | ) | $ | 3,641 | |||||||||||||
51
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEETS
(Millions of Dollars)
December 31, 2013 | |||||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
ASSETS | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash | $ | — | $ | 231 | $ | 147 | $ | — | $ | 378 | |||||||||
Receivables, net | — | 56 | 97 | — | 153 | ||||||||||||||
Inventories | — | 139 | 78 | — | 217 | ||||||||||||||
Deferred income taxes | — | 6 | 1 | — | 7 | ||||||||||||||
Prepaid expenses and other | — | 5 | 6 | — | 11 | ||||||||||||||
Total current assets | — | 437 | 329 | — | 766 | ||||||||||||||
Property and equipment, at cost | — | 1,477 | 504 | — | 1,981 | ||||||||||||||
Accumulated depreciation | — | (494 | ) | (161 | ) | — | (655 | ) | |||||||||||
Property and equipment, net | — | 983 | 343 | — | 1,326 | ||||||||||||||
Intangible assets, net | — | 2 | 29 | — | 31 | ||||||||||||||
Goodwill | — | 18 | — | — | 18 | ||||||||||||||
Investment in subsidiaries | 1,714 | — | — | (1,714 | ) | — | |||||||||||||
Deferred income taxes | — | — | 93 | — | 93 | ||||||||||||||
Other assets, net | 32 | 32 | 5 | — | 69 | ||||||||||||||
Total assets | $ | 1,746 | $ | 1,472 | $ | 799 | $ | (1,714 | ) | $ | 2,303 | ||||||||
52
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 2013 | |||||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Current portion of debt and capital lease obligations | $ | 35 | $ | 1 | $ | — | $ | — | $ | 36 | |||||||||
Accounts payable | — | 52 | 47 | — | 99 | ||||||||||||||
Accounts payable to Valero | (1 | ) | 158 | 96 | — | 253 | |||||||||||||
Dividends payable | 5 | — | — | — | 5 | ||||||||||||||
Accrued expenses | 4 | 23 | 16 | — | 43 | ||||||||||||||
Taxes other than income taxes | — | 16 | 1 | — | 17 | ||||||||||||||
Income taxes payable | — | 1 | 9 | — | 10 | ||||||||||||||
Total current liabilities | 43 | 251 | 169 | — | 463 | ||||||||||||||
Debt and capital lease obligations, less current portion | 1,003 | 3 | — | — | 1,006 | ||||||||||||||
Deferred income taxes | — | 94 | — | — | 94 | ||||||||||||||
Intercompany payables (receivables) | 58 | (58 | ) | — | — | — | |||||||||||||
Asset retirement obligations | — | 61 | 18 | — | 79 | ||||||||||||||
Other long-term liabilities | 15 | 7 | 12 | — | 34 | ||||||||||||||
Total liabilities | 1,119 | 358 | 199 | — | 1,676 | ||||||||||||||
Commitments and contingencies | |||||||||||||||||||
Stockholders’ equity: | |||||||||||||||||||
Common stock | 1 | — | — | — | 1 | ||||||||||||||
APIC | 406 | 1,037 | 551 | (1,588 | ) | 406 | |||||||||||||
Retained earnings | 87 | 77 | 49 | (126 | ) | 87 | |||||||||||||
AOCI | 133 | — | — | — | 133 | ||||||||||||||
Total stockholders’ equity | 627 | 1,114 | 600 | (1,714 | ) | 627 | |||||||||||||
Total liabilities and stockholders’ equity | $ | 1,746 | $ | 1,472 | $ | 799 | $ | (1,714 | ) | $ | 2,303 | ||||||||
53
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Millions of Dollars)
December 31, 2014 | |||||||||||||||||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | CST Eliminations | Total CST | CrossAmerica | Eliminations | Total Consolidated | ||||||||||||||||||||||||
US | Canada | ||||||||||||||||||||||||||||||
Operating revenues | $ | — | $ | 7,482 | $ | 4,702 | $ | — | $ | 12,184 | $ | 587 | $ | (13 | ) | $ | 12,758 | ||||||||||||||
Cost of sales | — | 6,638 | 4,309 | — | 10,947 | 553 | (13 | ) | 11,487 | ||||||||||||||||||||||
Gross profit | — | 844 | 393 | — | 1,237 | 34 | — | 1,271 | |||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||||
Operating expenses | — | 438 | 236 | — | 674 | 11 | — | 685 | |||||||||||||||||||||||
General and administrative expenses | 14 | 88 | 20 | — | 122 | 18 | — | 140 | |||||||||||||||||||||||
Depreciation, amortization and accretion expense | — | 90 | 38 | — | 128 | 19 | — | 147 | |||||||||||||||||||||||
Asset impairments | — | 3 | — | — | 3 | — | — | 3 | |||||||||||||||||||||||
Total operating expenses | 14 | 619 | 294 | — | 927 | 48 | — | 975 | |||||||||||||||||||||||
Gain on the sale of assets, net | — | 32 | — | — | 32 | — | — | 32 | |||||||||||||||||||||||
Operating (loss) income | (14 | ) | 257 | 99 | — | 342 | (14 | ) | — | 328 | |||||||||||||||||||||
Other income, net | — | 3 | 3 | — | 6 | — | — | 6 | |||||||||||||||||||||||
Interest expense | (41 | ) | — | (1 | ) | — | (42 | ) | (3 | ) | — | (45 | ) | ||||||||||||||||||
Equity in earnings of subsidiaries | 255 | — | — | (255 | ) | — | — | — | — | ||||||||||||||||||||||
Income (loss) before income tax expense | 200 | 260 | 101 | (255 | ) | 306 | (17 | ) | — | 289 | |||||||||||||||||||||
Income tax expense | — | 78 | 28 | — | 106 | 3 | — | 109 | |||||||||||||||||||||||
Net income (loss) | 200 | 182 | 73 | (255 | ) | 200 | (20 | ) | — | 180 | |||||||||||||||||||||
Net loss attributable to noncontrolling interest | — | — | — | — | — | — | 20 | 20 | |||||||||||||||||||||||
Net income attributable to CST stockholders | $ | 200 | $ | 182 | $ | 73 | $ | (255 | ) | $ | 200 | $ | (20 | ) | $ | 20 | $ | 200 | |||||||||||||
Other comprehensive loss, net of tax: | |||||||||||||||||||||||||||||||
Net income (loss) | $ | 200 | $ | 182 | $ | 73 | $ | (255 | ) | $ | 200 | $ | (20 | ) | $ | — | $ | 180 | |||||||||||||
Foreign currency translation adjustment | (56 | ) | — | — | — | (56 | ) | — | — | (56 | ) | ||||||||||||||||||||
Comprehensive income (loss) | 144 | 182 | 73 | (255 | ) | 144 | (20 | ) | — | 124 | |||||||||||||||||||||
Comprehensive income (loss) attributable to noncontrolling interests | — | — | — | — | — | (20 | ) | — | (20 | ) | |||||||||||||||||||||
Comprehensive income attributable to CST stockholders | $ | 144 | $ | 182 | $ | 73 | $ | (255 | ) | $ | 144 | $ | — | $ | — | $ | 144 | ||||||||||||||
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.
54
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING AND COMBINING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(CONTINUED)
(Millions of Dollars)
Year Ended December 31, 2013 | |||||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated and Combined | |||||||||||||||
Operating revenues | $ | — | $ | 7,761 | $ | 5,016 | $ | — | $ | 12,777 | |||||||||
Cost of sales | — | 7,062 | 4,618 | — | 11,680 | ||||||||||||||
Gross profit | — | 699 | 398 | — | 1,097 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Operating expenses | — | 414 | 243 | — | 657 | ||||||||||||||
General and administrative expenses | 4 | 57 | 17 | — | 78 | ||||||||||||||
Depreciation, amortization and accretion expense | — | 82 | 36 | — | 118 | ||||||||||||||
Asset impairments | — | 5 | 1 | — | 6 | ||||||||||||||
Total operating expenses | 4 | 558 | 297 | — | 859 | ||||||||||||||
Operating (loss) income | (4 | ) | 141 | 101 | — | 238 | |||||||||||||
Other income, net | 1 | — | 3 | — | 4 | ||||||||||||||
Interest expense | (27 | ) | — | — | — | (27 | ) | ||||||||||||
Equity in earnings of subsidiaries | 126 | — | — | (126 | ) | — | |||||||||||||
Income (loss) before income tax expense | 96 | 141 | 104 | (126 | ) | 215 | |||||||||||||
Income tax expense | — | 48 | 28 | — | 76 | ||||||||||||||
Net income (loss) | 96 | 93 | 76 | (126 | ) | 139 | |||||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||
Foreign currency translation adjustment | (37 | ) | — | — | — | (37 | ) | ||||||||||||
Comprehensive income | $ | 59 | $ | 93 | $ | 76 | $ | (126 | ) | $ | 102 | ||||||||
55
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
COMBINING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(CONTINUED)
(Millions of Dollars)
Year Ended December 31, 2012 | |||||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Combined | |||||||||||||||
Operating revenues | $ | — | $ | 7,907 | $ | 5,228 | $ | — | $ | 13,135 | |||||||||
Cost of sales | — | 7,185 | 4,817 | — | 12,002 | ||||||||||||||
Gross profit | — | 722 | 411 | — | 1,133 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Operating expenses | — | 398 | 246 | — | 644 | ||||||||||||||
General and administrative expenses | — | 44 | 17 | — | 61 | ||||||||||||||
Depreciation, amortization and accretion expense | — | 78 | 37 | — | 115 | ||||||||||||||
Asset impairments | — | — | — | — | — | ||||||||||||||
Total operating expenses | — | 520 | 300 | — | 820 | ||||||||||||||
Operating income | — | 202 | 111 | — | 313 | ||||||||||||||
Other income, net | — | — | 1 | — | 1 | ||||||||||||||
Interest expense | — | (1 | ) | — | — | (1 | ) | ||||||||||||
Income before income tax expense | — | 201 | 112 | — | 313 | ||||||||||||||
Income tax expense | — | 74 | 31 | — | 105 | ||||||||||||||
Net income | — | 127 | 81 | — | 208 | ||||||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||
Foreign currency translation adjustment | — | — | 10 | — | 10 | ||||||||||||||
Comprehensive income | $ | — | $ | 127 | $ | 91 | $ | — | $ | 218 | |||||||||
56
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF CASH FLOWS
(Millions of Dollars)
Year Ended December 31, 2014 | |||||||||||||||||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | CST Eliminations | Total CST | CrossAmerica | Eliminations | Total Consolidated | ||||||||||||||||||||||||
US | Canada | ||||||||||||||||||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||||||||||||||
Net cash (used in) provided by operating activities | $ | (50 | ) | $ | 247 | $ | 138 | $ | — | $ | 335 | $ | 20 | $ | — | $ | 355 | ||||||||||||||
Cash flows from investing activities: | |||||||||||||||||||||||||||||||
Capital expenditures | — | (223 | ) | (59 | ) | — | (282 | ) | (3 | ) | — | (285 | ) | ||||||||||||||||||
Proceeds from the sale of assets held for sale | — | 58 | — | — | 58 | — | — | 58 | |||||||||||||||||||||||
CST acquisition of Nice N Easy | — | (24 | ) | — | — | (24 | ) | — | — | (24 | ) | ||||||||||||||||||||
GP Purchase and IDR Purchase | — | (17 | ) | — | — | (17 | ) | — | — | (17 | ) | ||||||||||||||||||||
CrossAmerica acquisition of Nice N Easy | — | — | — | — | — | (54 | ) | — | (54 | ) | |||||||||||||||||||||
CrossAmerica cash acquired | — | — | — | — | — | 9 | — | 9 | |||||||||||||||||||||||
Other investing activities, net | — | 3 | (4 | ) | — | (1 | ) | 2 | — | 1 | |||||||||||||||||||||
Net cash used in investing activities | — | (203 | ) | (63 | ) | — | (266 | ) | (46 | ) | — | (312 | ) | ||||||||||||||||||
Cash flows from financing activities: | |||||||||||||||||||||||||||||||
Proceeds from issuance of long-term debt | — | — | — | — | — | 55 | — | 55 | |||||||||||||||||||||||
Payments of long-term debt | (34 | ) | — | — | — | (34 | ) | — | — | (34 | ) | ||||||||||||||||||||
Purchases of treasury shares | (22 | ) | — | — | — | (22 | ) | — | — | (22 | ) | ||||||||||||||||||||
Debt issuance and credit facility origination costs | (2 | ) | — | — | — | (2 | ) | — | — | (2 | ) | ||||||||||||||||||||
Payments of capital lease obligations | — | — | — | — | — | (2 | ) | — | (2 | ) | |||||||||||||||||||||
Dividends and distributions paid | (19 | ) | — | — | — | (19 | ) | (12 | ) | — | (31 | ) | |||||||||||||||||||
Intercompany funding | 127 | (127 | ) | — | — | — | — | — | — | ||||||||||||||||||||||
Net cash provided by (used in) financing activities | 50 | (127 | ) | — | — | (77 | ) | 41 | — | (36 | ) | ||||||||||||||||||||
Effect of foreign exchange rate changes on cash | — | — | (17 | ) | — | (17 | ) | — | — | (17 | ) | ||||||||||||||||||||
Net (decrease) increase in cash | — | (83 | ) | 58 | — | (25 | ) | 15 | — | (10 | ) | ||||||||||||||||||||
Cash at beginning of year | — | 231 | 147 | — | 378 | — | — | 378 | |||||||||||||||||||||||
Cash at end of year | $ | — | $ | 148 | $ | 205 | $ | — | $ | 353 | $ | 15 | $ | — | $ | 368 | |||||||||||||||
57
CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONSOLIDATING AND COMBINING STATEMENTS OF CASH FLOWS
(CONTINUED)
(Millions of Dollars)
Year Ended December 31, 2013 | |||||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated and Combined | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||
Net cash provided by operating activities | (21 | ) | 311 | 150 | — | 440 | |||||||||||||
Cash flows from investing activities: | |||||||||||||||||||
Capital expenditures | — | (153 | ) | (47 | ) | — | (200 | ) | |||||||||||
Acquisition | — | — | (7 | ) | — | (7 | ) | ||||||||||||
Proceeds from dispositions of property and equipment | — | — | 1 | — | 1 | ||||||||||||||
Other investing activities, net | — | — | — | — | — | ||||||||||||||
Net cash used in investing activities | — | (153 | ) | (53 | ) | — | (206 | ) | |||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Proceeds from issuance of long-term debt | 500 | — | — | — | 500 | ||||||||||||||
Payments on long-term debt | (12 | ) | — | — | — | (12 | ) | ||||||||||||
Debt issuance and credit facility origination costs | (19 | ) | — | — | — | (19 | ) | ||||||||||||
Payments of capital lease obligations | — | (1 | ) | — | — | (1 | ) | ||||||||||||
Dividends paid | (5 | ) | — | — | — | (5 | ) | ||||||||||||
Intercompany funding | 57 | (57 | ) | — | — | — | |||||||||||||
Net transfers (to)/from Valero | (500 | ) | 87 | 35 | — | (378 | ) | ||||||||||||
Net cash used in financing activities | 21 | 29 | 35 | — | 85 | ||||||||||||||
Effect of foreign exchange rate changes on cash | — | — | (2 | ) | — | (2 | ) | ||||||||||||
Net increase (decrease) in cash | — | 187 | 130 | — | 317 | ||||||||||||||
Cash at beginning of year | — | 44 | 17 | — | 61 | ||||||||||||||
Cash at end of year | $ | — | $ | 231 | $ | 147 | $ | — | $ | 378 | |||||||||
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CST BRANDS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Year Ended December 31, 2012 | |||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Combined | ||||||||||||
Cash flows from operating activities: | |||||||||||||||
Net cash provided by operating activities | — | 224 | 140 | 364 | |||||||||||
Cash flows from investing activities: | |||||||||||||||
Capital expenditures | — | (114 | ) | (42 | ) | (156 | ) | ||||||||
Acquisitions | — | (61 | ) | — | (61 | ) | |||||||||
Proceeds from dispositions of property and equipment | — | 2 | — | 2 | |||||||||||
Other investing activities, net | — | — | — | — | |||||||||||
Net cash used in investing activities | — | (173 | ) | (42 | ) | (215 | ) | ||||||||
Cash flows from financing activities: | |||||||||||||||
Payments of capital lease obligations | — | (1 | ) | — | (1 | ) | |||||||||
Net transfers to Valero | — | (122 | ) | (97 | ) | (219 | ) | ||||||||
Net cash used in financing activities | — | (123 | ) | (97 | ) | (220 | ) | ||||||||
Effect of foreign exchange rate changes on cash | — | — | — | — | |||||||||||
Net (decrease) increase in cash | — | (72 | ) | 1 | (71 | ) | |||||||||
Cash at beginning of year | — | 116 | 16 | 132 | |||||||||||
Cash at end of year | $ | — | $ | 44 | $ | 17 | $ | 61 | |||||||
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PART IV
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/A:
PAGE | ||
Report of Independent Registered Public Accounting Firm | ||
Consolidated and Combined Balance Sheets as of December 31, 2014 and December 31, 2013 | ||
Consolidated and Combined Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012 | ||
Consolidated and Combined Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012 | ||
Consolidated and Combined Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012 | ||
Consolidated and Combined Statements of Stockholders’ Equity / Net Investment for the Three Years Ended December 31, 2014 | ||
Notes to Consolidated and Combined Financial Statements | ||
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.
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3. Exhibits. Filed as part of this Form 10-K/A are the following exhibits:
Exhibit No. | Description |
2.1 | Separation and Distribution Agreement dated as of April 29, 2013 by and among Valero Energy Corporation and the Company (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
3.1 | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
3.2 | Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 15, 2014) |
4.1 | Indenture dated as of May 1, 2013 by and among the Company, the Guarantors (as defined) and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
4.2 | First Supplemental Indenture, dated as of September 13, 2013, by and among the Company, ELR, LLC, Real Estate Ventures, LLC, the existing Guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on November 6, 2013) |
4.3 | Second Supplemental Indenture, dated as of August 29, 2014, by and among the Company, CST Real Estate Holdings, LLC, the existing Guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on February 27, 2015 (“Form 10-K”)) |
4.4 | Third Supplemental Indenture, dated as of October 6, 2014, by and among the Company, CST Brands Holdings, LLC, CST Brands Holdings, Inc., the existing Guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.4 to the Form 10-K) |
4.5 | Fourth Supplemental Indenture, dated as of October 28, 2014, by and among the Company, CAPL Operations I, LLC, CAPL Holding, Inc., the existing Guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.5 to the Form 10-K) |
4.6 | Fifth Supplemental Indenture, dated as of November 26, 2014, by and among the Company, CST Arizona LLC, CST Louisiana LLC, CST Stations Texas, LLC, N2I One, LLC, N2I Two, LLC, CST Management, Inc., the existing Guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.6 to the Form 10-K) |
4.7 | Sixth Supplemental Indenture, dated as of January 1, 2015, by and among the Company, CST Fuel Supply LP, the existing Guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.7 to the Form 10-K) |
4.8 | Registration Rights Agreement, dated as of October 1, 2014, by and among the Company, The 2004 Irrevocable Agreement of Trust of Joseph V. Topper, Sr. and The 2008 Irrevocable Agreement of Trust of John B. Reilly, Jr. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2014) |
9.1 | Voting Agreement, dated as of October 1, 2014, by and among the Company, Joseph V. Topper, Jr., The 2004 Irrevocable Agreement of Trust of Joseph V. Topper, Sr. and Lehigh Gas Corporation (the former name of Dunne Manning Inc.) (incorporated by reference to Exhibit 9.1 to the Form 10-K) |
10.1 | Transition Services Agreement dated as of April 29, 2013 by and between Valero Services, Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
10.2 | Transition Services Agreement dated as of April 29, 2013 by and between ULTRAMAR LTD and CST Canada Co. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
10.3 | Tax Matters Agreement dated as of April 29, 2013 by and between Valero Energy Corporation and the Company (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
10.4 | Employee Matters Agreement dated as of April 29, 2013 by and between Valero Energy Corporation and the Company (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
10.5 | Branded Distributor Marketing Agreement (Multi-Brand) dated as of May 1, 2013 by and between Valero Marketing and Supply Company and CST Marketing and Supply Company (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
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10.6 | Master Agreement dated as of May 1, 2013 by and between Valero Marketing and Supply Company and CST Marketing and Supply Company (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
10.7 | Petroleum Product Supply Agreement dated as of May 1, 2013 by and between CST Marketing and Supply Company and Valero Marketing and Supply Company (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
10.8 | Petroleum Products Supply Agreement dated as of May 1, 2013 by and between ULTRAMAR LTD and CST Canada Co. (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
10.9 | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2013) |
10.10 | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2014) |
10.11 | 2013 Omnibus Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2013) |
10.12 | Amended and Restated 2013 Omnibus Stock and Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2014) |
10.13 | CST Brands, Inc. Savings Plan (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on May 6, 2013) |
10.14 | CST Brands, Inc. Excess Savings Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 13, 2013) |
10.15 | CST Brands, Inc. Short-Term Incentive Plan for Named Executive Officers (incorporated by reference to Amendment No. 4 to the Company’s Registration Statement on Form 10 filed with the Securities and Exchange Commission on April 4, 2013) |
10.16 | Credit Agreement dated as of March 20, 2013 by and among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders and other financial institutions named therein (incorporated by reference to Exhibit 10.11 to Amendment No. 4 to the Registration Statement on Form 10 filed with the Securities and Exchange Commission on April 4, 2013) |
10.17 | First Amendment to Credit Agreement, dated as of May 1, 2013, by and among the Company, as borrower, the several banks and other financial institutions or entities from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, and the other agents named therein (incorporated by reference to Exhibit 10.17 to the Form 10-K) |
10.18 | Second Amendment to Credit Agreement and Amendment to Guarantee and Collateral Agreement, dated as of September 30, 2014, by and among the Company, as borrower, the several banks and other financial institutions or entities from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, and certain subsidiaries of CST Brands, Inc., as subsidiary guarantors (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2014) |
10.19 | Third Amendment to Credit Agreement, dated as of December 5, 2014, by and among the Company, as borrower, the several banks and other financial institutions or entities from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, and the other agents named therein (incorporated by reference to Exhibit 10.19 to the Form 10-K) |
10.20 | GP Purchase Agreement, dated as of August 6, 2014, by and among Lehigh Gas Corporation, CST GP, LLC and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2014) |
10.21 | IDR Purchase Agreement, dated as of August 6, 2014, by and among The 2004 Irrevocable Agreement of Trust of Joseph V. Topper, Sr., The 2008 Irrevocable Agreement of Trust of John B. Reilly, Jr., CST Brands Holdings, LLC and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2014) |
10.22 | Form of Separation Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2014) |
10.23 | Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2014) |
10.24 | Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2014) |
10.25 | Contribution Agreement, dated as of December 16, 2014, by and among the Company, CST Services LLC and CrossAmerica Partners LP (incorporated by reference to Exhibit 10.25 to the Form 10-K) |
21.1 | List of subsidiaries (incorporated by reference to Exhibit 21.1 to the Form 10-K) |
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23.1* | Consent of KPMG LLP |
24.1 | Power of Attorney (included on signature page) |
31.1* | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1** | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2** | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following materials from the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 formatted in eXtensible Business Reporting Language: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Shareholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements. (incorporated by reference to Exhibit 101 to the Form 10-K) |
* Filed herewith.
** Furnished herewith.
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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: June 8, 2015
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