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EX-32.2 - EXHIBIT 32.2 - CST BRANDS, INC.cstq1-17exhibit322.htm
EX-31.2 - EXHIBIT 31.2 - CST BRANDS, INC.cstq1-17exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - CST BRANDS, INC.cstq1-17exhibit311.htm
EX-32.1 - EXHIBIT 32.1 - CST BRANDS, INC.cstq1-17exhibit321.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10–Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017

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
cst08.jpg
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.)

19500 Bulverde Road
Suite 100
San Antonio, Texas
(Address of Principal Executive Offices)
78259
(Zip Code)
(210) 692-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
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 ¨
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 “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
(do not check if a smaller reporting company)
Smaller reporting company o
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of May 4, 2017, there were 75,924,747 common shares outstanding.





TABLE OF CONTENTS
 
PAGE
 




Commonly Used Defined Terms
The following is a list of certain acronyms and terms generally used in the industry and throughout this document:
 
CST Brands, Inc. and subsidiaries:
CST
CST Brands, Inc., a Delaware corporation and, where appropriate in context, to one or more of CST’s subsidiaries without the inclusion or consolidation of the operations or subsidiaries of CrossAmerica. CST includes CST’s ownership of 100% of the equity interests in the sole member of CrossAmerica GP LLC, 100% of the outstanding IDRs of CrossAmerica (as defined herein) and any common units of CrossAmerica owned by CST
Board of Directors
the Board of Directors of CST
We, us, our, Company
The consolidated results and accounts of CST and CrossAmerica, or individually as the context implies
CrossAmerica
CrossAmerica Partners LP (NYSE:CAPL), a Delaware limited partnership, and, where appropriate in context, one or more of its subsidiaries, or all of them taken as a whole
General Partner
CrossAmerica GP LLC, the General Partner of CrossAmerica
GP Board
The board of directors of the General Partner
Guarantor Subsidiaries
CST’s 100% owned, domestic subsidiaries
CST Fuel Supply
CST Fuel Supply LP is the Parent of CST Marketing and Supply, CST's wholesale motor fuel supply business, which provides wholesale fuel distribution to the majority of CST's U.S. retail convenience stores on a fixed markup per gallon. CrossAmerica currently owns a 17.5% interest in CST Fuel Supply
 
 
CrossAmerica Partners LP related and affiliated parties:
DMS
Dunne Manning Stores LLC (formerly known as Lehigh Gas-Ohio, LLC), an entity associated with Joseph V. Topper, Jr., a member of the GP Board, and a related party. DMS is an operator of retail motor fuel stations. DMS leases retail sites from CrossAmerica in accordance with a master lease agreement with CrossAmerica and DMS purchases substantially all of its motor fuel for these sites from CrossAmerica on a wholesale basis under rack plus pricing
DMI
Dunne Manning Inc., an entity associated with Joseph V. Topper, Jr.
Topstar
Topstar Enterprises, an entity associated with Joseph V. Topper, Jr. Topstar is an operator of retail sites that leases retail sites from CrossAmerica, but does not purchase fuel from CrossAmerica
 
 
Recent Acquisitions:
Nice N Easy
Nice N Easy Grocery Shoppes, acquired by CrossAmerica and CST in November 2014
Flash Foods
Flash Foods, LLC and other entities acquired by CST from the Jones Company, a Georgia corporation, and certain other sellers in February 2016
Franchised Holiday Stores
The franchised Holiday stores acquired by CrossAmerica from S/S/G Corporation in March 2016
State Oil Assets
The assets acquired by CrossAmerica from State Oil Company in September 2016
Other Defined Terms:
 
Amended Omnibus Agreement
The Amended and Restated Omnibus Agreement, dated October 1, 2014, as amended on February 17, 2016, by and among CrossAmerica, the General Partner, DMI, DMS, CST Services LLC and Joseph V. Topper, Jr., which amends and restates the original omnibus agreement that was executed in connection with CrossAmerica’s initial public offering on October 30, 2012
AOCI
Accumulated Other Comprehensive Income
APIC
Additional Paid in Capital
ASC
Accounting Standards Codification
ASU
Accounting Standards Update

i




ATMs
Automated teller machines
Brent
Brent crude oil
BP
BP p.l.c.
Conversion
The conversion of all outstanding subordinated units representing limited partner interests in CrossAmerica into common units on a one-for-one basis
Couche-Tard
Alimentation Couche-Tard Inc. (TSX: ATD.A ATD.B)
CPG
Cents per gallon
DTW
Dealer tank wagon contracts, which are variable cent per gallon priced wholesale motor fuel distribution or supply contracts; DTW also refers to the pricing methodology under such contracts
Exchange Act
Securities Exchange Act of 1934, as amended
ExxonMobil
ExxonMobil Corporation
FASB
Financial Accounting Standards Board
Form 10-K
CST’s Annual Report on Form 10-K for the year ended December 31, 2016
FTC
United States Federal Trade Commission
GCC
U.S. Gulf Coast conventional gasoline
GP Purchase
CST’s purchase from Lehigh Gas Corporation of 100% of the membership interests in the sole member of Lehigh Gas GP LLC (now known as CrossAmerica GP LLC), the general partner of Lehigh Gas Partners LP, a publicly traded limited partnership, now known as CrossAmerica Partners LP (NYSE:CAPL), which occurred October 1, 2014
IDRs
Incentive Distribution Rights, which are partnership interests in CrossAmerica that provide for special distributions associated with increasing partnership distributions. CST is the owner of 100% of the outstanding IDRs of CrossAmerica
IRS
Internal Revenue Service
LIFO
The dollar-value, last-in, first-out method of accounting for motor fuel inventory in our U.S. Retail Segment
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Merger
The merger of Ultra Acquisition Corp. with CST, with CST surviving the merger as a wholly owned subsidiary of Circle K Stores Inc. See Merger Agreement below
Merger Agreement
Our Agreement and Plan of Merger (the “Merger Agreement”) entered into on August 21, 2016 with Circle K Stores Inc., a Texas corporation (“Parent”), and Ultra Acquisition Corp., a Delaware corporation and an indirect, wholly owned subsidiary of Parent (“Merger Sub”). Under and subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into CST, with CST surviving the Merger as a wholly owned subsidiary of Parent. Parent is a wholly owned subsidiary of Couche-Tard Inc.
Merger Consideration
Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock of the Company (other than shares owned by the Company as treasury stock and shares owned by Parent or Merger Sub, or by any subsidiary of the Company, Parent or Merger Sub, and any shares for which dissenters’ rights have been properly exercised and not withdrawn or lost under Delaware law) will be converted into the right to receive $48.53 in cash, without interest
Motiva
Motiva Enterprises LLC
NTI
Our new to industry stores in our U.S. Retail and Canadian Retail segments opened after January 1, 2008, which is generally when we began designing and operating our larger format stores that accommodate broader merchandise categories and food offerings and have more fuel dispensers than our legacy stores
NYSE
New York Stock Exchange
NYHC
New York Harbor conventional gasoline
Partnership Agreement
the First Amended and Restated Agreement of Limited Partnership of CrossAmerica Partners LP, dated as of October 1, 2014, as amended

ii




Retail site
A general term to refer to convenience stores, including those operated by commission agents / dealers, independent dealers or lessee dealers and company operated sites, as well as cardlock locations
SEC
U.S. Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
Second Request
A request for additional information and documentary material from the FTC received by us on November 16, 2016
Spin-off
The separation and distribution of the retail business from Valero’s other businesses and the creation of an independent publicly traded company, CST, on May 1, 2013, to hold the assets and liabilities associated with Valero’s retail business from and after the distribution
U.S. GAAP
United States Generally Accepted Accounting Principles
Valero
Valero Energy Corporation (NYSE: VLO) and, where appropriate in context, one or more of its subsidiaries, or all of them taken as a whole
WTI
West Texas Intermediate crude oil


iii





PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CST BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
 
 
March 31,
 
December 31,
 
 
2017
 
2016
ASSETS
 
(Unaudited)
 
 
Current assets:
 
 
 
 
Cash (CrossAmerica: $6 and $1, respectively)
 
$
182

 
$
137

Restricted cash
 
22

 
22

Accounts receivable, net of allowances of $1 and $1, at March 31, 2017 and December 31, 2016, respectively (CrossAmerica: $31 and $37, respectively)
 
174

 
195

Inventories (CrossAmerica: $13 and $13, respectively)
 
235

 
250

Prepaid taxes (CrossAmerica: $1 and $1, respectively)
 
7

 
3

Prepaid expenses and other (CrossAmerica: $6 and $8, respectively)
 
22

 
20

Total current assets
 
642

 
627

Property and equipment, at cost (CrossAmerica: $826 and $822, respectively)
 
3,579

 
3,565

Accumulated depreciation (CrossAmerica: $110 and $96, respectively)
 
(973
)
 
(923
)
Property and equipment, net (CrossAmerica: $716 and $726, respectively)
 
2,606

 
2,642

Intangible assets, net (CrossAmerica: $312 and $321, respectively)
 
347

 
357

Goodwill (CrossAmerica: $391 and $391, respectively)
 
619

 
619

Deferred income taxes
 
62

 
62

Other assets, net (CrossAmerica: $19 and $18, respectively)
 
33

 
53

Total assets
 
$
4,309

 
$
4,360

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of debt and capital lease obligations (CrossAmerica: $2 and $2, respectively)
 
$
78

 
$
78

Accounts payable (CrossAmerica: $32 and $35, respectively)
 
182

 
223

Accounts payable to Valero
 
174

 
181

Accrued expenses (CrossAmerica: $15 and $16, respectively)
 
73

 
70

Taxes other than income taxes (CrossAmerica: $13 and $12, respectively)
 
53

 
61

Income taxes payable
 
1

 
2

Total current liabilities
 
561

 
615

Debt and capital lease obligations, less current portion (CrossAmerica: $473 and $465, respectively)
 
1,463

 
1,427

Deferred income taxes (CrossAmerica: $48 and $52, respectively)
 
252

 
274

Asset retirement obligations (CrossAmerica: $28 and $28, respectively)
 
131

 
129

Other long-term liabilities (CrossAmerica: $100 and $100, respectively)
 
132

 
136

Total liabilities
 
2,539

 
2,581

Commitments and contingencies (Note 7)
 


 


Stockholders’ equity:
 
 
 
 
CST Brands, Inc. stockholders’ equity:
 
 
 
 
Common stock, 250,000,000 shares authorized at $0.01 par value; 78,129,071 and 77,935,731 shares issued as of March 31, 2017 and December 31, 2016, respectively
 
1

 
1

Additional paid-in capital (APIC)
 
639

 
629

Treasury stock, at cost: 2,208,436 and 2,186,617 common shares as of March 31, 2017 and December 31, 2016, respectively
 
(91
)
 
(89
)
Retained earnings
 
716

 
713

Accumulated other comprehensive (loss) (AOCI)
 
(21
)
 
(25
)
Total CST Brands, Inc. stockholders’ equity
 
1,244

 
1,229

Noncontrolling interests
 
526

 
550

Total stockholders’ equity
 
1,770

 
1,779

Total liabilities and stockholders’ equity
 
$
4,309

 
$
4,360

See Condensed Notes to Consolidated Financial Statements.

1




CST BRANDS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except Share and per Share Amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Operating revenues(a)
 
$
2,796

 
$
2,371

Cost of sales(b)
 
2,463

 
2,034

Gross profit
 
333

 
337

Operating expenses:
 
 
 
 
Operating expenses
 
207

 
204

General and administrative expenses
 
50

 
46

Depreciation, amortization and accretion expense
 
64

 
61

Total operating expenses
 
321

 
311

Operating income
 
12

 
26

Other income, net
 
2

 
10

Interest expense
 
(18
)
 
(15
)
Income (loss) before income tax expense
 
(4
)
 
21

Income tax expense (benefit)
 
(1
)
 
9

Consolidated net income (loss)
 
(3
)
 
12

Net loss attributable to noncontrolling interests
 
6

 
7

Net income attributable to CST stockholders
 
$
3

 
$
19

Earnings per common share
 
 
 
 
Basic earnings per common share
 
$
0.04

 
$
0.24

Weighted-average common shares outstanding (in thousands)
 
75,813

 
75,498

Earnings per common share – assuming dilution
 
 
 
 
Diluted earnings per common share
 
$
0.04

 
$
0.24

Weighted-average common shares outstanding - assuming dilution (in thousands)
 
76,468

 
75,965

 
 
 
 
 
Dividends per common share
 
$

 
$
0.0625


Supplemental information:
 
 
 
 
(a) Includes excise taxes of:
 
$
482

 
$
549

(a) Includes revenues from fuel sales to related parties of:
 
$
54

 
$
50

(a) Includes income from rentals of:
 
$
17

 
$
15

(b) Includes expenses from fuel sales to related parties of:
 
$
53

 
$
48

(b) Includes expenses from rentals of:
 
$
5

 
$
5

See Condensed Notes to Consolidated Financial Statements.

2




CST BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Consolidated net income (loss)
 
$
(3
)
 
$
12

Other comprehensive income:
 
 
 
 
Foreign currency translation adjustment
 
4

 
15

Other comprehensive income before income taxes
 
4

 
15

Income taxes related to items of other comprehensive income
 

 

Other comprehensive income
 
4

 
15

Comprehensive income
 
1

 
27

Loss attributable to noncontrolling interests
 
(6
)
 
(7
)
Comprehensive income attributable to CST
   stockholders
 
$
7

 
$
34

See Condensed Notes to Consolidated Financial Statements.

3




CST BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Consolidated net income (loss)
 
$
(3
)
 
$
12

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Stock-based compensation expense
 
8

 
6

Depreciation, amortization and accretion expense
 
64

 
61

Deferred income tax (benefit)
 
(3
)
 
(1
)
Changes in working capital, net of acquisitions
 
3

 
10

Net cash provided by operating activities
 
$
69

 
$
88

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
$
(43
)
 
$
(66
)
Proceeds from the sale of assets
 
2

 

CST acquisitions, net of cash acquired
 

 
(448
)
CrossAmerica acquisitions, net of cash acquired
 

 
(53
)
Net cash used in investing activities
 
$
(41
)
 
$
(567
)
Cash flows from financing activities:
 
 
 
 
Borrowings under the CST revolving credit facility
 
$
65

 
$
367

Payments on the CST revolving credit facility
 
(20
)
 
(55
)
Payments on the CST term loan facility
 
(19
)
 
(13
)
CST debt issuance costs
 

 
(1
)
Borrowings under the CrossAmerica revolving credit facility
 
31

 
91

Payments on the CrossAmerica revolving credit facility
 
(24
)
 
(26
)
CrossAmerica repurchases of common units
 

 
(3
)
Payments of capital lease obligations
 

 
(1
)
CST dividends paid
 

 
(5
)
CrossAmerica distributions paid
 
(16
)
 
(16
)
Net cash provided by financing activities
 
17

 
338

Effect of foreign currency translation changes on cash
 

 
(6
)
Net increase (decrease) in cash
 
45

 
(147
)
Cash at beginning of period
 
137

 
314

Cash at end of period
 
$
182

 
$
167

See Condensed Notes to Consolidated Financial Statements.

4


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.
MERGER AGREEMENT, DESCRIPTION OF BUSINESS AND OTHER DISCLOSURES
Our Merger Agreement
On August 21, 2016, our Board of Directors unanimously approved, and we entered into, the Merger Agreement with a subsidiary of Couche-Tard, under which, subject to the terms and conditions thereof, a U.S. subsidiary of Couche-Tard will acquire all of the shares of CST for $48.53 per share in cash, representing a total enterprise value of approximately $4.4 billion, including the assumption of net debt. CST’s stockholders approved the Merger Agreement at a special meeting of stockholders held November 16, 2016. The Merger Agreement provides for interim operating covenants as set forth therein, which limit certain activities and operations of CST.
Earlier this year, both CST and Couche-Tard certified substantive compliance with the second request received from the FTC in late 2016. CST and Couche-Tard have been continuing to work cooperatively with regulators in their review of the merger and, based on what we consider to be the substantial progress made to date, while there can be no assurances as to timing, we continue to expect that we will complete the merger on or before June 30, 2017.
Description of Business and Current Developments
CST is a holding company and conducts substantially all of its operations through its subsidiaries. CST was incorporated in Delaware in 2012, formed solely in contemplation of the Spin-off and, prior to May 1, 2013, had not commenced operations and had no material assets, liabilities or commitments.
CST owns 100% of the equity interests of the sole member of the General Partner, 100% of the IDRs and 20.2% (as of March 31, 2017) of the outstanding limited partner units of CrossAmerica. CrossAmerica is a separate publicly traded Delaware limited partnership. CST controls the General Partner and has the right to appoint all members of the GP Board. The General Partner is managed and operated by the executive officers of the General Partner, under the oversight of the GP Board. Therefore, we control the operations and activities of CrossAmerica even though we do not have a majority ownership of CrossAmerica’s outstanding limited partner units. As a result, under the guidance in ASC 810–Consolidation, we consolidate CrossAmerica.
Interim Financial Information
These unaudited financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Exchange Act. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Management believes that the disclosures made are adequate to keep the information presented from being misleading. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K. Financial information as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 included in the consolidated financial statements has been derived from our unaudited financial statements. Financial information as of December 31, 2016, has been derived from our audited financial statements and notes thereto as of that date.
Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. Our business exhibits substantial seasonality due to our wholesale and retail sites being located in certain geographic areas that are affected by seasonal weather and temperature trends and associated changes in retail customer activity during different seasons. Historically, sales volumes and operating income have been highest in the second and third quarters (during the summer activity months) and lowest during the winter months in the first and fourth quarters.
Our effective income tax rates for the three months ended March 31, 2017 and 2016 were 36% and 43%, respectively. The effective tax rate for 2016 was higher as a result of our consolidation of CrossAmerica, which incurred a loss that was not fully tax deductible. As a limited partnership, CrossAmerica is not subject to Federal and State income tax with the exception of its operations in certain tax paying corporate subsidiaries. CST’s effective tax rate, excluding CrossAmerica, was 37%, which includes Federal and State income tax expense.
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.

5


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Significant Accounting Policies
There have been no material changes to our significant accounting policies.
New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09–Revenue from Contracts with Customers (Topic 606), which results in comprehensive new revenue accounting guidance, requires enhanced disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized, and develops a common revenue standard under U.S. GAAP and International Financial Reporting Standards. Specifically, the core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. With the issuance of ASU 2015-14, which deferred the effective date by one year, this guidance is effective January 1, 2018. The guidance can be applied either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustment as of the date of adoption. Management is currently evaluating this new guidance, including how it will apply the guidance at the date of adoption.
In February 2016, the FASB issued ASU 2016-02–Leases (Topic 842). This standard modifies existing guidance for reporting organizations that enter into leases to increase transparency by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and requires a modified retrospective approach to adoption. Early adoption is permitted. Management is currently evaluating the impact of this new guidance in addition to the timing of adoption.
In March 2016, the FASB issued ASU 2016-09–Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard is issued as part of a simplification initiative involving several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. There was no material impact to our financial statements as a result of the application of this standard.
In October 2016, the FASB issued ASU 2016-16–Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires companies to account for income tax effects of intercompany transactions other than inventory in the period in which the transfer occurs. This guidance is effective January 1, 2018 and requires a modified retrospective application through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We have chosen to early adopt the standard effective January 1, 2017 using the modified retrospective method which resulted in a decrease to Other assets, net and Deferred income taxes of approximately $17 million.
In January 2017, the FASB issued ASU 2017-01–Business Combinations (Topic 805): Clarifying the Definition of a Business. This standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for public fiscal years and interim periods within those years beginning after December 15, 2017. We have chosen to early adopt this standard effective January 1, 2017. Although there was no impact upon adoption, among other things, this guidance will result in the capitalization rather than expensing of acquisition costs in future transactions that will be accounted for as asset acquisitions rather than business combinations under the new definition of a business.
In January 2017, the FASB issued ASU 2017-04–IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for a Company's annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Management has elected to early adopt this guidance effective January 1, 2017, which had no impact upon adoption but could result in a change in the measurement of an impairment loss if an impairment was required to be recorded in the future.
Certain other new financial accounting pronouncements have become effective for our financial statements but the adoption of these pronouncements will not affect our financial position or results of operations, nor will they require any additional disclosures.

6


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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 three months ended March 31, 2017 and 2016, our U.S. Retail and Canadian Retail segments purchased $1.4 billion and $1.2 billion, respectively, of motor fuel from Valero.
CrossAmerica purchases a substantial amount of motor fuel from three suppliers. For the three months ended March 31, 2017, CrossAmerica’s wholesale business purchased approximately 28%, 27% and 22% of its motor fuel from ExxonMobil, BP and Motiva (Shell), respectively. For the three months ended March 31, 2016, CrossAmerica's wholesale business purchased approximately 29%, 28% and 26% of its motor fuel from ExxonMobil, BP and Motiva (Shell), respectively. No other fuel suppliers accounted for 10% or more of CrossAmerica’s fuel purchases in 2017 or 2016.
No customers are individually material to our U.S. Retail and Canadian Retail segment operations. For the three months ended March 31, 2017 and 2016, CrossAmerica distributed approximately 14% and 17% of its total wholesale distribution volumes to DMS and its affiliates and DMS and its affiliates accounted for approximately 23% and 30% of CrossAmerica’s rental income, respectively. For more information regarding transactions with DMS, see Note 6.
Note 2.     INVENTORIES
Inventories consisted of the following (in millions):
 
 
March 31,
 
December 31,
 
 
2017
 
2016
Convenience store merchandise
 
$
159

 
$
156

Motor fuel
 
74

 
92

Supplies
 
2

 
2

Inventories
 
$
235

 
$
250

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 March 31, 2017, the replacement cost (market value) of our U.S. motor fuel inventories exceeded their LIFO carrying amounts by approximately $7 million. As of December 31, 2016, the replacement cost (market value) of our U.S. motor fuel inventories exceeded their LIFO carrying amounts by approximately $8 million. We account for our motor fuel inventory in our Canadian Retail and CrossAmerica segments under the weighted-average cost method.
Note 3. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following (in millions):
 
 
March 31,
 
December 31,
 
 
2017
 
2016
Land
 
$
824

 
$
813

Buildings 
 
968

 
949

Equipment
 
992

 
974

Land improvements and leasehold improvements
 
415

 
396

Other(a)
 
262

 
252

Asset retirement obligations
 
93

 
92

Construction in progress
 
25

 
89

Property and equipment, at cost
 
3,579

 
3,565

Accumulated depreciation
 
(973
)
 
(923
)
Property and equipment, net
 
$
2,606

 
$
2,642

(a) Other property and equipment consists primarily of signage and other imaging assets and computer hardware and software.

7


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 4. INTANGIBLE ASSETS
Intangible assets consisted of the following (in millions):
 
 
March 31, 2017
 
December 31, 2016
 
 
Gross Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Amount
 
Accumulated Amortization
 
Net Carrying Amount
US Retail Segment:
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks/tradenames
 
$
22

 
$
(3
)
 
$
19

 
$
22

 
$
(2
)
 
$
20

Other(a)
 
12

 
(2
)
 
10

 
12

 
(2
)
 
10

US total
 
34

 
(5
)
 
29

 
34

 
(4
)
 
30

Canadian Retail Segment:
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists(b)
 
95

 
(89
)
 
6

 
95

 
(89
)
 
6

Total CST
 
129

 
(94
)
 
35

 
129

 
(93
)
 
36

CrossAmerica:
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale fuel supply contracts/rights
 
401

 
(94
)
 
307

 
401

 
(87
)
 
314

Below market leases
 
11

 
(7
)
 
4

 
12

 
(7
)
 
5

Other
 
5

 
(4
)
 
1

 
5

 
(3
)
 
2

Total CrossAmerica
 
417

 
(105
)
 
312

 
418

 
(97
)
 
321

CST consolidated total
 
$
546

 
$
(199
)
 
$
347

 
$
547

 
$
(190
)
 
$
357

(a)
Other consists of fuel supply agreements, franchise agreements, pipeline shipping rights, licenses and permits.
(b)
Our customer lists in our Canadian Retail segment are amortized on a straight-line basis over their remaining life. As these assets are recorded in the local currency, Canadian dollars, historical gross carrying amounts are translated at each balance sheet date, resulting in changes to historical amounts presented.

8


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 5. DEBT
Our balances for long-term debt and capital leases are as follows (in millions):
 
 
March 31,
 
December 31,
 
 
2017
 
2016
CST debt and capital leases:(a)
 
 
 
 
$500 million revolving credit facility
 
$
195

 
$
150

Term loan due 2019
 
319

 
338

5.00% senior notes due 2023
 
550

 
550

Total CST outstanding debt
 
1,064

 
1,038

Deferred financing fees
 
(11
)
 
(12
)
Capital leases
 
13

 
12

Total CST debt and capital leases
 
$
1,066

 
$
1,038

CrossAmerica debt and capital leases:(b)
 
 
 
 
$550 million revolving credit facility
 
$
449

 
$
442

Other debt
 
1

 
1

Total CrossAmerica outstanding debt
 
450

 
443

Deferred financing fees
 
(3
)
 
(4
)
Capital leases
 
28

 
28

Total CrossAmerica debt and capital leases
 
$
475

 
$
467

Total consolidated debt and capital lease obligations outstanding
 
$
1,541

 
$
1,505

Less current portion–CST
 
76

 
76

Less current portion–CrossAmerica
 
2

 
2

Consolidated debt and capital lease obligations, less current portion
 
$
1,463

 
$
1,427

(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.
Financial Covenants and Interest Rate
The CST credit facility contains financial covenants (as defined in the credit agreement) consisting of (a) a maximum total lease adjusted leverage ratio set at 3.50 : 1.00, (b) a minimum fixed charge coverage ratio set at 1.30 : 1.00 and (c) limitations on capital expenditures. As of March 31, 2017, CST was in compliance with these covenants.
CrossAmerica is required to maintain a total leverage ratio (as defined in the credit agreement) for the most recently completed four fiscal quarters of less than or equal to 4.50 : 1.00, except for periods following a material acquisition. The total leverage ratio shall not exceed 5.00 : 1.00 for the first three full fiscal quarters following the closing of a material acquisition. The ratio shall not exceed 5.50 : 1.00 upon the issuance of Qualified Senior Notes (as defined in the credit agreement) in the aggregate principal amount of $175 million or greater. CrossAmerica is also required to maintain a senior leverage ratio (as defined in the credit agreement) after the issuance of Qualified Senior Notes of $175 million or greater of less than or equal to 3.00 : 1.00 and a consolidated interest coverage ratio (as defined in the credit agreement) of at least 2.75 : 1.00. As of March 31, 2017, CrossAmerica was in compliance with these covenants.
Outstanding borrowings currently under the CST credit facility bear a weighted average interest of 2.72% (LIBOR plus a margin of 1.75%) as of March 31, 2017. Outstanding borrowings under the CrossAmerica credit facility bear a weighted average interest rate of 3.95% (LIBOR plus a margin of 3.00%) as of March 31, 2017.
After taking into account debt covenant restrictions, approximately $110 million was available for future borrowings under the CST credit facility and approximately $86 million was available for future borrowings under the CrossAmerica credit facility as of March 31, 2017.

9


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 6. RELATED-PARTY TRANSACTIONS
We consider transactions with CrossAmerica to be with a related party and account for these transactions as entities under common control, all of which are eliminated upon consolidation.
Rent and Purchased Motor Fuel
CrossAmerica leases certain retail sites and sells motor fuel to the U.S. Retail segment operating the leased sites under a master fuel distribution agreement and a master lease agreement, each having initial 10-year terms. The fuel distribution agreement provides CrossAmerica with a fixed wholesale mark-up per gallon. The lease agreement is a triple net lease with an annual lease rate of 7.5% of the fair value of the leased property at inception. The U.S. Retail segment purchased motor fuel from CrossAmerica of approximately 18 million and 19 million gallons during the three months ended March 31, 2017 and 2016, respectively. We incurred rent expense on retail sites leased from CrossAmerica of $4 million during each of the three months ended March 31, 2017 and 2016. Amounts payable to CrossAmerica totaled $3 million and $4 million at March 31, 2017 and December 31, 2016, respectively, related to these transactions.
CST Fuel Supply
CST distributed $4 million in cash to CrossAmerica during each of the three months ended March 31, 2017 and 2016, related to CrossAmerica’s equity ownership interests in CST Fuel Supply.
Sale of Wholesale Fuel Supply Contracts to CrossAmerica
In February 2016, CST sold 21 independent dealer contracts and 11 subwholesaler contracts to CrossAmerica for $3 million. CrossAmerica purchases the fuel supplied to these retail sites from CST Fuel Supply. CrossAmerica purchased $6 million and $3 million of motor fuel from CST Fuel Supply for the three months ended March 31, 2017 and 2016, respectively, in connection with these retail sites.
Amended Omnibus Agreement
CST provides management and corporate support services to CrossAmerica and charged CrossAmerica $3 million under the terms of the Amended Omnibus Agreement for these services during each of the three months ended March 31, 2017 and 2016. CST charged non-cash stock-based compensation and incentive compensation costs to CrossAmerica of $1 million for each of the three months ended March 31, 2017 and 2016. Receivables from CrossAmerica were $9 million and $10 million at March 31, 2017 and December 31, 2016, respectively.
As approved by the independent conflicts committee of the GP Board and the executive committee of our Board of Directors, CrossAmerica and CST may mutually agree to settle, from time to time, some or all of the amount due under the terms of the Amended Omnibus Agreement in newly issued common units representing limited partner interests in CrossAmerica. CrossAmerica issued the following common units to us as consideration for amounts due under the terms of the Amended Omnibus Agreement:
Period
 
Date of Issuance
 
Number of Common Units Issued
Quarter ended December 31, 2016
 
February 28, 2017
 
171,039

Quarter ended March 31, 2017
 
*
 
128,983

* Expected to be issued on May 10, 2017
IDR and Common Unit Distributions
CST received cash distributions related to its ownership of CrossAmerica’s IDRs and common units as follows (in millions):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
IDRs
 
$
1

 
$
1

Common unit distributions
 
4

 
4

Total
 
$
5

 
$
5


10


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



CrossAmerica Wholesale Motor Fuel Sales and Real Estate Rentals
Revenues from motor fuel sales and rental income from DMS and its affiliates were as follows (in millions):
 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Revenues from motor fuel sales to DMS and its affiliates
 
$
54

 
$
50

Rental income from DMS and its affiliates
 
$
5

 
$
6

Receivables from DMS and its affiliates totaled $8 million and $9 million at March 31, 2017 and December 31, 2016, respectively.
Revenues from rental income from Topstar were $0.1 million for each of the three months ended March 31, 2017 and 2016.
CrossAmerica leases real estate from certain entities affiliated with Joseph V. Topper, Jr. Rent expense paid to these entities was $0.2 million for each of the three months ended March 31, 2017 and 2016.
Aircraft Usage Costs
From time to time, we lease, on a non-exclusive basis, an aircraft owned by an entity that is jointly owned by Kimberly S. Lubel, our Chief Executive Officer, President and Chairman of the Board of Directors and her husband, as previously approved in March 2015 by the Audit Committee of the Board of Directors. Lease costs incurred by us for use of this aircraft were not significant for each of the three months ended March 31, 2017 and 2016.
From time to time, we lease, on a non-exclusive basis, aircraft owned by a group of individuals that includes Joseph V. Topper, Jr. and John B. Reilly, III, members of the GP Board, as previously approved in August 2013 by the independent conflicts committee of the GP Board. Lease costs incurred by CrossAmerica for use of these aircraft were not significant for each of the three months ended March 31, 2017 and 2016.
Maintenance and Environmental Costs
Certain maintenance and environmental monitoring and remediation activities are undertaken by a related party of Joseph V. Topper, Jr. as approved by the independent conflicts committee of the GP Board. CrossAmerica incurred costs of $0.2 million and $0.6 million with this related party for the three months ended March 31, 2017 and 2016, respectively.
CrossAmerica Principal Executive Offices
CrossAmerica’s principal executive offices are in Allentown, Pennsylvania. CrossAmerica subleases office space from us that we lease from a related party of CrossAmerica. The management fee charged by us to CrossAmerica under the Amended Omnibus Agreement incorporates this rental expense, which amounted to $0.2 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively.
Note 7. COMMITMENTS AND CONTINGENCIES
We are from time to time party to various lawsuits, claims and other legal and administrative proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, environmental damages, infringement, indemnification, employment-related claims and damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we record a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In addition, we disclose matters for which management believes a material loss is at least reasonably possible. None of these proceedings, separately or in the aggregate, are expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows. In all instances, management has assessed the matter based on current information and made a judgment concerning its potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment may prove materially inaccurate, and such judgment is made subject to the known uncertainties of litigation.
Note 8.    FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). U.S. GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable

11


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the three hierarchy levels.
Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2—Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in inactive markets.
Level 3—Unobservable inputs are not corroborated by market data. This category is comprised of financial and non-financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies using significant inputs that are generally less readily observable from objective sources.
Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers occurred. There were no transfers between any levels in 2017 or 2016.
Financial Instruments
The aggregate fair value and carrying amount of the CST senior notes, credit facility and term loan at March 31, 2017 and December 31, 2016 were $1.1 billion and $1.1 billion, respectively. The fair value of the CST term loan and credit facility approximate their carrying value due to the frequency with which interest rates are reset. The fair value of the CST senior notes is determined primarily using quoted prices of over-the-counter traded securities. These quoted prices are considered Level 1 inputs.
The fair value of CrossAmerica’s revolving credit facility approximated its carrying values of $449 million as of March 31, 2017 and $442 million as of December 31, 2016 due to the frequency with which interest rates are reset.
Note 9. EQUITY
CrossAmerica Distributions
Quarterly distribution activity for 2017 was as follows:
Quarter Ended
 
Record Date
 
Payment Date
 
Cash Distribution (per unit)
 
Cash Distribution (in millions)
December 31, 2016
 
February 6, 2017
 
February 13, 2017
 
$
0.6125

 
$
21

March 31, 2017
 
May 8, 2017
 
May 15, 2017
 
$
0.6175

 
$
21

The amount of any distribution is subject to the discretion of the GP Board, which may modify or revoke CrossAmerica’s cash distribution policy at any time. CrossAmerica’s Partnership Agreement does not require CrossAmerica to pay any distributions. As such, there can be no assurance CrossAmerica will continue to pay distributions in the future at current levels or at all.

12


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Accumulated Comprehensive Income (Loss)
Comprehensive income for a period encompasses net income and all other changes in equity other than from transactions with our stockholders. Foreign currency translation adjustments are the only component of our accumulated other comprehensive income. Our other comprehensive income or loss before reclassifications results from changes in the value of foreign currencies (the Canadian dollar) in relation to the U.S. dollar. Changes in foreign currency translation adjustments were as follows for the three months ended March 31, 2017 and 2016 (in millions):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Balance at the beginning of the period
 
$
(25
)
 
$
(30
)
   Other comprehensive income before reclassifications
 
4

 
15

   Amounts reclassified from other comprehensive income
 

 

   Net other comprehensive income
 
4

 
15

Balance at the end of the period
 
$
(21
)
 
$
(15
)
Note 10. EQUITY-BASED COMPENSATION
Overview
We record equity-based compensation as a component of operating expenses and general and administrative expenses in the consolidated statements of income.
We recognized equity-based compensation expense as follows (in millions):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Equity-based compensation related to CST
 
$
7

 
$
5

Equity-based compensation related to CrossAmerica
 
1

 
1

Total equity-based compensation expense
 
$
8

 
$
6

During the three months ended March 31, 2017, we recognized $5 million of equity-based compensation expense, of which $4 million was attributable to CST and $1 million was attributable to CrossAmerica, related to equity-based awards granted to employees who were retirement eligible at the date of grant. During the three months ended March 31, 2016, we recognized $4 million of equity-based compensation expense, of which $3 million was attributable to CST and $1 million was attributable to CrossAmerica, related to equity-based awards granted to employees who were retirement eligible at the date of grant.
At the completion of the Merger, each stock option, restricted share and restricted stock unit that is outstanding immediately prior to the completion of the Merger, whether vested or unvested, will become fully vested and be converted into the right to receive a cash payment as defined in the Merger Agreement. For purposes of unvested CST market share units, which are CST restricted stock units that vest based on performance goals related to the price of CST common stock, in accordance with the award agreements, performance goals will be deemed satisfied under the Merger based on the value of the Merger Consideration.
CST Equity-Based Awards
Grants of equity-based awards occurred in the first quarter of 2017 and consisted of:
 
 
Number of Awards
 
Weighted-Avg Grant-Date Fair Value
Restricted stock units
 
299,877

 
$
48.35

The fair value of each restricted stock unit 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. The restricted stock units granted become exercisable in equal increments on the first, second and third anniversaries of their date of grant. At the completion of the Merger, each award of restricted stock

13


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



units that was granted in February 2017 will be converted into the right to receive a cash payment as defined in the Merger Agreement, but such award will remain subject to the same vesting terms and payment schedule as those set forth in the original restricted stock unit award agreement; provided that, upon completion of the Merger, such award will vest in full upon an involuntary termination of employment without cause, or termination for “Good Reason”, or termination due to death, “Disability” or “Retirement.”
Approximately 47,000 and 102,000 of CST’s equity-based awards were granted to certain employees of CST in 2017 and 2016, respectively, for services rendered on behalf of CrossAmerica and the expense associated with the awards was charged to CrossAmerica. These equity-based awards had a total fair value of $2 million on each of the dates of grant in 2017 and 2016, respectively.
Note 11.     EARNINGS PER COMMON SHARE
Earnings per common share are computed after adjustment for net income or loss attributable to noncontrolling interest; therefore, all earnings per common share information relates solely to CST common stockholders.
Earnings per common share were computed as follows (in millions, except shares outstanding, common equivalent shares and per share amounts):

 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
Participating Awards
 
Common Stock
 
Participating Awards
 
Common Stock
Earnings per common share:
 
 
 
 
 
 
 
 
Net income attributable to CST stockholders
 
 
 
$
3

 
 
 
$
19

Less dividends declared:
 
 
 
 
 
 
 
 
Common stock
 
 
 

 
 
 
5

Undistributed earnings
 
 
 
$
3

 
 
 
$
14

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (in thousands)
 
452

 
75,813

 
406

 
75,498

Earnings per common share
 
 
 
 
 
 
 
 
Distributed earnings
 
$

 
$

 
$
0.06

 
$
0.06

Undistributed earnings
 
0.04

 
0.04

 
0.18

 
0.18

Total earnings per common share
 
$
0.04

 
$
0.04

 
$
0.24

 
$
0.24

Earnings per common share - assuming dilution:
 
 
 
 
 
 
 
 
Net income attributable to CST stockholders
 
 
 
$
3

 
 
 
$
19

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (in thousands)
 
 
 
75,813

 
 
 
75,498

Common equivalent shares:
 
 
 
 
 
 
 
 
Stock options (in thousands)
 
 
 
332

 
 
 
119

Restricted stock (in thousands)
 
 
 

 
 
 
118

Restricted stock units (in thousands)
 
 
 
244

 
 
 
169

Market share units (in thousands)
 
 
 
79

 
 
 
61

Weighted-average common shares outstanding - assuming dilution (in thousands)
 
 
 
76,468

 
 
 
75,965

Earnings per common share - assuming dilution
 
 
 
$
0.04

 
 
 
$
0.24


14


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Weighted-average anti-dilutive stock awards (in thousands)
 
53

 
860

Note 12. SEGMENT INFORMATION
We have three reportable segments: U.S. Retail, Canadian Retail and CrossAmerica. The U.S. Retail, Canadian Retail and CrossAmerica segments are managed separately as individual strategic business units. Each segment experiences different operating income margins due to certain unique operating characteristics, geographic supply and demand attributes, specific country and local regulatory environments, and is exposed to variability in gross profit from the volatility of crude oil prices. Our Canadian Retail segment also experiences variability from the volatility of foreign currency exchange rates. Operating revenues from our business and home energy operations were less than 5% of our operating revenues for each period presented and have been included within the Canadian Retail segment information.
Our U.S. Retail segment operations are substantially a company owned and operated retail site business. We generate profit on motor fuel sales, prepared foods and convenience merchandise and services (car wash, lottery, money orders, air/water/vacuum services, video and game rentals, and access to ATMs). Our retail sites are operated by company employees.
Our Canadian Retail segment includes company owned and operated retail sites, commission sites, independent dealers, cardlocks and business and home energy operations. We generate profit on motor fuel sales, and, at our company owned and operated retail sites, profit is also generated on prepared foods and convenience merchandise and services (similar to our U.S. Retail segment).
CrossAmerica is engaged in the wholesale distribution of motor fuels, the operation of retail sites 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.
Results that are not included in our reportable segments are included in the corporate category, which consist primarily of general and administrative costs. The elimination column represents wholesale motor fuel supplied to our U.S. Retail segment from CrossAmerica, CrossAmerica’s income from CST Fuel Supply and rental income for retail sites owned by CrossAmerica and leased to our U.S. Retail segment. Management evaluates the performance of our CrossAmerica segment without considering the effects of the fair value adjustments to CrossAmerica’s historical account balances required under ASC 805—Business Combinations. As a result, we have included a fair value column to reconcile to our consolidated results.
The following table reflects activity related to our reportable segments (in millions):
 
 
U.S. Retail
 
Canadian Retail
 
CrossAmerica
 
Corporate
 
Eliminations
 
Fair value adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2017:
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
$
1,540

 
$
821

 
$
435

 
$

 
$

 
$

 
$
2,796

Intersegment revenues
 
6

 

 
34

 

 
(40
)
 

 

Gross profit
 
202

 
94

 
37

 

 

 

 
333

Depreciation, amortization and accretion expense
 
33

 
9

 
14

 

 

 
8

 
64

Operating income (loss)
 
28

 
30

 
12

 
(50
)
 

 
(8
)
 
12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016:
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
$
1,355

 
$
674

 
$
342

 
$

 
$

 
$

 
$
2,371

Intersegment revenues
 
5

 

 
25

 

 
(30
)
 

 

Gross profit
 
217

 
83

 
37

 

 

 

 
337

Depreciation, amortization and accretion expense
 
29

 
10

 
13

 

 

 
9

 
61

Operating income (loss)
 
46

 
23

 
13

 
(46
)
 

 
(10
)
 
26


15


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 13. 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):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Decrease (increase):
 
 
 
 
Receivables, net
 
$
23

 
$
2

Inventories
 
15

 
5

Prepaid expenses and other
 
(7
)
 

Increase (decrease):
 
 
 
 
Accounts payable
 
(19
)
 
2

Accounts payable to related parties
 

 
4

Accounts payable to Valero
 
(8
)
 
17

Accrued expenses
 
8

 
(2
)
Amortization of deferred debt costs
 

 
1

Taxes other than income taxes
 
(8
)
 
2

Income taxes payable
 
(1
)
 
(21
)
Changes in working capital
 
$
3

 
$
10

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.
Additionally, cash transactions between CST and CrossAmerica, including sales of CST Fuel Supply equity interests, IDR and common unit distributions, are eliminated from the statements of cash flows.
Cash flows related to interest and income taxes were as follows (in millions):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Interest paid in excess of amount capitalized
 
$
9

 
$
8

Income taxes paid
 
$
9

 
$
29

Note 14. GUARANTOR SUBSIDIARIES
The Guarantor Subsidiaries fully and unconditionally guarantee, on a joint and several basis, CST’s 5% senior notes due 2023. CrossAmerica is not a guarantor under CST’s 5% senior notes due 2023. The following consolidating schedules present financial information on a consolidated basis in conformity with the SEC’s Regulation S-X Rule 3–10(f):

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CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



CONSOLIDATING BALANCE SHEETS
(Millions of Dollars)
 
March 31, 2017
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
CST Eliminations
 
Total CST
 
CrossAmerica
 
Eliminations
 
Total Consolidated
 
 
 
US
 
Canada
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$

 
$
117

 
$
59

 
$

 
$
176

 
$
6

 
$

 
$
182

Restricted cash

 
22

 

 

 
22

 

 

 
22

Receivables, net
1

 
85

 
67

 

 
153

 
35

 
(14
)
 
174

Inventories

 
164

 
58

 

 
222

 
13

 

 
235

Prepaid taxes

 
6

 

 

 
6

 
1

 

 
7

Prepaid expenses and other

 
12

 
4

 

 
16

 
6

 

 
22

Total current assets
1

 
406

 
188

 

 
595

 
61

 
(14
)
 
642

Property and equipment, at cost

 
2,197

 
557

 

 
2,754

 
826

 
(1
)
 
3,579

Accumulated depreciation

 
(658
)
 
(205
)
 

 
(863
)
 
(110
)
 

 
(973
)
Property and equipment, net

 
1,539

 
352

 

 
1,891

 
716

 
(1
)
 
2,606

Intangible assets, net

 
29

 
6

 

 
35

 
312

 

 
347

Goodwill

 
226

 
2

 

 
228

 
391

 

 
619

Investment in subsidiaries
2,776

 

 

 
(2,776
)
 

 

 

 

Investment in CrossAmerica

 
262

 

 

 
262

 

 
(262
)
 

Deferred income taxes

 

 
62

 

 
62

 

 

 
62

Other assets, net
3

 
3

 
8

 

 
14

 
20

 
(1
)
 
33

Total assets
$
2,780

 
$
2,465

 
$
618

 
$
(2,776
)
 
$
3,087

 
$
1,500

 
$
(278
)
 
$
4,309

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Historical amounts for CrossAmerica were adjusted in consolidation with CST as a result of the GP Purchase as follows as of March 31, 2017:
 
 
 
 
Property and equipment, net
$
45

 
 
 
 
 
 
 
 
Intangibles, net
$
235

 
 
 
 
 
 
 
 
Goodwill
$
302

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

17


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




 
March 31, 2017
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
CST Eliminations
 
Total CST
 
CrossAmerica
 
Eliminations
 
Total Consolidated
 
 
 
US
 
Canada
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current portion of debt and capital lease obligations
$
75

 
$
1

 
$

 
$

 
$
76

 
$
2

 
$

 
$
78

Accounts payable

 
121

 
34

 

 
155

 
41

 
(14
)
 
182

Accounts payable to Valero
(1
)
 
102

 
73

 

 
174

 

 

 
174

Accrued expenses
12

 
30

 
16

 

 
58

 
15

 

 
73

Taxes other than income taxes

 
39

 
1

 

 
40

 
13

 

 
53

Income taxes payable

 

 
1

 

 
1

 

 

 
1

Total current liabilities
86

 
293

 
125

 

 
504

 
71

 
(14
)
 
561

Debt and capital lease obligations, less current portion
978

 
7

 
6

 

 
991

 
473

 
(1
)
 
1,463

Deferred income taxes
(2
)
 
206

 

 

 
204

 
48

 

 
252

Intercompany payables (receivables)
461

 
(590
)
 
129

 

 

 

 

 

Asset retirement obligations

 
86

 
17

 

 
103

 
28

 

 
131

Other long-term liabilities
4

 
12

 
16

 

 
32

 
100

 

 
132

Total liabilities
1,527

 
14

 
293

 

 
1,834

 
720

 
(15
)
 
2,539

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
1

 

 

 

 
1

 

 

 
1

APIC
648

 
1,773

 
62

 
(1,835
)
 
648

 

 
(9
)
 
639

Treasury stock
(91
)
 

 

 

 
(91
)
 

 

 
(91
)
Retained earnings
716

 
678

 
263

 
(941
)
 
716

 

 

 
716

AOCI
(21
)
 

 

 

 
(21
)
 

 

 
(21
)
Partners’ capital

 

 

 

 

 
780

 
(780
)
 

Noncontrolling interest

 

 

 

 

 

 
526

 
526

Total stockholders’ equity
1,253

 
2,451

 
325

 
(2,776
)
 
1,253

 
780

 
(263
)
 
1,770

Total liabilities and stockholders’ equity
$
2,780

 
$
2,465

 
$
618

 
$
(2,776
)
 
$
3,087

 
$
1,500

 
$
(278
)
 
$
4,309


Deferred taxes and noncontrolling interest for CrossAmerica include $8 million and $574 million, respectively, related to the consolidation of CrossAmerica with CST as a result of the GP Purchase.

18


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



CONSOLIDATING BALANCE SHEETS
(Millions of Dollars)
 
December 31, 2016
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
CST Eliminations
 
Total CST
 
CrossAmerica
 
Eliminations
 
Total Consolidated
 
 
 
US
 
Canada
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$

 
$
94

 
$
42

 
$

 
$
136

 
$
1

 
$

 
$
137

Restricted cash

 
22

 

 

 
22

 

 

 
22

Receivables, net
1

 
92

 
75

 

 
168

 
42

 
(15
)
 
195

Inventories

 
172

 
65

 

 
237

 
13

 

 
250

Prepaid taxes

 
2

 

 

 
2

 
1

 

 
3

Prepaid expenses and other

 
9

 
3

 

 
12

 
8

 

 
20

Total current assets
1

 
391

 
185

 

 
577

 
65

 
(15
)
 
627

Property and equipment, at cost

 
2,195

 
550

 

 
2,745

 
822

 
(2
)
 
3,565

Accumulated depreciation

 
(631
)
 
(196
)
 

 
(827
)
 
(96
)
 

 
(923
)
Property and equipment, net

 
1,564

 
354

 

 
1,918

 
726

 
(2
)
 
2,642

Intangible assets, net

 
30

 
6

 

 
36

 
321

 

 
357

Goodwill

 
226

 
2

 

 
228

 
391

 

 
619

Investment in subsidiaries
2,759

 

 

 
(2,759
)
 

 

 

 

Investment in CrossAmerica

 
262

 

 

 
262

 

 
(262
)
 

Deferred income taxes

 

 
62

 

 
62

 

 

 
62

Other assets, net
5

 
22

 
8

 

 
35

 
19

 
(1
)
 
53

Total assets
$
2,765

 
$
2,495

 
$
617

 
$
(2,759
)
 
$
3,118

 
$
1,522

 
$
(280
)
 
$
4,360

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Historical amounts for CrossAmerica were adjusted in consolidation with CST as a result of the GP Purchase as follows as of December 31, 2016:
 
 
 
 
Property and equipment, net
$
48

 
 
 
 
 
 
 
 
Intangibles, net
$
240

 
 
 
 
 
 
 
 
Goodwill
$
302

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

19


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 
December 31, 2016
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
CST Eliminations
 
Total CST
 
CrossAmerica
 
Eliminations
 
Total Consolidated
 
 
 
US
 
Canada
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current portion of debt and capital lease obligations
$
75

 
$
1

 
$

 
$

 
$
76

 
$
2

 
$

 
$
78

Accounts payable

 
146

 
47

 

 
193

 
45

 
(15
)
 
223

Accounts payable to Valero
(1
)
 
100

 
82

 

 
181

 

 

 
181

Accrued expenses
5

 
33

 
16

 

 
54

 
16

 

 
70

Taxes other than income taxes

 
48

 
1

 

 
49

 
12

 

 
61

Income taxes payable

 

 
2

 

 
2

 

 

 
2

Total current liabilities
79

 
328

 
148

 

 
555

 
75

 
(15
)
 
615

Debt and capital lease obligations, less current portion
951

 
7

 
6

 

 
964

 
465

 
(2
)
 
1,427

Deferred income taxes
(1
)
 
223

 

 

 
222

 
52

 

 
274

Intercompany payables (receivables)
490

 
(618
)
 
128

 

 

 

 

 

Asset retirement obligations

 
85

 
16

 

 
101

 
28

 

 
129

Other long-term liabilities
6

 
14

 
16

 

 
36

 
100

 

 
136

Total liabilities
1,525

 
39

 
314

 

 
1,878

 
720

 
(17
)
 
2,581

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
1

 

 

 

 
1

 

 

 
1

APIC
640

 
1,774

 
61

 
(1,835
)
 
640

 

 
(11
)
 
629

Treasury stock
(89
)
 

 

 

 
(89
)
 

 

 
(89
)
Retained earnings
713

 
682

 
242

 
(924
)
 
713

 

 

 
713

AOCI
(25
)
 

 

 

 
(25
)
 

 

 
(25
)
Partners’ capital

 

 

 

 

 
802

 
(802
)
 

Noncontrolling interest

 

 

 

 

 

 
550

 
550

Total stockholders’ equity
1,240

 
2,456

 
303

 
(2,759
)
 
1,240

 
802

 
(263
)
 
1,779

Total liabilities and stockholders’ equity
$
2,765

 
$
2,495

 
$
617

 
$
(2,759
)
 
$
3,118

 
$
1,522

 
$
(280
)
 
$
4,360

Deferred taxes and noncontrolling interest for CrossAmerica include $9 million and $581 million, respectively, related to the consolidation of CrossAmerica with CST as a result of the GP Purchase.


20


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Millions of Dollars)
 
Three Months Ended March 31, 2017
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
CST Eliminations
 
Total CST
 
CrossAmerica
 
Eliminations
 
Total Consolidated
 
 
 
US
 
Canada
 
 
 
 
 
 
 
 
 
 
Operating revenues
$

 
$
1,546

 
$
821

 
$

 
$
2,367

 
$
469

 
$
(40
)
 
$
2,796

Cost of sales

 
1,344

 
727

 

 
2,071

 
432

 
(40
)
 
2,463

Gross profit

 
202

 
94

 

 
296

 
37

 

 
333

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from CST Fuel Supply Equity

 

 

 

 

 
4

 
(4
)
 

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses

 
141

 
55

 

 
196

 
15

 
(4
)
 
207

General and administrative expenses
1

 
39

 
4

 

 
44

 
6

 

 
50

Depreciation, amortization and accretion expense

 
33

 
9

 

 
42

 
22
(a)
 

 
64

Total operating expenses
1

 
213

 
68

 

 
282

 
43

 
(4
)
 
321

Operating (loss) income
(1
)
 
(11
)
 
26

 

 
14

 
(2
)
 

 
12

Other income, net

 
2

 
1

 

 
3

 

 
(1
)
 
2

Interest expense
(11
)
 

 

 

 
(11
)
 
(7
)
 

 
(18
)
Intercompany interest income (expense)
1

 

 
(1
)
 

 

 

 

 

Equity in earnings of CrossAmerica
(1
)
 

 

 

 
(1
)
 

 
1

 

Equity in earnings of subsidiaries
15

 

 

 
(15
)
 

 

 

 

Income (loss) before income tax expense
3

 
(9
)
 
26

 
(15
)
 
5

 
(9
)
 

 
(4
)
Income tax expense (benefit)

 
(5
)
 
7

 

 
2

 
(3
)
 

 
(1
)
Net income (loss)
3

 
(4
)
 
19

 
(15
)
 
3

 
(6
)
 

 
(3
)
Net loss attributable to noncontrolling interest

 

 

 

 

 
5

 
1

 
6

Net income (loss) attributable to CST stockholders
$
3

 
$
(4
)
 
$
19

 
$
(15
)
 
$
3

 
$
(1
)
 
$
1

 
$
3

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
3

 
$
(4
)
 
$
19

 
$
(15
)
 
$
3

 
$
(6
)
 
$

 
$
(3
)
Foreign currency translation adjustment
4

 

 

 

 
4

 

 

 
4

Comprehensive income (loss)
7

 
(4
)
 
19

 
(15
)
 
7

 
(6
)
 

 
1

Comprehensive loss attributable to noncontrolling interests

 

 

 

 

 
(5
)
 
(1
)
 
(6
)
Comprehensive income (loss) attributable to CST
   stockholders
$
7

 
$
(4
)
 
$
19

 
$
(15
)
 
$
7

 
$
(1
)
 
$
1

 
$
7

(a) Depreciation, amortization and accretion expense for CrossAmerica includes $8 million of additional depreciation and amortization expense related to the consolidation of CrossAmerica with CST as a result of the GP Purchase.

21


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




 
Three Months Ended March 31, 2016
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
CST Eliminations
 
Total CST
 
CrossAmerica
 
Eliminations
 
Total Consolidated
 
 
 
US
 
Canada
 
 
 
 
 
 
 
 
 
 
Operating revenues
$

 
$
1,360

 
$
674

 
$

 
$
2,034

 
$
367

 
$
(30
)
 
$
2,371

Cost of sales

 
1,143

 
591

 

 
1,734

 
330

 
(30
)
 
2,034

Gross profit

 
217

 
83

 

 
300

 
37

 

 
337

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from CST Fuel Supply Equity

 

 

 

 

 
4

 
(4
)
 

Operating expenses:
 
 
 
 
 
 
 
 

 
 
 
 
 

Operating expenses

 
142

 
51

 

 
193

 
15

 
(4
)
 
204

General and administrative expenses
1

 
33

 
5

 

 
39

 
7

 

 
46

Depreciation, amortization and accretion expense

 
29

 
10

 

 
39

 
22
(a)
 

 
61

Total operating expenses
1

 
204

 
66

 

 
271

 
44

 
(4
)
 
311

Gain (loss) on the sale of assets, net

 

 
1

 

 
1

 
(1
)
 

 

Operating (loss) income
(1
)
 
13

 
18

 

 
30

 
(4
)
 

 
26

Other income, net

 
1

 
10

 

 
11

 

 
(1
)
 
10

Interest expense
(11
)
 

 

 

 
(11
)
 
(4
)
 

 
(15
)
Intercompany interest income (expense)
1

 

 
(1
)
 

 

 

 

 

Equity in earnings of CrossAmerica
(1
)
 

 

 

 
(1
)
 

 
1

 

Equity in earnings of subsidiaries
30

 

 

 
(30
)
 

 

 

 

Income (loss) before income tax expense
18

 
14

 
27

 
(30
)
 
29

 
(8
)
 

 
21

Income tax expense (benefit)
(1
)
 
4

 
7

 

 
10

 
(1
)
 

 
9

Net income (loss)
19

 
10

 
20

 
(30
)
 
19

 
(7
)
 

 
12

Net loss attributable to noncontrolling interest

 

 

 

 

 
6

 
1

 
7

Net income (loss) attributable to CST stockholders
$
19

 
$
10

 
$
20

 
$
(30
)
 
$
19

 
$
(1
)
 
$
1

 
$
19

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Net income (loss)
$
19

 
$
10

 
$
20

 
$
(30
)
 
$
19

 
$
(7
)
 
$

 
$
12

Foreign currency translation adjustment
15

 

 

 

 
15

 

 

 
15

Comprehensive income (loss)
34

 
10

 
20

 
(30
)
 
34

 
(7
)
 

 
27

Comprehensive loss attributable to noncontrolling interests

 

 

 

 

 
(6
)
 
(1
)
 
(7
)
Comprehensive income (loss) attributable to CST
   stockholders
$
34

 
$
10

 
$
20

 
$
(30
)
 
$
34

 
$
(1
)
 
$
1

 
$
34

(a) Depreciation, amortization and accretion expense for CrossAmerica includes $9 million of additional depreciation and amortization expense related to the consolidation of CrossAmerica with CST as a result of the GP Purchase.

22


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



CONSOLIDATING STATEMENTS OF CASH FLOWS
(Millions of Dollars)
 
Three Months Ended March 31, 2017
 
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
$
(6
)
 
$
34

 
$
20

 
$

 
$
48

 
$
22

 
$
(1
)
 
$
69

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(37
)
 
(3
)
 

 
(40
)
 
(3
)
 

 
(43
)
Proceeds from the sale of assets

 
2

 

 

 
2

 

 

 
2

Net cash used in investing activities

 
(35
)
 
(3
)
 

 
(38
)
 
(3
)
 

 
(41
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds under the CrossAmerica revolving credit facility

 

 

 

 

 
31

 

 
31

Payments on the CrossAmerica revolving credit facility

 

 

 

 

 
(24
)
 

 
(24
)
Proceeds under the CST revolving credit facility
65

 

 

 

 
65

 

 

 
65

Payments on the CST revolving credit facility
(20
)
 

 

 

 
(20
)
 

 

 
(20
)
Payments on the CST term loan facility
(19
)
 

 

 

 
(19
)
 

 

 
(19
)
Distributions from CrossAmerica

 
4

 

 

 
4

 

 
(4
)
 

Distributions paid

 

 

 

 

 
(21
)
 
5

 
(16
)
Intercompany funding
(20
)
 
20

 

 

 

 

 

 

Net cash provided by (used in) financing activities
6

 
24

 

 

 
30

 
(14
)
 
1

 
17

Effect of foreign currency translation changes on cash

 

 

 

 

 

 

 

Net increase in cash

 
23

 
17

 

 
40

 
5

 

 
45

Cash at beginning of year

 
94

 
42

 

 
136

 
1

 

 
137

Cash at end of period
$

 
$
117

 
$
59

 
$

 
$
176

 
$
6

 
$

 
$
182










23


CST BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



CONSOLIDATING STATEMENTS OF CASH FLOWS
(Millions of Dollars)

 
Three Months Ended March 31, 2016
 
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
$
(4
)
 
$
74

 
$

 
$

 
$
70

 
$
19

 
$
(1
)
 
$
88

Cash flows from investing activities:
 
 
 
 
 
 
 
 

 
 
 
 
 

Capital expenditures

 
(57
)
 
(6
)
 

 
(63
)
 
(3
)
 

 
(66
)
CST acquisitions, net of cash acquired

 
(448
)
 

 

 
(448
)
 

 

 
(448
)
CrossAmerica acquisitions, net of cash acquired

 

 

 

 

 
(53
)
 

 
(53
)
Cash received from sale of dealer contracts

 
3

 

 

 
3

 
(3
)
 

 

IDR income

 
1

 

 

 
1

 

 
(1
)
 

Net cash used in investing activities

 
(501
)
 
(6
)
 

 
(507
)
 
(59
)
 
(1
)
 
(567
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 

 
 
 
 
 

Proceeds under the CrossAmerica revolving credit facility

 

 

 

 

 
91

 

 
91

Payments on the CrossAmerica revolving credit facility

 

 

 

 

 
(26
)
 

 
(26
)
Proceeds under the CST revolving credit facility
367

 

 

 

 
367

 

 

 
367

Payments on the CST revolving credit facility
(55
)
 

 

 

 
(55
)
 

 

 
(55
)
Debt issuance costs
(1
)
 

 

 

 
(1
)
 

 

 
(1
)
Repayment of intercompany payable

 

 
(200
)
 
200

 

 

 

 

Intercompany loan
200

 

 

 
(200
)
 

 

 

 

Payments on the CST term loan facility
(13
)
 

 

 

 
(13
)
 

 

 
(13
)
Repurchases of common shares and units

 

 

 

 

 
(3
)
 

 
(3
)
Payments of capital lease obligations

 

 

 

 

 
(1
)
 

 
(1
)
Dividends paid
(5
)
 

 

 

 
(5
)
 

 

 
(5
)
Distributions from CrossAmerica

 
3

 

 

 
3

 

 
(3
)
 

Distributions paid

 

 

 

 

 
(20
)
 
4

 
(16
)
Intercompany funding
(489
)
 
488

 

 

 
(1
)
 

 
1

 

Net cash provided by (used in) financing activities
4

 
491

 
(200
)
 

 
295

 
41

 
2

 
338

Effect of foreign currency translation changes on cash

 

 
(6
)
 

 
(6
)
 

 

 
(6
)
Net (decrease) increase in cash

 
64

 
(212
)
 

 
(148
)
 
1

 

 
(147
)
Cash at beginning of year

 
66

 
247

 

 
313

 
1

 

 
314

Cash at end of period
$

 
$
130

 
$
35

 
$

 
$
165

 
$
2

 
$

 
$
167



24




ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR THE PURPOSE OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, are made throughout this Form 10-K. This Form 10-K includes forward-looking statements, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, credit ratings, dividend growth, potential growth opportunities, potential operating performance improvements, potential improvements in return on capital employed, the effects of competition and the effects of future legislation or regulations. You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “guidance,” “outlook,” “effort,” “target” and similar expressions. Such statements are based on management’s current views and assumptions, and involve risks and uncertainties that could affect expected results. These forward-looking statements include, among other things, statements regarding:
future retail gross profits, including gasoline, diesel, heating oil and convenience store merchandise gross profits;
our anticipated level of capital investments and the effect of these capital investments on our results of operations;
anticipated trends in the demand for, and volumes sold, of gasoline, diesel and heating oil globally and in the regions where we operate;
expectations regarding environmental, tax and other regulatory initiatives; and
the effect of general economic and other conditions on retail fundamentals.
The following factors related to the Merger or our Merger Agreement, among others, could cause actual results and events to differ materially from those expressed or implied in the forward-looking statements:
the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;
the inability to satisfy the other conditions specified in the Merger Agreement, including, without limitation, the receipt of necessary governmental or regulatory approvals required to complete the transactions contemplated by the Merger Agreement;
the risk that the Merger or covenants contained in the Merger Agreement disrupt current plans and operations, increase operating costs and the potential difficulties in customer loss and employee retention as a result of the announcement and consummation of such transactions;
the interim operating covenants and their limitations on incurrence of debt, capital expenditures, acquisitions and divestitures; and
the possibility that the Company may be adversely affected by other economic, business, and/or competitive factors.
Unless stated otherwise, all forward-looking information contained in this report does not take into account or give any effect to the impact of the proposed Merger. In general, we based the forward-looking statements on our current expectations, estimates and projections about our company and the industry in which we operate. We caution you that these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecasted in the forward-looking statements. Any differences could result from a variety of factors, including the following:
volatility and seasonality in crude oil, wholesale motor fuel costs and motor fuel sales;
political conditions in oil producing regions and global demand for oil;
competitive pressures from convenience stores and other non-traditional retailers located in our markets;

25




changes in our customers’ behavior and travel as a result of changing economic conditions, immigration laws and restrictions, labor strikes or otherwise;
increasing consumer preference for alternative motor fuel and improvements in fuel efficiency;
future legislation or campaigns to discourage smoking;
our ability to comply with federal, provincial and state regulations, including those related to environmental matters, the sale of alcohol, cigarettes and fresh foods, and employment laws and health benefits;
significant increases in statutory minimum wage;
future regulations and actions that could expand the non-exempt status of employees under the Fair Labor Standards Act;
severe or unfavorable weather conditions;
dependence on senior management and the ability to attract and retain qualified employees;
inability to build or acquire and successfully integrate new retail sites;
fluctuations in the exchange rate between the United States and Canadian currencies;
dependence on Valero and other suppliers for motor fuel and merchandise;
dependence on suppliers, including Valero, for credit terms;
supply chain disruptions;
litigation or adverse publicity concerning food quality, food safety, other health concerns or compliance with franchise agreements related to our food product merchandise or restaurant facilities;
dangers inherent in storing and transporting motor fuel;
pending or future consumer, environmental or other litigation;
dependence on our IT systems and maintaining data security;
acts of terrorism or war;
our and CrossAmerica’s access to capital, credit ratings, debt and ability to raise additional debt or equity financing;
impairment of long-lived assets, intangible assets or goodwill;
our ability to comply with covenants in any credit agreements or other debt instruments and availability, terms and deployment of capital;
our business strategy and operations and potential conflicts of interest with CrossAmerica;
our ability to successfully integrate any acquisition we may make;
future income tax legislation;
a determination by the IRS that the spin-off or certain related transactions should be treated as a taxable transaction;
litigation associated with the Merger Agreement; and
other unforeseen factors.
You should consider the areas of risk described above, as well as those set forth herein and in the section entitled “Risk Factors” included in our Form 10-K for the year ended December 31, 2016 and our Definitive Proxy Statement filed with the SEC on October 11, 2016, in connection with considering any forward-looking statements that may be made by us and our businesses generally. We cannot assure you that projected results or events reflected in the forward-looking statements will be achieved or will occur. The forward-looking statements included in this report are made as of the date of this report.

26




MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to these financial statements contained elsewhere in this report, this MD&A section and the consolidated financial statements and accompanying notes to those financial statements in our Form 10-K. Our Form 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates and contractual obligations.
Our MD&A is organized as follows:
Merger Agreement—This section provides information on our pending Merger.
Significant Factors Affecting Our Profitability—This section describes the significant impact on our results of operations caused by crude oil commodity price volatility and seasonality.
Results of Operations—This section provides an analysis of our results of operations, including the results of operations of our business segments, for the three months ended March 31, 2017.
Liquidity and Capital Resources—This section provides a discussion of our financial condition and cash flows. It also includes a discussion of our debt, capital requirements, other matters impacting our liquidity and capital resources and an outlook for our business considering the Merger and Merger Agreement.
New Accounting Policies—This section describes new accounting pronouncements that we have already adopted, those that we are required to adopt in the future, and those that became applicable in the current year as a result of new circumstances.
Critical Accounting Policies Involving Critical Accounting Estimates—This section describes the accounting policies and estimates that we consider most important for our business and that require significant judgment.


27




Merger Agreement
On August 21, 2016, our Board of Directors unanimously approved, and we entered into, a definitive Merger Agreement with a subsidiary of Couche-Tard, under which, subject to the terms and conditions thereof, a U.S. subsidiary of Couche-Tard will acquire all of the shares of CST for $48.53 per share in cash, representing a total enterprise value of approximately $4.4 billion, including the assumption of net debt. CST’s stockholders approved the Merger Agreement at a special meeting of stockholders held November 16, 2016. CST and Couche-Tard have been continuing to work cooperatively with regulators in their review of the merger and, based on what we consider to be the substantial progress made to date, while there can be no assurances as to timing, we continue to expect that we will complete the merger on or before June 30, 2017. See Note 1 included elsewhere in the Form 10-Q for additional information.
Significant Factors Affecting Our Profitability
The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit
CST
The prices paid to our motor fuel suppliers for wholesale motor fuel are closely correlated to the price of crude oil. The crude oil commodity markets are highly volatile, and the market prices of crude oil and wholesale motor fuel experience significant and rapid fluctuations. We attempt to pass along wholesale motor fuel price changes to our retail customers through “at the pump” retail price changes; however, market conditions do not always allow us to do so immediately. The timing of any related increase or decrease in “at the pump” retail prices is affected by competitive conditions in each geographic market in which we operate. As such, the prices we charge our customers for motor fuel and the gross profit we receive on our motor fuel sales can increase or decrease significantly and rapidly over short periods of time.
Changes in our average motor fuel selling price per gallon and gross margin for the three months ended March 31, 2017 and 2016 were directly related to the changes in crude oil and wholesale motor fuel prices over the same period. Variations in our reported revenues and cost of sales are, therefore, primarily related to the price of crude oil and wholesale motor fuel prices and generally not as a result of changes in motor fuel sales volumes, unless otherwise indicated and discussed below.
Approximately 40% of CST’s gross profit is derived from the sale of motor fuel. CST typically experiences lower motor fuel gross profits in periods when the wholesale cost of motor fuel increases, and higher motor fuel gross profits in periods when the wholesale cost of motor fuel declines.

28




Historically, the volatility of crude oil and wholesale motor fuel prices has significantly impacted CST’s operating revenues and motor fuel gross profits, and is further discussed in “Results of Operations” below. The following graph provides benchmark information for both crude oil and wholesale motor fuel prices for the thirty-six months ended March 31, 2017:
cstq12017f_chart-06159.jpg
(a) Represents the average monthly spot price per barrel during the periods presented for WTI and Brent crude oil. One barrel represents 42 gallons (source: EIA.gov).
(b)
Represents the average monthly spot price per gallon during the periods presented for GCC gasoline and NYHC gasoline (source: EIA.gov).

29




The following graph shows the volatility of wholesale motor fuel prices and the impact on our U.S. Retail and Canadian Retail segments’ gross profits (on a “per gallon” basis) for the thirty-six months ended March 31, 2017 (U.S. Retail and Canadian Retail CPG gross profits):
cstq12017f_chart-11658.jpg
(a)
Represents the average monthly spot price per gallon during the periods presented for GCC gasoline and NYHC gasoline (source: EIA.gov).
CrossAmerica
As discussed above, our U.S. Retail and Canadian Retail segments typically experience lower motor fuel gross profits in periods when the wholesale cost of motor fuel is increasing, and higher motor fuel gross profits in periods when the wholesale cost of motor fuel is decreasing. As it relates to its retail operations, CrossAmerica generally experiences similar effects on its gross profits from wholesale motor fuel price changes.
The prices paid to CrossAmerica’s motor fuel suppliers for wholesale motor fuel (which affects our cost of sales) are highly correlated to the price of crude oil. The crude oil commodity markets are highly volatile, and the market prices of crude oil, and, correspondingly, the market prices of wholesale motor fuel, experience significant and rapid fluctuations. CrossAmerica receives a fixed mark-up per gallon on approximately 86% of gallons sold to its wholesale customers. The remaining gallons are primarily DTW priced contracts with its other wholesale customers. These contracts provide for variable, market based pricing that results in motor fuel gross profit effects similar to retail motor fuel gross profits (as crude oil prices decline, motor fuel gross profit generally increases). The increase in DTW gross profit results from the acquisition cost of wholesale motor fuel declining at a faster rate as compared to the rate retail motor fuel prices decline. Alternatively, our DTW motor fuel gross profit declines when the cost of wholesale motor fuel increases at a faster rate as compared to the rate retail motor fuel prices increase.
Regarding CrossAmerica’s supplier relationships, a majority of CrossAmerica’s total gallons purchased are subject to discounts for prompt payment and other rebates and incentives, which are recorded within cost of sales. Prompt payment discounts are based on a percentage of the purchase price of motor fuel. As such, the dollar value of these discounts increase and decrease corresponding with motor fuel prices. Therefore, in periods of lower wholesale motor fuel prices, CrossAmerica’s gross profit

30




is negatively affected and, in periods of higher wholesale motor fuel prices, our gross profit is positively affected (as it relates to these discounts). 
Seasonality Effects on Volumes
Our business is subject to seasonality due to our wholesale and retail sites being located in certain geographic areas that are affected by seasonal weather and temperature trends and associated changes in retail customer activity during different seasons. Historically, sales volumes and operating income have been highest in the second and third quarters (during the summer months) and lowest during the winter months in the first and fourth quarters.
Impact on Inflation
Inflation affects our financial performance by increasing certain of our operating expenses, cost of goods sold and working capital requirements. Operating expenses include labor costs, leases, and general and administrative expenses. The long term impact of inflation is minimized, as we generally are able to pass along energy cost, merchandise cost and operating expense increases in the form of increased sales prices to our customers over time. Although we believe we have historically been able to pass on increased costs through price increases, there can be no assurance that we will be able to do so in the future.

31




Results of Operations
Consolidated Income Statement Analysis
Below is an analysis of our consolidated income statements, which provides the primary reasons for significant increases and decreases in the various income statement line items from period to period. Our consolidated income statements are as follows (in millions):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Operating revenues
 
$
2,796

 
$
2,371

Cost of sales
 
2,463

 
2,034

Gross profit
 
333

 
337

Operating expenses:
 
 
 
 
Operating expenses
 
207

 
204

General and administrative expenses
 
50

 
46

Depreciation, amortization and accretion expense
 
64

 
61

Total operating expenses
 
321

 
311

Operating income
 
12

 
26

Other income, net
 
2

 
10

Interest expense
 
(18
)
 
(15
)
Income (loss) before income tax expense
 
(4
)
 
21

Income tax expense (benefit)
 
(1
)
 
9

Consolidated net income (loss)
 
(3
)
 
12

Net loss attributable to noncontrolling interests
 
6

 
7

Net income attributable to CST stockholders
 
$
3

 
$
19

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Consolidated Results
California / Wyoming divestiture
As a result of our California and Wyoming retail site divestitures in July 2016, operating revenues declined $120 million, gross profit declined $13 million, operating expenses declined $7 million and depreciation, amortization and accretion expense declined $1 million.
Operating revenues
Significant items impacting these results (excluding the divestiture of the California and Wyoming retail sites) were:
A $306 million increase in our U.S. Retail segment operating revenues primarily attributable to:
An increase in the retail price per gallon of motor fuel that we sold as a result of an increase in wholesale gasoline prices, as more fully described below under the heading “Segment ResultsU.S. Retail.”
An increase in motor fuel gallons sold, as more fully described below under the heading “Segment ResultsU.S. Retail.”
Our merchandise and services revenues increased primarily from our expanded core network, as more fully described below under the heading “Segment ResultsU.S. Retail.”
A $147 million increase in our Canadian Retail segment operating revenues primarily attributable to:
An increase in the retail price of our motor fuel as a result of an increase in wholesale gasoline prices, as more fully described below under the heading “Segment ResultsCanadian Retail.”

32




An increase in the volume of motor fuel we sold as more fully described below under the heading “Segment ResultsCanadian Retail.”
An increase in merchandise and services revenues as more fully described below under the heading “Segment ResultsCanadian Retail.”
A decline of $27 million in operating revenues due to the foreign currency translation effects of the Canadian dollar relative to the U.S. dollar.
A $102 million increase in our CrossAmerica operating revenues primarily as a result of an increase in motor fuel operating revenues as more fully described below under the heading “Segment ResultsCrossAmerica.”
Cost of sales
The increase in crude oil and wholesale gasoline prices, as discussed above under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit” drove the increase.
Operating expenses
Excluding the effects of the California and Wyoming retail sites, operating expenses increased $10 million primarily due to our expanded core network.
General and administrative expenses
General and administrative expenses increased $4 million primarily as a result of $13 million in merger related expenses, partially offset by a $1 million decline in our CrossAmerica segment as a result of the integration of prior year acquisitions.
Depreciation, amortization and accretion expense
Excluding the effects of the California and Wyoming retail sites, depreciation, amortization and accretion expense increased $4 million related to our recent acquisitions and expanded core network.
Income tax expense
Income tax expense, including CrossAmerica, declined $10 million, primarily as a result of a decline in pretax income. Our effective income tax rate was 36% for the three months ended March 31, 2017 compared to an effective rate of 43% for the three months ended March 31, 2016. This decrease in our effective income tax rate was due primarily to our consolidation of CrossAmerica, which had a loss that was not fully tax deductible in 2016. CST’s effective tax rate, excluding CrossAmerica, was 37% for the three months ended March 31, 2017 compared to 36% for the three months ended March 31, 2016.

33




Segment Results
We present the results of operations of our segments consistent with how our management views the business. Therefore, the segments are presented before intercompany eliminations (which consist of motor fuel sold from our CrossAmerica segment to our U.S. Retail segment, CST Fuel Supply distributions and rent expense paid by our U.S. Retail segment to our CrossAmerica segment) and before purchase accounting adjustments related to the acquisition of CrossAmerica (primarily depreciation and amortization).
U.S. Retail
The following tables highlight the results of operations and certain operating metrics of our U.S. Retail segment. The narrative following these tables provides an analysis of the results of operations of that segment (millions of dollars, except for the number of retail sites, per site per day and per gallon amounts):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Operating revenues:
 
 
 
 
Motor fuel
 
$
1,121

 
$
946

Merchandise and services(a)
 
424

 
413

Other(b)
 
1

 
1

Total operating revenues
 
$
1,546

 
$
1,360

Gross profit:
 
 
 
 
Motor fuel–before amounts attributable to CrossAmerica
 
$
63

 
$
80

Motor fuel–amounts attributable to CrossAmerica
 
(5
)
 
(5
)
Motor fuel–after amounts attributable to CrossAmerica
 
58

 
75

Merchandise and services(a)
 
143

 
141

Other(b)
 
1

 
1

Total gross profit
 
202

 
217

Operating expenses:
 
 
 
 
Operating expenses
 
141

 
142

Depreciation, amortization and accretion expense
 
33

 
29

Total operating expenses
 
174

 
171

Operating income
 
$
28

 
$
46

 
 
 
 
 
Core store operating statistics:(c)
 
 
 
 
End of period core stores
 
1,179

 
1,054

Motor fuel sales (gallons per store per day)
 
4,867

 
5,054

Motor fuel sales (per store per day)
 
$
10,539

 
$
8,927

 
 
 
 
 
Motor fuel gross profit per gallon, net of credit card fees
 
$
0.121

 
$
0.154

CST Fuel Supply wholesale profit attributable to CrossAmerica(e)
 
(0.009
)
 
(0.009
)
Motor fuel gross profit per gallon, net of credit card fees(d), (e)
 
$
0.112

 
$
0.145

 
 
 
 
 
Merchandise and services sales (per store per day)(a)
 
4,012

 
3,872

Merchandise and services gross profit percentage, net
of credit card fees
(a)
 
33.9
%
 
34.1
%

34




U.S. Retail (continued)
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Company operated retail sites:
 
 
 
 
Beginning of period
 
1,167

 
1,049

NTIs opened
 
13

 
6

Acquisitions
 

 
165

Closed or divested
 
(1
)
 
(1
)
End of period
 
1,179

 
1,219

End of period non-core retail stores
 

 
165

End of period core retail stores(c)
 
1,179

 
1,054

 
 
 
 
 
Core store same-store information(c),(f):
 
 
 
 
Company operated retail sites(g)
 
964

 
964

NTIs included in core same-store information(f)
 
107

 
107

Motor fuel sales (gallons per store per day)
 
4,783

 
4,948

Merchandise and services sales (per store per day)(a)
 
$
3,915

 
$
4,013

Merchandise and services gross profit percent, net of
credit card fees
(a)
 
33.9
%
 
34.1
%
Merchandise and services sales, ex. cigarettes (per store per day)(a)
 
$
2,885

 
$
2,959

Merchandise and services gross profit percent, net of
credit card fees and ex. cigarettes
(a)
 
40.0
%
 
40.3
%
Merchandise and services gross profit dollars(a)
 
$
115

 
$
120


Notes to U.S. Retail Statistical Table
(a)
Includes the results from car wash sales and commissions from lottery, money orders, air/water/vacuum services, video and game rentals and ATM fees.
(b)
Primarily consists of rental income.
(c)
Represents the portfolio of core retail stores and excludes recently acquired retail stores that are being integrated or are under performance evaluation to determine if they are: (a) to be fully integrated into the existing core retail operations of CST, (b) to be converted into a dealer operated site, or (c) other strategic alternatives, including divestiture or longer term operation by CrossAmerica. All NTIs are core stores and, accordingly, are included in the core system operating statistics. For the period of February 1 to March 31, 2016, Flash Foods stores were classified as non-core. Effective April 1, 2016, the Flash Foods stores are included in the U.S. Retail Segment’s core-store operations. Accordingly, their operations are excluded from the core system operating statistics for the first quarter of 2016.
(d)
Includes $0.05 per gallon of wholesale fuel distribution profit.
(e)
CrossAmerica owns a 17.5% limited partner equity interest in CST Fuel Supply, which is the sole owner of CST Marketing & Supply, which distributes motor fuel to our retail operations at a net $0.05 per gallon margin. A separate entity, Fuel South LLC, distributes motor fuel to the Flash Foods retail operations.
(f)
The same-store information consists of aggregated individual store results for all stores in operation substantially throughout both periods presented. Stores that were temporarily closed for a brief period of time during the periods being compared remain in the same-store sales comparison. If a store is replaced, either at the same location or relocated to a new location, it is removed from the comparison until the new store has been in operation for substantially all of the periods being compared. NTIs are included in the core same-store metrics when they meet this criteria.
(g)
Includes 6 retail sites that do not sell motor fuel, which were acquired in the Nice N Easy acquisition.


35




Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
California / Wyoming divestiture
As a result of our California and Wyoming retail site divestitures in July 2016, operating revenues declined $120 million, gross profit declined $13 million, operating expenses declined $7 million and depreciation, amortization and accretion expense declined $1 million.
Operating revenues
Significant items impacting these results (excluding the divestiture of the California and Wyoming retail sites) were:
An increase in the retail price per gallon of motor fuel that we sold contributed $186 million of the increase to our motor fuel operating revenues, and was attributable to the volatility in wholesale gasoline prices, as discussed above under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit.” The average daily spot price of GCC gasoline increased to $1.55 per gallon during 2017 compared to $1.06 per gallon during 2016, representing a 46% increase.
We had an increase in motor fuel gallons sold of 1%, which increased motor fuel operating revenues by $10 million. Excluding the impact of our California and Wyoming retail site divestitures, our motor fuel gallons sold increased 11%, or $94 million. This increase was primarily a result of our expanded core network, which includes Flash Foods (acquired on February 1, 2016) and NTIs.
Our merchandise and services revenues increased $26 million excluding the impact of our California and Wyoming retail site divestitures. This increase was primarily a result of our expanded core network, which includes Flash Foods and NTIs.
Gross profit
Excluding the impact of our California and Wyoming retail site divestitures, our motor fuel gross profit declined $10 million due to a decline in our cents per gallon gross profit as a result of higher wholesale motor fuel prices as discussed under the heading “The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit.”
Excluding the impact of our California and Wyoming retail site divestitures, our merchandise and services gross profit increased $8 million. This increase was primarily from the contribution of the Flash Foods stores and from the contribution of our newly constructed NTIs.
Operating expenses
Excluding the effects of our California and Wyoming retail site divestitures, operating expenses increased $6 million primarily from the Flash Foods stores and from operating expenses of our newly constructed NTIs.
Depreciation, amortization and accretion expense
Excluding the effects of our California and Wyoming retail site divestitures, depreciation, amortization and accretion expense increased $5 million as a result of our expanded core network, which includes Flash Foods and NTIs.


36




Canadian Retail
The following tables highlight the results of operations and certain operating metrics of our Canadian Retail segment, expressed in U.S. dollars, except for retail site counts and motor fuel gallons. The narrative following these tables provides an analysis of the results of operations of that segment (which are expressed in millions of U.S. dollars, except where indicated and except for the number of retail sites, per site per day and per gallon amounts):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Operating revenues:
 
 
 
 
Motor fuel
 
$
650

 
$
530

Merchandise and services(a)
 
63

 
57

Other(b)
 
108

 
87

Total operating revenues
 
$
821

 
$
674

Gross profit:
 
 
 
 
Motor fuel
 
$
54

 
$
45

Merchandise and services(a)
 
21

 
19

Other(b)
 
19

 
19

Total gross profit
 
94

 
83

Operating expenses:
 
 
 
 
Operating expenses
 
55

 
51

Depreciation, amortization and accretion expense
 
9

 
10

Total operating expenses
 
64

 
61

Gain on sale of assets, net
 

 
1

Operating income
 
$
30

 
$
23

 
 
 
 
 
Total retail sites (end of period):
 
 
 
 
Company operated retail sites (fuel and merchandise)
 
314

 
306

Commission sites (fuel only)
 
499

 
495

Cardlock (fuel only)
 
72

 
72

Total retail sites (end of period)
 
885

 
873

 
 
 
 
 
Average retail sites during the period:
 
 
 
 
Company operated retail sites (fuel and merchandise)
 
314

 
305

Commission sites (fuel only)
 
499

 
494

Cardlock (fuel only)
 
72

 
72

Average retail sites during the period
 
885

 
871

 
 
 
 
 
Total system operating statistics:
 
 
 
 
Motor fuel sales (gallons per site per day)
 
3,001

 
2,940

Motor fuel sales (per site per day)
 
$
8,165

 
$
6,687

Motor fuel gross profit per gallon, net of credit card fees
 
$
0.226

 
$
0.194

 
 
 
 
 
Company operated retail site statistics:
 
 
 
 
Merchandise and services sales (per site per day)(a)
 
$
2,207

 
$
2,071

Merchandise and services gross profit percentage, net of credit card
   fees(a)
 
32.9
%
 
32.9
%

37




Canadian Retail (continued)
 
 
Three Months Ended March 31,
Company operated statistics(c)
 
2017
 
2016
Retail sites:
 
 
 
 
Beginning of period
 
314

 
303

NTIs opened
 

 
2

Conversions, net(d)
 
2

 
1

Closed or divested
 
(2
)
 

End of period
 
314

 
306

 
 
 
 
 
Average foreign exchange rate for $1 CAD to USD
 
0.75348

 
0.73635

 
 
 
 
 
Same-store information ($ amounts in CAD)(e), (f):
 
 
 
 
Company operated retail sites
 
298

 
298

NTIs included in same-store information
 
44

 
44

Motor fuel sales (gallons per site per day)
 
3,278

 
3,225

Merchandise and services sales (per site per day)(a)
 
$
2,954

 
$
2,851

Merchandise and services gross profit percent, net of credit card
   fees(a)
 
33.0
%
 
32.9
%
Merchandise and services sales, ex. cigarettes (per site per day)(a)
 
$
1,614

 
$
1,542

Merchandise and services gross profit percent, net of credit card
   fees and ex. cigarettes(a)
 
46.3
%
 
44.7
%
Merchandise and services gross profit dollars(a)
 
$
26

 
$
25

 
 
 
 
 
Commission agent and dealer statistics(c)
 
 
 
 
Retail sites:
 
 
 
 
Beginning of period
 
498

 
494

New dealers
 
2

 
3

Conversions, net(d)
 

 
(1
)
Closed or de-branded
 
(1
)
 
(1
)
End of period
 
499

 
495

 
 
 
 
 
Same Site Information(f):
 
 
 
 
Commission agent and dealer retail sites
 
475

 
475

Motor fuel sales (gallons per site per day)
 
2,403

 
2,432

Notes to Canadian Retail Statistical Table
(a)
Includes the results from car wash sales, commissions from lottery and ATM fees.
(b)
Primarily consists of our business and home energy operations.
(c)
Company operated retail sites sell motor fuel and merchandise. The Company sells only motor fuel at commission agent and dealer sites. We do not currently distinguish between core and non-core stores in our Canadian Retail segment. All sites in our Canadian Retail segment are core stores.
(d)
Conversions represent stores that have changed their classification from commission sites to company-owned and operated or vice versa. Changes in classification result when we either take over the operations of commission sites or convert an existing company-owned and operated store to commission sites.
(e)
All amounts presented are stated in Canadian dollars to remove the impact of foreign exchange and all fuel information excludes amounts related to cardlock operations.

38




(f)
The same-store and same-site information consists of aggregated individual store results for all sites in operation substantially throughout both periods presented. Stores that were temporarily closed for a brief period of time during the periods being compared remain in the same-store sales comparison. If a store is replaced, either at the same location or relocated to a new location, it is removed from the comparison until the new store has been in operation for substantially all of the periods being compared. NTIs are included in the same-store metrics when they meet this criteria.
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Operating revenues increased $147 million, gross profit increased $11 million, operating expenses increased $4 million, and operating income increased $7 million.
Significant items impacting these results included:
Operating revenues
A decline of $27 million in operating revenues due to the foreign currency translation effects of the Canadian dollar relative to the U.S. dollar. Although the Canadian dollar strengthened 2% relative to the U.S. dollar, our operating revenues in Canadian dollars increased 19% (from the factors discussed below), which resulted in a larger translation effect relative to the prior year.
Excluding the effects of foreign currency translation changes, our operating revenues increased $174 million. This increase was primarily attributable to:
A $125 million increase in operating revenues primarily attributable to an increase in the retail price of our motor fuel. The average daily spot price of NYHC gasoline increased to $1.55 per gallon during 2017, compared to $1.13 per gallon during 2016.
Our operating revenues increased $18 million attributable to a 3% increase in the volume of motor fuel we sold mainly related to the increase in the average number of retail sites.
Our merchandise and services revenues increased $5 million as a result of the increase in company operated retail sites and increases in store customer count and an improvement in car wash revenues as a result of milder weather in the current year.
Our business and home energy operating revenues increased as a result of an increase in the price of oil and were the primary reason for the increase in other revenues of $26 million.
Gross profit
Our motor fuel gross profit increased $16 million driven by increases in motor fuel gross profit across our Canadian retail sites and in volume at our company operated and cardlock retail sites, which we believe are reflective of solid economic indicators in our Quebec and Ontario markets. This was partially offset by foreign currency translation effects of $7 million.
Our merchandise and services gross profit increased $2 million as a result of an increase in the number of company operated retail sites during 2017 and the increase in store customer count and car washes discussed above.
Operating expenses
Operating expenses increased $4 million primarily from the increase in company operated retail sites.

39




CrossAmerica
The following table highlights the results of operations and certain operating metrics of CrossAmerica. CrossAmerica is presented excluding the accounting purchase price adjustments and before elimination of transactions with our U.S. Retail segment to be consistent with how our management reviews its results. The impact of the purchase accounting adjustments is to increase depreciation, amortization and accretion expense by $8 million and $9 million for the three months ended March 31, 2017 and 2016, respectively. As discussed in Note 6 of the Condensed Notes to Consolidated Financial Statements included elsewhere in this quarterly report, transactions with our U.S. Retail segment consisted of a wholesale mark-up on purchased motor fuel, rent income and equity ownership interest in CST Fuel Supply. Additionally, CST provides management and corporate support services to CrossAmerica and charges CrossAmerica a management fee under the terms of the Amended and Restated Omnibus Agreement, as well as an allocation of certain incentive compensation. All transactions between our U.S. Retail segment and CrossAmerica are eliminated from our consolidated financial statements. Approximately 80% and 81% of CrossAmerica’s operating results are attributable to noncontrolling interests for the three months ended March 31, 2017 and 2016, respectively. Therefore, a substantial portion of the operating results of CrossAmerica are not earned by CST shareholders. CrossAmerica is a publicly traded Delaware limited partnership and its common units are listed for trading on the NYSE under the symbol “CAPL.” As a result, CrossAmerica is required to file reports with the SEC, where additional information about its results of operations can be found and should be read in conjunction with the table below (millions of dollars).
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Operating revenues
 
$
469

 
$
367

Cost of sales
 
432

 
330

Gross profit
 
37

 
37

 
 
 
 
 
Income from CST Fuel Supply
 
4

 
4

Operating expenses:
 
 
 
 
Operating expenses
 
15

 
15

Depreciation, amortization and accretion expense
 
14

 
13

Total operating expenses
 
29

 
28

Operating income
 
$
12

 
$
13

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Operating revenues
Operating revenues increased $102 million primarily from an increase in the price of crude oil. The average daily spot price of WTI crude oil increased 55% to $51.62 per barrel during 2017, compared to $33.35 per barrel during 2016. See “Significant Factors Affecting our Profitability—The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit.”
Cost of sales
Cost of sales increased $102 million primarily from the increase in crude oil prices discussed above.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense increased $1 million related to our recent acquisitions.

40




Liquidity and Capital Resources
Capital Structure
CST and CrossAmerica maintain separate debt and equity capital structures. As such, CST and CrossAmerica each maintain credit facilities with separate covenants and restrictions. In addition, CST has outstanding publicly registered 5% senior notes due 2023, the terms of which are covered by a bond indenture. CST’s subsidiary that owns 100% of the membership interests in the General Partner has been designated an “unrestricted” subsidiary under this bond indenture and there are no guarantees of outstanding debt between CST and CrossAmerica. However, the IDRs and any current and future common units of CrossAmerica representing limited partner interests acquired and owned by CST are considered collateral under CST’s revolving credit facility.
Consolidated Cash Flows
The following table summarizes cash flow activity (in millions):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Net Cash Provided by Operating Activities
 
$
69

 
$
88

Net Cash Used in Investing Activities
 
$
(41
)
 
$
(567
)
Net Cash Provided by Financing Activities
 
$
17

 
$
338

Operating Activities
The decrease in cash provided by operating activities in 2017 was primarily the result of a decline in net income for the reasons discussed above under the heading “Results of Operations.” Changes in cash provided by or used for working capital are shown in Note 13 included elsewhere in this quarterly report.
Investing Activities
We incurred $43 million of capital expenditures for the three months ended March 31, 2017. For the three months ended March 31, 2016, we incurred $66 million of capital expenditures. During the three months ended March 31, 2016, we purchased Flash Foods and the Franchised Holiday Stores for an aggregate of $501 million. We did not have any acquisitions during the three months ended March 31, 2017.
Financing Activities
During the three months ended March 31, 2017, we had net proceeds under the CrossAmerica revolving credit facility of $7 million, net proceeds under the CST revolving credit facility of $45 million, $16 million for the payment of CrossAmerica distributions and payments of $19 million on the CST term loan.
During the three months ended March 31, 2016, we had net proceeds under the CrossAmerica revolving credit facility of $65 million, net proceeds under the CST revolving credit facility of $312 million, spent $3 million on CrossAmerica’s unit repurchase program, $5 million for the payment of dividends on CST common stock, $16 million for the payment of CrossAmerica distributions and payments of $13 million on the CST term loan. Borrowings during 2016 on the CST revolving credit facility, along with cash on hand, were used to finance the Flash Foods acquisition and borrowings on the CrossAmerica revolving credit facility were used to finance the Franchised Holiday Stores acquisition.

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Consolidated Debt
As of March 31, 2017, our consolidated debt consisted of the following (in millions):
CST debt:(a)
 
 
$500 million revolving credit facility
 
$
195

Term loan due 2019
 
319

5.00% senior notes due 2023
 
550

Total CST debt
 
$
1,064

CrossAmerica debt:(b)
 
 
$550 million revolving credit facility
 
$
449

Other
 
1

Total CrossAmerica debt
 
$
450

Total consolidated debt outstanding
 
$
1,514

Less current portion:
 
 
CST
 
75

CrossAmerica
 

Consolidated debt, less current portion
 
$
1,439

(a) The assets of CST can only be used to settle the obligations of CST and creditors of CST have no recourse to the assets or general credit of CrossAmerica. CST has pledged its equity ownership in CrossAmerica to secure the CST Credit Facility.
(b) The assets of CrossAmerica can only be used to settle the obligations of CrossAmerica and creditors of CrossAmerica have no recourse to the assets or general credit of CST.
Debt related to CST
The credit facility is secured by substantially all of the assets of CST and its subsidiaries. As of March 31, 2017, CST’s outstanding borrowings currently under this credit facility bear a weighted average interest of 2.72% (LIBOR plus a margin of 1.75%). As of May 4, 2017, approximately $89 million was available for future borrowings under the revolving credit facility. The credit facility contains certain customary representations and warranties, financial covenants and events of default. The financial covenants (as defined in the credit agreement) consist of (a) a maximum total lease adjusted leverage ratio set at 3.50 : 1.00, (b) a minimum fixed charge coverage ratio set at 1.30 : 1.00, and (c) limitations on capital expenditures. As of March 31, 2017, we were in compliance with these financial covenant ratios.
See Note 5 included elsewhere in this quarterly report for additional information regarding CST’s debt.
Debt related to CrossAmerica
CrossAmerica maintains a revolving credit facility that provides for aggregate outstanding borrowings of up to $550 million. CrossAmerica’s borrowings had a weighted-average interest rate of 3.95% (LIBOR plus a margin of 3.00%) at March 31, 2017. The credit facility is secured by substantially all of the assets of CrossAmerica and its subsidiaries. The amount of availability under the revolving credit facility at May 4, 2017, was $92 million. In connection with future acquisitions, the revolving credit facility requires, among other things, that CrossAmerica has, after giving effect to such acquisition, at least $20 million of borrowing availability under its revolving credit facility and unrestricted cash on the balance sheet on the date of such acquisition. CrossAmerica is required to maintain a total leverage ratio (as defined in the revolving credit facility) for the most recently completed four fiscal quarters of less than or equal to 4.50 : 1.00 and a consolidated interest coverage ratio (as defined in the revolving credit facility) of greater than or equal to 2.75 : 1.00. The total leverage ratio covenant is 5.00 : 1.00 for the three quarters following a material acquisition (as defined in the revolving credit facility). As of March 31, 2017, CrossAmerica was in compliance with these financial covenant ratios.
See Note 5 included elsewhere in this quarterly report for additional information regarding CrossAmerica’s debt.
Consolidated Capital Requirements
Our capital expenditures and investments relate primarily to the acquisition of land and the construction of NTIs. We also spend capital to improve, renovate and remodel our existing retail sites, which we refer to as sustaining capital, and, from time to time, we enter into strategic acquisitions.

42




Management believes CST and CrossAmerica will have sufficient cash flow from operations, borrowing capacity under their revolving credit facilities, and access to capital markets and alternative sources of funding to continue to operate and fund our growth for the next twelve months. However, we are subject to business and operational risks that could adversely affect our cash flow. A material decrease in our cash flows would likely produce an adverse effect on our borrowing capacity as well as our ability to issue additional equity and/or debt securities.
During the three months ended March 31, 2017, CST completed thirteen NTIs in the U.S., which are located in Texas, Arizona and New York. In Canada, we completed zero NTIs.
The following table outlines our consolidated capital expenditures and expenditures for acquisitions by segment for the three months ended March 31, 2017 and 2016.
 
 
Three Months Ended March 31,
 
 
2017
 
2016
U.S. Retail Segment
 
 
 
 
NTI
 
$

 
$
34

Acquisitions
 

 
448

Sustaining capital
 
5

 
15

 
 
$
5

 
$
497

Canadian Retail Segment
 
 
 
 
NTI
 
$

 
$
4

Acquisitions
 

 

Sustaining capital
 
3

 
2

 
 
$
3

 
$
6

CrossAmerica
 
 
 
 
Sustaining capital(a)
 
$
3

 
$
3

Acquisitions
 

 
53

 
 
$
3

 
$
56

 
 
 
 
 
Total aggregate capital expenditures and
   acquisitions(b)
 
$
11

 
$
559

(a) CrossAmerica’s sustaining capital expenditures include approximately $2 million and $3 million of “growth” capital expenditures for the three months ended March 31, 2017 and 2016, respectively, which are those capital expenditures expected to increase CrossAmerica’s operating income or operating capacity over the long term.
(b) $32 million of capital expenditures during 2017 were accrued at December 31, 2016 and $8 million of capital expenditures during 2016 were accrued at December 31, 2015.
Other Matters Impacting Liquidity and Capital Resources
Cash Held by Our Canadian Subsidiary
As of March 31, 2017, $59 million of cash was held in Canada. In December 2015, we established a U.S. dollar denominated intercompany loan from the U.S. to a Canadian subsidiary. At March 31, 2017, the outstanding amount of this loan was $125 million. As the Canadian foreign currency exchange rates fluctuate with the U.S. dollar, we will recognize either a gain or loss related to the outstanding balance of this loan in “other income” on our consolidated income statement.
Cash Held by CrossAmerica
As of March 31, 2017, $6 million of cash was held by CrossAmerica.

43




Concentration of Suppliers
For the three months ended March 31, 2017, CST purchased substantially all of its motor fuel for resale from Valero.
For the three months ended March 31, 2017, CrossAmerica purchased approximately 28%, 27% and 22% of its motor fuel from ExxonMobil, BP, and Motiva, respectively.
Concentration of Customers
CST has no significant concentration of customers. For the three months ended March 31, 2017, CrossAmerica distributed approximately 14% of its total wholesale distribution volumes to DMS and its affiliates and received 23% of its rent income from DMS and its affiliates. For the three months ended March 31, 2017, CrossAmerica distributed 7% of its total wholesale distribution volume to CST and received 20% of its rent income from CST, respectively.
CrossAmerica Limited Partnership Distributions
Distribution activity for 2017 was as follows:
Quarter Ended
 
Record Date
 
Payment Date
 
Cash Distribution (per unit)
 
Cash Distribution (in millions)
December 31, 2016
 
February 6, 2017
 
February 13, 2017
 
$
0.6125

 
$
21

March 31, 2017
 
May 8, 2017
 
May 15, 2017
 
$
0.6175

 
$
21

The amount of any distribution is subject to the discretion of the GP Board, which may modify or revoke CrossAmerica’s cash distribution policy at any time. CrossAmerica’s Partnership Agreement does not require CrossAmerica to pay any distributions. As such, there can be no assurance CrossAmerica will continue to pay distributions in the future at current levels or at all.
For each of the three months ended March 31, 2017 and 2016, CrossAmerica distributed $4 million to us with respect to our ownership of common units.
CrossAmerica IDR Distributions to CST
For each of the three months ended March 31, 2017 and 2016, CrossAmerica distributed $1 million to us with respect to our ownership of the IDRs.
CrossAmerica Acquisition of State Oil Assets
In September 2016, CrossAmerica acquired certain assets of State Oil Company located in the greater Chicago market for approximately $42 million.
Outlook
On August 21, 2016, our Board of Directors unanimously approved the Merger, and subject to the terms and conditions thereof, Couche-Tard will acquire all of the shares of CST. CST’s stockholders approved the Merger Agreement at a special meeting of stockholders held November 16, 2016. The Merger Agreement contains certain restrictions that may limit our ability to undertake or continue various strategic initiatives without Couche-Tard’s consent. Additionally, there are a number of other factors related to the Merger and Merger Agreement that could impact our operations, which are included under the heading “Cautionary Statement for the Purpose of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.” CST and Couche-Tard have been continuing to work cooperatively with regulators in their review of the merger and, based on what we consider to be the substantial progress made to date, while there can be no assurances as to timing, we continue to expect that we will complete the merger on or before June 30, 2017. See Note 1 included elsewhere in this quarterly report for additional information.


44




New Accounting Policies
In May 2014, the FASB issued ASU 2014-09–Revenue from Contracts with Customers (Topic 606), which results in comprehensive new revenue accounting guidance, requires enhanced disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized, and develops a common revenue standard under U.S. GAAP and International Financial Reporting Standards. Specifically, the core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. With the issuance of ASU 2015-14, which deferred the effective date by one year, this guidance is effective January 1, 2018. The guidance can be applied either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustment as of the date of adoption. Management is currently evaluating this new guidance, including how it will apply the guidance at the date of adoption.
In February 2016, the FASB issued ASU 2016-02–Leases (Topic 842). This standard modifies existing guidance for reporting organizations that enter into leases to increase transparency by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and requires a modified retrospective approach to adoption. Early adoption is permitted. Management is currently evaluating the impact of this new guidance in addition to the timing of adoption.
In March 2016, the FASB issued ASU 2016-09–Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard is issued as part of a simplification initiative involving several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. There was no material impact to our financial statements as a result of the application of this standard.
In October 2016, the FASB issued ASU 2016-16–Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires companies to account for income tax effects of intercompany transactions other than inventory in the period in which the transfer occurs. This guidance is effective January 1, 2018 and requires a modified retrospective application through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We have chosen to early adopt the standard effective January 1, 2017 using the modified retrospective method which resulted in a decrease to Other assets, net and Deferred income taxes of approximately $17 million.
In January 2017, the FASB issued ASU 2017-01–Business Combinations (Topic 805): Clarifying the Definition of a Business. This standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for public fiscal years and interim periods within those years beginning after December 15, 2017. We have chosen to early adopt this standard effective January 1, 2017. Although there was no impact upon adoption, among other things, this guidance will result in the capitalization rather than expensing of acquisition costs in future transactions that will be accounted for as asset acquisitions rather than business combinations under the new definition of a business.
In January 2017, the FASB issued ASU 2017-04–IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for a Company's annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Management has elected to early adopt this guidance effective January 1, 2017, which had no impact upon adoption but could result in a change in the measurement of an impairment loss if an impairment was required to be recorded in the future.
Certain other new financial accounting pronouncements have become effective for our financial statements but the adoption of these pronouncements will not affect our financial position or results of operations, nor will they require any additional disclosures.

45




Critical Accounting Policies Involving Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ from those estimates.
There have been no material changes to the critical accounting policies described in our Form 10-K.

46




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
CST’s debt includes a $319 million, five-year, amortizing term loan bearing interest at a variable rate. In addition, the CST revolving credit facility has a borrowing capacity of up to $500 million, and any borrowings would bear interest at variable rates. As of March 31, 2017, the weighted average interest rate on outstanding borrowings under the credit facility was 2.72%. A one percentage point change in the average interest rate would impact annual interest expense by approximately $5 million.
As of March 31, 2017, CrossAmerica had $449 million outstanding under its revolving credit facility. Outstanding borrowings under this credit facility had a weighted-average interest rate of 3.95%. A one percentage point change in CrossAmerica’s average rate would impact annual interest expense by approximately $4 million.
Commodity Price Risk
We have not historically hedged or managed our price risk in any significant manner with respect to our commodity inventories (gasoline and diesel fuel), as the time period between the purchases of our motor fuel inventory and the sales to our customers is a few days.
A change in gross profit margin of $.01 per gallon affects our gross profit margin by approximately $20 million in our U.S. Retail segment and approximately $10 million in our Canadian Retail segment (on an annualized basis). Based on CrossAmerica’s current volumes, we estimate a $10 per barrel change in the price of crude oil would impact CrossAmerica’s annual wholesale motor fuel gross profit by approximately $2 million related to its payment discounts.
Foreign Currency Risk
Our financial statements are reported in U.S. dollars. However, a substantial portion of our operations and assets are located in Canada. As such, our reported results of operations, cash flows and financial position as they relate to our Canadian operations are impacted by fluctuations in the Canadian dollar exchange rate into U.S. dollars. We have not historically hedged our risk associated with our exposure to the Canadian dollar/U.S. dollar exchange rate. A one percent decline in the 2017 weighted average exchange rate would have no material impact to our March 31, 2017 net income. As of March 31, 2017, $59 million of cash was held in Canada.
At March 31, 2017, a Canadian subsidiary had outstanding to the U.S. a U.S. dollar denominated loan in the amount of $125 million. If the Canadian dollar strengthens against the U.S. dollar during a reporting period, we will recognize a gain related to the outstanding balance of this loan in “other income” on our consolidated income statement. If the Canadian dollar weakens against the U.S. dollar during a reporting period, we will recognize a loss related to the outstanding balance of this loan in “other income” on our consolidated income statement.
The operations of CrossAmerica are located in the U.S., and therefore are not subject to foreign currency risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective as of March 31, 2017.
(b) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As a public company, CrossAmerica’s management is required to report on its evaluation and conclusions regarding the effectiveness of its internal control. As noted in CrossAmerica’s Form 10-Q for quarter ended March 31, 2017, there were no changes in its internal control over financial reporting that occurred during the three months ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

47




PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We hereby incorporate by reference into this Item our disclosures made in Part I, Item 1 of this quarterly report included in Note 7 of the Condensed notes to Consolidated Financial Statements.


48




ITEM 1A. RISK FACTORS
There were no material changes in risk factors for the company in the period covered by this report. See the risk factors disclosed in the section entitled “Risk Factors” in our Form 10-K.


49




ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS.
Exhibit No.
Description
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*
Interactive Data Files
* Filed herewith.
** Furnished herewith.
*** Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to supplementally furnish to the Securities and Exchange Commission upon request any omitted schedule or exhibit to the Merger Agreement.

50




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/ Clayton E. Killinger                    
Clayton E. Killinger
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)


Date: May 8, 2017



51