EX-99.1 2 a09-2012ex9901infostmt.htm EXHIBIT 99.1 INFORMATION STATEMENT 09-2012 EX 99.1 Info Stmt
Exhibit 99.1



[Ÿ]

Dear Valero Stockholder:

We previously announced Valero Energy Corporation’s intention to pursue the separation of its retail business from its other businesses. I am pleased to report that on [•], Corner Store Holdings, Inc., a Delaware corporation, will become an independent public company and will hold, through its subsidiaries, the assets (including the equity interests of certain Valero subsidiaries) and liabilities associated with Valero’s retail business.
The separation and distribution will be completed by way of a pro rata distribution of 80 percent of the outstanding shares of Corner Store common stock to Valero’s stockholders of record as of 5:00 p.m. Eastern Time on [•], the record date for the distribution. Each Valero stockholder of record will receive one share of Corner Store common stock for every [•] shares of Valero common stock held on the record date. The distribution will be made in electronic book-entry form, which means that no physical share certificates will be issued. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing rates and distribute the net cash proceeds pro rata to each holder who would otherwise have been entitled to receive fractional shares in the distribution.
Valero is seeking a private letter ruling from the Internal Revenue Service to the effect that, among other things, the distribution of Corner Store’s common stock to Valero stockholders, together with certain related transactions, will qualify as a transaction that is generally tax-free for U.S. federal income tax purposes. However, any cash that you receive in lieu of fractional shares generally will be taxable to you. It is a condition to completing the distribution that Valero receive the private letter ruling from the Internal Revenue Service, in form and substance satisfactory to Valero, which condition may be waived by Valero in its discretion. You should consult your own tax adviser as to the particular tax consequences of the distribution to you, including potential tax consequences under state, local and non-U.S. tax laws. The separation is also subject to other conditions, including receipt of necessary regulatory approvals.
The distribution does not require stockholder approval, and you do not need to take any action to receive your shares of Corner Store common stock. Valero’s common stock will continue to trade on the New York Stock Exchange under the ticker symbol “VLO.” Corner Store intends to apply to have its common stock authorized for listing on the New York Stock Exchange under the ticker symbol “CST.”
The enclosed information statement, which we are mailing to all Valero stockholders, describes the separation and the distribution in detail and contains important information about Corner Store, including its historical combined financial statements. We urge you to read this information statement carefully.
We want to thank you for your continued support of Valero.


Sincerely,


Bill Klesse
Chief Executive Officer
and Chairman of the Board



Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.
Preliminary Information Statement
(Subject to Completion, Dated November 16, 2012)
Information Statement
Distribution of Common Stock of
CORNER STORE HOLDINGS, INC.
This information statement is being furnished in connection with the distribution by Valero Energy Corporation of 80 percent of the shares of common stock of Corner Store Holdings, Inc. outstanding immediately prior to the distribution. To implement the distribution, Valero will distribute shares of Corner Store common stock on a pro rata basis to the holders of Valero common stock. Each of you, as a holder of Valero common stock, will receive one share of Corner Store common stock for every [•] shares of Valero common stock that you held at 5:00 p.m. Eastern Time on [•], the record date for the distribution. Following the distribution, Corner Store will hold, through its subsidiaries, the assets (including the equity interests of certain Valero subsidiaries) and liabilities associated with Valero’s retail business.
The distribution will be made in electronic book-entry form, without the delivery of any physical share certificates. Valero will not distribute any fractional shares of Corner Store. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing rates and distribute the net cash proceeds pro rata to each holder who would otherwise have been entitled to receive fractional shares in the distribution.
The distribution will occur after the New York Stock Exchange market closing on [•]. Immediately after the distribution is completed, Corner Store will be an independent, publicly traded company. It is expected that the distribution will be tax-free to Valero stockholders for United States (“U.S.”) federal income tax purposes, except to the extent that cash is received in lieu of fractional shares.
No vote of the stockholders of Valero is required in connection with the distribution. We are not asking you for a proxy and you are requested not to send us a proxy.
Valero stockholders will not be required to pay any consideration for the shares of Corner Store common stock they receive in the distribution, and they will not be required to surrender or exchange shares of their Valero common stock or take any other action in connection with the distribution. From and after the distribution, certificates representing Valero common stock will continue to represent Valero common stock, which at that point will include the remaining businesses of Valero.
All of the outstanding shares of Corner Store common stock are currently owned by Valero. There currently is no public trading market for Corner Store common stock. We intend to file an application to list Corner Store common stock under the ticker symbol “CST” on the New York Stock Exchange. Assuming that Corner Store common stock is approved for listing, we anticipate that a limited market, commonly known as a “when-issued” trading market, for Corner Store common stock will develop on or shortly before the record date for the distribution and will continue up to and including the date the distribution occurs, and we anticipate that the “regular-way” trading of Corner Store common stock will begin on the first day of trading following the date the distribution occurs.
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE CAPTION “RISK FACTORS” BEGINNING ON PAGE 15 OF THIS INFORMATION STATEMENT.



NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
The date of this information statement is [•].
Valero first mailed this information statement to Valero stockholders on or about [•].
_______________________________






TABLE OF CONTENTS
 
Page
Summary
Our Business
Questions and Answers About the Separation and the Distribution
The Separation and the Distribution
Risk Factors
Risks Relating to the Separation and the Distribution
Risks Relating to Our Industry and Our Business
Risks Relating to Our Common Stock
Cautionary Statement Regarding Forward-Looking Statements
The Separation and the Distribution
General
Reasons for the Separation and the Distribution
The Number of Shares You Will Receive
Treatment of Fractional Shares
When and How You Will Receive the Distribution of Corner Store Shares
Treatment of Stock-Based Compensation
Treatment of 401(k) Shares
Results of the Separation and the Distribution
Material U.S. Federal Income Tax Consequences of the Distribution
Market for Our Common Stock
Trading Between the Record Date and the Distribution Date
Conditions to the Distribution
Transferability of Shares of Our Common Stock
Reason for Furnishing This Information Statement
Manner of Effecting the Separation and the Distribution
Business and Properties
Overview
Retail–U.S.
Retail–Canada
Dividend Policy
Capitalization
Unaudited Pro Forma Combined Financial Statements
Selected Combined Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Results of Operations
Liquidity and Capital Resources
New Accounting Policies
Critical Accounting Policies Involving Critical Accounting Estimates



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Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Commodity Price Risk
Foreign Currency Risk
Corporate Governance and Management
Executive Officers Following the Distribution
Board of Directors Following the Distribution
Committees of the Board of Directors Following the Distribution
Selection of Nominees for Directors
Decision-Making Process to Determine Director Compensation
Board Risk Oversight
Communications with the Board of Directors
Director Compensation
Executive Compensation
Stock Ownership and Retention Guidelines for Directors and Officers
Compensation Committee Interlocks and Insider Participation
Executive Compensation
Compensation Discussion and Analysis
Introduction
Valero 2012 Executive Compensation
Effects of the Separation on Outstanding Stock-Based Awards
Corner Store Compensation Programs
Certain Relationships and Related-Party Transactions
The Separation from Valero
Related-Party Transactions
Agreements Between Us and Valero
Recent Sales of Unregistered Securities
Security Ownership of Certain Beneficial Owners and Management
Description of Capital Stock
General
Distributions of Securities
Common Stock
Preferred Stock
Restrictions on Payment of Dividends
Size of Board and Vacancies; Removal
No Stockholder Action by Written Consent
Special Meetings of Stockholders
Requirements for Advance Notification of Stockholder Nominations and Proposals
Amendments to the Certificate of Incorporation and Bylaws
Exclusive Forum
Delaware Statutory Business Combination Statute
Limitation on Liability of Directors, Indemnification of Directors and Officers, and Insurance



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Transfer Agent and Registrar
Stock Exchange Listing
Description of Financing Transactions and Certain Indebtedness
Indebtedness in Connection with the Separation
Debt Exchange
Delivery of Information Statement
Where You Can Find More Information
Index to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 



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NOTE REGARDING THE USE OF CERTAIN TERMS
We use the following terms to refer to the items indicated:

“We,” “us,” “our” and “company,” unless the context requires otherwise, refer to Corner Store, the entity that at the time of the distribution will hold, through its subsidiaries, the assets (including the equity interests of certain Valero subsidiaries) and liabilities associated with Valero’s retail business, as defined below.

“Corner Store” refers to Corner Store Holdings, Inc., a Delaware corporation, and, where appropriate in context, to one or more of its subsidiaries, or all of them taken as a whole.

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

The term “separation” refers to the separation of the retail business from Valero’s other businesses and the creation of an independent publicly traded company, Corner Store, to hold the assets (including the equity interests of certain Valero subsidiaries) and liabilities associated with the retail business from and after the distribution.

The term “distribution” refers to the distribution of 80 percent of the shares of Corner Store common stock outstanding immediately prior to the distribution date by Valero to stockholders of Valero as of the record date.

The term “distribution date” means the date on which the distribution occurs.

The term “retail site” is a general term that refers to any of the following types of retail locations through which we sell merchandise and/or motor fuel to our customers:

a “convenience store,” which is operated by us and provides motor fuel, food, convenience merchandise items and additional services to our customers;

a “filling station,” which is operated by an independent dealer or agent and provides motor fuel to our customers; or

a “cardlock,” which is an unattended self-service filling station that provides motor fuel to our fleet customers, such as trucking and other commercial customers.

The term “retail business” or “Valero’s retail business” refers to the assets (including the equity interests of certain Valero subsidiaries) and liabilities associated with Valero’s retail operations in the U.S. and Canada, as described below. All trade names and trademarks of Valero that are referenced herein have been registered by Valero with the appropriate national registration agencies in the U.S. and/or Canada.

Retail–U.S.:

We operate convenience stores and are one of the largest independent retailers of motor fuel and convenience merchandise items in the U.S. As of September 30, 2012, we had 1,027 convenience stores in nine states located predominantly in the southwestern U.S.
 
Our convenience stores are operated predominantly under the Corner Store name, and we offer a variety of convenience merchandise, such as immediately consumable and take-home items from major consumer products companies, as well as a proprietary line of consumable products under the Fresh Choices, U Force, Cibolo Mountain and Flavors2Go brands.




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Our convenience stores offer motor fuel to our customers primarily under the Valero and Diamond Shamrock brands.

Some of our convenience stores also offer additional products and services, such as car wash, lottery, money orders, air/water/vacuum services for motor vehicles, video and game rentals and access to automated teller machines (“ATMs”).

Retail–Canada:

Our business includes the operation of convenience stores, filling stations and cardlocks, and we are one of the largest independent retailers of motor fuel and convenience merchandise items in eastern Canada. As of September 30, 2012, we had 849 retail sites in six eastern Canada provinces, including 256 convenience stores, 514 filling stations and 79 cardlocks.

Our convenience stores are operated predominantly under the Corner Store/Depanneur du Coin names, and we offer a variety of convenience merchandise items, such as immediately consumable and take-home items from major consumer products companies, as well as a proprietary line of consumable products under the Transit Café brand.

Some of our convenience stores also offer additional products and services, such as car wash, lottery, air/water/vacuum services for motor vehicles and access to ATMs.

Our convenience stores offer motor fuel to our retail customers primarily under the Ultramar brand.

We offer Ultramar-branded motor fuel at filling stations and cardlocks.

We also supply Ultramar-branded heating oil to residential customers and Ultramar-branded heating oil and motor fuel to small commercial customers.

The term “U.S. Fuel Supply Agreements” refers to a Branded Distributor Marketing Agreement, a Petroleum Product Sale Agreement and a Master Agreement expected to be entered into with Valero in connection with the separation and the distribution for the supply of motor fuel for our Retail–U.S. operations.







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SUMMARY
This summary highlights selected information from this information statement relating to Corner Store, Corner Store’s separation from Valero and the distribution of Corner Store common stock by Valero to Valero’s stockholders. For a more complete understanding of our business and the separation and the distribution, you should read the entire information statement carefully, particularly the discussion set forth under “Risk Factors” beginning on page 15 of this information statement, and our audited and unaudited historical combined financial statements, our unaudited pro forma combined financial statements and the respective notes to those statements appearing elsewhere in this information statement.
Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement, including the combined financial statements of Corner Store, assumes the completion of all the transactions referred to in this information statement in connection with the separation and the distribution.
Our Business
Overview
We are one of the largest independent retailers of motor fuel and convenience merchandise items in the U.S. and eastern Canada. Our operations include (i) the sale of motor fuel at convenience stores, filling stations and cardlocks, (ii) the sale of convenience merchandise items and services at convenience stores and (iii) the sale of heating oil to residential customers and heating oil and motor fuel to small commercial customers.
We have two operating segments:

Retail–U.S. – As of September 30, 2012, we had 1,027 convenience stores located in Arizona, Arkansas, California, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Wyoming; and

Retail–Canada – As of September 30, 2012, we had 849 retail sites located in New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island and Québec.

Corner Store was formed in November 2012 and at the time of the distribution will hold, through its subsidiaries, the assets (including the equity interests of certain Valero subsidiaries) and liabilities of Valero’s retail business. Our headquarters will be located in San Antonio, Texas, and our telephone number is (210) 345-2000. Our Internet website is www.cornerstore4u.com. Our website and information contained on that site, or connected to that site, are not incorporated by reference into this information statement.
Retail–U.S.
We sell motor fuel primarily under the Valero and Diamond Shamrock brands, convenience merchandise items and other services through convenience stores operated predominantly under the Corner Store name in nine states, with significant concentrations in Texas and Colorado. Most of these retail sites are located in metropolitan areas where there are high concentrations of consumers and daily commuters. Of these retail sites, 828 are owned and 199 are leased under leases that generally contain renewal options for periods ranging from five to ten years.

We carry a broad selection of immediately consumable and take-home items, including beverages, tobacco products, snacks, freshly prepared and pre-packaged foods (including sandwiches, kolaches, tacos, salads, pastries, coffee and fountain drinks), health and beauty products, motor oils and automotive products and general convenience merchandise items. Many of these products are offered under a line of proprietary brands, including Fresh Choices, U Force, Cibolo Mountain and Flavors2Go. At some of our retail sites, we offer a variety of additional products and services, such as car wash, lottery, money orders, air/water/vacuum services for motor vehicles, video and game rentals and access to ATMs. We offer automated car wash services at 194 of our retail sites. We are a Subway® franchisee and currently offer Subway® food services at 31 of our retail sites.




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Our Retail–U.S. segment is substantially a company owned and operated business. We retain the gross margins on motor fuel sales, convenience merchandise sales and services, and the retail sites are operated by company employees.

Retail–Canada
We sell Ultramar-branded motor fuel, convenience merchandise items and other services through convenience stores operated predominantly under the Corner Store/Depanneur du Coin names in six provinces in eastern Canada, with a significant concentration in Québec. We also sell Ultramar-branded motor fuel at filling stations and cardlocks in eastern Canada. Most of our retail sites are located in metropolitan areas where there are high concentrations of consumers and daily commuters. Of these retail sites, 323 are owned and 526 are leased under leases that generally contain renewal options for periods ranging from five to ten years.

Our convenience stores carry a broad selection of immediately consumable and take-home items, including beverages, tobacco products, snacks, freshly prepared and pre-packaged foods (including sandwiches, salads, pastries and coffee), health and beauty products, motor oils and automotive products and general convenience merchandise items. At some of our retail sites, we offer a variety of additional products and services, such as car wash, lottery, air/water/vacuum services for motor vehicles and access to ATMs. We offer automated car wash services at 63 of our retail sites. We are a Subway® and Country Style® franchisee and currently provide these food offerings at 34 of our retail sites.

Our Retail–Canada segment consists of the following operations:

256 convenience stores, of which 184 are owned and 72 are leased. We retain the gross margins on motor fuel sales, convenience merchandise sales and services, and the retail sites are operated by company employees.

514 retail sites that are dealer/agent operated. At each of these retail sites, we retain title to the motor fuel inventory and sell it directly to our customers; therefore, we manage motor fuel pricing and retain the gross margin on motor fuel sales. We provide a commission to the dealer or agent to operate the retail site. These retail sites consist of the following:

402 filling stations, where each retail site is typically owned and operated by an independent dealer, and
112 filling stations, where each retail site is owned by us but operated by an independent agent.

79 cardlocks, where the site is owned or leased by us. We retain the gross margin on motor fuel sales at these retail sites.

We also supply Ultramar-branded heating oil to residential customers and Ultramar-branded heating oil and motor fuel to small commercial customers. Operating revenues from these sales were less than 9 percent of Retail–Canada’s operating revenues for the nine months ended September 30, 2012 and for the year ended December 31, 2011.

Our Competitive Strengths
Our competitive strengths include the following:

Significant Presence in the Attractive Southwestern U.S. and Eastern Canadian Markets
We are one of the largest independent retailers of motor fuel and convenience merchandise items in the U.S. and eastern Canada with nearly 1,900 retail sites. We believe we are competitively positioned in targeted regions that offer high growth potential. In the U.S., over 60 percent of our retail sites and the majority of our capital investment are concentrated in Texas, which has a strong regional economy supported by a lower-than-average unemployment rate, higher-than-average economic growth and a strong housing market. We believe that our market concentration in the major metropolitan areas of Houston and San Antonio gives us an advantage to engage the convenience consumer with the Corner Store brand. Our Canadian retail sites are concentrated in Québec and the eastern Canadian provinces, which have certain governmental regulations on motor fuel pricing that tend to reduce margin volatility and protect against below-cost selling.




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Efficient Supply Chain
We operate our own distribution center in Texas that supplies over 500 of our convenience stores in the U.S., provides us with improved inventory management, allows us to handle a greater product variety and supports the development and growth of our private label packaged goods and fresh food programs. We have a strategic alliance with Core-Mark International, Inc. (“Core-Mark”), a leading distributor of groceries, tobacco and fresh foods, to manage and operate our distribution center. Our distribution center benchmarks at the highest level of efficiency and service level against other Core-Mark distribution centers. Core-Mark also supplies the remainder of our Retail–U.S. network. In Canada, for grocery supply, we have an agreement with Sobeys Québec Inc. (“Sobeys”), which is a leading grocery wholesale distributor in eastern Canada. Sobeys provides Retail–Canada with merchandising expertise, purchasing power and efficient distribution services.

Advantageous Long-Term Motor Fuel Supply Agreements
We expect to have long-term motor fuel supply agreements with Valero, providing stability to our motor fuel supply. These agreements are expected to be based on existing volumes, but we expect to have the ability to seek other supply agreements for any incremental volumes we may add.

Differentiated Cardlock and Heating Oil Operations
Our Retail–Canada cardlock and heating oil operations add diversity to our revenue streams and present additional growth opportunities for our business. Users of our cardlocks must be registered with a membership card, which provides purchasing security and helps promote customer loyalty and retain our customer base. We believe that there is an opportunity to expand our cardlock business into the U.S., and in northern Québec in areas where trucking routes have increased due to increased industrial and mining activity. Our heating oil operations provide multiple revenue streams, including delivery of heating oil and various maintenance services. We are implementing a new onboard global positioning satellite system to increase the efficiency of our heating oil delivery routes and better utilize our fleet of delivery trucks.

Our Business Strategies
Our business strategy is built on four key platforms.

Enhance Profitability Through Optimized Motor Fuel Sales
We seek to maximize our profitability by optimizing our motor fuel offering and pricing throughout our retail system and by increasing our customer loyalty. Currently, we are expanding the availability of automotive diesel throughout our retail system and growing the offering of high-speed diesel, which significantly reduces refueling times, to meet the needs of commercial trucking operations.

In Retail–U.S., we are implementing a new automated fuel pricing system throughout our network. This system will provide analytics that will allow us to improve motor fuel gross margins across our system by enhancing our flexibility to evaluate our competitors’ pricing moves and implement pricing decisions on an instantaneous basis.

In both of our operating segments, we have multiple customer loyalty programs, including Valero’s proprietary credit cards and fleet cards, gift cards and various promotions, coupons and discounts designed to retain our customers and increase our sales and gross margin. We have considerable initiatives underway that engage the interest and loyalty of consumers through social media.

Drive Consistent Growth and Profitability of In-Store Convenience Merchandising
Our merchandise initiatives are focused on achieving sales growth and increased profitability by offering our customers superior convenience, service, quality and variety compared to our competition. We optimize our product offering to meet the unique customer preferences and demand in each of the areas in which we operate by offering food and beverage options specific to each region. Additionally, we have developed strong private label product offerings, which increase our customer loyalty, provide enhanced gross margins versus third-party products and are difficult for our competitors to replicate. We plan to continue to expand these private label products throughout our retail system to drive increased merchandise gross margins in our business. We have a proprietary prepared food offering in approximately 85 percent of our retail sites in Retail–U.S. and approximately 16 percent of our retail sites in Retail–Canada. We also have Subway® and Country Style® food offerings at selected retail sites in our network that provide



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us with enhanced gross margin opportunities and further differentiate us from our competition. We have Subway® in 31 of our retail sites in Retail–U.S. and we have four Subway® locations and 30 Country Style® locations in Retail–Canada. The proprietary and branded food offerings enhance the total gross margin of the retail site, provide differentiation in the market and promote increased sales.

Optimize Use of Capital Through Targeted Investments in Our Existing Network and New-to-Industry Retail Sites
We believe the best use of our capital is a combination of updates to our existing convenience store network, land acquisitions and new convenience store construction supported by the divestiture of underperforming convenience stores and the de-branding of filling stations where we choose not to renew our relationship with the dealers/agents who operate those retail sites. We believe this strategy supports sales growth and allows us to offer our customers a more desirable experience capable of earning higher returns on capital.

In our Retail–U.S. segment, we believe there is significant opportunity to expand our business through new site construction of New-to-Industry (“NTI”) convenience stores. As a separate company from Valero, we believe improved access to capital will allow us to accelerate our growth and better target opportunities to enter new markets. Our typical NTI convenience store incorporates an expanded branded or proprietary food offering and a car wash. We plan to focus our NTI program primarily in Texas, but we will also pursue opportunities in other strong U.S. markets.

In our Retail–Canada segment, we believe we will have opportunities that include a balance between redevelopment of older properties and NTI opportunities focused in growing urban centers or along major highways, including the addition of NTI cardlock locations.

Create Value Through Selective Expansion in Existing and Contiguous Markets
We believe our existing distribution network and merchandising initiatives create a strong platform for growth through acquisition and expansion. In addition, the convenience store industry is fragmented, providing an opportunity for larger competitors with better access to capital that are able to leverage existing infrastructure. We plan to pursue acquisition opportunities of smaller chains (50 or fewer convenience stores) in existing and contiguous markets with overall market characteristics similar to our existing markets. A recent example is our July 2012 acquisition of the Crackerbox chain in Arkansas. This market is contiguous to our existing operations in northeast Texas and northern Louisiana and the acquisition allowed us to expand our operations into an attractive and growing market. In Retail–Canada, we plan to focus on expanding our dealer network, particularly in non-urban markets where we believe the best opportunities for acquisition and expansion exist. This allows us to capitalize on the strong and stable motor fuel gross margins in Canada while deploying minimal capital.

Our supply chain is a key asset that we plan to leverage as we acquire and expand our operations into new and existing markets. Our ability to supply a large variety of proprietary offerings coupled with our expected long-term motor fuel supply agreements with Valero provide us a strong competitive advantage. Other key elements of our infrastructure include human resources, pricing software, information technology (“IT”) and accounting systems. These infrastructure and supply chain systems will allow us to acquire less sophisticated operators and quickly integrate their sites into our existing network in an efficient and cost-effective manner.








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Questions and Answers About the Separation and the Distribution
Q:
Why is Valero separating its retail business from its other businesses?
A:
The Board of Directors and management of Valero believe the separation and the distribution will allow each company to pursue a more focused, industry-specific strategy; enable the management of each company to concentrate resources wholly on its particular market segments, customers and core businesses, with greater ability to anticipate and respond to changing markets and opportunities; allow each company to recruit and retain employees with expertise directly applicable to its needs; provide Corner Store with a valuable acquisition currency; eliminate competition for capital between Corner Store’s business and Valero’s other businesses and allow more direct and efficient access to capital; and provide investors in each company with a more targeted investment opportunity.
See “The Separation and the Distribution—Reasons for the Separation and the Distribution” included elsewhere in this information statement.
Q:
How will Valero accomplish the separation and the distribution of Corner Store?
A:
The separation will be accomplished through a series of transactions in which the assets (including the equity interests of certain Valero subsidiaries) and liabilities associated with Valero’s retail business will be transferred to Corner Store or entities that are, or will become prior to the distribution, subsidiaries of Corner Store. In the distribution, Valero will distribute to its stockholders 80 percent of the shares of Corner Store’s common stock. See “The Separation and the Distribution—Manner of Effecting the Separation and the Distribution” included elsewhere in this information statement.
Q:
What will I receive in the distribution?
A:
Valero will distribute one share of Corner Store common stock for every [•] shares of Valero common stock outstanding at 5:00 p.m. Eastern Time on [•], the record date for the distribution. You will pay no consideration and will not give up any portion of your Valero common stock to receive shares of Corner Store common stock in the distribution.
Q:
What is the record date for the distribution, and when will the distribution occur?
A:
The record date is [], and ownership will be determined as of 5:00 p.m., Eastern Time, on that date. When we refer to the “record date,” we are referring to that time and date. Valero will distribute shares of Corner Store common stock on [], which we refer to as the distribution date.
Q:
As a holder of Valero common stock on the record date, what do I need to do to participate in the distribution?
A:
Nothing. You do not need to take any action, but we urge you to read this entire document carefully. No stockholder approval of the distribution is required or sought. You are not being asked for a proxy. You are not required to make any payment, surrender or exchange any of your shares of Valero common stock or take any other action to receive your shares of Corner Store common stock.
Q:
How will fractional shares be treated in the distribution?

A:
Valero will not distribute any fractional shares of Corner Store common stock to Valero stockholders. Fractional shares of Corner Store common stock to which Valero stockholders of record would otherwise be entitled will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of the sales will be distributed pro rata to each holder who would otherwise have been entitled to receive a fractional share in the distribution. Proceeds from these sales will generally result in a taxable gain or loss to those stockholders. Each stockholder entitled to receive cash proceeds from these shares should consult his, her or its own tax adviser as to such stockholder’s particular circumstances. The tax consequences of the distribution are described in more detail under “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution.”



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Q:
If I sell, on or before the distribution date, shares of Valero common stock that I held on the record date, am I still entitled to receive shares of Corner Store common stock in the distribution?
A:
Beginning on or shortly before the record date and continuing up to and including the distribution date, we expect there will be two markets in Valero common stock: a “regular way” market and an “ex-distribution” market. Shares of Valero common stock that trade on the regular way market will trade with an entitlement to receive shares of Corner Store common stock to be distributed in the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to receive shares of Corner Store common stock to be distributed in the distribution, so that holders who sell shares ex-distribution will be entitled to receive shares of Corner Store common stock even though they have sold their shares of Valero common stock after the record date. Therefore, if you owned shares of Valero common stock on the record date and sell those shares on the regular way market before the distribution date, you will also be selling the shares of our common stock that would have been distributed to you in the distribution. You are encouraged to consult with your financial adviser regarding the specific implications of selling your Valero common stock prior to or on the distribution date.
Q:
Will the distribution affect the number of shares of Valero I currently hold?
A:
No. The number of shares of Valero common stock held by a stockholder will be unchanged. The market value of each Valero share, however, is expected to decline to reflect the impact of the distribution. See “The Separation and the Distribution—The Number of Shares You Will Receive” included elsewhere in this information statement.
Q:
What are the U.S. federal income tax consequences of the distribution to me?
A:
The distribution is conditioned upon, among other matters, Valero’s receipt of a private letter ruling from the U.S. Internal Revenue Service (the “IRS”) in form and substance satisfactory to Valero in its sole discretion, to the effect that the distribution, together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”).
Valero has applied for a private letter ruling from the IRS, and expects to receive an opinion from a nationally recognized accounting firm, to the effect that the distribution will so qualify. On the basis that the distribution so qualifies, for U.S. federal income tax purposes, you will not recognize any gain or loss, and no amount will be included in your income, upon your receipt of shares of Corner Store common stock pursuant to the distribution, except with respect to any cash received in lieu of fractional shares.
You should consult your own tax adviser as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state and local tax laws, as well as foreign tax laws, which may result in the distribution being taxable to you. For more information, see “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution” included elsewhere in this information statement.
Q:
How will I determine the tax basis I will have in my Valero shares after the distribution and the Corner Store shares I receive in the distribution?
A:
Generally, for U.S. federal income tax purposes, your aggregate basis in your shares of Valero common stock and the shares of Corner Store common stock you receive in the distribution (including any fractional share for which cash is received) will equal the aggregate basis of Valero common stock held by you immediately before the distribution. This aggregate basis should be allocated between your shares of Valero common stock and the shares of Corner Store common stock you receive in the distribution (including any fractional share for which cash is received) in proportion to the relative fair market value of each immediately following the distribution. See “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution.”




8


Q: Will I receive a stock certificate for Corner Store shares distributed in the distribution?
A:
No. Registered holders of Valero common stock (meaning Valero stockholders who hold Valero stock directly through an account with Valero’s transfer agent, Computershare Investor Services LLC (“Computershare”)) who are entitled to participate in the distribution will receive from Computershare a book-entry account statement reflecting their ownership of Corner Store common stock. For additional information, registered stockholders in the U.S. should contact Valero’s transfer agent, Computershare, at (800) 736-3001 or through its website at www.computershare.com. Stockholders from outside the U.S. may call Computershare at (781) 575-3100. See “The Separation and the Distribution—When and How You Will Receive the Distributions of Corner Store Shares.”
Q:
What if I hold my shares through a broker, bank or other nominee?
A:
Valero stockholders who hold their shares through a broker, bank or other nominee will have their brokerage account credited with Corner Store common stock. For additional information, those stockholders should contact their broker, bank or other nominee directly.
Q:
What if I have stock certificates reflecting my shares of Valero common stock? Should I send them to the transfer agent or to Valero?
A:
No. You should not send your stock certificates to the transfer agent or to Valero. You should retain your Valero stock certificates.
Q:
Can Valero decide to cancel the distribution of Corner Store common stock, even if all the conditions are met?
A:
Yes. Until the distribution has occurred, the Valero Board of Directors has the right, in its sole discretion, to terminate the distribution, even if all the conditions are met. See “The Separation and the Distribution—Conditions to the Distribution” included elsewhere in this information statement.
Q:
Will Corner Store incur any debt prior to or at the time of separation?
A:
Yes. Corner Store intends to enter into new financing arrangements in anticipation of the separation and the distribution. In connection with the separation, it is expected that Corner Store will incur up to $1.05 billion in new debt, which may include bank debt, short term notes, long term notes or a combination thereof. We expect to transfer certain proceeds of the debt to Valero and to issue other debt directly to Valero in consideration for the contribution by Valero to us of the retail business. We expect that Valero will further transfer our debt issued to Valero to certain financial institutions, which we refer to as “exchange counterparties,” in order to satisfy certain of Valero’s then-outstanding debt obligations to such exchange counterparties. We refer to this transfer as a “debt exchange.” We expect that these exchange counterparties will then sell our debt that they received in the debt exchange to third-party investors. As a result of these financing transactions, Valero will receive in connection with the separation approximately $1.05 billion in cash, and we will incur indebtedness of $1.05 billion for which we will not retain any cash following the separation. See “Description of Financing Transactions and Certain Indebtedness” included elsewhere in this information statement.
Following the separation, Corner Store’s debt obligations could restrict its business and may adversely impact its financial condition, results of operations or cash flows. In addition, its separation from Valero’s other businesses may increase the overall cost of debt funding and decrease the overall debt capacity and commercial credit available to the businesses collectively. Corner Store’s business, financial condition, results of operations and cash flows could be harmed by a deterioration of its credit profile or by factors adversely affecting the credit markets generally. See “Risk Factors—Risks Relating to the Separation and the Distribution.”




9


Q:
Does Corner Store intend to pay dividends?
A:
After the distribution, Corner Store intends to pay a cash dividend to its common stockholders at an initial rate of $0.0625 per share per quarter, or $0.25 per share per year. However, the declaration and amount of all dividends to holders of Corner Store’s common stock will be at the discretion of the Board of Directors of Corner Store and will depend upon many factors, including Corner Store’s financial condition, earnings, capital requirements of its business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors the Board of Directors deems relevant. Corner Store is a holding company and has no direct operations. As a result, Corner Store will be able to pay dividends on its common stock only from available cash on hand and distributions received from its subsidiaries.
Q:
Will my shares of Corner Store common stock trade on a stock market?
A:
Yes. Currently, there is no public market for Corner Store common stock. We intend to apply to list Corner Store common stock on the New York Stock Exchange (“NYSE”) under the ticker symbol “CST.” We cannot predict the trading prices for Corner Store common stock when such trading begins.
Q:
Will my shares of Valero common stock continue to trade?
A:
Yes. Valero common stock will continue to be listed and trade on the NYSE under the ticker symbol “VLO.”
Q:
Will the distribution of Corner Store common stock affect the market price of my Valero shares?
A:
Yes. As a result of the distribution, the trading price of shares of Valero common stock immediately after the distribution is expected to change from the trading price immediately before the distribution, because the trading price immediately after the distribution will no longer reflect the value of Valero’s retail business. Furthermore, until the market has fully analyzed the value of Valero after the distribution, Valero may experience more stock price volatility than usual. It is possible that the combined trading prices of Valero common stock and Corner Store common stock immediately after the distribution will be less than the trading price of shares of Valero common stock immediately before the distribution.
Q:
What will happen to Valero stock options, restricted shares and performance shares?
A:
No stock-based awards of Corner Store will be issued in exchange for either vested or non-vested Valero stock-based awards held by Corner Store employees prior to the separation. Valero intends to accelerate the vesting of all of its non-vested stock-based awards held by Corner Store employees at the distribution date. Adjustments to Valero’s outstanding stock-based awards and long-term incentive plans will be addressed in a subsequent amendment to the registration statement of which this information statement is a part. 
Q:
What will the relationship be between Valero and Corner Store after the separation and the distribution?
A:
Following the distribution, Corner Store will be an independent, publicly owned company, and Valero will retain 20 percent of the common stock of Corner Store. In connection with the separation and the distribution, Corner Store is expected to enter into a Separation and Distribution Agreement and several other agreements with Valero for the purpose of both effecting the separation and governing the relationship of Valero and Corner Store following the separation. Corner Store is also expected to enter into a Stockholder’s and Registration Rights Agreement with Valero pursuant to which, among other things, Corner Store will agree that, upon the request of Valero, it will use its best efforts to effect the registration under applicable securities laws of the shares of common stock retained by Valero.We describe these agreements in more detail under “Certain Relationships and Related-Party Transactions—Agreements Between Us and Valero” included elsewhere in this information statement.



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Q:
What does Valero intend to do with the shares of Corner Store common stock that it retains?
A:
Valero currently plans to dispose of all of our shares through one or more exchanges for indebtedness of Valero outstanding at the time of such exchange. Any shares not disposed of by Valero pursuant to such exchanges will be otherwise disposed of by Valero as soon as practicable consistent with the business reasons for the retention, but in no event later than five years after the distribution.
Q:
How will Valero vote the shares of Corner Store common stock that it retains?
A:
It is expected that Valero will agree to vote the shares of Corner Store common stock that it retains in proportion to the votes cast by Corner Store’s other stockholders and to grant Corner Store a proxy with respect to such shares. For additional information, see “Certain Relationships and Related-Party Transactions—Agreements Between Us and Valero—Stockholder’s and Registration Rights Agreement” included elsewhere in this information statement.
Q:
Are there risks to owning Corner Store common stock?
A:
Yes. There are risks associated with Corner Store’s business, the separation and the distribution, the incurrence by Corner Store of up to $1.05 billion of indebtedness in connection with the separation and Corner Store’s operation as an independent, publicly traded company. These risks are described in the section entitled “Risk Factors” included elsewhere in this information statement. We encourage you to read that entire section carefully.
Q:
Will I have appraisal rights in connection with the separation and the distribution?
A:
No. Holders of Valero common stock are not entitled to appraisal rights in connection with the separation or the distribution.
Q:
Where can I get more information?
A:
If you have any questions relating to the transfer or mechanics of the stock distribution, you should contact the distribution agent:
[•]

For other questions relating to the separation or the distribution, prior to the distribution, or for questions relating to Valero’s stock after the distribution, you should contact Valero’s investor relations department:
Valero Investor Relations
One Valero Way
San Antonio, Texas 78249
investorrelations@valero.com
(800) 531-7911

For other questions relating to the separation or the distribution, after the distribution, you should contact Corner Store’s investor relations department:

[•]






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The Separation and the Distribution
Distributing Company
 
Valero is currently the sole stockholder of Corner Store. Immediately after the distribution, Valero will own 20 percent of the shares of Corner Store’s common stock.
Distributed Company
 
Corner Store is currently a wholly owned subsidiary of Valero. After the distribution, Corner Store will be an independent, publicly traded company.
Distribution Ratio
 
One share of Corner Store common stock for every [•] shares of Valero common stock held on the record date.
Shares to Be Distributed
 
Valero will distribute 80 percent of the shares of Corner Store common stock outstanding immediately before the distribution. Based on approximately [•] shares of Valero common stock outstanding as of [•], assuming distribution of 80 percent of our common stock and applying the distribution ratio, approximately [•] shares of Corner Store common stock will be distributed.
Record Date for the Distribution
 
5:00 p.m. Eastern Time on [•].
Distribution Date
 
[•].
Fractional Shares
 
The distribution agent will not distribute any fractional shares of Corner Store common stock to Valero stockholders. Instead, it will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing rates and distribute the net cash proceeds pro rata to each holder who would otherwise have been entitled to receive fractional shares in the distribution. Valero stockholders will not be entitled to any interest on the amount of any payment made in lieu of a fractional share.
Distribution Method
 
The distribution will be made in electronic book-entry form, without the delivery of any physical share certificates. Registered stockholders will receive additional information from the distribution agent shortly before the distribution date. Beneficial holders will receive information from their brokerage firms.



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Conditions to the Distribution
 
The distribution is subject to the satisfaction, or waiver by Valero, of the following conditions, among others:
 
 
The Securities and Exchange Commission (the “SEC”) will have declared effective our registration statement on Form 10, of which this information statement is a part, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with no order suspending the effectiveness of the registration statement in effect and no proceedings for such purposes pending before or threatened by the SEC.
 
 
Any required actions and filings with regard to state securities and blue sky laws of the U.S. (and any comparable laws under any foreign jurisdictions) will have been taken and, where applicable, will have become effective or been accepted.
 
 
Corner Store’s common stock will have been authorized for listing on the NYSE, or another national securities exchange approved by Valero, subject to official notice of issuance.
 
 
Prior to the distribution, this information statement will have been mailed to the holders of Valero common stock as of the record date.
 
 
Valero will have received a private letter ruling from the IRS in form and substance satisfactory to Valero in its sole discretion, to the effect that the distribution, together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code.
 
 
No order, injunction, decree or regulation issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing completion of the distribution will be in effect.
 
 
Any government approvals and other material consents necessary to consummate the distribution will have been obtained and be in full force and effect.
 
 
The Separation and Distribution Agreement will not have been terminated.
 
 
See: “The Separation and the Distribution—Conditions to the Distribution” included elsewhere in this information statement.
Stock Exchange Listing
 
There currently is not a public market for Corner Store common stock. We intend to apply to list Corner Store common stock on the NYSE under the symbol “CST.”



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Dividend Policy after the Distribution





 
After the distribution, Corner Store intends to pay a cash dividend to its common stockholders at an initial rate of $0.0625 per share per quarter, or $0.25 per share per year. However, the declaration and amount of all dividends to holders of Corner Store’s common stock will be at the discretion of the Board of Directors of Corner Store and will depend upon many factors, including Corner Store’s financial condition, earnings, capital requirements of its business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors the Board of Directors deems relevant. There can be no assurance Corner Store will continue to pay any dividend even if it commences the payment of dividends. Corner Store is a holding company and has no direct operations. As a result, Corner Store will be able to pay dividends on its common stock only from available cash on hand and distributions received from its subsidiaries.
Distribution Agent, Transfer Agent and Registrar for Our Shares of Common Stock

 
[•].
U.S. Federal Income Consequences

 
On the basis that the distribution, together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes, no gain or loss will be recognized by a stockholder of Valero, and no amount will be included in the income of a stockholder of Valero for U.S. federal income tax purposes, upon the receipt of shares of our common stock pursuant to the distribution, except with respect to any cash received in lieu of fractional shares. For more information regarding the potential U.S. federal income tax consequences to you of the distribution, see “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution.”



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RISK FACTORS
You should carefully consider each of the following risks and all of the other information contained in this information statement. Some of these risks relate principally to our separation from Valero, while others relate principally to our business and the industry in which we operate or to the securities markets generally and ownership of our common stock. Our business, prospects, financial condition, results of operations or cash flows could be materially and adversely affected by any of these risks, and, as a result, the trading price of our common stock could decline.
Risks Relating to the Separation and the Distribution
We may not realize the potential benefits from the separation, and our historical and pro forma combined financial information is not necessarily indicative of our future prospects. We may be unable to achieve some or all of the benefits that we expect to achieve as an independent, publicly traded company.
We may not realize the potential benefits we expect from our separation from Valero. We have described those anticipated benefits elsewhere in this information statement. See “The Separation and the Distribution—Reasons for the Separation and the Distribution.” In addition, we will incur significant costs, including those described below, which may exceed our estimates, and we will incur some negative effects from our separation from Valero, including loss of access to some of the financial, managerial and professional resources from which we have benefited in the past.
 
Our historical and pro forma combined financial statements do not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as an independent, publicly traded company during the periods presented or those that we will achieve in the future, as a result of the following factors:
Our historical combined financial results reflect allocations of expenses for services historically provided by Valero, and those allocations may be significantly lower than the comparable expenses we would have incurred as an independent company.

Our working capital requirements historically have been satisfied as part of Valero’s corporate-wide cash management programs, and our cost of debt and other capital may significantly differ from that reflected in our historical combined financial statements.

Our historical combined financial information may not fully reflect the costs associated with being an independent public company, including significant changes that may occur in our cost structure, management, financing arrangements and business operations as a result of our separation from Valero.

We based the pro forma adjustments on available information and assumptions that we believe are reasonable; however, our assumptions may prove not to be accurate. In addition, our unaudited pro forma combined financial information may not give effect to various ongoing additional costs we may incur in connection with being an independent public company. Accordingly, our unaudited pro forma combined financial information does not reflect what our financial condition, results of operations or cash flows would have been as an independent public company and is not necessarily indicative of our future financial condition or future results of operations. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined Financial Statements” and our historical audited and unaudited combined financial statements and the notes to those statements included elsewhere in this information statement.
We have no history operating as an independent public company. We will incur significant costs to create the corporate infrastructure necessary to operate as an independent public company. We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company. We may experience increased ongoing costs in connection with being an independent public company.
We have historically used Valero’s corporate infrastructure to support our business functions, including IT systems. Valero has been performing various corporate functions for us, including tax administration, treasury activities, accounting, IT services, ethics and compliance program administration, risk management and public relations. The expenses related to establishing and maintaining this infrastructure were spread among all of Valero’s businesses.



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Following the separation and after the expiration of the transition arrangements described below, we will no longer have access to Valero’s infrastructure, and we will need to establish our own. We expect to incur costs beginning in [•] to establish the necessary infrastructure. See “Unaudited Pro Forma Combined Financial Statements” included elsewhere in this information statement.
Following the separation, Valero will be contractually obligated to provide to us only those transition services specified in the Transition Services Agreements and the other agreements we enter into with Valero in connection with the separation and the distribution. The expiration date of the Transition Services Agreements will vary by service provided, but is expected to be generally no longer than 18 months from the distribution date. See “Certain Relationships and Related-Party Transactions—Agreements Between Us and Valero—Transition Services Agreements” for a description of the terms of the Transition Services Agreements. We may be unable to replace in a timely manner or on comparable terms the services or other benefits that Valero previously provided to us. Upon the expiration of the Transition Services Agreements or other agreements, many of the services that are covered in such agreements will be provided internally or by unaffiliated third parties. We expect that, in some instances, we will incur higher costs to obtain such services than we incurred prior to the separation and the distribution or under the terms of such agreements. If Valero does not effectively perform the services that are called for under the Transition Services Agreements and other agreements, we may not be able to operate our business effectively, and our profitability may decline. After the expiration of the Transition Services Agreements and the other agreements, we may be unable to replace the services specified in such agreements in a timely manner or on comparable terms.
Similarly, we currently purchase a wide variety of products and services, including software licenses, from third parties as part of Valero. We may experience some increased costs after the separation as a result of our inability to continue to purchase products and services on terms that are as favorable to us as those obtained under these combined purchasing arrangements. Although we cannot predict the extent of any such increased costs, it is possible that such costs could have a negative impact on our business and results of operations.
Until the distribution occurs, Valero has sole discretion to change the terms of the distribution in ways that may be unfavorable to us.
Until the distribution occurs, we are a wholly owned subsidiary of Valero. Accordingly, Valero has the sole and absolute discretion to determine and change the terms of the distribution, including the establishment of the record date and distribution date. These changes could be unfavorable to us. In addition, Valero may decide at any time not to proceed with the separation or the distribution.

In connection with our separation from Valero, Valero will indemnify us for certain liabilities, and we will indemnify Valero for certain liabilities. If we are required to act on these indemnities to Valero, we may need to divert cash to meet those obligations, and our financial results could be negatively impacted. In the case of Valero’s indemnity, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or as to Valero’s ability to satisfy its indemnification obligations in the future.
Pursuant to the Separation and Distribution Agreement and other agreements with Valero, it is expected that Valero will agree to indemnify us for certain liabilities, and we will agree to indemnify Valero for certain liabilities, in each case for uncapped amounts, as discussed further in “Certain Relationships and Related-Party Transactions—Agreements With Valero.” Indemnities that we may be required to provide Valero are not expected to be subject to any cap, may be significant and could negatively impact our business, particularly indemnities relating to our actions that could impact the tax-free nature of the distribution. Third parties could also seek to hold us responsible for any of the liabilities that Valero has agreed to retain. Further, there can be no assurance that the indemnity from Valero will be sufficient to protect us against the full amount of such liabilities, or that Valero will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Valero any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, cash flows, results of operations and financial condition.

We will be subject to continuing contingent liabilities of Valero following the separation.
After the separation, there will be several significant areas where the liabilities of Valero may become our obligations. For example, under the Code and the related rules and regulations, each corporation that was a member of the Valero consolidated U.S. federal income tax reporting group during any taxable period or portion of any taxable period ending



16


on or before the effective time of the distribution is jointly and severally liable for the U.S. federal income tax liability of the entire Valero consolidated tax reporting group for that taxable period. In connection with the separation, we will enter into a Tax Matters Agreement with Valero that will allocate the responsibility for prior period taxes of the Valero consolidated tax reporting group between us and Valero. See “Certain Relationships and Related-Party Transactions—Agreements Between Us and Valero—Tax Matters Agreement.” However, if Valero is unable to pay any prior period taxes for which it is responsible, we could be required to pay the entire amount of such taxes.

If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, you and Valero could be subject to significant tax liability and, in certain circumstances, we could be required to indemnify Valero for material taxes pursuant to indemnification obligations under the Tax Matters Agreement.
If the distribution or certain internal transactions undertaken in anticipation of the distribution are determined to be taxable for U.S. federal income tax purposes, then we, Valero and/or our stockholders could be subject to significant tax liability. Valero has applied for a private letter ruling from the IRS substantially to the effect that, for U.S. federal income tax purposes, the distribution, except for cash received in lieu of fractional shares, will qualify as tax-free under Sections 355 and 361 of the Code, and that certain internal transactions undertaken in anticipation of the distribution will qualify for favorable treatment. Notwithstanding the private letter ruling, the IRS could determine on audit that the distribution or the internal transactions should be treated as taxable transactions if it determines that any of the facts, assumptions, representations or undertakings we or Valero have made or provided to the IRS is not correct, or that the distribution or the internal transactions should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the distribution. If the distribution ultimately is determined to be taxable, the distribution could be treated as a taxable dividend or capital gain to you for U.S. federal income tax purposes, and you could incur significant U.S. federal income tax liabilities. In addition, Valero would recognize gain in an amount equal to the excess of the fair market value of shares of our common stock distributed to Valero stockholders on the distribution date over Valero’s tax basis in such shares of our common stock. Moreover, Valero could incur significant U.S. federal income tax liabilities if it is ultimately determined that certain internal transactions undertaken in anticipation of the distribution are taxable.

Under the Tax Matters Agreement between Valero and us, it is expected that we would generally be required to indemnify Valero against any tax resulting from the distribution to the extent that such tax resulted from (i) an acquisition of all or a portion of our stock or assets, whether by merger or otherwise, (ii) other actions or failures to act by us or (iii) any of our representations or undertakings being incorrect. For a more detailed discussion, see “Certain Relationships and Related-Party Transactions—Agreements Between Us and Valero—Tax Matters Agreement.” Our indemnification obligations to Valero and its officers and directors are not expected to be limited by any maximum amount. If we are required to indemnify Valero or such other persons under the circumstances set forth in the Tax Matters Agreement, we may be subject to substantial liabilities.
We might not be able to engage in desirable strategic transactions and equity issuances following the distribution because of certain restrictions relating to requirements for tax-free distributions.
To preserve the tax-free treatment to Valero of the distribution, for the two-year period following the distribution, we may be limited or prohibited, except in specified circumstances, from:

entering into any transaction pursuant to which all or a portion of our stock would be acquired, whether by merger or otherwise;

issuing equity securities beyond certain thresholds;

repurchasing our common stock;

ceasing to actively conduct the retail business; and/or

taking or failing to take any other action that prevents the distribution and related transactions from being tax-free.




17


These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. For more information, see “The Separation and the Distribution—Material U.S. Federal Income Tax Consequences of the Distribution” and “Certain Relationships and Related-Party Transactions—Agreements Between Us and Valero—Tax Matters Agreement.”
We potentially could have received better terms from unaffiliated third parties than the terms we receive in our agreements with Valero.
The agreements we expect to enter into with Valero in connection with the separation, including the Separation and Distribution Agreement, the Tax Matters Agreement and other agreements, will have been negotiated in the context of the separation while we were still a wholly owned subsidiary of Valero. Accordingly, during the period in which the terms of those agreements will have been negotiated, we will not have had an independent Board of Directors or a management team independent of Valero. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. The terms of the agreements to be negotiated in the context of the separation relate to, among other things, the allocation of assets, liabilities, rights and other obligations between Valero and us. Arm’s-length negotiations between Valero and an unaffiliated third party in another form of transaction, such as a buyer in a sale of a business transaction, may have resulted in more favorable terms to the unaffiliated third party. See “Certain Relationships and Related-Party Transactions—Agreements Between Us and Valero” included elsewhere in this information statement.

Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the separation and the distribution.
Our financial results previously were included within the consolidated results of Valero, and our reporting and control systems were appropriate for those of subsidiaries of a public company. Prior to the distribution, we were not directly subject to reporting and other requirements of the Exchange Act and Section 404 of the Sarbanes-Oxley Act of 2002. After the distribution, we will be subject to such reporting and other requirements, which will require, among other things, annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. These and other obligations will place significant demands on our management and administrative and operational resources, including accounting resources.

To comply with these requirements, we anticipate that we will need to upgrade our systems, including computer hardware infrastructure, implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff. We expect to incur additional annual expenses related to these steps, including with respect to, among other things, directors and officers liability insurance, director fees, reporting with the SEC, transfer agent fees, increased auditing and legal fees and similar expenses, which expenses may be significant. If we are unable to upgrade our financial and management controls, reporting systems, IT and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to achieve and maintain effective internal controls could have an adverse effect on our business, financial condition, results of operations and cash flows.
After the separation and the distribution, we will have indebtedness, which could restrict our ability to pay dividends and have a negative impact on our financing options and liquidity position.
Immediately following the separation, we expect to bear a total combined indebtedness for borrowed money of approximately $1.05 billion. We may also incur additional indebtedness in the future. Our indebtedness may impose restrictions on us that could have material adverse consequences by:

limiting our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions;

limiting our ability to refinance our indebtedness on terms acceptable to us or at all;

requiring us to dedicate a significant portion of our cash flows from operations to paying the principal of and interest on our indebtedness, thereby reducing funds available for other corporate purposes;




18


making it more difficult for us to pay our anticipated cash dividends on our common stock; and

making us more vulnerable to economic downturns and limiting our ability to withstand competitive pressures.

See “Description of Financing Transactions and Certain Indebtedness” included elsewhere in this information statement for more information.
Risks Relating to Our Industry and Our Business
The convenience store and retail motor fuel industries are highly competitive, and new entrants or increased competition could result in reduced gross margins.
The convenience store and retail motor fuel industries in the geographic areas in which we operate are highly competitive and marked by ease of entry and constant change in the number and type of retailers offering the products and services found at our retail sites. We compete with numerous other convenience store chains, independent convenience stores, supermarkets, drugstores, discount clubs, motor fuel service stations, mass merchants, fast food operations and other similar retail outlets. In recent years, several non-traditional retailers, including supermarkets, club stores and mass merchants, have begun to compete directly with convenience stores, particularly in the sale of motor fuel. These non-traditional motor fuel retailers have obtained a significant share of the motor fuel market, and their market share is expected to grow, and these retailers may use promotional pricing or discounts, both at the fuel pump and in the convenience store, to encourage in-store merchandise sales and motor fuel sales. Some of our competitors have been in existence longer than us and have greater financial, marketing and other resources than we do. As a result, our competitors may be able to respond better to changes in the economy and new opportunities within the industry.

Volatility in oil and wholesale motor fuel costs, and seasonality in those costs and in motor fuel sales, could affect our operating results.
Historically, motor fuel revenue has comprised a substantial portion of our overall revenues. Oil and domestic wholesale motor fuel markets are volatile. General political conditions, acts of war or terrorism, instability in oil producing regions, particularly in the Middle East and South America, and the value of U.S. or Canadian dollars relative to other foreign currencies, particularly those of oil producing nations, could significantly affect oil supplies and wholesale motor fuel costs. In addition, the supply of motor fuel and our wholesale purchase costs could be adversely affected in the event of a shortage, which could result from, among other things, lack of capacity at oil refineries, sustained increase in global demand or the fact that our motor fuel contracts do not guarantee an uninterrupted, unlimited supply of motor fuel. Significant increases and volatility in wholesale motor fuel costs could result in lower motor fuel gross margins per gallon. This volatility makes it extremely difficult to predict the effect that future wholesale cost fluctuations will have on our operating results and financial condition. Dramatic increases in oil prices reduce retail motor fuel gross margins, because wholesale motor fuel costs typically increase faster than retailers are able to pass them along to customers. Furthermore, oil prices, wholesale motor fuel costs, motor fuel sales and motor fuel gross margins can be subject to seasonal fluctuations. For example, consumer demand for motor fuel typically increases during the summer driving season, and typically falls during the winter months. A significant change in any of these factors, including a significant decrease in consumer demand (other than typical seasonal variations), could materially affect our motor fuel and merchandise volumes, motor fuel gross profit and overall customer traffic, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Changes in credit card expenses could reduce our gross margin, especially on motor fuel.
A significant portion of our sales involve payment using credit cards. We are assessed credit card fees as a percentage of transaction amounts and not as a fixed dollar amount or percentage of our gross margins. Higher motor fuel prices result in higher credit card expenses, and an increase in credit card use or an increase in credit card fees would have a similar effect. Therefore, credit card fees charged on motor fuel purchases that are more expensive as a result of higher motor fuel prices are not necessarily accompanied by higher gross margins. In fact, such fees may cause lower gross margins. Lower gross margins on motor fuel sales caused by higher credit card fees may decrease our overall gross margin and could have a material adverse effect on our business, financial condition and results of operations.




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General economic conditions that are largely out of our control may adversely affect our financial condition and results of operations.
Recessionary economic conditions, higher interest rates, higher motor fuel and other energy costs, inflation, increases in commodity prices, higher levels of unemployment, higher consumer debt levels, higher tax rates and other changes in tax laws or other economic factors may affect consumer spending or buying habits, and could adversely affect the demand for products we sell at our retail sites. Unfavorable economic conditions, higher motor fuel prices and unemployment levels can affect consumer confidence, spending patterns and miles driven, with many customers “trading down” to lower priced products in certain categories when unfavorable conditions exist. These factors can lead to sales declines in both motor fuel and general merchandise, and in turn have an adverse impact on our business, financial condition and results of operations.

Changes in consumer behavior and travel as a result of changing economic conditions or otherwise could affect our business.
In the convenience store industry, customer traffic is generally driven by consumer preferences and spending trends, growth rates for commercial truck traffic and trends in travel and weather. Changes in economic conditions generally, or in the regions in which we operate, could adversely affect consumer spending patterns and travel in our markets. In particular, weakening economic conditions may result in decreases in miles driven and discretionary consumer spending and travel, which affect spending on motor fuel and convenience items. In addition, changes in the types of products and services demanded by consumers may adversely affect our merchandise sales and gross margin. Additionally, negative publicity or perception surrounding motor fuel suppliers could adversely affect their reputation and brand image, which may negatively affect our motor fuel sales and gross margin. Similarly, advanced technology and increased use of “green” automobiles (e.g., those automobiles that do not use petroleum-based motor fuel or that are powered by hybrid engines) would reduce demand for motor fuel. Our success depends on our ability to anticipate and respond in a timely manner to changing consumer demands and preferences while continuing to sell products and services that remain relevant to the consumer and thus will positively impact overall merchandise gross margin.
Legal, technological, political and scientific developments regarding climate change may decrease demand for motor fuel.
Developments regarding climate change and the effects of greenhouse gas emissions on climate change and the environment may decrease the demand for our major product, petroleum-based motor fuel. Attitudes toward this product and its relationship to the environment may significantly affect our sales and ability to market our product. New technologies developed to steer the public toward non-fuel dependent means of transportation may create an environment with negative attitudes toward motor fuel, thus affecting the public’s attitude toward our major product and potentially having a material adverse effect on our business, financial condition and results of operations. Further, new technologies developed to improve fuel efficiency or governmental mandates to improve fuel efficiency may result in decreased demand for petroleum-based motor fuel, which could have a material adverse effect on our business, financial condition and results of operations.

Future tobacco legislation, campaigns to discourage smoking, increases in tobacco taxes and wholesale cost increases of tobacco products could have a material adverse impact on our operating revenues and gross margin.
Sales of tobacco products have historically accounted for an important portion of our total sales of convenience store merchandise. Significant increases in wholesale cigarette costs and tax increases on tobacco products, as well as future legislation and national and local campaigns to discourage smoking in the U.S. and Canada, may have an adverse effect on the demand for tobacco products, and therefore reduce our revenues and profits. Competitive pressures in our markets can make it difficult to pass price increases on to our customers. These factors could materially and adversely affect our retail price of cigarettes, cigarette unit volume and sales, merchandise gross margin and overall customer traffic. Reduced sales of tobacco products or smaller gross margins on the sales we make could have a material adverse effect on our business, financial condition and results of operations.

Currently, major cigarette manufacturers offer substantial rebates to retailers. We include these rebates as a component of our gross margin. In the event these rebates are no longer offered, or decreased, our profit from cigarette sales will decrease accordingly. In addition, reduced retail display allowances on cigarettes offered by cigarette manufacturers negatively affect gross margins. These factors could materially affect our retail price of cigarettes, cigarette unit volume



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and revenues, merchandise gross margin and overall customer traffic, which could in turn have a material adverse effect on our business, financial condition and results of operations.

We are subject to extensive government laws and regulations, and the cost of compliance with such laws and regulations can be material.
Our business and properties are subject to extensive local, state, provincial and federal governmental laws and regulations relating to, among other things, environmental conditions, the sale of alcohol, tobacco and money orders, employment conditions, including minimum wage requirements, and public accessibility requirements. The cost of compliance with these laws and regulations can have a material adverse effect on our operating results and financial condition. In addition, failure to comply with local, state, provincial and federal laws and regulations to which our operations are subject may result in penalties and costs that could adversely affect our business and our operating results.

In certain areas where our convenience stores are located, provincial, state or local laws limit the convenience stores’ hours of operation or their sale of alcoholic beverages, tobacco products, possible inhalants and lottery tickets, in particular to minors. Moreover, in some Canadian provinces, we are subject to price regulation on products such as gasoline, heating oil, milk, beer and wine. Failure to comply with these laws could adversely affect our revenues and results of operations because these state and local regulatory agencies have the power to revoke, suspend or deny applications for and renewals of permits and licenses relating to the sale of these products or to seek other remedies, such as the imposition of fines or other penalties.
Regulations related to wages also affect our business. Any appreciable increase in the statutory minimum wage would result in an increase in our labor costs and such cost increase, or the penalties for failing to comply with such statutory minimums, could adversely affect our business, financial condition and results of operations.
Further, although we are still evaluating what effect, if any, U.S. health care reform legislation may have on our business, a requirement to provide additional health insurance benefits to our employees, or health insurance coverage to additional employees, would likely increase our costs and expenses, and such increases could be significant enough to materially affect our business, financial position, results of operations and cash flows. We currently estimate that our health care costs will increase by approximately $5 million per year beginning in 2014.
Any changes in the laws or regulations described above that are adverse to us and our properties could affect our operating and financial performance. In addition, new regulations are proposed from time to time which, if adopted, could have a material adverse effect on our operating results and financial condition.
We are subject to extensive federal, provincial, state and local environmental laws.
Our operations are subject to a variety of environmental laws and regulations, including those relating to emissions to the air, discharges into water, releases of hazardous and toxic substances and remediation of contaminated sites. Under various federal, provincial, state and local laws and regulations, we may, as the owner or operator, be liable for the costs of removal or remediation of contamination at our current locations or our former locations, whether or not we knew of, or were responsible for, the presence of such contamination. In particular, as an owner and operator of motor fueling stations, we face risks relating to petroleum product contamination that other convenience store operators not engaged in such activities would not face. The remediation costs and other costs required to clean up or treat contaminated sites could be substantial. Contamination on and from our current or former locations may subject us to liability to third parties or governmental authorities for injuries to persons, property or natural resources and may adversely affect our ability to sell or rent our properties or to borrow money using such properties as collateral.

In the U.S., persons who dispose of or arrange for the disposal or treatment of hazardous or toxic substances away from locations used in a business may also be liable for the costs of removal or remediation of such substances at the disposal sites although such sites are not owned by such persons. Although we do not typically arrange for the treatment or disposal of large quantities of hazardous or toxic substances from any location, our current and historic operation of many locations and the disposal of contaminated soil and groundwater wastes generated during cleanups of contamination at such locations could expose us to such liability.




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We are subject to extensive environmental laws and regulations regulating underground storage tanks (“USTs”) and vapor recovery systems. Compliance with existing and future environmental laws regulating such tanks and systems may require significant expenditures. In the U.S., we pay fees to state “leaking UST” trust funds in states where they exist. These state trust funds are expected to pay or reimburse us for remediation expenses related to contamination associated with USTs subject to their jurisdiction. Such payments are always subject to a deductible paid by us, specified per incident caps and specified maximum annual payments, which vary among the funds. Additionally, such funds may have eligibility requirements that not all of our sites will meet. To the extent state funds or other responsible parties do not pay or delay payments for remediation, we will be obligated to make these payments, which could materially adversely affect our financial condition and results of operations. We cannot assure you that these funds or responsible third parties are or will continue to remain viable.
The nature of our motor fuel operations and those we acquire present risks of soil and groundwater contamination. In the future, we may incur substantial expenditures for remediation of contamination that has not been discovered at existing locations or locations which we may acquire. We regularly monitor our facilities for environmental contamination and record reserves on our financial statements to cover potential environmental remediation and compliance costs as we consider appropriate. However, we cannot assure you that the liabilities we have recorded are the only environmental liabilities relating to our current and former locations, that material environmental conditions not known to us do not exist, that future laws or regulations will not impose material environmental liability on us or that our actual environmental liabilities will not exceed our reserves. In addition, failure to comply with any environmental regulations or an increase in regulations could materially and adversely affect our operating results and financial condition.
Legislative and regulatory initiatives regarding climate change and greenhouse gas emissions have accelerated recently in the U.S. and in Canada. Greenhouse gases are certain gases, including carbon dioxide, that may be contributing to global warming and other climatic changes. If governmental climate change or greenhouse gas reduction initiatives are enacted, they could have a material adverse impact on our business, financial condition and results of operations by increasing our regulatory compliance expenses, increasing our motor fuel costs and/or decreasing customer demand for motor fuel sold at our locations. For example, the California Global Warming Solutions Act, also known as AB 32, directs the California Air Resources Board to develop and issue regulations to reduce greenhouse gas emissions in California to 1990 levels by 2020. The California Air Resources Board has issued a variety of regulations aimed at reaching this goal, including a Low Carbon Fuel Standard, a statewide cap-and-trade program and electricity renewable standards. The California Air Resources Board is also intending to require the establishment of Clean Fuels Outlets for alternative fuel vehicles. In addition, the Canadian province of Québec enacted a regulation creating a cap-and-trade system that will apply to our Canadian subsidiary starting on January 1, 2015. To the degree these programs or greenhouse gas regulations increase costs that we are unable to recover or otherwise adversely affect consumer demand, these matters could have a material adverse effect on our financial position, results of operations and liquidity.

Unfavorable weather conditions, the impact of climate change or other trends or developments in the regions in which we operate could adversely affect our business.
Substantially all of our convenience stores are located in the southwestern U.S., Colorado and in eastern Canada. These regions are susceptible to certain severe weather events, such as hurricanes, severe thunderstorms, snowstorms, tornadoes and extreme heat and cold. Inclement weather conditions could damage our facilities, our suppliers or could have a significant impact on consumer behavior, travel and convenience store traffic patterns, as well as our ability to operate our retail sites. We could also be affected by regional occurrences, such as energy shortages or increases in energy prices, fires or other natural disasters. Besides these more obvious consequences of severe weather, our ability to insure these locations and the related cost of such insurance may also affect our business, financial condition and results of operations.

We could be adversely affected if we are not able to attract and retain a strong management team.
We are dependent on our ability to attract and retain a strong management team. If, for any reason, we are not able to attract and retain qualified senior personnel, our business, financial condition, results of operations and cash flows could be adversely affected. We also are dependent on our ability to recruit qualified convenience store and field managers. If we fail to attract and retain these individuals at reasonable compensation levels, our operating results may be adversely affected.



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Valero will be our principal supplier of motor fuel after the distribution. A disruption in supply or a change in that relationship could have a material adverse effect on our business.
In connection with the separation, we intend to enter into long-term fuel supply agreements with Valero pursuant to which Valero will supply our retail sites with motor fuel. As a result, following the distribution, we will depend on Valero as the principal supplier of our motor fuel. A change of motor fuel suppliers, a disruption in supply or a significant change in our relationship with Valero could have a material adverse effect on our business, cost of sales, financial condition and results of operations.

Pending or future litigation could adversely affect our financial condition and results of operations. Litigation and publicity concerning motor fuel or food quality, health and other related issues could result in significant liabilities or litigation costs and cause consumers to avoid our retail sites.
Convenience store businesses can be adversely affected by litigation and complaints from customers or government agencies resulting from motor fuel or food quality, illness or other health or environmental concerns or operating issues stemming from one or more locations. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from purchasing motor fuel, merchandise or food at one or more of our retail sites. We could also incur significant liabilities if a lawsuit or claim results in a decision against us. Even if we are successful in defending such litigation, our litigation costs could be significant, and the litigation may divert time and money away from our operations and adversely affect our performance. Our defense costs and any resulting damage awards may not be fully covered by our insurance policies.

The dangers inherent in the storage of motor fuel could cause disruptions and could expose us to potentially significant losses, costs or liabilities.
We store motor fuel in storage tanks at our retail sites. Our operations are subject to significant hazards and risks inherent in storing motor fuel. These hazards and risks include, but are not limited to, fires, explosions, spills, discharges and other releases, any of which could result in distribution difficulties and disruptions, environmental pollution, governmentally imposed fines or cleanup obligations, personal injury or wrongful death claims and other damage to our properties and the properties of others. Any such event could have a material adverse effect on our business, financial condition and results of operations.

Future consumer or other litigation could adversely affect our financial condition and results of operations.
Our retail operations are characterized by a high volume of customer traffic and by transactions involving a wide array of product selections. These operations carry a higher exposure to consumer litigation risk when compared to the operations of companies operating in many other industries. Consequently, we may become a party to individual personal injury, off-specification motor fuel, products liability and other legal actions in the ordinary course of our business. While these actions are generally routine in nature, incidental to the operation of our business and immaterial in scope, if our assessment of any action or actions should prove inaccurate, our financial condition and results of operations could be adversely affected. Additionally, we are occasionally exposed to industry-wide or class-action claims arising from the products we carry or industry-specific business practices. For example, we recently reached a settlement in principle of a series of class-action claims alleging that the sale of unadjusted volumes of motor fuel at temperatures in excess of 60 degrees Fahrenheit violates various state consumer protection laws due to the expansion of the motor fuel with the increase of motor fuel temperatures. The settlement is currently pending before the lead court. If the settlement is not ultimately approved by the court, the claims asserted in these lawsuits, if resolved adversely to us, could give rise to substantial damages. Our defense costs and any resulting damage awards may not be fully covered by our insurance policies. Thus, the failure to approve the pending settlement of one or more of these lawsuits could have a material adverse effect on our financial position, liquidity and results of operations in a particular period or periods. See further discussion of this matter in Note 8 under the caption “Litigation Matters” of Notes to Combined Financial Statements that accompany our audited combined financial statements included elsewhere in this information statement.

We rely on our IT systems and network infrastructure to manage numerous aspects of our business, and a disruption of these systems could adversely affect our business.
We depend on our IT systems and network infrastructure to manage numerous aspects of our business and provide analytical information to management. These systems are an essential component of our business and growth strategies, and a serious disruption to them could significantly limit our ability to manage and operate our business efficiently.



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These systems are vulnerable to, among other things, damage and interruption from power loss or natural disasters, computer system and network failures, loss of telecommunications services, physical and electronic loss of data, security breaches and computer viruses, which could result in a loss of sensitive business information, systems interruption or the disruption of our business operations. To protect against unauthorized access or attacks, we have implemented infrastructure protection technologies and disaster recovery plans, but there can be no assurance that a technology systems breach or systems failure will not have a material adverse effect on our financial condition or results of operations.

Our business and our reputation could be adversely affected by the failure to protect sensitive customer, employee or vendor data or to comply with applicable regulations relating to data security and privacy.
In the normal course of our business as a motor fuel and merchandise retailer, we obtain large amounts of personal data, including credit and debit card information from our customers. While we have invested significant amounts in the protection of our IT systems and maintain what we believe are adequate security controls over individually identifiable customer, employee and vendor data provided to us, a breakdown or a breach in our systems that results in the unauthorized release of individually identifiable customer or other sensitive data could nonetheless occur and have a material adverse effect on our reputation, operating results and financial condition. Such a breakdown or breach could also materially increase the costs we incur to protect against such risks. Also, a material failure on our part to comply with regulations relating to our obligation to protect such sensitive data or to the privacy rights of our customers, employees and others could subject us to fines or other regulatory sanctions and potentially to lawsuits.

We are subject to currency exchange risk.
We expect that a significant portion of our sales will be made in Canada. In our combined financial statements, we translate the local currency financial results of our Retail–Canada segment into U.S. dollars based on average exchange rates prevailing during a reporting period. During times of a strengthening U.S. dollar, at a constant level of business, our reported Canadian revenues and earnings will be reduced because the local currency will translate into fewer U.S. dollars.

We expect that substantially all of our indebtedness following the distribution will be denominated in U.S. dollars, while a significant portion of our revenue and cash flow is expected to be generated from our Canadian operations. To the extent that the cash flow generated from our U.S. operations is not sufficient to satisfy the ongoing payment obligations under our U.S. dollar-denominated debt, we will need to convert Canadian dollars into U.S. dollars in order to make the necessary payments and we may incur additional tax expense. Accordingly, a strengthening of the U.S. dollar against the Canadian dollar could make it more difficult for us to repay our indebtedness.
Given the volatility of exchange rates, we may not be able to manage our currency risks effectively, which could have a material adverse effect on our financial condition or results of operations.
We are insured under Valeros insurance policies for occurrences prior to the completion of the distribution. The specifications and insured limits under those policies, however, are at a level consistent with Valero as a whole. As a result, we are effectively self-insured and are exposed to most losses relating to occurrences prior to the completion of the distribution. Upon completion of the distribution, we expect to obtain comprehensive insurance coverage, but we may incur losses that are not covered by insurance or reserves in whole or in part, and such losses could adversely affect our results of operations and financial position.
We reserve for estimated general liability and workers’ compensation losses, and, in connection with our separation from Valero, we expect to enter into an agreement that will permit us to access Valeros insurance for general liability and workers’ compensation losses that we incur up to the distribution date. The specifications and insured limits under these policies are at a level consistent with Valero as a whole, and Corner Store may suffer losses for which insurance coverage is not available. Upon our separation from Valero, we expect to carry comprehensive insurance policies to cover general liabilities, workers’ compensation liabilities, employee work injury liabilities, property losses and directors and officers liabilities. We expect both the coverage limits and deductibles will be consistent with industry standards for companies of a similar size and operations. A significant portion of the risk may be self-insured where the risk may not be insurable or cannot be insured at a reasonable cost. Some losses, such as those resulting from wars or acts of terrorism may not be insurable at any cost. Self-insured losses and uninsurable losses, if large enough, could have a material impact on our results of operations and financial position. Should an uninsured loss or a loss in excess of



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insured limits occur, we could lose capital invested in that property, as well as the anticipated future revenues derived from the retailing activities conducted at that property, while remaining obligated for any mortgage debt or other financial obligations related to the property. Any such loss could adversely affect our business, results of operations or financial condition.

Uncertainty and illiquidity in credit and capital markets could impair our ability to obtain credit and financing on acceptable terms.
Our ability to obtain credit and capital depends in large measure on capital markets and liquidity factors that we do not control. Our ability to access credit and capital markets may be restricted at a time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, the cost and availability of debt and equity financing may be adversely affected by unstable or illiquid market conditions. Protracted uncertainty and illiquidity in these markets also could have an adverse impact on our lenders, causing them to fail to meet their obligations to us. Our access to credit and capital markets may be affected by the credit ratings assigned to our debt by independent credit rating agencies.

Compliance with and changes in tax laws could adversely affect our performance.
We are subject to extensive tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty, sales/use and gross receipts taxes), payroll taxes, franchise taxes, withholding taxes and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Many of these liabilities are subject to periodic audits by the respective taxing authority. Subsequent changes to our tax liabilities as a result of these audits may subject us to interest and penalties.

Risks Relating to Our Common Stock
There is no existing market for our common stock, and a trading market that will provide you with adequate liquidity may not develop for our common stock. In addition, once our common stock begins trading, the market price of our shares may fluctuate widely.
There is currently no public market for our common stock. We intend to list our common stock on the NYSE under the ticker symbol “CST.” It is anticipated that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue up to and including the distribution date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the distribution or be sustained in the future.

We cannot predict the prices at which our common stock may trade after the distribution. The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:
our business profile and market capitalization may not fit the investment objectives of Valero’s current stockholders, and our common stock may not be included in some indices, causing certain holders to sell their shares, though some of this selling pressure may be offset to the extent our stock is purchased by other investors due to our inclusion in other indices;

a shift in our investor base;

our quarterly or annual earnings, or those of other companies in our industry;

actual or anticipated fluctuations in our operating results;

announcements by us or our competitors of significant acquisitions or dispositions;

the failure of securities analysts to cover our common stock after the distribution;

changes in earnings estimates by securities analysts or our ability to meet our earnings guidance;




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the operating and stock price performance of other comparable companies;

overall market fluctuations and general economic conditions; and

the other factors described in these “Risk Factors” and elsewhere in this information statement.

Stock markets in general have also experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could negatively affect the trading price of our common stock.
Future sales or distributions of our common stock, including the sale by Valero of the shares of our common stock that it retains after the distribution, could depress the market price for shares of our common stock.
The shares of our common stock that Valero distributes to its stockholders generally may be sold immediately in the public market. It is possible that some stockholders of Valero, including possibly some of Valero’s major stockholders and index fund investors, will sell Valero or our common stock received in the distribution for various reasons (for example, if our business profile or market capitalization as an independent company does not fit their investment objectives). The sales of significant amounts of our common stock or the perception in the market that this will occur may result in the lowering of the market price of our common stock. In addition, following the distribution, Valero will retain an ownership interest in 20 percent of our common stock. Pursuant to a Stockholder’s and Registration Rights Agreement with Valero, it is expected that Valero will be required to vote such shares in proportion to the votes cast by our other stockholders. See “Certain Relationships and Related-Party Transactions—Agreements Between Us and Valero—Stockholder’s and Registration Rights Agreement” included elsewhere in this information statement. We further expect that pursuant to the private letter ruling Valero will be required to dispose of such retained shares of our common stock that it owns as soon as practicable and consistent with its reasons for retaining such shares, but in no event later than five years after the distribution. Pursuant to the Stockholder’s and Registration Rights Agreement, it is expected that we will agree that, upon the request of Valero, we will use our best efforts to effect the registration under applicable securities laws of the shares of common stock retained by Valero. Any disposition by Valero, or any significant shareholder, of our common stock in the public market, or the perception that such dispositions could occur, could adversely affect prevailing market prices for our common stock.

Your percentage ownership in us may be diluted in the future.
As with any publicly traded company, your percentage ownership in us may be diluted in the future because of equity issuances for acquisitions, capital market transactions or otherwise, including, without limitation, equity awards that we expect will be granted to our directors, officers and employees.

Certain provisions in our corporate documents and Delaware law may prevent or delay an acquisition of our company, even if that change may be considered beneficial by some of our stockholders.
The existence of some provisions of our certificate of incorporation and bylaws and Delaware law could discourage, delay or prevent a change in control of us that a stockholder may consider favorable. These include provisions:
 
providing our Board of Directors with the right to issue preferred stock without stockholder approval;

prohibiting stockholders from taking action by written consent;

restricting the ability of our stockholders to call a special meeting;

providing for a classified Board of Directors;

providing that the number of directors will be filled by the Board of Directors and vacancies on the Board of Directors, including those resulting from an enlargement of the Board of Directors, will be filled by the Board of Directors;

requiring cause and an affirmative vote of at least 60 percent of the voting power of the then-outstanding voting stock to remove directors;
 



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requiring the affirmative vote of at least 80 percent of the voting power of the then-outstanding voting stock to amend certain provisions of our certificate of incorporation and bylaws; and

establishing advance notice requirements for nominations of candidates for election to our Board of Directors or for stockholder proposals.

In addition, following the distribution, we will be subject to Section 203 of the Delaware General Corporation Law (the “DGCL”) which may have an anti-takeover effect with respect to transactions not approved in advance by our Board of Directors, including discouraging takeover attempts that could have resulted in a premium over the market price for shares of our common stock.
We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board of Directors determines is not in the best interests of our company and our stockholders.
See “Description of Capital Stock” included elsewhere in this information statement for more information.




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This information statement includes forward-looking statements, including the sections entitled “Summary,” “Risk Factors,” “The Separation and the Distribution,” “Business and Properties” and “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, benefits resulting from our separation from Valero, 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,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goals,” “guidance,” “outlook,” “effort,” “target” and similar expressions.

These forward-looking statements include, among other things, statements regarding:

future retail gross margins, including gasoline, diesel, heating oil and convenience store merchandise gross margins;

our anticipated level of capital investments and the effect of these capital investments on our results of operations;

anticipated trends in the demand for 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.

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 involved 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:

competitive pressures from convenience stores, filling stations and other non-traditional retailers located in our markets;

volatility and seasonality in crude oil, wholesale petroleum costs and motor fuel sales;

increasing consumer preferences for alternative motor fuel, or improvements in fuel efficiency;

the operation of our retail sites in close proximity to stores of Valero’s other branded wholesale customers;

seasonal trends in the retail industry;

severe or unfavorable weather conditions;

inability to build or acquire and successfully integrate new retail sites;

our ability to comply with federal, provincial and state regulations, including those related to environmental matters and the sale of alcohol and cigarettes and employment laws and health benefits;




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dangers inherent in storing and transporting motor fuel;

pending or future consumer or other litigation;

wholesale cost increases of tobacco products or future legislation or campaigns to discourage smoking;

litigation or adverse publicity concerning food quality, food safety or other health concerns related to our restaurant facilities;

dependence on Valero for motor fuel;

dependence on suppliers for credit terms;

dependence on senior management and the ability to attract qualified employees;

acts of war and terrorism;

political conditions in oil producing regions and global demand for oil;

dependence on our IT systems;

changes in accounting standards, policies or estimates;

fluctuations in the exchange rate between the U.S. and Canadian currencies;

impairment of long-lived assets;

our ability to comply with covenants in any credit agreements or other debt instruments and availability, terms and deployment of capital;

the impact of the separation and the distribution and risks relating to our ability to operate effectively as an independent, publicly traded company, including any difficulties associated with enhancing our accounting systems and internal controls and complying with financial reporting requirements;

changes in our cost structure, management, financing and business operations following the separation;

our different capital structure as an independent company, including our access to capital, credit ratings, debt and ability to raise additional financing;

any failure to fully and/or timely achieve the expected benefits of the separation and the distribution;

a determination by the IRS that the distribution or certain related transactions should be treated as a taxable transaction; and

other unforeseen factors.

You should consider the areas of risk described above, as well as those set forth in the section entitled “Risk Factors” included elsewhere in this information statement, 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 document are made as of the date of this information statement. We undertake no obligation to publicly release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.



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THE SEPARATION AND THE DISTRIBUTION
General
On July 31, 2012, Valero announced its intention to pursue the separation of Valero’s retail business.
The separation will be accomplished through a series of transactions in which the assets (including the equity interests of certain Valero subsidiaries) and liabilities associated with Valero’s retail business will be transferred to Corner Store or entities that are, or will become prior to the distribution, subsidiaries of Corner Store. In connection with the separation, we expect that Corner Store will incur up to $1.05 billion in new debt for which we will not retain any cash following the separation.
Following the separation, the distribution will be effected on the distribution date by way of a pro rata distribution of 80 percent of the outstanding shares of Corner Store common stock to Valero’s stockholders of record as of 5:00 p.m. Eastern Time on [•], the record date for the distribution.
Reasons for the Separation and the Distribution
The Board of Directors of Valero believes that the separation and the distribution are in the best interests of Valero and its stockholders and will provide opportunities and benefits. The opportunities and benefits that the Valero Board of Directors considered include the following:
Strategic Focus and Operational Flexibility—Position each company to pursue a more focused, industry-specific strategy, with Corner Store well-positioned to pursue value creation strategies in the retail business and Valero well-positioned to focus on its remaining businesses, and create additional operational flexibility within each of Corner Store and Valero.

Management Focus—Allow management of each company to concentrate that company’s resources wholly on its particular market segments, customers and core businesses, with greater ability to anticipate and respond rapidly to changing markets and new opportunities. Management of each company will be able to focus on core operations, with greater focus on customized strategies that can deliver long-term shareholder value.

Recruiting and Retaining Employees—Allow each company to recruit and retain employees with expertise directly applicable to its needs and pursuant to compensation policies that are appropriate for its specific lines of business. In particular, following the distribution, the value of equity-based incentive compensation arrangements offered by each company should be more closely aligned with the performance of its businesses, and the employee benefits offered by each company should be better tailored to the nature of each company’s business. The equity-based compensation arrangements following the distribution should provide enhanced incentives for employee performance and improve the ability of each company to attract, retain and motivate qualified personnel at all levels of the organization.

Access to Capital and Capital Structure—Eliminate competition for capital between the business lines. Instead, both companies will have direct access to the debt and equity capital markets to fund their respective growth strategies and to establish a capital structure and dividend policy appropriate for their business needs. In addition, the separation will result in separately traded stock that will facilitate each company’s growth strategy.

Acquisition Currency—Corner Store’s common stock will become a valuable acquisition currency after the distribution. Financial advisers to Corner Store have advised that the distribution may result in a greater willingness of certain targets to accept the equity of Corner Store as merger consideration because of a more aligned investment profile and growth strategy. Accordingly, the distribution is anticipated to further drive Corner Store’s growth by enhancing its mergers and acquisitions program.

Investor Choice—Provide investors with a more targeted investment opportunity in each company that offers different investment business characteristics, including different opportunities for growth, capital structure,



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business models and financial returns. This will allow investors to evaluate the separate and distinct merits, performance and future prospects of each company.

The Valero Board of Directors also considered a number of potentially negative factors in evaluating the separation and the distribution, including potential loss of synergies from operating as one company, increased costs, loss of joint purchasing power, disruptions to the business as a result of the separation, limitations placed on Corner Store as a result of the agreements it is expected to enter into with Valero in connection with the separation, the impact of Corner Store’s incurrence of new indebtedness in connection with the separation, the risk of not being able to realize the expected benefits of the separation in a timely manner or at all, the risk that the separation might not be completed in a timely manner or at all and the one-time and ongoing costs of the separation. The Valero Board of Directors concluded that notwithstanding these potentially negative factors, the pursuit of the separation and the distribution would be in the best interests of Valero and its stockholders.
The Number of Shares You Will Receive
Each Valero stockholder of record will receive one share of Corner Store common stock for every [•] shares of Valero common stock held on the record date for the distribution.
Treatment of Fractional Shares
Fractional shares will not be distributed in connection with the distribution. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds from the sales, net of brokerage fees and other costs, pro rata to each holder who would otherwise have been entitled to receive a fractional share in the distribution. Valero stockholders will not be entitled to interest on any cash payment made in lieu of fractional shares.
If you have any questions concerning the mechanics of the issuance of fractional shares of common stock held directly, we encourage you to contact Computershare using the contact information for Computershare set forth elsewhere in this information statement. If you have any questions concerning the mechanics of the issuance of fractional shares of common stock held in “street name,” we encourage you to contact your bank or brokerage firm.
When and How You Will Receive the Distribution of Corner Store Shares
Valero will distribute the shares of Corner Store common stock on [•], the distribution date, to holders of record on the record date. The distribution is expected to occur following the NYSE market closing on the distribution date. It is expected that Valero’s transfer agent and registrar, Computershare, will serve as transfer agent and registrar for the Corner Store common stock and as distribution agent in connection with the distribution.
If you own Valero common stock as of 5:00 p.m. Eastern Time on the record date, the shares of Corner Store common stock that you are entitled to receive in the distribution will be issued electronically, on the distribution date, to your account as follows:
Registered Stockholders—If you own your shares of Valero stock directly, either in book-entry form through an account at Valero’s transfer agent and/or if you hold paper stock certificates, you will receive your shares of Corner Store common stock by way of direct registration in book-entry form. Registration in book-entry form refers to a method of recording stock ownership in which no physical paper share certificates are issued to stockholders, as is the case in this distribution. Commencing on or shortly after the distribution date, the distribution agent will mail to you an account statement that indicates the number of shares of Corner Store common stock that have been registered in book-entry form in your name. If you have any questions concerning the mechanics of having shares of our common stock registered in book-entry form, we encourage you to contact Computershare using the contact information for Computershare set forth elsewhere in this information statement.




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Beneficial Stockholders—If you hold your shares of Valero common stock beneficially through a bank or brokerage firm, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank or brokerage firm’s books, and your bank or brokerage firm will credit your account for the shares of Corner Store common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares of common stock held in “street name,” we encourage you to contact your bank or brokerage firm.

Treatment of Stock-Based Compensation
No stock-based awards of Corner Store will be issued in exchange for either vested or non-vested Valero stock-based awards held by our employees prior to the separation. Valero intends to accelerate the vesting of all of its non-vested stock-based awards held by our employees at the distribution date. Adjustments to Valero’s outstanding stock-based awards and long-term incentive plans will be addressed in a subsequent amendment to the registration statement of which this information statement is a part. 

Treatment of 401(k) Shares
The treatment of shares of Valero common stock held in retirement plans maintained by Valero has not been finally determined, and we will include information regarding their treatment in an amendment to the registration statement of which this information statement is a part.
Results of the Separation and the Distribution
After the separation and the distribution, we will be an independent, publicly traded company. Immediately following the distribution, we expect to have approximately [•] stockholders of record, based on the number of registered stockholders of Valero common stock on [•], and approximately [•] shares of Corner Store common stock outstanding. The actual number of shares to be distributed will be determined on the record date and will reflect any exercise or vesting of Valero equity-based awards prior to the record date for the distribution.
Before the distribution, we expect to enter into the Separation and Distribution Agreement and several other agreements with Valero to affect the separation and provide a framework for our relationship with Valero after the separation. These agreements will provide for the allocation between Valero and Corner Store of Valero’s assets, liabilities and obligations subsequent to the separation and distribution, including with respect to transition matters, employee matters, intellectual property matters, tax matters and other commercial relationships. We also expect to enter into a Stockholder’s and Registration Rights Agreement with Valero pursuant to which, among other things, it is expected that we will agree that, upon the request of Valero, we will use our best efforts to affect the registration under applicable federal and state securities laws of the shares of common stock retained by Valero after the distribution. For a description of these agreements, see “Certain Relationships and Related-Party TransactionsAgreements Between Us and Valero” included elsewhere in this information statement.
The distribution will not affect the number of outstanding shares of Valero common stock or any rights of Valero stockholders, except that the trading price of Valero shares will likely change as a result of the distribution.
Material U.S. Federal Income Tax Consequences of the Distribution
The following is a summary of the material U.S. federal income tax consequences of the distribution to U.S. Holders (as defined below) of Valero common stock that receive shares of Corner Store common stock in the distribution. This summary is based on the Code, the U.S. Treasury regulations promulgated thereunder and interpretations of the Code and the U.S. Treasury regulations by the courts and the IRS, in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. This summary does not discuss all the tax considerations that may be relevant to Valero stockholders in light of their particular circumstances, and it does not address the consequences to Valero stockholders subject to special treatment under the U.S. federal income tax laws (such as holders other than U.S. Holders (as defined below), insurance companies, dealers or brokers in securities or currencies, tax-exempt organizations, financial institutions, mutual funds, pass-through entities and investors in such entities, holders who hold their shares



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as a hedge or as part of a hedging, straddle, conversion, synthetic, security, integrated investment or other risk-reduction transaction or who are subject to alternative minimum tax or holders who acquired their shares upon the exercise of employee stock options or otherwise as compensation). In addition, this summary does not address the U.S. federal income tax consequences to those Valero stockholders who do not hold their Valero common stock as a capital asset. Finally, this summary does not address any state, local or foreign tax consequences.
VALERO STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS CONCERNING THE U.S. FEDERAL, STATE AND LOCAL AND NON-U.S. TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM.
For purposes of this discussion, a U.S. Holder is a beneficial owner of Valero common stock that is, for U.S. federal income tax purposes:
an individual who is a citizen or resident of the U.S.;

a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S. or any state thereof or the District of Columbia;

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

a trust, if (1) a court within the U.S. is able to exercise primary supervision over its administration and one or more U.S. persons has the authority to control all of the substantial decisions of such trust or (2) in the case of a trust that was treated as a domestic trust under the law in effect before 1997, a valid election is in place under applicable U.S. Treasury regulations.

If a partnership (including any entity treated as a partnership for U.S. federal income tax purposes) holds Valero common stock, the tax treatment of a partner will generally depend on the status of the partner and on the activities of the partnership. Partners in a partnership holding Valero common stock should consult their own tax advisers regarding the tax consequences of the distribution.
Distribution
The distribution is conditioned upon Valero’s receipt of a private letter ruling from the IRS, substantially to the effect that the distribution, together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. Valero has applied for a private letter ruling from the IRS, and expects to receive an opinion from a nationally recognized accounting firm, substantially to the effect that the distribution will so qualify.

On the basis the distribution so qualifies, in general, for U.S. federal income tax purposes: (i) the distribution will not result in any taxable income, gain or loss to Valero, except for taxable income or gain possibly arising as a result of certain intercompany transactions; (ii) no gain or loss will be recognized by (and no amount will be included in the income of) U.S. Holders of Valero common stock upon their receipt of shares of Corner Store common stock in the distribution, except with respect to cash received in lieu of fractional shares measured by the difference between the cash received for such fractional share and the U.S. Holder’s basis in that fractional share, as determined below; (iii) the aggregate basis of the Valero common stock and the Corner Store common stock (including any fractional share interests in Corner Store common stock for which cash is received) in the hands of each U.S. Holder of Valero common stock after the distribution will equal the aggregate basis of Valero common stock held by the U.S. Holder immediately before the distribution, allocated between the Valero common stock and the Corner Store common stock in proportion to the relative fair market value of each on the date of the distribution; and (iv) the holding period of the Corner Store common stock received by each U.S. Holder of Valero common stock (including any fractional share interests in Corner Store common stock for which cash is received) will include the holding period at the time of the distribution for the Valero common stock on which the distribution is made, provided that the Valero common stock is held as a capital asset on the date of the distribution.




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Although a private letter ruling from the IRS generally is binding on the IRS, if the factual representations or assumptions made in the letter ruling request are untrue or incomplete in any material respect, we will not be able to rely on the ruling. Furthermore, the IRS will not rule on whether a distribution satisfies certain requirements necessary to obtain tax-free treatment under Section 355 of the Code. Rather, the ruling is based upon representations by Valero that these conditions have been satisfied, and any inaccuracy in such representations could invalidate the ruling. In addition to obtaining the ruling from the IRS, Valero expects to obtain an opinion from a nationally recognized accounting firm substantially to the effect that the distribution, together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The opinion will rely on the ruling as to matters covered by the ruling. In addition, the opinion will be based on, among other things, certain assumptions and representations made by Valero and us, which if incorrect or inaccurate in any material respect would jeopardize the conclusions reached by the accounting firm in its opinion. The tax opinion will not be binding on the IRS or the courts.
Notwithstanding receipt by Valero of the private letter ruling from the IRS and the opinion from a nationally recognized accounting firm, the IRS could assert that the distribution does not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in taking this position, Valero’s stockholders and Valero could be subject to significant U.S. federal income tax liability. In general, Valero would be subject to tax as if it had sold the Corner Store common stock in a taxable sale for its fair market value and Valero stockholders who receive shares of Corner Store common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares. In addition, even if the distribution was otherwise to qualify under Section 355 of the Code, it may be taxable to Valero (but not to Valero stockholders) under Section 355(e) of the Code, if the distribution was later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquires, directly or indirectly, stock representing a 50 percent or greater interest in Valero or us. For this purpose, any acquisitions of Valero stock or of our common stock within the period beginning two years before the distribution and ending two years after the distribution are presumed to be part of such a plan, although we or Valero may be able to rebut that presumption.
U.S. Treasury regulations also generally provide that if a U.S. Holder of Valero common stock holds different blocks of Valero common stock (generally shares of Valero common stock purchased or acquired on different dates or at different prices), the aggregate basis for each block of Valero common stock purchased or acquired on the same date and at the same price will be allocated, to the greatest extent possible, between the shares of Corner Store common stock received in the distribution in respect of such block of Valero common stock and such block of Valero common stock, in proportion to their respective fair market values. The holding period of the shares of Corner Store common stock received in the distribution in respect of such block of Valero common stock will include the holding period of such block of Valero common stock, provided that such block of Valero common stock was held as a capital asset on the distribution date. If a U.S. Holder of Valero common stock is not able to identify which particular shares of Corner Store common stock are received in the distribution with respect to a particular block of Valero common stock, for purposes of applying the rules described above, the U.S. Holder may designate which shares of Corner Store common stock are received in the distribution in respect of a particular block of Valero common stock, provided that such designation is consistent with the terms of the distribution. Holders of Valero common stock are urged to consult their own tax advisers regarding the application of these rules to their particular circumstances.
Tax Matters Agreement
In connection with the distribution, we and Valero intend to enter into a Tax Matters Agreement pursuant to which it is expected that we will agree to be responsible for certain liabilities and obligations following the distribution. In general, under the expected terms of the Tax Matters Agreement, in the event the distribution were to fail to qualify for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code (including as a result of Section 355(e) of the Code) and if such failure were the result of actions taken after the distribution by Valero or us, the party responsible for such failure would be responsible for all taxes imposed on Valero to the extent such taxes result from such actions. However, if such failure was the result of any acquisition of our shares or assets or any of our representations or undertakings being incorrect or breached, we would be responsible for all taxes imposed on Valero as a result of such acquisition. For a more detailed discussion, see “Certain Relationships and Related-Party Transactions—Agreements With ValeroTax Matters Agreement.” Our indemnification obligations to Valero and its subsidiaries, officers and directors are not expected to be limited in amount or subject to any cap. If we are required to indemnify



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Valero and its subsidiaries and their respective officers and directors under the circumstances set forth in the Tax Matters Agreement, we may be subject to substantial liabilities.

Information Reporting and Backup Withholding
U.S. Treasury regulations require certain stockholders who receive stock in a distribution to attach to the stockholder’s U.S. federal income tax return for the year in which the distribution occurs a detailed statement setting forth certain information relating to the tax-free nature of the distribution. In addition, payments of cash to a Valero stockholder in lieu of fractional shares of Corner Store common stock in the distribution may be subject to information reporting and backup withholding (currently at a rate of 28 percent), unless the stockholder provides proof of an applicable exemption or a correct taxpayer identification number and otherwise complies with the requirements of the backup withholding rules. Backup withholding does not constitute an additional tax, but merely an advance payment, which may be refunded or credited against a stockholder’s U.S. federal income tax liability, provided the required information is timely supplied to the IRS.

THE FOREGOING IS A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW AND FOR GENERAL INFORMATION ONLY. THE FOREGOING DOES NOT PURPORT TO ADDRESS ALL U.S. FEDERAL INCOME TAX CONSEQUENCES OR TAX CONSEQUENCES THAT MAY ARISE UNDER THE TAX LAWS OR THAT MAY APPLY TO PARTICULAR CATEGORIES OF STOCKHOLDERS. EACH VALERO STOCKHOLDER SHOULD CONSULT SUCH STOCKHOLDER’S OWN TAX ADVISER AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.
Market for Our Common Stock
There is not currently a public market for Corner Store’s common stock. A condition to the distribution is the listing on the NYSE, or another national securities exchange approved by Valero, of our common stock. We intend to apply to have Corner Store’s common stock authorized for listing on the NYSE under the ticker symbol “CST,” subject to official notice of issuance. We cannot predict the prices at which our common stock will trade.
Trading Between the Record Date and the Distribution Date
Beginning on, or shortly before, the record date and continuing up to and including the distribution date, we expect there will be two markets in Valero common stock: a “regular-way” market and an “ex-distribution” market. Shares of Valero common stock that trade on the “regular-way” market will trade with an entitlement to receive shares of Corner Store common stock in the distribution. Shares that trade on the “ex-distribution” market will trade without an entitlement to receive shares of Corner Store common stock in the distribution. Therefore, if you sell shares of Valero common stock in the “regular-way” market after 5:00 p.m. Eastern Time on the record date and up to and including through the distribution date, you will be selling your right to receive shares of Corner Store common stock in the distribution. If you own shares of Valero common stock at 5:00 p.m. Eastern Time on the record date and sell those shares in the “ex-distribution” market, up to and including through the distribution date, you will still receive the shares of Corner Store common stock that you would be entitled to receive in respect of your ownership, as of the record date, of the shares of Valero common stock that you sold.
Furthermore, beginning on or shortly before the record date and continuing up to and including the distribution date, we expect there will be a “when-issued” market in our common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of Corner Store common stock that will be distributed to Valero stockholders on the distribution date. If you own shares of Valero common stock at 5:00 p.m. Eastern Time on the record date, you would be entitled to receive shares of our common stock in the distribution. You may trade this entitlement to receive shares of Corner Store common stock, without trading the shares of Valero common stock you own, in the “when-issued” market. On the first trading day following the distribution date, we expect “when-issued” trading with respect to Corner Store common stock will end and “regular-way” trading will begin.



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Conditions to the Distribution
We expect that the distribution will be effective on [•], the distribution date, provided that, among other conditions set forth in the Separation and Distribution Agreement, the following conditions will have been satisfied or, if permissible under the Separation and Distribution Agreement, waived by Valero:
The SEC will have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, with no order suspending the effectiveness of the registration statement in effect and no proceedings for such purposes pending before or threated by the SEC.

Any required actions and filings with regard to state securities and blue sky laws of the U.S. (and any comparable laws under any foreign jurisdictions) will have been taken and, where applicable, will have become effective or been accepted.

Corner Store’s common stock will have been authorized for listing on the NYSE, or another national securities exchange approved by Valero, subject to official notice of issuance.

Prior to the distribution, this information statement will have been mailed to the holders of Valero common stock as of the record date for the distribution.

Valero will have received a private letter ruling from the IRS in form and substance satisfactory to Valero in its sole discretion, to the effect that the distribution, together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code.

No order, injunction, decree or regulation issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing completion of the distribution will be in effect.

Any government approvals and other material consents necessary to consummate the distribution will have been obtained and be in full force and effect.

The Separation and Distribution Agreement will not have been terminated.

The fulfillment of the foregoing conditions does not create any obligations on Valero’s part to effect the distribution, and the Valero Board of Directors has reserved the right, in its sole discretion, to abandon, modify or change the terms of the distribution, including by accelerating or delaying the timing of the completion of all or part of the distribution, at any time prior to the distribution date.
Transferability of Shares of Our Common Stock
The shares of our common stock that you will receive in the distribution will be freely transferable, unless you are considered an “affiliate” of ours under Rule 144 under the Securities Act of 1933, as amended (“the Securities Act”). Persons who can be considered our affiliates after the separation generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by or are under common control with us, and may include certain of our officers and directors. In addition, individuals who are affiliates of Valero on the distribution date may be deemed to be affiliates of ours. Our affiliates may sell shares of our common stock received in the distribution only:
under a registration statement that the SEC has declared effective under the Securities Act; or

under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144.




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In general, under Rule 144 as currently in effect, an affiliate will be entitled to sell, within any three-month period commencing 180 days after the date the registration statement of which this information statement is a part is declared effective, a number of shares of our common stock that does not exceed the greater of:
1.0 percent of our common stock then outstanding; or

the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 for the sale.

Rule 144 also includes restrictions governing the manner of sale. Sales may not be made under Rule 144 unless certain information about us is publicly available.
For a discussion of certain registration rights with respect to our common shares, see “Certain Relationships and Related-Party Transactions—Agreements Between Us and Valero—Stockholder’s and Registration Rights Agreement” included elsewhere in this information statement.
Reason for Furnishing This Information Statement
This information statement is being furnished solely to provide information to Valero stockholders who are entitled to receive shares of our common stock in the distribution. This information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities. We believe that the information in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date, and neither Valero nor we undertake any obligation to update such information except in the normal course of discharging our respective public disclosure obligations.
Manner of Effecting the Separation and the Distribution
The general terms and conditions relating to the separation and the distribution will be set forth in a Separation and Distribution Agreement that we will enter into with Valero. For a description of the terms of that agreement, see “Certain Relationships and Related-Party TransactionsAgreements Between Us and ValeroSeparation and Distribution Agreement” included elsewhere in this information statement.



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BUSINESS AND PROPERTIES
Overview
We are currently a wholly owned subsidiary of Valero. Following the distribution, we will be an independent, publicly traded company. Valero will retain 20 percent of our common stock after the distribution. We are a holding company and conduct substantially all of our operations through our subsidiaries, which at the time of the distribution, will hold the assets (including the equity interests of certain Valero subsidiaries) and liabilities associated with Valero’s retail business.
We are incorporated in Delaware. The address of our principal executive offices is One Valero Way, San Antonio, Texas 78249, and our telephone number is (210) 345-2000.
We are one of the largest independent retailers of motor fuel and convenience merchandise items in the U.S. and eastern Canada. Our operations include (i) the sale of motor fuel at convenience stores, filling stations and cardlocks, (ii) the sale of convenience merchandise items and services at convenience stores and (iii) the sale of heating oil to residential customers and heating oil and motor fuel to small commercial customers.
We have two operating segments:

Retail–U.S. – As of September 30, 2012, we had 1,027 convenience stores located in Arizona, Arkansas, California, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Wyoming; and

Retail–Canada – As of September 30, 2012, we had 849 retail sites located in New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island and Québec.

Our Internet website is www.cornerstore4u.com. Our website and information contained on that site, or connected to that site, are not incorporated by reference into this information statement.
Retail–U.S.

Overview of Operations
We are one of the largest independent retailers of motor fuel and convenience merchandise items in the U.S.

We sell motor fuel primarily under the Valero and Diamond Shamrock brands, convenience merchandise items and other services through convenience stores operated predominantly under the Corner Store name in nine states, with significant concentrations in Texas and Colorado. Most of these retail sites are located in metropolitan areas where there are high concentrations of consumers and daily commuters. Of these retail sites, 828 are owned and 199 are leased under lease agreements that generally contain renewal options for periods ranging from five to ten years.

We carry a broad selection of immediately consumable and take-home items, including beverages, tobacco products, snacks, freshly prepared and pre-packaged foods (including sandwiches, kolaches, tacos, salads, pastries, coffee and fountain drinks), health and beauty products, motor oils and automotive products and general convenience merchandise items. Many of these products are offered under a line of proprietary brands, including Fresh Choices, U Force, Cibolo Mountain and Flavors2Go. At some of our retail sites, we offer a variety of additional products and services, such as car wash, lottery, money orders, air/water/vacuum services for motor vehicles, video and game rentals and access to ATMs. We offer automated car wash services at 194 of our retail sites. We are a Subway® franchisee and currently offer Subway® food services at 31 of our retail sites. Subway is a registered trademark of Doctor’s Associates Inc.

Our Retail–U.S. segment is substantially a company owned and operated business. We retain the gross margins on motor fuel sales, convenience merchandise sales and services, and the retail sites are operated by company employees.

During the nine months ended September 30, 2012 and the year ended December 31, 2011, our Retail–U.S. segment sold 1.4 billion gallons and 1.8 billion gallons, respectively, of branded motor fuel purchased primarily from Valero.




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Industry Trends
We operate within the large and growing U.S. convenience store industry, which is highly fragmented. We believe we will continue to benefit from several key industry trends and characteristics, including:

increasing size of supermarkets and large format hypermarkets, driving consumers to small box retailers, such as convenience stores, to meet their demand for speed and convenience in daily shopping needs;

continuing shift of consumer food and general merchandise purchases away from traditional supermarkets and quick service restaurants to convenience stores, hypermarkets and drug stores;

changing consumer demographics and eating patterns resulting in more food consumed away from home;

highly fragmented nature of the industry providing larger chain operators with significant scale advantage; and

continued opportunities to compete more effectively and grow through acquisitions as a result of continued industry consolidation.

Properties
As of September 30, 2012, we owned 828 of our retail sites and leased the real property of the remaining 199 retail sites. We believe that we will be able to negotiate acceptable extensions of the lease agreements for those retail sites that we intend to continue operating. Our convenience store buildings average approximately 2,200 square feet. Twenty-three retail sites also have commercial motor fuel operations catering to independent truckers.

The following table provides the number of our convenience stores by state as of September 30, 2012:

State
 
Number of
Convenience
Stores
Arkansas
 
29

Arizona
 
63

California
 
83

Colorado
 
158

Louisiana
 
30

New Mexico
 
37

Oklahoma
 
2

Texas
 
621

Wyoming
 
4

 
 
1,027





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The following table provides a history of our convenience stores opened (reflected as NTIs below), acquired and closed or divested for the last three years and nine months:

 
Nine Months
Ended
September 30,
2012
 
Year Ended December 31,
 
 
2011
 
2010
 
2009
Number at beginning of period
998

 
994

 
991

 
1,010

NTIs
5

 
8

 
10

 
4

Acquired
29

 

 

 

Closed or divested
(5
)
 
(4
)
 
(7
)
 
(23
)
Number at end of period
1,027

 
998

 
994

 
991


We intend to lease approximately 78,000 square feet of office space in San Antonio, Texas from Valero, pursuant to a lease agreement based on market terms, which will serve as our corporate headquarters.

Retail Distribution Center
We lease a 130,000 square-foot distribution center in Schertz, Texas, that supplies over 500 of our convenience stores, provides us with improved inventory management, allows us to handle a greater product variety and supports the development and growth of our private label packaged goods and fresh food programs. Core-Mark operates our distribution center on our behalf under a management agreement. We own the distribution centers improvements and inventory and pay a fee to Core-Mark for management of the center. We also pay Core-Mark a license fee for use of proprietary software necessary for operating the center.

IT Systems and Store Automation
All of our convenience stores use IT systems, including point-of-sale (“POS”) scanning, that are designed to improve operating efficiencies, streamline back office functions, provide corporate management with timely access to financial, human resource and marketing data, reduce convenience store level and corporate administrative expense and provide better control over cash and motor fuel and merchandise inventories. Our IT platform is highly scalable, which allows new convenience stores to be quickly integrated into our processes and system-wide reporting.

Our IT systems obtain detailed convenience store-level sales and volume data on a daily basis and generate gross margin, payroll and convenience store contribution data on a weekly basis. We utilize price scanning and POS technology in all of our convenience stores that primarily use a single platform, the VeriFone System, supported by on-site computers that are networked to our central server and back office. We analyze and manage our motor fuel pricing through automated fuel pricing software, which is integrated with the VeriFone system. TelaPoint software uses automated tank gauge information to enable us to monitor and coordinate motor fuel inventory management with our motor fuel supplier and transportation service providers. This product has allowed us to better control motor fuel inventory levels. Our systems also facilitate workforce management including employee on-boarding, status changes, labor modeling and labor allocation, employee scheduling, time reporting and associated approval workflows, all of which are handled electronically through proprietary software.

Our merchandise price book, scanning, motor fuel management, merchandise ordering and trend reports are supported by PDI Enterprise software. This system provides us with significant flexibility to continuously review and adjust our pricing and merchandising strategies, automates the traditional convenience store paperwork process, improves the speed and accuracy of category management and controls inventory. We hold a software license for PDI Enterprise software.

Data collected by the PDI Enterprise system is consolidated for financial reporting, data analysis and category management purposes through SAP, which is the enterprise system that Valero uses for payroll, fixed asset accounting, and financial reporting. We expect to have Transition Services Agreements with Valero that will allow us to continue



40


using Valero’s SAP and several other sub-systems for up to 18 months after the separation. We anticipate having a cost effective and efficient replacement of SAP by that time.

Our IT network is kept up to date by investing capital each year, replacing end-of-life hardware and updating to the latest software versions. We also invest capital in critical system backup and redundancy, firewall, remote access security and virus and spam protection to ensure a high level of network security. We have business policies and processes around access controls, password expirations and file retention to ensure a high level of control within our IT network.

Supplier Arrangements
Merchandise Supply
We have strong relationships with merchandise suppliers resulting from our high volume purchases allowing us to negotiate preferable prices. Through our retail distribution center and private label products, we believe we have a strategic advantage over our peers in terms of product knowledge and pricing. We have an agreement with Core-Mark, which is a leading grocery and merchandise wholesale distributor, to provide us with merchandising expertise, purchasing power and efficient distribution services.

Motor Fuel Supply
We currently purchase branded motor fuel from Valero at market-based transfer prices. The transfer price formulas vary from terminal to terminal. The actual prices we pay typically change daily, based on market fluctuations. We take legal title to the motor fuel when we receive it at the rack, and payment is due upon delivery. We arrange for a third-party transportation provider to take delivery of the motor fuel at the rack and deliver it to the appropriate retail sites in our network.

Under the U.S. Fuel Supply Agreements, we expect to continue to purchase motor fuel from Valero at per-terminal market-based prices, but we expect that those price formulas will differ from those currently employed. As a result, we expect our annual cost of sales to increase by approximately $14 million. The U.S. Fuel Supply Agreements are also expected to differ from our current arrangement by providing for payment terms of “net 10” days instead of requiring same day payment. The unaudited pro forma combined financial statements included elsewhere in this information statement reflect the new motor fuel pricing arrangements that are expected to exist after the separation, but they do not give effect to the change in the payment terms because the impact of that change cannot be determined and would represent a financial projection.

Competition
The convenience store industry in the U.S. is highly competitive and marked by ease of entry and constant change in the number and type of retailers offering products and services of the type we sell in our convenience stores. We compete with other convenience store chains, independently owned convenience stores, motor fuel stations, supermarkets, drugstores, discount stores, dollar stores, club stores and hypermarkets. Over the past ten years, several non-traditional retailers, such as supermarkets, club stores and hypermarkets, have impacted the convenience store industry, particularly in the geographic areas in which we operate, by entering the motor fuel retail business. These non-traditional motor fuel retailers have captured a significant share of the retail motor fuel market, and we expect their market share will continue to grow. In addition, some large retailers and supermarkets are adjusting their store layouts and product prices in an attempt to appeal to convenience store customers. Major competitive factors include, among others, location, ease of access, product and service selection, motor fuel brands, pricing, customer service, store appearance, cleanliness and safety.

Trade Names, Service Marks and Trademarks
We sell motor fuel primarily under the Valero and Diamond Shamrock brands, which are trademarks of Valero. We also sell motor fuel under the Arco brand at six sites in California. The U.S. Fuel Supply Agreements that we expect to enter into with Valero in connection with the separation will contain customary language granting us the right to continue to use the Valero-owned trademarks throughout the terms of those agreements.

The Corner Store trademark and a number of other registered trademarks and service marks, including Fresh Choices, U Force, Cibolo Mountain and Flavors2Go, are used exclusively in the retail business and not in connection with any other businesses conducted by Valero. We expect these trademarks to be licensed or transferred to us as part of the



41


separation. We are not aware of any facts that would negatively affect our continuing use of any of the above trademarks, trade names or service trademarks.

Environmental Laws and Regulations
We are subject to extensive federal, state and local environmental laws and regulations, including those relating to USTs, the release or discharge of materials into the air, water and soil, waste management, pollution prevention measures, the generation, storage, handling, use, transportation and disposal of hazardous materials, the exposure of persons to hazardous materials, greenhouse gas emissions, and characteristics, composition, storage and sale of motor fuel and the health and safety of our employees. We incorporate by reference into this section our disclosures included in Note 8 under the caption “Environmental Matters”of Notes to Combined Financial Statements that accompany our audited combined financial statements included elsewhere in this information statement.

Sale of Regulated Products
In certain areas where our convenience stores are located, state or local laws limit the hours of operation for the sale of alcoholic beverages and restrict the sale of alcoholic beverages and cigarettes to persons younger than a certain age. State and local regulatory agencies have the authority to approve, revoke, suspend or deny applications for and renewals of permits and licenses relating to the sale of alcoholic beverages, as well as to issue fines to convenience stores for the improper sale of alcoholic beverages and cigarettes. Failure to comply with these laws may result in the loss of necessary licenses and the imposition of fines and penalties on us. Such a loss or imposition could have a material adverse effect on our business, liquidity and results of operations. In many states, retailers of alcoholic beverages have been held responsible for damages caused by intoxicated individuals who purchased alcoholic beverages from them. While the potential exposure for damage claims as a seller of alcoholic beverages and cigarettes is substantial, we have adopted procedures intended to minimize such exposure.

Federally mandated anti-money laundering regulations, specifically the USA PATRIOT Act, which amends the Bank Secrecy Act, dictate the rules and documentation requirements we follow for the sales of money orders. In addition, we are subject to random anti-money laundering compliance audits. We have an anti-money laundering compliance officer, who reviews all money order sales transactions to ensure compliance with federal regulations.

We also adhere to the rules governing lottery sales as determined by state lottery commissions in each state in which we make such sales.

Safety
We are subject to comprehensive federal, state and local safety laws and regulations. These regulations address issues ranging from facility design, equipment specific requirements, training, hazardous materials, record retention, self-inspection, equipment maintenance and other worker safety issues, including workplace violence. These regulatory requirements are fulfilled through health, environmental and safety programs.

Other Regulatory Matters
Our retail sites are subject to regulation by federal agencies and to licensing and regulations by state and local health, sanitation, safety, fire and other departments relating to the development and operation of retail sites, including regulations relating to zoning and building requirements and the preparation and sale of food. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new retail site in a particular area.

Our operations are also subject to federal and state laws governing such matters as wage rates, overtime, working conditions and citizenship requirements. At the federal level, there are proposals under consideration from time to time to increase minimum wage rates and to introduce a system of mandated health insurance, both of which could affect our results of operations.

Employees
As of September 30, 2012, we employed 8,888 persons in the U.S., of which approximately 67 percent were full-time employees. Approximately 95 percent of our employees work in our convenience stores and 5 percent work in our corporate or field offices. Our convenience stores typically employ an average of six to seven individuals, who are



42


supervised by a single convenience store manager, and one to three assistant convenience store managers. Our field management staff consists of 100 area managers, each of whom is responsible for nine to ten convenience stores, and 13 zone managers, each of whom is responsible for approximately 70 to 90 convenience stores. Our business is seasonal, and as a result, the number of employees fluctuates from a high in the spring and summer to a low in the fall and winter. These employee numbers exclude general corporate overhead employees of Valero who are not fully dedicated to our operations.

Legal Proceedings
We incorporate by reference into this section our disclosures included in Note 8 under the caption “Litigation Matters” of Notes to Combined Financial Statements that accompany our audited combined financial statements included elsewhere in this information statement.

Retail–Canada

Overview of Operations
We are one of the largest independent retailers of motor fuel and convenience merchandise items in eastern Canada. We sell Ultramar-branded motor fuel, convenience merchandise items and other services through convenience stores operated predominantly under the Corner Store/Depanneur du Coin names in six provinces in eastern Canada, with a significant concentration in Québec. We also sell Ultramar-branded motor fuel at filling stations and cardlocks in eastern Canada. Most of our retail sites are located in metropolitan areas where there are high concentrations of consumers and daily commuters. Of these retail sites, 323 are owned and 526 are leased under lease agreements that generally contain renewal options for periods ranging from five to ten years.

Our convenience stores carry a broad selection of immediately consumable and take-home items, including beverages, tobacco products, snacks, freshly prepared and pre-packaged foods (including sandwiches, salads, pastries and coffee), health and beauty products, motor oils and automotive products and general convenience merchandise items. At some of our retail sites, we offer a variety of additional products and services, such as car wash, lottery, air/water/vacuum services for motor vehicles and access to ATMs. We offer automated car wash services at 63 of our retail sites. We are a Subway® and Country Style® franchisee and currently provide these food offerings at 34 of our retail sites. Country Style is a registered trademark of MTY Tiki Ming Enterprises Inc.

Our Retail–Canada segment consists of the following operations:

256 convenience stores, of which 184 are owned and 72 are leased. We retain the gross margins on motor fuel sales, merchandise sales and services, and the retail sites are operated by company employees.

514 retail sites that are dealer/agent operated. At each of these retail sites, we retain title to the motor fuel inventory and sell it directly to our customers; therefore, we manage motor fuel pricing and retain the gross margin on motor fuel sales. We provide a commission to the dealer or agent to operate the retail site. These retail sites consist of the following:

402 filling stations, where each retail site is typically owned and operated by an independent dealer, and
112 filling stations, where each retail site is owned by us but operated by an independent agent.

79 cardlocks, where the site is owned or leased by us. We retain the gross margin on motor fuel sales at these retail sites.

We also supply Ultramar-branded heating oil to residential customers and Ultramar-branded heating oil and motor fuel to small commercial customers. Operating revenues from these sales were less than 9 percent of Retail–Canada’s operating revenues for the nine months ended September 30, 2012 and for the year ended December 31, 2011.




43


For the nine months ended September 30, 2012 and year ended December 31, 2011, our Retail–Canada segment sold 789 million gallons and 1.1 billion gallons, respectively, of branded motor fuel purchased primarily from Valero.

Industry Trends
We operate within the Canadian gas and convenience store industry. The industry in which our Retail–Canada segment operates is highly fragmented. We believe we will continue to benefit from several key industry trends and characteristics, including:

increasing size of supermarkets and large format hypermarkets, driving consumers to small box retailers, such as convenience stores, to meet their demand for speed and convenience in daily shopping needs;

continuing shift of consumer food and general merchandise purchases away from traditional supermarkets to convenience stores, hypermarkets and drug stores;

changing consumer demographics and eating patterns resulting in more food consumed away from home;

highly fragmented nature of the industry providing larger chain operators with significant scale advantage; and

continued opportunities to compete more effectively and grow through acquisitions as a result of continued industry consolidation.

Properties
As of September 30, 2012, we owned 323 of our retail sites and leased the real property of the remaining 526 retail sites. We believe that we will be able to negotiate acceptable extensions of the lease agreements for those retail sites that we intend to continue operating. Our operations consisted of 849 retail sites, which includes 256 convenience stores. Our convenience store buildings average 1,700 square feet.

The following table provides the number and type of our retail sites by region as of September 30, 2012:

Province
 
Convenience
Stores
 
Filling
Stations
 
Cardlock
 
Total
Québec
 
169

 
332

 
44

 
545

Ontario
 
15

 
86

 
18

 
119

Maritimes (a)
 
49

 
56

 
12

 
117

Newfoundland
and Labrador
 
23

 
40

 
5

 
68

Total
 
256

 
514

 
79

 
849

_______________________
(a) Includes the provinces of Nova Scotia, New Brunswick and Prince Edward Island.




44


The following table provides a history of retail sites opened (reflected as NTIs below) and closed, divested or de-branded for the last three years and nine months:

 
Nine Months
Ended
September 30,
2012
 
Year Ended December 31,
 
 
2011
 
2010
 
2009
Number at beginning of period
873

 
895

 
907

 
950

NTIs and new dealers
8

 
19

 
24

 
16

Closed, divested or de-branded (a)
(32
)
 
(41
)
 
(36
)
 
(59
)
Number at end of period
849

 
873

 
895

 
907

________________________
(a)    “De-branded” is a term we use to refer to filling stations where we choose not to renew our relationship with the dealers/agents who operate those retail sites.

We intend to lease approximately 50,000 square feet of office space in Montreal, Québec from Valero to support our Retail–Canada operations.

IT Systems and Store Automation
All of our company operated convenience stores use IT systems, including POS scanning, that are designed to improve operating efficiencies, streamline back office functions, provide corporate management with timely access to financial, human resource and marketing data, reduce convenience store level and corporate administrative expense and provide better control over cash, motor fuel and merchandise inventories. Our IT platform is highly scalable, which allows new retail sites to be quickly integrated into our processes and system-wide reporting.

Our information systems obtain detailed retail site-level sales and volume data on a daily basis and generate gross margin, payroll and convenience store contribution data on a weekly basis. At our company operated convenience stores, we utilize price scanning and POS technology that is consolidated on a single platform, the Bt9000 System from Bulloch technologies, supported by on-site computers that are networked to our central server and back office. We support two POS options for filling stations and certain retail sites, the Bt9000 and the SIR system. In addition, a small number of non-consignee dealer sites utilize a VX570 terminal for credit acceptance. We analyze and manage our motor fuel pricing through an in-house application named Price Information Center. Motor fuel mass price changes are pushed to retail sites by Somum Solutions, an automated call system. Our systems also facilitate workforce management including employee on-boarding, status changes, employee scheduling, time reporting and associated approval workflows, all of which is handled electronically through proprietary software that is integrated with SAP.

All convenience store level, back office, accounting functions, including our merchandise price book, scanning, motor fuel management, merchandise ordering and trend reports, are supported by PDI Enterprise software. This system provides us with significant flexibility to continuously review and adjust our pricing, merchandising strategies and price book, automates the traditional convenience store paperwork process and improves the speed and accuracy of category management and inventory control. We hold the software license for PDI Enterprise software. Data collected by the PDI Enterprise system are consolidated for financial reporting, data analysis and category management purposes through SAP, which is the enterprise system that we use for fixed asset accounting and reporting. We expect to have Transition Services Agreements with Valero that will allow us to continue using Valero’s SAP and several other sub-systems for up to 18 months after the separation.

Our network is kept up to date by investing capital each year, replacing end-of-life hardware and updating to the latest software versions. We also invest capital in critical system backup and redundancy, firewall, remote access security and virus and spam protection to ensure a high level of network security. We have business policies and processes around access controls, password expirations and file retention to ensure a high level of control within our network.




45


Supplier Arrangements
Merchandise Supply
We have strong relationships with merchandise suppliers resulting from our high purchase volumes allowing us to negotiate preferable prices. We have an agreement with Sobeys, which is a leading grocery wholesale distributor in eastern Canada, to provide us with merchandising expertise, purchasing power and efficient distribution services.

Motor Fuel Supply
We purchase branded motor fuel from Valero primarily under the Ultramar brand at market-based transfer prices. The transfer price formulas vary from terminal to terminal. The actual prices we pay typically change daily, based on market fluctuations. We take legal title to the motor fuel when we receive it at the rack, and payment is due upon delivery. We arrange for a third-party transportation provider to take delivery of the motor fuel at the rack and deliver it to the appropriate retail sites in our network.

In connection with the separation, we expect to enter into a new Petroleum Product Supply Agreement with Valero, which is described under “Certain Relationships and Related-Party Transactions—Agreements Between Us and Valero—Petroleum Product Supply Agreement (Canada)” included elsewhere in this information statement. The terms and pricing of the agreement have not been finalized and will be provided in an amendment to the registration statement of which this information statement is a part.

Competition
The convenience store industry is highly competitive and marked by ease of entry and constant change in the number and type of retailers offering products and services of the type we sell in our convenience stores and other retail sites. We compete with other convenience store chains, independently owned convenience stores, motor fuel stations, supermarkets, drugstores, discount stores, dollar stores, club stores and hypermarkets. Over the past ten years, several non-traditional retailers, such as supermarkets, club stores and hypermarkets, have impacted the convenience store industry, particularly in the geographic areas in which we operate, by entering the motor fuel retail business. These non-traditional motor fuel retailers have captured a significant share of the retail motor fuel market, and we expect their market share will continue to grow. In addition, some large retailers and supermarkets are adjusting their store layouts and product prices in an attempt to appeal to convenience store customers. Major competitive factors include, among others, location, ease of access, product and service selection, motor fuel brands, pricing, customer service, store appearance, cleanliness and safety.

Trade Names, Service Marks and Trademarks
We sell motor fuel under the Ultramar brand, which is a trademark of Valero. The Corner Store and Depanneur du Coin trademarks and trade names are used exclusively in the retail business and not in connection with any other business conducted by Valero. We expect these trademarks and trade names to be licensed or transferred to us as a part of the separation. We are not aware of any facts that would negatively affect our continuing use of any of the above trademarks, trade names or service marks.

Environmental Laws and Regulations
We are subject to extensive federal, provincial and local environmental laws and regulations, including those relating to USTs, the release or discharge of materials into the air, water and soil, waste management, pollution prevention measures, the generation, storage, handling, use, transportation and disposal of hazardous materials, the exposure of persons to hazardous materials, greenhouse gas emissions and characteristics, composition, storage and sale of motor fuel and the health and safety of our employees. We incorporate by reference into this section our disclosures included in Note 8 under the caption “Environmental Matters” of Notes to Combined Financial Statements that accompany our audited combined financial statements included elsewhere in this information statement.

Sale of Regulated Products
Our activities require certain government permits and licenses, in particular pertaining to the sale of alcoholic beverages, tobacco and lottery tickets and as a distributor of heating oil. Our retail sites are concentrated in Québec and the eastern Canadian provinces, which have certain governmental regulations on motor fuel pricing. Moreover, we sell certain products subject to price regulation in certain provinces, such as milk, beer and wine. In addition, in some instances, provincial or local laws limit the hours of operation for the sale of alcoholic beverages and restrict the sale of alcoholic



46


beverages, cigarettes and lottery tickets to persons younger than a certain age. Provincial and local regulatory agencies have the authority to approve, revoke, suspend or deny applications for and renewals of permits and licenses relating to the sale of alcoholic beverages, as well as to issue fines to convenience stores for the improper sale of alcoholic beverages, cigarettes and lottery tickets. Failure to comply with these laws may result in the loss of necessary licenses and the imposition of fines and penalties on us. Such a loss or imposition could have a material adverse effect on our business, liquidity and results of operations.

Safety
We are subject to provincial and local safety laws and regulations. These regulations address issues such as facility design, equipment specific requirements, training, hazardous materials, record retention, self-inspection, equipment maintenance, inspection of heating oil installations and other health and safety issues. These regulatory requirements are fulfilled through health, environmental and safety programs.

Other Regulatory Matters
Our retail sites are subject to regulation by provincial and/or local agencies related to health, sanitation, safety and fire. Our retail sites are further regulated by other departments relating to the development and operation of retail sites, including regulations relating to zoning and building requirements and the preparation and sale of food. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new retail site in a particular area.

Our operations are also subject to provincial laws governing such matters as wage rates, overtime and working conditions. In each province where we operate, there are proposals under consideration from time to time to increase minimum wage rates which could have an impact on our results of operations.

Employees
As of September 30, 2012, we employed 2,813 persons in Canada, of which approximately 44 percent were full-time employees. Approximately 86 percent of our employees work in our convenience stores and 14 percent work in our field or administrative offices. Our convenience stores typically employ an average of eight to fifteen individuals, who are supervised by a single convenience store manager, and one to three assistant convenience store managers. Our field management staff consists of 23 area managers, each of whom is responsible for eight to 12 convenience stores, and three zone managers, each of whom is responsible for approximately 80 to 90 convenience stores. These employee numbers exclude overhead employees of Valero who are not fully dedicated to our operations.

Legal Proceedings
We incorporate by reference into this section our disclosures included in Note 8 under the caption “Litigation Matters” of Notes to Combined Financial Statements that accompany our audited combined financial statements included elsewhere in this information statement.





47


DIVIDEND POLICY
After the distribution, we intend to pay a cash dividend to our common stockholders at an initial rate of $0.0625 per share per quarter, or $0.25 per share per year. However, the declaration and amount of all dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors the Board of Directors deems relevant. There can be no assurance we will continue to pay any dividend even if we commence the payment of dividends. We are a holding company and have no direct operations. As a result, we will be able to pay dividends on our common stock only from our available cash on hand and distributions received from our subsidiaries.




48


CAPITALIZATION
The following table sets forth (i) our historical capitalization as of September 30, 2012 and (ii) our adjusted capitalization assuming the separation and the distribution and the related transactions described in this information statement, including the incurrence of approximately $1.05 billion of debt, were effective September 30, 2012. The table should be read in conjunction with the audited and unaudited combined financial statements and accompanying notes, the unaudited pro forma combined financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement.

We are providing the capitalization table below for information purposes only. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we been operating as a separate, independent entity on September 30, 2012 and is not necessarily indicative of our future capitalization or financial condition.
The amounts in the following table are presented in millions.
 
September 30, 2012
 
Actual
 
As Adjusted
Debt outstanding:
 
 
 
Current portion of long-term debt and capital lease obligations
$
1

 
$
1

Debt and capital lease obligations, less current portion
4

 
1,054

Total debt and capital lease obligations
5

 
1,055

 
 
 
 
Net investment / stockholders’ equity:
 
 
 
Common stock, at par value

 
1

Additional paid-in capital

 
343

Accumulated other comprehensive income
169

 
169

Net parent investment
1,087

 

Total net investment / stockholders’ equity
1,256

 
513

 
 
 
 
Total capitalization
$
1,261

 
$
1,568






49


UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements of Corner Store (the “pro forma financial statements”) have been derived from our historical combined financial statements included elsewhere in this information statement. While the historical combined financial statements reflect the past financial results of Valero’s retail business, these pro forma financial statements give effect to:
the separation of the assets (including the equity interests of certain subsidiaries) and liabilities related to Valero’s retail business from Valero and the transfer of those assets (including the equity interests of certain subsidiaries) and liabilities to Corner Store;

the issuance of 100 percent of our common stock to Valero upon the separation of Valero’s retail business;

the issuance of $1.05 billion of new debt, which includes the issuance of debt to Valero, assumed to be $550 million for purposes of these pro forma financial statements;

a cash distribution to Valero, assumed to be $500 million for purposes of these pro forma financial statements; and

the recording of the income tax effects of the separation and the distribution.

The Separation and Distribution Agreement, the Tax Matters Agreement, the Transition Services Agreements, the Employee Matters Agreements, the U.S. Fuel Supply Agreements, the Petroleum Product Supply Agreement, the Office Lease Agreement and the Office Sublease Agreement have not been finalized, and the effects of those agreements are therefore not reflected in the pro forma financial statements, except for the anticipated effects of the U.S. Fuel Supply Agreements as more fully described below. To the extent appropriate, the pro forma financial statements will be revised in future amendments to the registration statement of which this information statement is a part to reflect any material impacts of those agreements.

The pro forma adjustments are based on available information and assumptions management believes are reasonable. In addition, such adjustments are estimates and may not prove to be accurate. The pro forma financial statements do not reflect all of the costs of operating as a stand-alone company, including possible higher IT, tax, accounting, treasury, legal, investor relations, insurance and other similar expenses associated with operating as a stand-alone company. Only costs that management has determined to be factually supportable and recurring are included as pro forma adjustments. Incremental costs and expenses associated with operating as a stand-alone company, which are not reflected in the accompanying pro forma financial statements, are estimated to be in the range of approximately $15 million to $20 million before-tax annually.

Subject to the terms of the Separation and Distribution Agreement, Valero will generally pay all nonrecurring third-party costs and expenses related to the separation. Such nonrecurring amounts are expected to include costs to separate and/or duplicate IT systems, investment banker fees, outside legal and accounting fees and similar costs. After the separation, subject to the terms of the Separation and Distribution Agreement, all costs and expenses related to ongoing support of a stand-alone company (including those related to IT infrastructure capital costs) will be our responsibility. Nonrecurring capital costs associated with the IT infrastructure, which we expect to be reflected in our financial statements within one year after the separation, are estimated to be in the range of $30 million to $35 million.

For additional information regarding the matters discussed above, see “Risk FactorsRisks Relating to the Separation and the Distribution” included elsewhere in this information statement.

In connection with the separation, we intend to enter into the U.S. Fuel Supply Agreements in the U.S. and a Petroleum Product Supply Agreement in Canada with Valero for the supply of motor fuel. These new agreements will change certain pricing provisions from the amounts reflected in our historical results of operations. The expected effects of the U.S. Fuel Supply Agreements are reflected as a pro forma adjustment. The terms and pricing of the Petroleum Product Supply Agreement have not been determined and, therefore, the effects of this agreement are not reflected as a pro



50


forma adjustment. We intend to adjust the pro forma adjustments to reflect the finalized agreements in a subsequent amendment to the registration statement of which this information statement is a part.

In connection with the separation and the distribution, Valero expects to accelerate the vesting of all of its stock-based awards held by our employees. As a result, we will be charged for the remaining unrecognized stock-based compensation related to those awards at that time, which we believe will be approximately $2 million. This amount has not been reflected as a pro forma adjustment because it is a nonrecurring item that results directly from the separation and the distribution.

Our cash balance is subject to working capital adjustments immediately preceding the separation and the distribution. The pro forma financial statements do not reflect any impact of those adjustments because such amounts at the separation date are not currently determinable and would represent a financial projection. See “Management’s Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesOther Matters Impacting Liquidity and Capital ResourcesWorking Capital Adjustments to Be Made in Connection With the Separation and the Distribution” included elsewhere in this information statement.

The unaudited pro forma combined balance sheet as of September 30, 2012 has been prepared as though the separation occurred on September 30, 2012. The unaudited pro forma combined statements of income for the nine months ended September 30, 2012 and the year ended December 31, 2011 have been prepared as though the separation occurred on January 1, 2012 and 2011, respectively. The pro forma financial statements are provided for illustrative purposes only and do not reflect what our financial position and results of operations would have been had the separation occurred on the dates indicated. In addition, they are not necessarily indicative of our future financial position and future results of operations.

The pro forma financial statements should be read in conjunction with our historical combined financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement. The pro forma financial statements constitute forward-looking information and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Cautionary Statement Regarding Forward-Looking Statements” included elsewhere in this information statement.



51


CORNER STORE HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 2012
(Millions of Dollars)
 
As
Reported
 
Pro Forma
Adjustments
 
Pro Forma
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash
$
65

 
$
(13
)
(a)
$
52

Receivables, net
198

 
4

(b)
202

Inventories
155

 

 
155

Deferred income taxes
16

 
(10
)
(c)
6

Prepaid expenses and other
7

 

 
7

Total current assets
441

 
(19
)
 
422

Property and equipment, at cost
1,810

 

 
1,810

Accumulated depreciation
(575
)
 

 
(575
)
Property and equipment, net
1,235

 

 
1,235

Intangible assets, net
43

 

 
43

Deferred income taxes

 
218

(d)
218

Deferred charges and other assets, net
8

 
26

(e)
34

Total assets
$
1,727

 
$
225

 
$
1,952

LIABILITIES AND
NET INVESTMENT / STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current portion of debt and capital lease obligations
$
1

 
$

 
$
1

Accounts payable
86

 

 
86

Accrued expenses
39

 

 
39

Taxes other than income taxes
101

 

 
101

Total current liabilities
227

 

 
227

Debt and capital lease obligations, less current portion
4

 
1,050

(f)
1,054

Deferred income taxes
133

 
(82
)
(c)
51

Other long-term liabilities
107

 

 
107

Commitments and contingencies
 
 
 
 
 
Net investment / stockholders’ equity:
 
 
 
 
 
Common stock

 
1

(g)
1

Additional paid-in capital

 
343

(h)
343

Accumulated other comprehensive income
169

 

 
169

Net parent investment
1,087

 
(1,087
)
(h)

Total net investment / stockholders’ equity
1,256

 
(743
)
 
513

Total liabilities and net investment / stockholders’ equity
$
1,727

 
$
225

 
$
1,952


See Notes to Unaudited Pro Forma Combined Financial Statements.



52


CORNER STORE HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2012
(Millions of Dollars, Except per Share Amounts)
 
As
Reported
 
Pro Forma
Adjustments
 
Pro Forma
 
Operating revenues
$
9,939

 
$

 
$
9,939

 
Costs and expenses:
 
 
 
 
 
 
Cost of sales
9,110

 
10

(i)
9,120

 
Operating expenses
484

 

 
484

 
General and administrative expenses
44

 

 
44

 
Depreciation, amortization and accretion expense
83

 

 
83

 
Total costs and expenses
9,721

 
10


9,731

 
Operating income
218

 
(10
)

208

 
Other income, net
1

 

 
1

 
Interest and debt expense

 
(41
)
(j)
(41
)
 
Income before income tax expense
219

 
(51
)

168

 
Income tax expense
73

 
(17
)
(k)
56

 
Net income
$
146

 
$
(34
)

$
112

 
 
 
 
 
 
 
 
Pro forma earnings per common share
 
 
 
 
$
1.12

(l)
Pro forma weighted-average common shares
outstanding (in millions)
 
 
 
 
100

(l)

See Notes to Unaudited Pro Forma Combined Financial Statements.





53


CORNER STORE HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2011
(Millions of Dollars, Except per Share Amounts)
 
As
Reported
 
Pro Forma
Adjustments
 
Pro Forma
 
Operating revenues
$
12,863

 
$

 
$
12,863

 
Costs and expenses:
 
 
 
 
 
 
Cost of sales
11,735

 
14

(i)
11,749

 
Operating expenses
636

 

 
636

 
General and administrative expenses
59

 

 
59

 
Depreciation, amortization and accretion expense
113

 

 
113

 
Asset impairment loss
3

 

 
3

 
Total costs and expenses
12,546

 
14

 
12,560

 
Operating income
317

 
(14
)
 
303

 
Other income, net
1

 

 
1

 
Interest and debt expense
(1
)
 
(55
)
(j)
(56
)
 
Income before income tax expense
317

 
(69
)
 
248

 
Income tax expense
103

 
(22
)
(k)
81

 
Net income
$
214

 
$
(47
)
 
$
167

 
 
 
 
 
 
 
 
Pro forma earnings per common share
 
 
 
 
$
1.67

(l)
Pro forma weighted-average common shares
outstanding (in millions)
 
 
 
 
100

(l)

See Notes to Unaudited Pro Forma Combined Financial Statements.





54


CORNER STORE HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS


(a)
This adjustment represents the net impact to cash, resulting from the following (in millions):
Cash received from the issuance of debt (see Note (f))
 
$
500

Cash paid to Valero (see Note (f))
 
(500
)
Cash paid for debt issuance costs (see Note (e))
 
(13
)
Cash pro forma adjustment
 
$
(13
)
(b)
This adjustment reflects the recognition by us of the current portion of a receivable from Valero in connection with Valero’s expected agreement to indemnify us for self-insurance obligations and certain legal matters that we incurred up to and including the distribution date. See Note (e) for the long-term portion of this receivable.
(c)
The adjustments to deferred income tax assets and liabilities represent the realization of our net deferred tax liability resulting from the separation and the distribution of the assets (including the equity interests of certain Valero subsidiaries) and liabilities associated with Valero’s retail business from Valero and the transfer of those assets (including the equity interests of certain Valero subsidiaries) and liabilities to us as follows (in millions):
Deferred income tax liabilities:
 
 
U.S.
 
$
(60
)
Canada
 
(22
)
Deferred income taxes pro forma adjustment
 
(82
)
Deferred income tax asset (Canada) pro forma adjustment
 
10

Net deferred income tax liability paid by Valero (see Note (h))
 
$
(72
)
Upon the distribution, the tax basis of certain of our U.S. assets related to certain historical intercompany transactions between Valero and us will be stepped up, but the historical book basis of these assets will not be stepped up because the distribution represents a transaction with Valero’s stockholders. Therefore, the U.S. adjustment represents the realization by us and the payment by Valero of a portion of our U.S. deferred income tax liabilities. In Canada, the separation of the assets (including the equity interests of a certain Valero subsidiary) and liabilities of Valero’s Canadian retail business and transfer of those assets (including the equity interests of a certain Valero subsidiary) and liabilities to our Canadian subsidiary is a taxable event. Therefore, the Canadian adjustments reflect the realization by us and the payment by Valero of our Canadian net deferred tax liability. These tax amounts are based on the estimated fair value of Valero’s retail business. We believe this estimate is reasonable; however, the fair value will ultimately be determined by an independent appraiser. A significant change to the estimated fair value could have a material impact to these estimated taxes.
(d)
As described in Note (c), the separation of the assets (including the equity interests of a certain Valero subsidiary)and liabilities of Valero’s Canadian retail business and transfer of those assets (including the equity interests of a certain Valero subsidiary) and liabilities to our Canadian subsidiary is a taxable event in Canada, and as a result, the tax basis of those assets (including the equity interests of a certain Valero subsidiary) and liabilities will be stepped up to their fair values upon the separation. The historical book basis of those assets (including the equity interests of a certain Valero subsidiary) and liabilities, however, will not be stepped up because they are wholly owned by Valero and will be transferred within the Valero consolidated group. This adjustment, therefore, represents the deferred tax asset of $218 million that we will recognize as a result of the step-up in the tax basis of those assets and liabilities. In addition, upon the separation, we will incur income taxes of $138 million, which will be paid by Valero (see Note (h)), and we will recognize a deferred income tax benefit of $80 million. Because the deferred tax benefit is a nonrecurring item that results directly from the separation, it has been excluded from pro forma income. However, the deferred tax benefit is a component of the deferred tax asset of $218 million and is therefore



55





CORNER STORE HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(Continued)



reflected as an adjustment to additional paid-in capital in Note (h). These tax amounts are based on the estimated fair value of Valero’s Canadian retail business. We believe this estimate is reasonable; however, the fair value will ultimately be determined by an independent appraiser. A significant change to the estimated fair value could have a material impact to these estimated taxes.
(e)
This adjustment represents estimated costs and expenses that we expect to incur related to obtaining new debt, which is described in Note (f), and the recognition of the long-term portion of the indemnification receivable from Valero, which is described in Note (b), as follows (in millions):
Debt issuance costs
 
$
13

Long-term receivable from Valero
 
13

Deferred charges and other assets pro forma adjustment
 
$
26

The debt issuance costs will be amortized over the estimated weighted-average term of the related debt of 7.7 years.
(f)
We expect to incur $1.05 billion of new long-term debt that will bear an expected weighted-average interest rate of 5.0 percent per annum. We expect to transfer certain proceeds of the new debt (assumed to be $500 million for purposes of these pro forma financial statements) to Valero and to issue certain debt (assumed to be $550 million for purposes of these pro forma financial statements) to Valero in connection with the separation of the assets (including the equity interests of certain Valero subsidiaries) and liabilities of Valero’s retail business from Valero and the transfer of those assets (including the equity interests of certain Valero subsidiaries) and liabilities to us. We expect that Valero will transfer our debt to exchange counterparties to satisfy certain of Valero’s then-outstanding debt obligations. As a result of these financing transactions, we will incur indebtedness of $1.05 billion for which we will not retain any cash following the separation.
(g)
This adjustment reflects the issuance by us of our common stock, par value of $0.01 per share, upon the separation of Valero’s retail business. For purposes of these pro forma financial statements, we have assumed that we will issue 100 million shares of our common stock. At the distribution date, Valero will distribute 80 percent of our shares of common stock to its stockholders and retain 20 percent of our shares of common stock.
(h)
This adjustment represents the elimination of the net parent investment of Valero and adjustments to additional paid-in capital resulting from the following (in millions):
Reclassification of Valero’s net parent investment
$
1,087

Cash distribution to Valero (see Notes (a) and (f))
(500
)
Issuance of debt obligation to Valero (see Note (f))
(550
)
Recognition of receivable from Valero (see Notes (b) and (e))
17

Tax liabilities paid by Valero (see Notes (c) and (d))
210

Recognition of deferred tax benefit (see Note (d))
80

Total net investment / stockholders’ equity
344

Common stock, $0.01 par value (see Note (g))
(1
)
Total additional paid-in capital
$
343




56





CORNER STORE HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(Continued)



(i)
This adjustment represents the increase to our cost of sales related to the increase in the cost of motor fuel purchased from Valero. We expect provisions to be included in the U.S. Fuel Supply Agreements that we intend to enter into with Valero in the U.S. in connection with the separation to increase the price per gallon of motor fuel we purchase from Valero in the U.S. This increase is a fixed amount per gallon; therefore, this pro forma adjustment is calculated by applying the price increase to the actual volumes purchased from Valero during the applicable periods. The terms and pricing of the Petroleum Product Supply Agreement that we intend to enter into with Valero in Canada have not been determined and, therefore, the effects of this agreement are not reflected as a pro forma adjustment. We intend to adjust the pro forma adjustments to reflect the finalized agreements in a subsequent amendment to the registration statement of which this information statement is a part.
(j)
This adjustment represents interest expense resulting from the assumed incurrence of $1.05 billion of new debt in connection with the separation, as follows (in millions):
 
 
Nine Months
Ended
September 30,
2012
 
Year Ended
December 31,
2011
Interest expense on $1.05 billion of new debt (see Note (f))
 
$
39

 
$
53

Loan fees and amortization of debt issuance costs
 
2

 
2

Total pro forma adjustment to interest expense
 
$
41

 
$
55

Pro forma interest expense was calculated based on an assumed weighted-average interest rate of 5.0 percent before debt issuance costs and fees. The interest rate reflects a non-investment grade rating with an appropriate spread over the relevant benchmark rate. Interest expense also includes amortization of debt issuance costs and liquidity facility fees, which are amortized over the term of the associated debt and facility. Actual interest expense may be higher or lower depending on fluctuations in interest rates. A one-eighth percentage change in interest would result in a $1 million change in annual interest expense.
(k)
This adjustment represents the net impact to income tax expense of the pro forma adjustments using our effective tax rates of 33.3 percent and 32.5 percent for the nine months ended September 30, 2012, and the year ended December 31, 2011, respectively. Our effective tax rate could be different (either higher or lower) depending on activities subsequent to the separation.
(l)
The calculation of pro forma earnings per share and pro forma weighted average shares outstanding for the periods presented is based on the assumption that (i) we will issue 100 million of our shares to Valero upon the separation of the assets (including the equity interests of certain Valero subsidiaries) and liabilities of Valero’s retail business and the transfer of those assets (including the equity interests of certain Valero subsidiaries) and liabilities to us; and (ii) the separation will occur as of the beginning of each period presented and that all shares will remain outstanding during the periods presented. The calculation of pro forma earnings per share and pro forma weighted average shares outstanding will be revised and reflected in an amendment to the registration statement of which this information statement is a part when the number of shares to be issued by us and the distribution ratio are known. Pro forma earnings per share–assuming dilution and weighted-average shares–assuming dilution are not presented because dilutive securities of Valero held by our employees on the distribution date will not convert into our securities.



57


SELECTED COMBINED FINANCIAL DATA
The following selected financial data reflect the combined operations of Corner Store. We derived the selected combined income statement data for the nine months ended September 30, 2012 and 2011, and the selected combined balance sheet data as of September 30, 2012, from the unaudited combined financial statements of Corner Store, which are included elsewhere in this information statement. We derived the selected combined income statement data for the years ended December 31, 2011, 2010 and 2009, and the selected combined balance sheet data as of December 31, 2011 and 2010, from Corner Store’s audited combined financial statements, which are also included elsewhere in this information statement. We derived the selected combined income statement data for the years ended December 31, 2008 and 2007, and the selected combined balance sheet data as of September 30, 2011 and December 31, 2008 and 2007, from the unaudited combined financial statements of Corner Store, which are not included in this information statement.

To ensure a full understanding, you should read the selected combined financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited combined financial statements and accompanying notes included elsewhere in this information statement.

The financial data below are presented in millions.

 
 
Nine Months Ended
September 30,
 
Year Ended December 31,
 
 
2012
 
2011
 
2011
 
2010
 
2009
 
2008
 
2007
Operating revenues
 
$
9,939

 
$
9,745

 
$
12,863

 
$
10,371

 
$
8,780

 
$
11,531

 
$
9,867

Operating income
 
218

 
247

 
317

 
289

 
222

 
344

 
216

Net income
 
146

 
166

 
214

 
193

 
146

 
225

 
139

Total assets
 
1,727

 
1,607

 
1,691

 
1,621

 
1,580

 
1,569

 
1,648

Capital lease obligations,
less current portion
 
4

 
5

 
5

 
5

 
6

 
2

 
1

Net investment
 
1,256

 
1,213

 
1,249

 
1,193

 
1,197

 
1,207

 
1,237






58


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Management’s discussion and analysis is the analysis of our financial performance and it includes a discussion of significant trends that may affect our future performance. It should be read in conjunction with the audited and unaudited combined financial statements and accompanying notes included elsewhere in this information statement. It contains forward-looking statements, including, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions identify forward-looking statements. We do not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with our disclosures under “Cautionary Statement Regarding Forward-Looking Statements” included elsewhere in this information statement.
Management’s discussion and analysis is organized as follows:
Executive Overview—This section provides an overview of the separation of Corner Store from Valero, the basis of presentation with respect to the amounts presented in the discussion of our results of operations, a description of our business segments, an overview of our results of operations and the outlook for our business. This section also provides an overview of our historical liquidity and our expectations about our future liquidity.
Results of Operations—This section provides an analysis of our results of operations, including the results of operations of our two business segments, for the nine months ended September 30, 2012 and 2011, and for the years ended December 31, 2011, 2010 and 2009.
Liquidity and Capital Resources—This section provides a discussion of our financial condition and cash flows for the nine months ended September 30, 2012 and 2011, and for the years ended December 31, 2011, 2010 and 2009. It also includes a discussion of how the separation is expected to affect our capital resources.
New Accounting Policies—This section describes new accounting pronouncements that we have already adopted and those that we are required to adopt in the future.
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.
Executive Overview

Overview of the Separation from Valero
On July 31, 2012, Valero announced its intention to pursue the separation of its retail business from its other businesses and create a stand-alone, publicly traded corporation. This separation is expected to be completed in accordance with a Separation and Distribution Agreement between Valero and Corner Store. On the basis that the distribution, together with certain related transactions, qualifies as a reorganization for U.S. federal income tax purposes, in general, we expect, for U.S. federal income tax purposes, that no gain or loss will be recognized by U.S. holders of Valero common stock, and no amount will be included in their income, upon their receipt of shares of Corner Store common stock in the distribution, except with respect to any cash received in lieu of fractional shares. However, the transfer of assets (including the equity interests of certain Valero subsidiaries) and liabilities associated with Valero’s retail business in the U.S. will result in the recognition of certain historical intercompany transactions for which Valero will pay taxes, and the distribution of assets (including the equity interests of a certain Valero subsidiary) and liabilities associated with Valero’s retail business in Canada will be taxable for Canadian income tax purposes. Valero intends to distribute, on a pro rata basis, 80 percent of the shares of Corner Store common stock to Valero stockholders as of the record date for the distribution. Upon completion of the separation, Valero and Corner Store will each be separate, publicly traded companies and have separate management. For additional information, see “The Separation and the Distribution” included elsewhere in this information statement.




59


Basis of Presentation
The audited and unaudited combined financial statements of Corner Store included elsewhere in this information statement were prepared in connection with the separation and reflect the combined historical results of operations, financial position and cash flows of Valero’s retail business, including an allocable portion of corporate costs. Although the legal transfer of the retail business of Valero into Corner Store has yet to take place, for ease of reference, these combined financial statements are collectively referred to as those of Corner Store.

The combined financial statements are presented as if Valero’s retail business in the U.S. and Canada had been combined for all periods presented. The assets and liabilities in the combined financial statements have been reflected on a historical cost basis, as immediately prior to the separation all of the assets and liabilities presented are wholly owned by Valero and are being transferred within the Valero consolidated group. The combined statements of income also include expense allocations for certain corporate functions historically performed by Valero and not allocated to its retail business, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal and IT. These allocations are based primarily on specific identification of time and/or activities associated with Corner Store, employee headcount or capital expenditures. We believe the assumptions underlying the combined financial statements, including the assumptions regarding allocating general corporate expenses from Valero, are reasonable. Nevertheless, the combined financial statements may not include all of the actual expenses that would have been incurred had we operated as a stand-alone company during the periods presented and may not reflect our combined results of operations, financial position and cash flows had we operated as a stand-alone company during the periods presented. Actual costs that would have been incurred if we had operated as a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including IT and related infrastructure.

Business Segments
Our business is organized into two operating segments: Retail–U.S. and Retail–Canada. Operating segments were determined based on geographic criteria, with each geographic area having separate gross margins, country specific regulatory environments and location-specific supply and demand characteristics. The following provides an overview of our segments; however, for more information about our business segments, see “Business and Properties” included elsewhere in this information statement.

Retail–U.S.
We operate convenience stores and are one of the largest independent retailers of motor fuel and convenience merchandise items in the U.S. As of September 30, 2012, we had 1,027 convenience stores located predominantly in the southwestern U.S. and Colorado. We operate as a retail distributor of motor fuel that we purchase from Valero, and we primarily market motor fuel under the Valero and Diamond Shamrock brands. Subsequent to the separation and the distribution, we will be Valero’s largest retail distributor of motor fuel in the U.S.

The prices we pay for the motor fuel we purchase from Valero are based on market prices in the locations of our retail sites. In addition, the sales prices of our motor fuel are based on local market factors such as supply and demand, competition and local economic factors, among others. Therefore, the gross margins we receive for our sales of motor fuel are commodity-based, change daily and are volatile.

Retail–Canada
We operate convenience stores, filling stations and cardlocks, and are one of the largest independent retailers of motor fuel and convenience merchandise items in eastern Canada. As of September 30, 2012, we had 849 retail sites in six eastern Canada provinces, including 256 convenience stores, 514 filling stations and 79 cardlocks.

The prices we pay for the motor fuel we purchase from Valero are based on market prices in the locations of our retail sites. In addition, the sales prices of our motor fuel are based on local market factors such as supply and demand, competition and local economic factors, among others. Therefore, the gross margins we receive for our sales of motor fuel are commodity-based, change daily and are volatile. However, the regulatory environment in Canada differs from the U.S. and certain provincial laws serve to regulate and preserve the gross margin for motor fuel and protect against below-cost selling. As such, the gross margin for motor fuel in Canada is typically less volatile than in the U.S.



60


Overview and Outlook
Overview
A summary of our earnings, along with the earnings of each of our business segments, is provided in the following table (in millions):

 
Nine Months Ended
September 30,
 
Year Ended December 31,
 
2012
 
2011
 
2011
 
2010
 
2009
Retail–U.S. operating income
$
165

 
$
156

 
$
202

 
$
197

 
$
160

Retail–Canada operating income
97

 
135

 
174

 
149

 
114

Corporate expenses
(44
)
 
(44
)
 
(59
)
 
(57
)
 
(52
)
Operating income
218

 
247

 
317

 
289

 
222

Other expenses, net
(72
)
 
(81
)
 
(103
)
 
(96
)
 
(76
)
Net income
$
146

 
$
166

 
$
214

 
$
193

 
$
146


The decrease in net income of $20 million in the first nine months of 2012 compared to the first nine months of 2011 was primarily due to:

An increase of $9 million in the operating income of our Retail–U.S. segment, which was largely attributable to an increase in our merchandise gross margin driven by product pricing changes, along with gross margin growth in our food service offerings.

A decrease of $38 million in the operating income of our Retail–Canada segment, which was almost entirely the result of a decrease in our motor fuel gross margin. Our motor fuel gross margin declined from $0.279 per gallon in 2011 to $0.238 per gallon in 2012 related to supply and demand conditions during the period.

A decrease of $9 million in other expenses primarily as a result of a decrease in income tax expense resulting from lower operating income in 2012.

The increase in net income of $21 million in 2011 compared to 2010 was primarily due to an increase of $25 million in the operating income of our Retail–Canada segment. This increase was significantly driven by the strengthening of the Canadian dollar relative to the U.S. dollar year over year. Excluding the impact of the movement in exchange rates, the increase in the operating income of our Retail–Canada segment was $14 million. This increase in Retail–Canada operating income, excluding the impact of the movement in exchange rates, was primarily attributable to a $25 million increase in gross margin resulting from an increase in motor fuel sales volume related to supply and demand conditions during the period, partially offset by an $8 million increase in operating expenses primarily attributable to an increase in salaries and incentive compensation.

The increase in net income of $47 million in 2010 compared to 2009 was primarily due to:

An increase of $37 million in the operating income of our Retail–U.S. segment, which was largely due to the beneficial impact of blending ethanol with the motor fuel that we sold. For most of 2010, ethanol was a lower cost product than gasoline and this lower cost resulted in an increase in our motor fuel gross margin. Our motor fuel gross margin increased by $27 million year over year, and we estimate that the lower cost of ethanol contributed almost entirely to that increase.

An increase of $35 million in the operating income of our Retail–Canada segment, which was significantly driven by the strengthening of the Canadian dollar relative to the U.S. dollar year over year. Excluding the impact of the movement in exchange rates, the increase in the operating income of our Retail–Canada segment was $18 million. This increase in operating income was primarily attributable to higher sales volumes



61


associated with NTIs, agreements with new dealers and an active convenience store remodeling program, which led to an increase in customer traffic in our convenience stores.

An increase of $20 million in other expenses, consisting primarily of a $21 million increase in income tax expense resulting from higher operating income in 2010.

Our cash flows have been strong over the three years and nine months ended September 30, 2012, and we have generated positive cash flows from operations during this period. We have used some of the cash generated from operations to invest in our business, incurring capital expenditures of $90 million and $78 million in the first nine months of 2012 and 2011, respectively, and $130 million, $105 million and $64 million in 2011, 2010 and 2009, respectively. In addition, we acquired 29 convenience stores in Little Rock and Hot Springs, Arkansas in 2012 for total consideration of $61 million.

We are wholly owned by Valero, and as a result, we participate in Valero’s centralized cash management system. We transfer cash to Valero daily and Valero funds our operating and investing activities as needed. However, during the three years and nine months ended September 30, 2012, we generated net cash and transferred that cash to Valero. We transferred $152 million and $129 million of cash in the first nine months of 2012 and 2011, respectively, and $150 million, $220 million and $205 million of cash during 2011, 2010 and 2009, respectively, to Valero.

Outlook
The majority of our operations are conducted in areas of the U.S. and Canada that have fared better than many other parts of North America during the economic downturn of the last five years. Although our operations were impacted by the worldwide recession that began in late 2008, we continued to generate operating income and net income, and our operations have improved along with improvements in the North American economy. The economy in Texas has fared better than many other parts of the U.S., partly supported by a solid economy, a relatively stable housing market and strong population growth and job creation. We have also benefited from the significant increase in economic activity in Texas that has resulted from the increased oil and gas drilling activity in Texas. We have a large number of convenience stores in Texas, and these operations have benefited from the increase in population resulting from employees of the oil and gas industry who have moved to Texas to support that industry. In addition, the economy in Canada has been strong, reflecting sustained growth in the domestic economy. This economic growth has been supported by, among other things, strong global demand for Canadian commodities.

Our operations are significantly impacted by the gross margins we receive on our motor fuel sales. These gross margins are commodity-based, change daily and are volatile. While we expect our motor fuel sales volumes to grow and the gross margins we realize on those sales to remain strong, these gross margins can change rapidly due to many factors. These factors include the price of crude oil (which impacts the wholesale price we pay for the motor fuel we purchase), interruptions in supply caused by severe weather, severe refinery mechanical failures for an extended period of time, and competition in the local markets in which we operate. We continue to expand the variety of products we sell in our convenience stores, such as our food services and, in the RetailU.S. segment, private label branded products and services that provide commissions such as video and game rentals. We also continue to enlarge our convenience stores so that we are able to handle more customers during peak times. We believe that these business strategies help minimize the negative impacts of periods with lower motor fuel gross margins.

We expect to incur up to $1.05 billion in debt in connection with our separation from Valero. In connection with the separation and the distribution, we expect to issue debt to third parties and distribute the cash proceeds to Valero and issue debt directly to Valero in consideration for the contribution by Valero to us of the retail business. As a result, we will not retain or receive any cash from these debt offerings following the separation. We also anticipate incurring $30 million to $35 million in capital costs for IT infrastructure within the first year following the separation in order to operate as a stand-alone company. We believe that we will generate sufficient cash from operations to fund our ongoing operating requirements after the separation. In addition, we expect to have liquidity facilities available to us upon separation from Valero and, to the extent necessary, we will borrow under these facilities to fund our ongoing operating requirements. There can be no assurances, however, that we will generate sufficient cash from operations or obtain the liquidity facilities. In addition, even if we obtain the liquidity facilities, the borrowing capacity under the facilities may not be available to us.



62


Results of Operations
Income Statement Analysis
Provided below is an analysis of our income statements, which provides the primary reasons for significant increases and decreases in the various income statement line items from period to period. Our combined statements of income are as follows (in millions):
 
 
Nine Months Ended September 30,
 
Year Ended December 31,
 
 
2012
 
2011
 
2011
 
2010
 
2009
Operating revenues
 
$
9,939

 
$
9,745

 
$
12,863

 
$
10,371

 
$
8,780

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
9,110

 
8,893

 
11,735

 
9,310

 
7,811

Operating expenses
 
484

 
479

 
636

 
605

 
581

General and administrative expenses
 
44

 
44

 
59

 
57

 
52

Depreciation, amortization and accretion expense
 
83

 
82

 
113

 
105

 
101

Asset impairment loss
 

 

 
3

 
5

 
13

Total costs and expenses
 
9,721

 
9,498

 
12,546

 
10,082

 
8,558

Operating income
 
218

 
247

 
317

 
289

 
222

Other income, net
 
1

 
1

 
1

 
2

 
1

Interest expense
 

 
(1
)
 
(1
)
 
(1
)
 
(1
)
Income before income tax expense
 
219

 
247

 
317

 
290

 
222

Income tax expense
 
73

 
81

 
103

 
97

 
76

Net income
 
$
146

 
$
166

 
$
214

 
$
193

 
$
146

Nine Months Ended September 30, 2012 vs. Nine Months Ended September 30, 2011
Operating revenues increased by $194 million, or 2 percent, primarily due to a $261 million increase resulting from strong motor fuel demand leading to higher motor fuel sales volume and higher motor fuel selling price per gallon in our Retail–U.S. segment. We also experienced a $23 million increase in operating revenues in our Retail–Canada segment attributable to higher prices for the motor fuel that we sold resulting from an increase in wholesale motor fuel prices. These operating revenue increases were partially offset by a $90 million decline in the Retail–Canada segment resulting from the weakening of the Canadian dollar relative to the U.S. dollar.

Cost of sales increased by $217 million, or 2 percent, primarily from a $299 million increase due to higher prices for motor fuel purchased by us for resale that resulted from an increase in wholesale motor fuel prices. Partially offsetting that increase is a cost of sales decline of $82 million resulting from the weakening of the Canadian dollar relative to the U.S. dollar.
Income tax expense decreased by $8 million primarily due to the decrease in operating income in the first nine months of 2012.
2011 vs. 2010
Operating revenues increased by $2.5 billion, or 24 percent, primarily due to higher prices for the motor fuel that we sold resulting from an increase in wholesale motor fuel prices, as well as a $222 million increase resulting from the strengthening of the Canadian dollar relative to the U.S. dollar.

Cost of sales increased by $2.4 billion, or 26 percent, primarily due to higher prices for motor fuel purchased by us for resale resulting from an increase in wholesale motor fuel prices. Included in this increase is a $200 million increase resulting from the strengthening of the Canadian dollar relative to the U.S. dollar.



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Operating expenses increased by $31 million primarily due to increases of $12 million related to the strengthening of the Canadian dollar relative to the U.S. dollar, $6 million for wages and incentive compensation expenses, $2 million resulting from the impact of a favorable legal settlement in 2010, $1 million from higher electricity usage, $2 million from ad valorem taxes and various other items, none of which were individually significant.
 
Depreciation, amortization and accretion expense increased by $8 million due primarily to an increase in retail sites placed in service during 2011.

2010 vs. 2009
Operating revenues increased by $1.6 billion, or 18 percent, primarily due to higher prices for the motor fuel that we sold resulting from an increase in wholesale motor fuel prices, as well as a $325 million increase resulting from the strengthening of the Canadian dollar relative to the U.S. dollar.

Cost of sales increased by $1.5 billion, or 19 percent, primarily due to higher prices for motor fuel purchased by us for resale resulting from an increase in wholesale motor fuel prices. Included in this increase is a $289 million increase resulting from the strengthening of the Canadian dollar relative to the U.S. dollar.
Operating expenses increased by $24 million primarily due to an increase of $21 million related to the strengthening of the Canadian dollar relative to the U.S. dollar.
The asset impairment loss was $5 million in 2010 compared to $13 million in 2009. Our operations were impacted by the worldwide recession that began in late 2008, which was a contributing factor to the asset impairment recorded in 2009. As our operations improved in 2010 along with improvements in the North American economy, we incurred fewer asset impairments.

Income tax expense increased by $21 million mainly due to higher operating income.



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Segment Results
Retail–U.S.
The following tables highlight the results of operations of our Retail–U.S. segment and its operating performance. The narrative following these tables provides an analysis of the results of operations of that segment (millions of dollars, except merchandise sales per convenience store per day and per gallon amounts):
 
 
Nine Months Ended September 30,
 
Year Ended December 31,
 
 
2012
 
2011
 
2011
 
2010
 
2009
Operating revenues:
 
 
 
 
 
 
 
 
 
 
Motor fuel
 
$
5,015

 
$
4,763

 
$
6,281

 
$
4,926

 
$
4,092

Merchandise
 
936

 
930

 
1,223

 
1,205

 
1,171

Other
 
43

 
40

 
53

 
52

 
48

Total operating revenues
 
$
5,994

 
$
5,733

 
$
7,557

 
$
6,183

 
$
5,311

 
 
 
 
 
 
 
 
 
 
 
Gross margin:
 
 
 
 
 
 
 
 
 
 
Motor fuel
 
$
201

 
$
195

 
$
258

 
$
251

 
$
224

Merchandise
 
280

 
267

 
351

 
341

 
329

Other
 
41

 
40