10-Q 1 capl-10q_20170930.htm 10-Q capl-10q_20170930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10–Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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

For the transition period from               to              

Commission file No. 001-35711

 

CROSSAMERICA PARTNERS LP

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

45-4165414

(State or Other Jurisdiction of
Incorporation or Organization)

 

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

 

 

 

515 Hamilton Street, Suite 200

Allentown, PA

 

18101

(Address of Principal Executive Offices)

 

(Zip Code)

(610) 625-8000

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of November 3, 2017, the registrant had outstanding 33,984,970 common units.

 

 

 


 

TABLE OF CONTENTS

 

 

 

PAGE

 

 

 

Commonly Used Defined Terms

 

i

PART I - FINANCIAL INFORMATION

 

1

Item 1. Financial Statements

 

1

Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

 

1

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

 

2

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

 

3

Condensed Notes to Consolidated Financial Statements

 

4

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

 

19

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

37

Item 4. Controls and Procedures

 

37

PART II - OTHER INFORMATION

 

38

Item 1. Legal Proceedings

 

38

Item 1A. Risk Factors

 

38

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

 

38

Item 6. Exhibits

 

38

SIGNATURE

 

39

 

 

 

 


 

COMMONLY USED DEFINED TERMS

 

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

 

 

CrossAmerica Partners LP and subsidiaries:

 

CrossAmerica, the Partnership, we, us, our

 

CrossAmerica Partners LP

 

 

 

LGW

 

Lehigh Gas Wholesale LLC

 

 

 

LGPR

 

LGP Realty Holdings LP

 

 

 

LGWS

 

Lehigh Gas Wholesale Services, Inc. and subsidiaries

 

 

 

CrossAmerica Partners LP related and affiliated parties:

 

Circle K

 

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

 

 

 

Couche-Tard

 

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

 

 

 

CST

 

CST Brands, LLC, a wholly owned subsidiary of Circle K.

 

 

 

DMR

 

Dunne Manning Realty LP, an entity affiliated with Joseph V. Topper, Jr., a member of the Board.

 

 

 

DMS

 

 

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

 

 

 

General Partner

 

CrossAmerica GP LLC, the General Partner of CrossAmerica, a Delaware limited liability company.

 

 

 

CST Fuel Supply

 

CST Fuel Supply LP is the parent of CST Marketing and Supply LLC, CST’s wholesale motor fuel supply business, which provides wholesale fuel distribution to the majority of CST’s U.S. retail convenience stores on a fixed markup per gallon. As of September 30, 2017, our total limited partner interest in CST Fuel Supply was 17.5%.

 

 

 

CST Marketing and Supply

 

CST Marketing and Supply, LLC, CST’s wholesale motor fuel supply business, which provides wholesale fuel distribution to the majority of CST’s U.S. retail convenience stores on a fixed markup per gallon. As of September 30, 2017, our total limited partner interest in CST Marketing and Supply was 17.5%.

 

 

 

CST Services

 

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

 

 

 

Topstar

 

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

 

 

 

Recent Acquisitions:

 

PMI

 

Petroleum Marketers, Inc., acquired in April 2014

 

 

 

Erickson

 

Erickson Oil Products, Inc., acquired in February 2015

 

 

 

One Stop

 

M&J Operations, LLC, acquired in July 2015

 

 

 

Franchised Holiday Stores

 

The franchised Holiday stores acquired from S/S/G Corporation in March 2016

 

 

 

State Oil Assets

 

The assets acquired from State Oil Company in September 2016

 

 

 

Other Defined Terms:

 

 

 

 

 

Amended Omnibus Agreement

 

The Amended and Restated Omnibus Agreement, dated October 1, 2014, as amended on February 17, 2016 by and among CrossAmerica, the General Partner, Dunne Manning Inc., DMS, CST Services and Joseph V. Topper, Jr., which amends and restates the original omnibus agreement that was executed in connection with CrossAmerica’s initial public offering on October 30, 2012

 

 

 

ASU

 

Accounting Standards Update issued by the FASB to communicate changes to the FASB codification.

 

 

 

Board

 

Board of Directors of our General Partner

i


 

 

 

 

BP

 

BP p.l.c.

 

 

 

DTW

 

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

 

 

 

EBITDA

 

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

 

 

 

EICP

 

The Partnership’s Executive Income Continuity Plan, as amended

 

 

 

Exchange Act

 

Securities Exchange Act of 1934, as amended

 

 

 

ExxonMobil

 

ExxonMobil Corporation

 

 

 

FASB

 

Financial Accounting Standards Board

 

 

 

Form 10-K

 

CrossAmerica’s Annual Report on Form 10-K for the year ended December 31, 2016

 

 

 

Getty lease

 

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

 

 

 

IDRs

 

Incentive Distribution Rights, which are interests in the Partnership that provide for special distributions associated with increasing partnership distributions. Couche-Tard is the indirect owner of 100% of the outstanding IDRs of CrossAmerica.

 

 

 

Internal Revenue Code

 

Internal Revenue Code of 1986, as amended

 

 

 

IPO

 

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

 

 

 

LIBOR

 

London Interbank Offered Rate

 

 

 

Merger

 

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

 

 

 

Merger Agreement

 

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

 

 

 

Merger Sub

 

Ultra Acquisition Corp., a Delaware corporation and an indirect, wholly owned subsidiary of Circle K

 

 

 

MD&A

 

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

 

 

 

Motiva

 

Motiva Enterprises LLC

 

 

 

NTI

 

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

 

 

 

Partnership Agreement

 

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

 

 

 

Predecessor Entity

 

Wholesale distribution business of Lehigh Gas-Ohio, LLC and real property and leasehold interests contributed in connection with the IPO

 

 

 

Plan

 

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

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

 

 

 

SEC

 

U.S. Securities and Exchange Commission

 

 

 

Terms Discounts

 

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

ii


 

 

 

 

U.S. GAAP

 

United States Generally Accepted Accounting Principles

 

 

 

Valero

 

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

 

 

 

WTI

 

West Texas Intermediate crude oil

 

 

iii


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CROSSAMERICA PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(Thousands of Dollars, except unit data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

1,566

 

 

 

1,350

 

Accounts receivable, net of allowances of $476 and $487, respectively

 

 

23,930

 

 

 

29,251

 

Accounts receivable from related parties

 

 

14,994

 

 

 

12,975

 

Inventories

 

 

12,020

 

 

 

13,164

 

Assets held for sale

 

 

2,496

 

 

 

2,111

 

Other current assets

 

 

7,168

 

 

 

6,556

 

Total current assets

 

 

62,174

 

 

 

65,407

 

Property and equipment, net

 

 

634,718

 

 

 

677,329

 

Intangible assets, net

 

 

68,989

 

 

 

80,760

 

Goodwill

 

 

89,109

 

 

 

89,109

 

Other assets

 

 

22,499

 

 

 

19,384

 

Total assets

 

$

877,489

 

 

$

931,989

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of debt and capital lease obligations

 

$

2,884

 

 

$

2,100

 

Accounts payable

 

 

37,785

 

 

 

34,903

 

Accounts payable to related parties

 

 

16,289

 

 

 

9,958

 

Accrued expenses and other current liabilities

 

 

19,210

 

 

 

15,705

 

Motor fuel taxes payable

 

 

12,081

 

 

 

12,467

 

Total current liabilities

 

 

88,249

 

 

 

75,133

 

Debt and capital lease obligations, less current portion

 

 

454,773

 

 

 

465,119

 

Deferred tax liabilities, net

 

 

39,952

 

 

 

42,923

 

Asset retirement obligations

 

 

28,155

 

 

 

27,750

 

Other long-term liabilities

 

 

97,085

 

 

 

100,253

 

Total liabilities

 

 

708,214

 

 

 

711,178

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Partners’ Capital

 

 

 

 

 

 

 

 

Common units—(33,984,970 and 33,524,952 units issued and

   outstanding at September 30, 2017 and December 31, 2016,

   respectively)

 

 

169,569

 

 

 

221,044

 

General Partner’s interest

 

 

 

 

 

 

Total Partners’ Capital

 

 

169,569

 

 

 

221,044

 

Noncontrolling interests

 

 

(294

)

 

 

(233

)

Total equity

 

 

169,275

 

 

 

220,811

 

Total liabilities and equity

 

$

877,489

 

 

$

931,989

 

 

See Condensed Notes to Consolidated Financial Statements.

1


CROSSAMERICA PARTNERS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating revenues(a)

 

$

544,092

 

 

$

487,950

 

 

$

1,542,167

 

 

$

1,368,334

 

Costs of sales(b)

 

 

502,517

 

 

 

448,812

 

 

 

1,421,524

 

 

 

1,251,491

 

Gross profit

 

 

41,575

 

 

 

39,138

 

 

 

120,643

 

 

 

116,843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from CST Fuel Supply equity interests

 

 

3,752

 

 

 

4,022

 

 

 

11,185

 

 

 

12,318

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

15,371

 

 

 

14,224

 

 

 

46,853

 

 

 

45,754

 

General and administrative expenses

 

 

5,994

 

 

 

6,142

 

 

 

23,731

 

 

 

18,068

 

Depreciation, amortization and accretion expense

 

 

14,049

 

 

 

13,432

 

 

 

42,675

 

 

 

40,594

 

Total operating expenses

 

 

35,414

 

 

 

33,798

 

 

 

113,259

 

 

 

104,416

 

Gain on sales of assets, net

 

 

2,371

 

 

 

631

 

 

 

2,013

 

 

 

525

 

Operating income

 

 

12,284

 

 

 

9,993

 

 

 

20,582

 

 

 

25,270

 

Other income (expense), net

 

 

121

 

 

 

(59

)

 

 

366

 

 

 

375

 

Interest expense

 

 

(7,102

)

 

 

(5,634

)

 

 

(20,599

)

 

 

(16,403

)

Income before income taxes

 

 

5,303

 

 

 

4,300

 

 

 

349

 

 

 

9,242

 

Income tax expense (benefit)

 

 

966

 

 

 

1,308

 

 

 

(1,686

)

 

 

851

 

Net income

 

 

4,337

 

 

 

2,992

 

 

 

2,035

 

 

 

8,391

 

Less: net income (loss) attributable to noncontrolling

   interests

 

 

4

 

 

 

3

 

 

 

(1

)

 

 

9

 

Net income attributable to limited partners

 

 

4,333

 

 

 

2,989

 

 

 

2,036

 

 

 

8,382

 

IDR distributions

 

 

(1,115

)

 

 

(877

)

 

 

(3,162

)

 

 

(2,456

)

Net income (loss) available to limited partners

 

$

3,218

 

 

$

2,112

 

 

$

(1,126

)

 

$

5,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per limited partner unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common unit

 

$

0.09

 

 

$

0.06

 

 

$

(0.03

)

 

$

0.18

 

Diluted earnings per common unit

 

$

0.09

 

 

$

0.06

 

 

$

(0.03

)

 

$

0.18

 

Basic and diluted earnings per subordinated unit

 

n/a

 

 

n/a

 

 

n/a

 

 

$

0.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average limited partner units:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic common units

 

 

33,931,056

 

 

 

33,366,380

 

 

 

33,773,964

 

 

 

31,714,462

 

Diluted common units(c)

 

 

33,937,702

 

 

 

33,391,096

 

 

 

33,773,964

 

 

 

31,766,802

 

Basic and diluted subordinated units

 

 

 

 

 

 

 

 

 

 

 

1,537,956

 

Total diluted common and subordinated units

 

 

33,937,702

 

 

 

33,391,096

 

 

 

33,773,964

 

 

 

33,304,758

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution paid per common and subordinated unit

 

$

0.6225

 

 

$

0.6025

 

 

$

1.8525

 

 

$

1.7925

 

Distribution declared (with respect to each respective

   period) per common and subordinated unit

 

$

0.6275

 

 

$

0.6075

 

 

$

1.8675

 

 

$

1.8075

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Includes excise taxes of:

 

$

19,704

 

 

$

19,698

 

 

$

58,351

 

 

$

59,902

 

(a) Includes revenues from fuel sales to related parties

      of:

 

 

101,190

 

 

 

99,891

 

 

 

281,611

 

 

 

280,330

 

(a) Includes rental income of:

 

 

21,644

 

 

 

19,752

 

 

 

65,090

 

 

 

59,634

 

(b) Includes rental expense of:

 

 

4,876

 

 

 

5,103

 

 

 

14,593

 

 

 

14,870

 

(c) Diluted common units were not used in the calculation of diluted earnings per common unit for the nine months ended

      September 30, 2017 because to do so would have been antidilutive.

 

 

See Condensed Notes to Consolidated Financial Statements.

 

 

2


CROSSAMERICA PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of Dollars)

(Unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,035

 

 

$

8,391

 

Adjustments to reconcile net income to net cash flows provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion expense

 

 

42,675

 

 

 

40,594

 

Amortization of deferred financing fees

 

 

1,278

 

 

 

1,106

 

Amortization of below market leases, net

 

 

57

 

 

 

150

 

Provision for losses on doubtful accounts

 

 

46

 

 

 

93

 

Deferred income taxes

 

 

(2,971

)

 

 

69

 

Equity-based employees and directors compensation expense

 

 

1,889

 

 

 

2,597

 

Amended Omnibus Agreement fees settled in common units

 

 

9,900

 

 

 

7,600

 

Gain on sales of assets, net

 

 

(2,013

)

 

 

(525

)

Erickson working capital adjustment

 

 

 

 

 

335

 

Changes in working capital, net of acquisitions

 

 

13,542

 

 

 

3,288

 

Net cash provided by operating activities

 

 

66,438

 

 

 

63,698

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

 

23,900

 

 

 

610

 

Capital expenditures

 

 

(10,175

)

 

 

(11,567

)

Principal payments received on notes receivable

 

 

345

 

 

 

214

 

Refund payment related to the sale by CST of California and Wyoming assets

 

 

 

 

 

17,528

 

Cash paid in connection with acquisitions, net of cash acquired

 

 

(2,779

)

 

 

(94,173

)

Cash paid to CST in connection with acquisitions

 

 

 

 

 

(2,900

)

Net cash provided by (used in) investing activities

 

 

11,291

 

 

 

(90,288

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under the revolving credit facility

 

 

88,840

 

 

 

178,270

 

Repayments on the revolving credit facility

 

 

(98,856

)

 

 

(82,182

)

Repurchases of common units

 

 

 

 

 

(3,252

)

Payments of long-term debt and capital lease obligations

 

 

(1,509

)

 

 

(1,772

)

Payments of sale leaseback obligations

 

 

(635

)

 

 

(541

)

Payment of deferred financing fees

 

 

(6

)

 

 

 

Contributions from parent company

 

 

329

 

 

 

 

Distributions paid on distribution equivalent rights

 

 

(15

)

 

 

(34

)

Distributions paid to holders of the IDRs

 

 

(3,162

)

 

 

(2,456

)

Distributions paid to noncontrolling interests

 

 

(60

)

 

 

(85

)

Distributions paid on common and subordinated units

 

 

(62,439

)

 

 

(59,653

)

Net cash (used in) provided by financing activities

 

 

(77,513

)

 

 

28,295

 

Net increase in cash

 

 

216

 

 

 

1,705

 

Cash at beginning of period

 

 

1,350

 

 

 

1,192

 

Cash at end of period

 

$

1,566

 

 

$

2,897

 

 

See Condensed Notes to Consolidated Financial Statements.

 

 

3


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.DESCRIPTION OF BUSINESS AND OTHER DISCLOSURES

CST’s Merger

CST entered into the Merger Agreement dated as of August 21, 2016, with Circle K and Merger Sub. On June 28, 2017, Merger Sub merged with and into CST, at which time the separate corporate existence of Merger Sub ceased, and CST survived the Merger as an indirect, wholly owned subsidiary of Circle K.

As a result of the Merger, Circle K indirectly owns all of the membership interests in our General Partner, as well as a 20.8% limited partner interest in the Partnership and all of the IDRs of the Partnership. Circle K, through its indirect ownership interest in the sole member of our General Partner, has the ability to appoint all of the members of the Board and to control and manage our operations and activities. 

Description of Business

Our business consists of:

 

the wholesale distribution of motor fuels;

 

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

 

the owning or leasing of retail sites used in the retail distribution of motor fuels and, in turn, generating rental income from the lease or sublease of the retail sites; and

 

the operation of retail sites.

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

 

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

 

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

 

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

In 2015, we issued our common units as consideration in the purchase of equity interests in CST Fuel Supply and the real property associated with certain of CST’s NTI retail sites. In addition, we also issued, and may continue to issue, our common units as payment to Circle K for charges and expenses incurred by us under the Amended Omnibus Agreement. There is no obligation for CST or our General Partner to accept common units representing limited partner interests in lieu of cash for amounts due under the Amended Omnibus Agreement. CST also acquired our common units through open market purchases from September 2015 through December 2015. At September 30, 2017, Circle K indirectly owned 20.8% of our limited partner interests.

Interim Financial Statements

These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and the Exchange Act. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Management believes that the disclosures made are adequate to keep the information presented from being misleading. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K. Financial information as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 included in the consolidated financial statements has been derived from our unaudited financial statements. Financial information as of December 31, 2016 has been derived from our audited financial statements and notes thereto as of that date.


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. Our business exhibits seasonality due to our wholesale and retail sites being located in certain geographic areas that are affected by seasonal weather and temperature trends and associated changes in retail customer activity during different seasons. Historically, sales volumes have been highest in the second and third quarters (during the summer activity months) and lowest during the winter months in the first and fourth quarters.

Use of Estimates

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

Significant Accounting Policies

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

New Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09–Revenue from Contracts with Customers (Topic 606), which results in comprehensive new revenue accounting guidance, requires enhanced disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized, and develops a common revenue standard under U.S. GAAP and International Financial Reporting Standards. Specifically, the core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. With the issuance of ASU 2015-14, which deferred the effective date by one year, this guidance is effective January 1, 2018. The guidance can be applied either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustment as of the date of adoption. Although management continues to evaluate the impact of adopting this new guidance, we have completed an assessment and to date, have not identified any material impact on the financial statements, although it will affect disclosures. This guidance is expected to apply to over 90% of our revenues as the only primary revenue stream outside the scope of this guidance is rental income. We anticipate using the modified retrospective method of adoption.

In February 2016, the FASB issued ASU 2016-02–Leases (Topic 842). This standard modifies existing guidance for reporting organizations that enter into leases to increase transparency by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and requires a modified retrospective approach to adoption. Early adoption is permitted. Management continues to evaluate the impact of this new guidance, but the adoption will have a material impact on our balance sheet as we will be required to recognize right-of-use assets and lease liabilities for operating leases. We do not anticipate adopting this guidance early. We intend to apply each of the practical expedients in adopting this new guidance.

In October 2016, the FASB issued ASU 2016-16–Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires companies to account for income tax effects of intercompany transactions other than inventory in the period in which the transfer occurs. This guidance is effective January 1, 2018 and requires a modified retrospective application through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We have chosen to early adopt the standard effective January 1, 2017, which had no impact as of the date of adoption but could impact us in the future.

In January 2017, the FASB issued ASU 2017-01–Business Combinations (Topic 805): Clarifying the Definition of a Business. This standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. We have chosen to early adopt this standard effective January 1, 2017. Although there was no impact upon adoption, among other things, this guidance will result in the capitalization rather than expensing of acquisition costs in future transactions that will be accounted for as asset acquisitions rather than business combinations under the new definition of a business.

5


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In January 2017, the FASB issued ASU 2017-04–IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for a company's annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Management has elected to early adopt this guidance effective January 1, 2017, which had no impact upon adoption but could result in a change in the measurement of an impairment loss if an impairment was required to be recorded in the future.

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

Concentration Risk

For the nine months ended September 30, 2017 and 2016, we distributed approximately 14% and 17% of our total wholesale distribution volumes to DMS and its affiliates and DMS and its affiliates accounted for approximately 23% and 27% of our rental income, respectively.  

For the nine months ended September 30, 2017 and 2016, we distributed 8% of our total wholesale distribution volume to CST retail sites that are not supplied by CST Fuel Supply and received 22% and 21% of our rental income from CST, respectively.

For more information regarding transactions with DMS and its affiliates and CST, see Note 8.

For the nine months ended September 30, 2017 and 2016, we received 9% of our rental income from a lessee dealer that operates certain of the retail sites acquired through the PMI and One Stop acquisitions.

For the nine months ended September 30, 2017, our wholesale business purchased approximately 28%, 27% and 17% of its motor fuel from ExxonMobil, BP and Motiva, respectively. For the nine months ended September 30, 2016, our wholesale business purchased approximately 29%, 24% and 23% of its motor fuel from ExxonMobil, BP and Motiva (Shell), respectively. No other fuel suppliers accounted for 10% or more of our motor fuel purchases during the nine months ended September 30, 2017 and 2016.

Valero supplied substantially all of the motor fuel purchased by CST Fuel Supply during all periods presented. During the nine months ended September 30, 2017 and 2016, CST Fuel Supply purchased approximately 1.3 billion and 1.4 billion gallons of motor fuel from Valero, respectively.      

Note 2. ACQUISITIONS

On August 4, 2017, we entered into a definitive asset purchase agreement (the “Purchase Agreement”), by and among (i) CrossAmerica, (ii) Jet-Pep, Inc., and (iii) other persons listed as signatories in the Purchase Agreement (collectively the “Sellers”).  Pursuant to the Purchase Agreement, we have agreed to purchase the real property and the fuel supply business of 92 fee simple sites, and the leasehold interest in 5 leased real property sites; and the fuel supply business to four independent dealers, all located in Alabama (“Acquired Assets”), for an aggregate cash consideration of $72.3 million (the “Purchase Price”), subject to certain closing adjustments. We also agreed to assume certain liabilities and pay for the value of the petroleum inventory contained in the retail sites. Circle K also entered into a definitive asset purchase agreement with the Sellers.  The closing of the purchase of the Acquired Assets and the closing of the purchase by Circle K of certain related retail and terminaling assets from the Sellers (the “Circle K Agreements”), are mutually conditioned upon each other.  We paid a deposit of $2.8 million in the third quarter of 2017.

The closing of the transaction is expected to occur in the fourth quarter of 2017, and is subject to the satisfaction or waiver of customary closing conditions. The Purchase Agreement contains customary representations, warranties, agreements and obligations of the parties, and termination and closing conditions. We and the Sellers have generally agreed to indemnify each other for breaches of the representations, warranties and covenants contained in the Purchase Agreement, subject to survival period limitations and a general indemnification cap for the Sellers in the amount of $6.5 million in the aggregate for Sellers’ liabilities under the Purchase Agreement and the Circle K Agreements.

6


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3. ASSETS HELD FOR SALE

We have classified  four sites as held for sale at September 30, 2017 and December 31, 2016. These assets are expected to be sold within a year of the date they were initially classified as held for sale. Assets held for sale were as follows (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Land

 

$

1,741

 

 

$

882

 

Buildings and site improvements

 

 

1,608

 

 

 

1,054

 

Equipment and other

 

 

489

 

 

 

702

 

Total

 

 

3,838

 

 

 

2,638

 

Less accumulated depreciation

 

 

(1,342

)

 

 

(527

)

Assets held for sale

 

$

2,496

 

 

$

2,111

 

 

During the three and nine months ended September 30, 2017, as approved by the conflicts committee of our Board, we sold 28 properties to DMR for $16.6 million, resulting in a $0.5 million loss.  Three additional properties and approximately $3.0 million of proceeds remain in escrow, as of September 30, 2017 until certain conditions are met.  These sites were generally sites at which we did not supply fuel or represented vacant land.

 

During the three and nine months ended September 30, 2017, we sold 2 properties as a result of the FTC’s requirements associated with the Merger for $6.7 million, resulting in a gain of $2.2 million.  In addition, Couche-Tard agreed to reimburse us for the tax liability incurred on the required sale, resulting in additional proceeds of $0.3 million, which was accounted for as a contribution to partners’ capital.

 

During the three and nine months ended September 30, 2017, DMS renewed its contract with one of its customers, triggering a $0.8 million earn-out payment by DMS to us under a contract entered into with DMS at the time of CST acquiring our General Partner in October 2014, which was recorded as a gain.

Note 4. INVENTORIES

Inventories consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Retail site merchandise

 

$

7,715

 

 

$

8,374

 

Motor fuel

 

 

4,305

 

 

 

4,790

 

Inventories

 

$

12,020

 

 

$

13,164

 

 

Note 5. PROPERTY AND EQUIPMENT

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Land

 

$

270,740

 

 

$

280,400

 

Buildings and site improvements

 

 

334,705

 

 

 

346,834

 

Leasehold improvements

 

 

9,721

 

 

 

9,095

 

Equipment and other

 

 

171,208

 

 

 

169,245

 

Construction in progress

 

 

3,720

 

 

 

3,173

 

Property and equipment, at cost

 

 

790,094

 

 

 

808,747

 

Accumulated depreciation and amortization

 

 

(155,376

)

 

 

(131,418

)

Property and equipment, net

 

$

634,718

 

 

$

677,329

 

 

7


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6. INTANGIBLE ASSETS

Intangible assets consisted of the following (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

Gross

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Wholesale fuel supply contracts/rights

 

$

118,201

 

 

$

(53,607

)

 

$

64,594

 

 

$

118,201

 

 

$

(44,298

)

 

$

73,903

 

Trademarks

 

 

1,094

 

 

 

(807

)

 

 

287

 

 

 

1,094

 

 

 

(685

)

 

 

409

 

Covenant not to compete

 

 

4,131

 

 

 

(3,095

)

 

 

1,036

 

 

 

4,131

 

 

 

(2,503

)

 

 

1,628

 

Below market leases

 

 

11,401

 

 

 

(8,329

)

 

 

3,072

 

 

 

12,081

 

 

 

(7,261

)

 

 

4,820

 

Total intangible assets

 

$

134,827

 

 

$

(65,838

)

 

$

68,989

 

 

$

135,507

 

 

$

(54,747

)

 

$

80,760

 

 

Note 7. DEBT

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

$550 million revolving credit facility

 

$

431,484

 

 

$

441,500

 

Note payable

 

 

779

 

 

 

822

 

Capital lease obligations

 

 

27,728

 

 

 

28,455

 

Total debt and capital lease obligations

 

 

459,991

 

 

 

470,777

 

Current portion

 

 

2,884

 

 

 

2,100

 

Noncurrent portion

 

 

457,107

 

 

 

468,677

 

Deferred financing fees

 

 

(2,334

)

 

 

(3,558

)

Noncurrent portion, net of deferred financing fees

 

$

454,773

 

 

$

465,119

 

 

Our $550 million revolving credit facility is secured by substantially all of our assets. Letters of credit outstanding at September 30, 2017 and December 31, 2016 totaled $6.5 million, which reduce our availability under the credit facility. The amount of availability at September 30, 2017 under the revolving credit facility, after taking into account debt covenant restrictions, was $53.7 million. In connection with future acquisitions, the revolving credit facility requires, among other things, that we have, after giving effect to such acquisition, at least $20.0 million in the aggregate of borrowing availability under the revolving credit facility and unrestricted cash on the balance sheet on the date of such acquisition.

Financial Covenants and Interest Rate

We are required to comply with certain financial covenants under the credit facility. We are required to maintain a total leverage ratio (as defined in the credit facility) for the most recently completed four fiscal quarters of less than or equal to 4.50 : 1.00, except for periods following a material acquisition, generally defined as an acquisition with a purchase price of at least $30.0 million. The total leverage ratio shall not exceed 5.00 : 1.00 for the first three full fiscal quarters following the closing of a material acquisition. If we issued Qualified Senior Notes (as defined in the credit facility) in the aggregate principal amount of $175.0 million or greater, the ratio shall not exceed 5.50 : 1.00. If we issued Qualified Senior Notes of $175.0 million or greater, we are also required to maintain a senior leverage ratio (as defined in the credit facility) of less than or equal to 3.00 : 1.00 and a consolidated interest coverage ratio (as defined in the credit facility) of at least 2.75 : 1.00. As of September 30, 2017, we were in compliance with these financial covenants.

Outstanding borrowings under the revolving credit facility bear interest at LIBOR plus a margin of 3.00%. Our borrowings had an effective interest rate of 4.24% as of September 30, 2017.

8


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 8. RELATED-PARTY TRANSACTIONS

Transactions with CST

Fuel Sales and Rental Income

We sell wholesale motor fuel under a master fuel distribution agreement to 48 CST retail sites and lease real property on 73 retail sites to CST under a master lease agreement each having initial 10-year terms. The fuel distribution agreement provides us with a fixed wholesale mark-up per gallon. The master lease agreement is a triple net lease.

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

 

 

 

For the Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues from motor fuel sales to CST

 

$

36,449

 

 

$

31,738

 

 

$

100,683

 

 

$

87,819

 

Rental income from CST

 

$

4,262

 

 

$

4,207

 

 

$

12,823

 

 

$

12,841

 

 

Accounts receivable from CST for fuel amounted to $3.5 million and $3.2 million at September 30, 2017 and December 31, 2016, respectively.

Amended Omnibus Agreement and Management Fees

We incurred $2.9 million and $3.9 million for the three months ended September 30, 2017 and 2016 and $11.5 million and $12.1 million for the nine months ended September 30, 2017 and 2016, respectively, including incentive compensation costs and non-cash stock-based compensation expense under the Amended Omnibus Agreement, which are recorded as a component of operating expenses and general and administrative expenses in the statement of operations. Amounts payable to CST were $16.3 million and $10.0 million at September 30, 2017 and December 31, 2016, respectively.  The amounts payable at September 30, 2017 include separation benefits associated with the Merger and equity compensation expense associated with CST stock-based awards.  See Note 15 for additional information.

Common Units Issued to CST as Consideration for Amounts Due Under the Terms of the Amended Omnibus Agreement

As approved by the independent conflicts committee of the Board, the Partnership and CST mutually agreed to settle, from time to time, some or all of the amounts due under the terms of the Amended Omnibus Agreement in newly issued common units representing limited partner interests in the Partnership. We issued the following common units to CST as consideration for amounts due under the terms of the Amended Omnibus Agreement:

 

Period

 

Date of Issuance

 

Number of

Common

Units Issued

 

Quarter ended December 31, 2016

 

February 28, 2017

 

 

171,039

 

Quarter ended March 31, 2017

 

May 10, 2017

 

 

128,983

 

Quarter ended June 30, 2017

 

August 9, 2017

 

 

124,003

 

Quarter ended September 30, 2017

 

*

 

 

126,491

 

 

*

Expected to be issued on November 10, 2017

CST Fuel Supply Equity Interests

CST Fuel Supply provides wholesale motor fuel distribution to the majority of CST’s legacy U.S. retail sites at cost plus a fixed markup per gallon. We owned a 17.5% total interest in CST Fuel Supply at September 30, 2017 and 2016. We account for the income derived from our equity interest of CST Fuel Supply as “Income from CST Fuel Supply equity” on our statement of operations, which amounted to $3.8 million and $4.0 million for the three months ended September 30, 2017 and 2016, respectively, and $11.2 million and $12.3 million for the nine months ended September 30, 2017 and 2016, respectively.

9


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In connection with the Merger, the Federal Trade Commission (FTC) approved a final order requiring the divestiture by CST of certain retail fuel stations. As a result, in September 2017, 61 sites were sold to a third party and removed from the fuel distribution agreement between CST Marketing and Supply, a wholly-owned subsidiary of CST Fuel Supply, and CST Services, a wholly owned subsidiary of Circle K, and CST Marketing and Supply no longer supplies fuel to such sites. To compensate for the decrease in the amount of motor fuels sold by CST Marketing and Supply, CST Services agreed to purchase at least 114.9 million gallons annually (the “Annual Commitment”) in addition to the volumes continued to be sold under the fuel distribution agreement to retail fuel stations that remain with CST after the divestiture.  In addition, should CST Services fail to purchase all or a portion of the Annual Commitment, CST Services has agreed to make monthly payments to CST Marketing and Supply in the amount of the seller’s margin of 5 cents per gallon under the fuel distribution agreement multiplied by the number of gallons not physically sold pursuant to the Annual Commitment. Consequently, the Partnership, by virtue of its 17.5% ownership interest in CST Fuel Supply, the 100% owner of CST Marketing and Supply, will continue to receive its share from the volumes sold to the 61 retail sites prior to the FTC mandated divestiture.  This agreement continues until the fuel distribution agreement between CST Marketing and Supply and CST Services is terminated, which had an initial term of 10 years expiring in December 2024. 

In July 2016, CST provided a refund payment to us related to our 17.5% interest in CST Fuel Supply resulting from the sale by CST of 79 retail sites in California and Wyoming to 7-Eleven, Inc. and its wholly-owned subsidiary, SEI Fuel Services, Inc., to which CST Fuel Supply no longer supplies motor fuel. The purpose of the refund payment was to make us whole for the decrease in the value of our interest in CST Fuel Supply arising from sales volume decreases. The total refund payment received by us, as approved by the independent conflicts committee of the Board and by the executive committee of the board of directors of CST, was approximately $18.2 million ($17.5 million in cash with the remainder in CrossAmerica common units owned by CST) and was accounted for as a contribution to equity.

Purchase of Fuel from CST

We purchase the fuel supplied to 32 retail sites from CST Fuel Supply of which we own a 17.5% interest, and resell the wholesale motor fuel to independent dealers and sub-wholesalers. We purchased $6.2 million and $5.7 million of motor fuel from CST Fuel Supply for the three months ended September 30, 2017 and 2016, and $17.9 million and $14.7 million for the nine months ended September 30, 2017 and 2016, respectively, in connection with these retail sites.

IDR and Common Unit Distributions

We distributed $1.1 million and $0.9 million to CST related to its ownership of our IDRs and $4.3 million and $3.9 million related to its ownership of our common units during the three months ended September 30, 2017 and 2016, respectively. We distributed $3.2 million and $2.5 million to CST related to its ownership of our IDRs and $12.6 million and $11.5 million related to its ownership of our common units during the nine months ended September 30, 2017 and 2016, respectively.

Income Tax Reimbursement

As discussed in Note 3, we sold 2 properties during the three and nine months ended September 30, 2017 as a result of the FTC’s requirements associated with Couche-Tard’s acquisition of CST.  Couche-Tard agreed to reimburse us for the tax liability incurred on the required sale, resulting in additional proceeds of $0.3 million, which was accounted for as a contribution to partners’ capital.

Wholesale Motor Fuel Sales and Real Estate Rentals

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

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues from motor fuel sales to DMS and its affiliates

 

$

64,741

 

 

$

68,153

 

 

$

180,928

 

 

$

192,511

 

Rental income from DMS and its affiliates

 

$

4,739

 

 

$

5,037

 

 

$

14,472

 

 

$

16,250

 

 

Accounts receivable from DMS and its affiliates totaled $10.3 million and $8.6 million at September 30, 2017 and December 31, 2016, respectively.

Revenues from rental income from Topstar were $0.2 million and $0.4 million for the three and nine months ended September 30, 2017 and 2016, respectively.

10


CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

CrossAmerica leases real estate from certain entities affiliated with Joseph V. Topper, Jr., director of the Board. Rent expense paid to these entities was $0.2 million for the three months ended September 30, 2017 and 2016 and $0.7 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively.

As discussed in Note 3, DMS renewed its contract with one of its customers, triggering a $0.8 million earn-out payment by DMS to us under a contract entered into with DMS at the time of CST acquiring our General Partner in October 2014.

Also as discussed in Note 3, we sold 28 properties to DMR during the three and nine months ended September 30, 2017 for $16.6 million.

Maintenance and Environmental Costs

Certain maintenance and environmental monitoring and remediation activities are performed by a related party of Joseph V. Topper, Jr., a member of the Board, as approved by the independent conflicts committee of the Board. We incurred charges with this related party of $0.4 million and $0.3 million for the three months ended September 30, 2017 and 2016 and $1.3 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively.

Principal Executive Offices

Our principal executive offices are in Allentown, Pennsylvania. We sublease office space from CST that CST leases from an affiliate of John B. Reilly, III and Joseph V. Topper, Jr., members of our Board. The management fee charged by CST to us under the Amended Omnibus Agreement incorporates this rental expense, which amounted to $0.2 million for the three months ended September 30, 2017 and 2016 and $0.5 million and $0.4 million for the nine months ended September 30, 2017 and 2016, respectively.

Note 9. COMMITMENTS AND CONTINGENCIES

Litigation Matters

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

We were a co-defendant, together with our General Partner, CST and CST Services, in a lawsuit brought by Charles Nifong, a former employee of CST Services who, until March 2015, provided services to us as Chief Investment Officer and Vice President of Finance (Court of Common Pleas, Lehigh County, Pennsylvania, case number 2015-1003). Following CST’s acquisition of our General Partner, the plaintiff alleged breach of contract and associated claims relating to his termination of employment and claimed severance benefits under the EICP. The trial occurred in early October and the decision by the jury was to award Mr. Nifong a total of $1.7 million.  Such amount was recorded in general and administrative expenses for the three and nine months ended September 30, 2017. Under the EICP, we were also obligated to pay reasonable legal expenses incurred by the plaintiff in connection with this dispute, which we expensed as incurred. The Partnership incurred total legal fees related to this case of $0.6 million for the nine months ended September 30, 2017.

Environmental Matters

Environmental liabilities related to the sites contributed to the Partnership in connection with our IPO have not been assigned to us, and are still the responsibility of the Predecessor Entity. Under the Amended Omnibus Agreement, the Predecessor Entity must indemnify us for any costs or expenses that it incurs for environmental liabilities and third-party claims, regardless of when a claim is made, that are based on environmental conditions in existence prior to the closing of the IPO for contributed sites. The Predecessor Entity’s environmental liabilities and indemnification assets associated with contributed sites amounted to $4.4 million and $2.8 million at September 30, 2017 and $6.1 million and $5.1 million at December 31, 2016, respectively.

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CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 10. FAIR VALUE MEASUREMENTS

General

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

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

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

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

Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers occurred. There were no transfers between any levels in 2017 or 2016.

As further discussed in Note 11, we have accrued for unvested phantom units and vested and unvested profits interests as a liability and adjust that liability on a recurring basis based on the market price of our common units each balance sheet date. Such fair value measurements are deemed Level 1 measurements.

Financial Instruments

The fair value of our accounts receivable, notes receivable, and accounts payable approximated their carrying values as of September 30, 2017 and 2016 due to the short-term maturity of these instruments. The fair value of the revolving credit facility approximated its carrying values of $431.5 million as of September 30, 2017 and $441.5 million as of December 31, 2016, due to the frequency with which interest rates are reset and the consistency of the market spread.

Note 11. EQUITY-BASED COMPENSATION

Overview

We record equity-based compensation as a component of general and administrative expenses in the statements of operations. Compensation expense was $0.2 million and $0.7 million for the three months ended September 30, 2017 and 2016, and $1.9 million and $2.6 million for the nine months ended September 30, 2017 and 2016, respectively.

Partnership Equity-Based Awards

Under the Plan, the Partnership granted 1,233 phantom units in June 2017 to an employee of CST who provides services to the Partnership; such phantom units will vest in equal annual installments on the first, second and third anniversaries of the date of grant and this award was accompanied by tandem distribution equivalent rights that entitle the holder to cash payments equal to the amount of unit distributions authorized to be paid to the holders of our common units

Since we grant awards to employees of CST who provide services to us under the Amended Omnibus Agreement, and since the grants may be settled in cash, unvested phantom units and vested and unvested profits interests receive fair value variable accounting treatment. As such, they are measured at fair value at each balance sheet reporting date and the cumulative compensation cost recognized is classified as a liability, which is included in accrued expenses and other current liabilities on the consolidated balance sheet. The balance of the accrual at September 30, 2017 and December 31, 2016 totaled $0.8 million and $1.8 million, respectively.

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CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

CST Awards

CST granted equity-based awards of approximately 47,000 and 102,000 in the form of time vested restricted stock units of CST, stock options of CST and market share units of CST for the nine months ended September 30, 2017 and 2016, respectively, which were granted to certain employees of CST for services rendered on our behalf. Expense associated with these awards that was charged to us under the Amended Omnibus Agreement was $0.1 million and $0.3 million for the three months ended September 30, 2017 and 2016 and $1.6 million and $1.3 million for the nine months ended September 30, 2017 and 2016, respectively.

At the completion of the Merger, each CST stock option, restricted stock unit and market share unit that was outstanding immediately prior to the completion of the Merger, excluding the CST restricted stock units granted in February 2017, whether vested or unvested, became fully vested and converted into the right to receive a cash payment as defined in the Merger Agreement.  The Partnership was allocated a $0.4 million charge upon the accelerated vesting of these awards, included in the expense amounts for the nine months ended September 30, 2017 set forth above.

At the completion of the Merger, each award of CST restricted stock units that was granted in February 2017 converted into the right to receive a cash payment as defined in the Merger Agreement, but such award will remain subject to the same vesting terms and payment schedule as those set forth in the original restricted stock unit award agreement; provided that such award will vest in full upon an involuntary termination of employment without cause, or termination for “Good Reason,” or termination due to death, “Disability” or “Retirement.” Unrecognized compensation expense associated with CST restricted stock units granted in February 2017 amounted to $0.7 million as of September 30, 2017, which will be recognized over the vesting term through January 2020.

Awards to Members of the Board

In November 2016, the Partnership granted 5,364 phantom units to non-employee directors of the Board as a portion of director compensation. Such awards vested upon the Merger.  

In August 2017, the Partnership granted 10,539 phantom units to non-employee directors of the Board as a portion of director compensation. Such awards vest over one year and this award was accompanied by tandem distribution equivalent rights that entitle the holder to cash payments equal to the amount of unit distributions authorized to be paid to the holders of our common units.

The liability for these awards at September 30, 2017 and December 31, 2016 was not significant.  The associated compensation expense was not significant for the three months ended September 30, 2017 and 2016 and $0.2 million for the nine months ended September 30, 2017 and 2016.

Note 12. NET INCOME PER LIMITED PARTNER UNIT

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

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CROSSAMERICA PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

For the Three Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

Common

Units

 

 

Subordinated

Units

 

 

Common

Units

 

 

Subordinated

Units

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions paid(a)

 

$

21,079

 

 

$