CROSSAMERICA PARTNERS LP The following MD&A is intended to help the reader understand our results of operations and financial condition. This section is provided as a supplement to and should be read in conjunction with Items 1, 1A and 8 (which includes our consolidated financial statements) contained in this report.
MD&A is organized as follows:
• GP Purchase-This section provides information on the GP Purchase.
• Recent Developments-This section describes significant recent developments.
• Significant Factors Affecting Our Profitability-This section describes the
significant impact on our results of operations caused by crude oil
commodity price volatility, seasonality and acquisition and financing
activities.
• Results of Operations-This section provides an analysis of our results of
operations, including the results of operations of our business segments,
for 2019, 2018 and 2017 and non-GAAP financial measures.
• Liquidity and Capital Resources-This section provides a discussion of our
financial condition and cash flows. It also includes a discussion of our
debt, capital requirements, other matters impacting our liquidity and
capital resources and an outlook for our business.
• New Accounting Policies-This section describes new accounting
pronouncements that we have already adopted, those that we are required to
adopt in the future and those that became applicable in the current year
as a result of new circumstances.
• Critical Accounting Policies Involving Critical Accounting Estimates-This
section describes the accounting policies and estimates that we consider
most important for our business and that require significant judgment.
Purchase of the General Partner by the Topper Group
As a result of the GP Purchase, on November 19, 2019 , subsidiaries of DMP
purchased from subsidiaries of Circle K : 1) 100% of the membership interests in
the sole member of the General Partner; 2) 100% of the IDRs issued by the
Partnership; and 3) an aggregate of 7,486,131 common units of the Partnership.
Joseph V. Topper , Jr. is the founder and, since November 19, 2019 , chairman of
the Board.
Through its control of DMP, the Topper Group controls the sole member of our
General Partner and has the ability to appoint all of the members of the Board
and to control and manage the operations and activities of the Partnership. As
of February 21, 2020 , the Topper Group also has beneficial ownership of a 47.7%
limited partner interest in the Partnership (see "Recent Developments" below for
disclosure regarding the elimination of the IDRs).
Recent DevelopmentsEquity Restructuring
OnJanuary 15, 2020 , the Partnership entered into an Equity Restructuring Agreement (the "Equity Restructuring Agreement") with theGeneral Partner and Dunne Manning CAP Holdings II LLC ("DM CAP Holdings "), a wholly owned subsidiary of DMP. Pursuant to the Equity Restructuring Agreement, all of the outstanding IDRs of the Partnership, all of which were held byDM CAP Holdings , were cancelled and converted into 2,528,673 newly-issued common units representing limited partner interests in the Partnership based on a value of$45 million and calculated using the 20 business day volume weighted average trading price of our common units ended five business days prior to the execution of the Equity Restructuring Agreement (the "20-day VWAP").
This transaction closed on
Simultaneously with the Equity Restructuring Closing, the General Partner executed and delivered the Second Amended and Restated Agreement of Limited Partnership of the Partnership (the "Second Amended and Restated Partnership Agreement") to give effect to the Equity Restructuring Agreement.
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The Second Amended and Restated Partnership Agreement amended and restated the
First Amended and Restated Agreement of Limited Partnership of the Partnership,
dated as of October 30, 2012 , as amended, in its entirety to, among other items,
(i) reflect the cancellation of the IDRs and (ii) eliminate certain legacy
provisions that no longer apply, including provisions related to the IDRs and
subordinated units of the Partnership that were formerly outstanding.
The terms of the Equity Restructuring Agreement were approved by the independent conflicts committee of the Board.
CST Fuel Supply Exchange Agreement
OnNovember 19, 2019 , the Partnership entered into an Exchange Agreement (the "CST Fuel Supply Exchange Agreement") withCircle K . Pursuant to the CST Fuel Supply Exchange Agreement,Circle K has agreed to transfer to the Partnership 45 owned and leased convenience store properties (the "Properties") and related assets (including fuel supply agreements) relating to such Properties, andU.S. wholesale fuel supply contracts covering 387 additional sites (the "DODO Sites"), and, in exchange, the Partnership has agreed to transfer toCircle K 100% of the limited partnership units inCST Fuel Supply LP that are owned by the Partnership, which represent 17.5% of the outstanding units ofCST Fuel Supply LP (collectively, the "CST Fuel Supply Exchange"). The assets being exchanged byCircle K include (a) fee simple title to all land and other real property and related improvements owned byCircle K at the Properties, (b)Circle K's leasehold interest in all land and other real property and related improvements leased byCircle K at the Properties, (c) all buildings and other improvements and permanently attached machinery, equipment and other fixtures located on the Properties, (d) all tangible personal property owned byCircle K and located on the Properties, including all underground storage tanks located on the Properties, and owned byCircle K , (e) all ofCircle K's rights under the dealer agreements related to the Properties and the DODO Sites, (f)Circle K's rights under the leases to the leased Properties and all tenant leases and certain other contracts related to the Properties, (g) all fuel inventory owned byCircle K and stored in the underground storage tanks at locations operated by dealers that are independent commission marketers, (h) all assignable permits related to the Properties and related assets owned byCircle K , (i) all real estate records and related registrations and reports and other books and records ofCircle K to the extent relating to the Properties, and (j) all goodwill and other intangible assets associated with the foregoing assets (collectively, the "Assets"). The Partnership will also assume certain liabilities associated with the Assets. The closing of the CST Fuel Supply Exchange is expected to occur in the first quarter of 2020 and is subject to the satisfaction or waiver of customary closing conditions. The CST Fuel Supply Exchange Agreement contains customary representations, warranties, agreements and obligations of the parties, including covenants regarding the conduct byCircle K with respect to the Assets prior to closing. The Partnership andCircle K have agreed to indemnify each other for, among other things, breaches of their respective representations and warranties contained in the CST Fuel Supply Exchange Agreement for a period of 18 months after the date of closing (except for certain fundamental representations and warranties, which survive until the expiration of the applicable statute of limitations) and for breaches of their respective covenants and for certain liabilities assumed or retained by the Partnership orCircle K , respectively. The respective indemnification obligations of each of the Partnership andCircle K to the other are subject to the limitations set forth in the CST Fuel Supply Exchange Agreement. The CST Fuel Supply Exchange Agreement may be terminated, among other ways, by mutual written consent of the Partnership andCircle K . In connection with the execution of the CST Fuel Supply Exchange Agreement, the Partnership andCircle K also entered into an Environmental Responsibility Agreement, dated as ofNovember 19, 2019 (the "ERA"), which agreement sets forth the parties' respective liabilities and obligations with respect to environmental matters relating to the Properties. As further described in the ERA,Circle K will retain liability for known environmental contamination or non-compliance at the Properties, and the Partnership will assume liability for unknown environmental contamination and non-compliance at the Properties.
The terms of the CST Fuel Supply Exchange Agreement were approved by the independent conflicts committee of the Board.
We are in the process of amending our credit facility to allow for the divestiture of our investment in CST Fuel Supply.
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--------------------------------------------------------------------------------Retail and Wholesale Acquisition
OnJanuary 15, 2020 , in connection with the Partnership's strategic reorientation to add retail capability, the Partnership entered into an asset purchase agreement ("Asset Purchase Agreement") with the sellers ("Sellers") signatories thereto, including DMS and certain of DMS's affiliates, with respect to the acquisition (the "Retail Acquisition") by the Partnership from the Sellers of the retail operations at 172 sites, wholesale fuel distribution to 114 sites, including 55 third-party wholesale dealer contracts, and leasehold interests in at least 53 sites, for an aggregate consideration of$21 million in cash and 842,891 in newly-issued common units valued at$15 million and calculated based on the 20-day VWAP. The Partnership will also acquire for cash the inventory related to the sites. The Partnership expects to finance the aggregate cash consideration with borrowings under its credit facility. In addition, the parties agreed to perform Phase I environmental site assessments with respect to certain sites. The Sellers agreed to retain liability for known environmental contamination or non-compliance at certain sites, and the Partnership agreed to assume liability for unknown environmental contamination and non-compliance at certain sites. The closing of the transactions contemplated by the Asset Purchase Agreement is expected to occur prior to the end of the second quarter of 2020 (such date, the "Retail Acquisition Closing") and is subject to closing conditions and purchase price adjustments customary in comparable transactions. In addition, the Asset Purchase Agreement contains customary representations and warranties of the parties as well as indemnification obligations by Sellers and the Partnership, respectively, to each other. The indemnification obligations must be asserted within 18 months of the Retail Acquisition Closing and are limited to an aggregate of$7.2 million for each party. In connection with the Retail Acquisition Closing, the Partnership will assume certain contracts with third parties and affiliates necessary for the continued operation of the sites, including agreements with dealers and franchise agreements. Further, the Partnership will enter into ten-year master leases with certain affiliates of theTopper Group , with an aggregate annual rent of$6.5 million payable by the Partnership. Additionally, DMS will no longer be a customer or lessee of the Partnership as we will terminate the contracts with DMS upon closing on this transaction.
The terms of the Asset Purchase Agreement were approved by the independent conflicts committee of the Board.
With this transaction, we will not only be adding wholesale fuel contracts to our portfolio but will be adding retail assets and a retail capability that will enable the Partnership to pursue a broader range of acquisition opportunities and provides greater flexibility for optimizing the class of trade for each asset in our portfolio.
Topper Group Omnibus Agreement
OnJanuary 15, 2020 , the Partnership entered into an Omnibus Agreement, effective as ofJanuary 1, 2020 (the "Topper Group Omnibus Agreement"), among the Partnership, the General Partner and DMI. The terms of theTopper Group Omnibus Agreement were approved by the conflicts committee of the Board, which is composed of the independent directors of the Board. Pursuant to the Topper Group Omnibus Agreement, DMI has agreed, among other things, to provide, or cause to be provided, to the General Partner for the benefit of the Partnership, at cost without markup, certain management, administrative and operating services, which services were previously provided byCircle K under the Transitional Omnibus Agreement, dated as ofNovember 19, 2019 , among the Partnership, the General Partner andCircle K . The Topper Group Omnibus Agreement will continue in effect until terminated in accordance with its terms.The Topper Group has the right to terminate the Topper Group Omnibus Agreement at any time upon 180 days' prior written notice, and the General Partner has the right to terminate the Topper Group Omnibus Agreement at any time upon 60 days' prior written notice. 44 --------------------------------------------------------------------------------
Asset Exchange Transaction with
OnDecember 17, 2018 , as approved by the independent conflicts committee of the Board, we entered into an Asset Exchange Agreement (the "Asset Exchange Agreement") withCircle K . Pursuant to the Asset Exchange Agreement, the parties have agreed to exchange (i) certain assets ofCrossAmerica related to 56 convenience and fuel retail stores currently leased and operated byCircle K pursuant to a master lease thatCrossAmerica previously purchased jointly with or from CST (the "master lease properties"), and 17 convenience and fuel retail stores currently owned and operated byCrossAmerica located in theU.S. Upper Midwest (collectively, including the master lease properties, the "CAPL Properties "), having an aggregate fair value of approximately$184.5 million , for (ii) certain assets ofCircle K related to 192 (162 fee and 30 leased) company-operated convenience and fuel retail stores (the "CK Properties "), having an aggregate fair value of approximately$184.5 million . The existing fuel supply arrangements for the 56 master lease properties will remain unchanged. The estimated positive net impact to our annual EBITDA following the close of all tranches is$7 to$8 million . The assets being exchanged byCrossAmerica include (i) its fee simple title to all land and other real property and related improvements owned byCrossAmerica at theCAPL Properties , (ii) all buildings and other improvements located on theCAPL Properties , (iii) all tangible personal property owned byCrossAmerica and primarily used in connection with the operation of theCAPL Properties , including all underground storage tanks located on such properties and owned byCrossAmerica , (iv)CrossAmerica's rights under certain contracts related to theCAPL Properties , (v) all in-store cash, inventory owned byCrossAmerica and assignable permits owned or held byCrossAmerica at the 17 convenience store sites owned and operated byCrossAmerica , (vi) all real estate records and related registrations and reports relating exclusively to theCAPL Properties , and (vii) all goodwill and other intangible assets associated with the foregoing assets (collectively, the "CAPL Assets"). The assets being exchanged byCircle K include (a) its fee simple title to all land and other real property and related improvements owned byCircle K at theCK Properties , (b) all buildings and other improvements located on theCK Properties , (c) all tangible personal property owned byCircle K and primarily used in connection with the operation of theCK Properties , including all underground storage tanks located on such properties and owned byCircle K , (d)Circle K's rights under the dealer agreements and agent agreements to be entered into and assigned toCrossAmerica relating to each CK Property that will be dealerized as contemplated by the Asset Exchange Agreement, (e)Circle K's rights under certain contracts related to theCK Properties , (f) all real estate records and related registrations and reports relating exclusively to theCK Properties , and (g) all goodwill and other intangible assets associated with the foregoing assets (collectively, the "CK Assets").CrossAmerica will also assume certain liabilities associated with the CK Assets, andCircle K will assume certain liabilities associated with the CAPL Assets.The CK Properties will be assigned toCrossAmerica in multiple tranches afterCircle K has executed a dealer agreement or agent agreement, as applicable, with respect to each CK Property to be included in a tranche and the applicable dealer or agent has assumed possession and operating control of such property. As a result, it is expected that the exchange of assets pursuant to the Asset Exchange Agreement will occur in a series of separate tranche closings over a period of up to 24 months asCircle K enters into such dealer agreements or agent agreements. At each separate closing,CK Properties and related CK Assets will be exchanged forCAPL Properties and related CAPL Assets of approximately equivalent value. After the final tranche closing, any net valuation difference will be paid by the party owing such amount to the other. Each separate closing is subject to the satisfaction or waiver of customary closing conditions. The Asset Exchange Agreement contains customary representations, warranties, agreements and obligations of the parties, including covenants regarding the conduct byCrossAmerica andCircle K with respect to theCAPL Properties and theCK Properties , respectively, prior to closing.CrossAmerica andCircle K have generally agreed to indemnify each other for breaches of the representations, warranties and covenants contained in the Asset Exchange Agreement for a period of 18 months after the date of the final closing (or for certain specified losses, until the expiration of the applicable statute of limitations). Except for such specified losses, the respective indemnification obligations of each ofCrossAmerica andCircle K to the other will not apply to the first$1.845 million of losses and the aggregate indemnification obligations will not exceed$39.9 million . The Asset Exchange Agreement may be terminated by mutual written consent ofCrossAmerica andCircle K . In connection with the execution of the Asset Exchange Agreement,CrossAmerica andCircle K also entered into an Environmental Responsibility Agreement (the "ERA"), which agreement sets forth the parties' respective liabilities and obligations with respect to environmental matters relating to theCAPL Properties and theCK Properties . Generally, (i) each party will retain liability for known contamination at the sites it is transferring to the other party and (ii) each party will assume liability for unknown contamination at the sites it is receiving from the other party, except that the ERA does not affect any liability thatCircle K currently has under the existing master lease of the master lease properties. 45
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First Asset Exchange
OnMay 21, 2019 , the closing of the first separate tranche of asset exchanges under the Asset Exchange Agreement occurred (the "First Asset Exchange"). In this First Asset Exchange,Circle K transferred to the Partnership 60 (52 fee and 8 leased)U.S. company-operated convenience and fuel retail stores having an aggregate fair value of approximately$58.1 million , and the Partnership transferred toCircle K all 17 of the Upper Midwest properties and the real property for eight of the master lease properties having an aggregate fair value of approximately$58.3 million .
Second Asset Exchange
OnSeptember 5, 2019 , the closing of the second separate tranche of asset exchanges under the Asset Exchange Agreement occurred (the "Second Asset Exchange"). In this Second Asset Exchange,Circle K transferred to the Partnership 56 (51 fee and 5 leased)U.S. company-operated convenience and fuel retail stores having an aggregate fair value of approximately$50.2 million , and the Partnership transferred toCircle K the real property for 19 of the master lease properties having an aggregate fair value of approximately$51.4 million . In connection with the closing of the First Asset Exchange and the Second Asset Exchange (collectively, the "Closed Asset Exchange Transactions"), the stores transferred byCircle K were dealerized as contemplated by the Asset Exchange Agreement andCircle K's rights under the dealer agreements and agent agreements that were entered into in connection therewith were assigned to the Partnership. Additionally, at the closing of the First Asset Exchange, LGW, a wholly-owned subsidiary of the Partnership, andCircle K entered into a Sub-Jobber Agreement, dated as ofMay 21, 2019 (the "Sub-Jobber Agreement"), pursuant to whichCircle K will supply fuel to LGW for resale to the dealers at the stores thatCircle K transferred to the Partnership in the Closed Asset Exchange Transactions. While there is no minimum or maximum quantity of products that LGW is required to purchase fromCircle K , for each store location covered by the Sub-Jobber Agreement, LGW must purchase fromCircle K all of the requirements for motor fuel at the stores covered by the Sub-Jobber Agreement, except in certain limited circumstances described in the Sub-Jobber Agreement. The term of the Sub-Jobber Agreement will expire onMay 21, 2024 , unless earlier terminated by either party in accordance with the terms of the Sub-Jobber Agreement.Circle K also has the right to grant temporary extensions of the Sub-Jobber Agreement of up to 180 days per extension.
After each subsequent separate "tranche" closing under the Asset Exchange
Agreement, the Sub-Jobber Agreement will be amended by agreement of LGW and
OnFebruary 25, 2020 , the closing of the third separate tranche of asset exchanges under the Asset Exchange Agreement occurred. In this tranche,Circle K transferred to the Partnership ten (all fee)U.S. company-operated convenience and fuel retail stores having an aggregate fair value of approximately$11.0 million , and the Partnership transferred toCircle K the real property for five of the master lease properties having an aggregate fair value of approximately$10.3 million .
The remaining tranches are anticipated to close in the first half of 2020.
See Note 3 to the financial statements for additional information.
Dealerization of Our Midwest Company Operated Sites
InJune 2019 , we entered into master fuel supply and master lease agreements with Applegreen. During the third quarter of 2019, we dealerized 46 company operated Upper Midwest sites. The master fuel supply and master lease agreements have an initial 10-year term with four 5-year renewal options. Base rent generally increases by 1.5% annually, including during the renewal options. Applegreen has the right to sever up to 10 specifically identified sites, for which notice must be provided prior to the end of the first year, and the effective date will be after the second year. Applegreen has the right to sever up to eight of the remaining 36 sites with proper notice. We have committed to making certain EMV upgrades at these 46 sites byOctober 1, 2020 . As a result of this transition, we have not had any company operated sites sinceSeptember 30, 2019 . See "Retail and Wholesale Acquisition" above for information regarding the acquisition of retail and wholesale assets from theTopper Group and certain other parties. 46
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New Credit Facility
On
• Increased commitments from
increase commitments by
• Provides for the current and future asset exchange transactions with Circle
K, subject to certain conditions being satisfied;
• Provided for a general reduction in the applicable margin;
• Increased the maximum permitted leverage ratio during most periods;
• Reduced cost of compliance, including removal of the requirement to
mortgage real property; and
• Extended the maturity from April 2020 to April 2024 .
On
See Note 11 to the financial statements for additional information.
Significant Factors Affecting our ProfitabilityThe Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit
Wholesale segment
The prices paid to our motor fuel suppliers for wholesale motor fuel (which affects our cost of sales) are highly correlated to the price of crude oil. The crude oil commodity markets are highly volatile, and the market prices of crude oil, and, correspondingly, the market prices of wholesale motor fuel, experience significant and rapid fluctuations. We receive a fixed mark-up per gallon on approximately 82% of gallons sold to our customers. The remaining gallons are primarily DTW priced contracts with our customers. These contracts provide for variable, market-based pricing that results in motor fuel gross profit effects similar to retail motor fuel gross profits (as crude oil prices decline, motor fuel gross profit generally increases, as discussed in our Retail segment below). The increase in DTW gross profit results from the cost of wholesale motor fuel declining at a faster rate as compared to the rate that retail motor fuel prices decline. Conversely, our DTW motor fuel gross profit declines when the cost of wholesale motor fuel increases at a faster rate as compared to the rate that retail motor fuel prices increase. From the time of theNovember 2017 Jet-Pep acquisition throughOctober 31, 2018 , we purchased motor fuel for our Jet-Pep Assets fromCircle K atCircle K's cost plus terminal and administration fees of$0.015 per gallon.Circle K's cost to supply these sites included price fluctuations associated with index-based motor fuel pricing for pipeline delivery and the generation and sale of RINs. EffectiveNovember 1, 2018 , we amended our contract withCircle K such that our cost is based on a rack-based price, which reduces our exposure to price fluctuations inherent in the previous pricing methodology. We completed the upgrades of dispensers and the rebranding of substantially all these sites to a major fuel supplier in the third quarter of 2019 and anticipate continuing to see a positive impact on volume and fuel margin. Regarding our supplier relationships, a majority of our total gallons purchased are subject to Terms Discounts. The dollar value of these discounts increases and decreases corresponding to motor fuel prices. Therefore, in periods of lower wholesale motor fuel prices, our gross profit is negatively affected, and, in periods of higher wholesale motor fuel prices, our gross profit is positively affected (as it relates to these discounts).
Retail segment
We attempt to pass along wholesale motor fuel price changes to our retail
customers through "at the pump" retail price changes; however, market conditions
do not always allow us to do so immediately. The timing of any related increase
or decrease in "at the pump" retail prices is affected by competitive conditions
in each geographic market in which we operate. As such, the prices we charge our
customers for motor fuel and the gross profit we receive on our motor fuel sales
can increase or decrease significantly over short periods of time.
Changes in our average motor fuel selling price per gallon and gross margin are
directly related to the changes in crude oil and wholesale motor fuel prices.
Variations in our reported revenues and cost of sales are, therefore, primarily
related to the price of crude oil and wholesale motor fuel prices and generally
not as a result of changes in motor fuel sales volumes, unless otherwise
indicated and discussed below.
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We typically experience lower retail motor fuel gross profits in periods when
the wholesale cost of motor fuel increases, and higher retail motor fuel gross
profits in periods when the wholesale cost of motor fuel declines.
See "Recent Developments-Dealerization of Our Remaining Company Operated Sites"
in Item 7 and Note 21 to the financial statements for information on the
dealerization of our remaining company operated sites in the third quarter of
2019. As a result of this transition, we have not had any company operated sites
since September 30, 2019 .
Seasonality Effects on Volumes
Our business is subject to seasonality due to our wholesale and retail sites being located in certain geographic areas that are affected by seasonal weather and temperature trends and associated changes in retail customer activity during different seasons. Historically, sales volumes have been highest in the second and third quarters (during the summer months) and lowest during the winter months in the first and fourth quarters.
Impact of Inflation
Inflation affects our financial performance by increasing certain of our operating expenses and cost of goods sold. Operating expenses include labor costs, leases, and general and administrative expenses. While our Wholesale segment benefits from higher Terms Discounts as a result of higher fuel costs, inflation could negatively impact our operating expenses. Although we have historically been able to pass on increased costs through price increases, there can be no assurance that we will be able to do so in the future.
Acquisition and Financing Activity
Our results of operations and financial condition are also impacted by our acquisition and financing activities as summarized below.
2017
• On
party as a result of the
for
• On
of our Board, we sold 29 properties to DMR for
were generally sites at which we did not supply fuel or represented vacant
land.
• On
for approximately $75.6 million , including working capital.
2018
• On
"Liquidity and Capital Resources- Debt."
• In March and
sites from
• In July and
the Jet-Pep Assets acquisition and nine Upper Midwest Sites to
unaffiliated third parties as a result of
$4.9 million . 2019 • OnApril 1, 2019 , we entered into a new credit facility as further
discussed in "Liquidity and Capital Resources-Debt" and Note 11 to the
financial statements. On November 19, 2019 , we further amended the new
credit facility to allow for the GP Purchase.
• On
Exchange Transactions as further discussed in "Recent Developments-Asset
Exchange Transactions with
statements.
Adoption of ASC 842 on Lease Accounting
As further discussed in Notes 2 and 21 to the financial statements, we adopted ASC 842 effectiveJanuary 1, 2019 , and as a result, our results for 2019 are not directly comparable to the results for 2018. Most significantly, payments on our previous failed sale-leaseback obligations were characterized as principal and interest expense in periods prior to 2019. Starting in 2019, these payments are characterized as rent expense. These payments for the Wholesale and Retail segments amounted to approximately$6.7 million and$0.5 million for 2018, respectively. Of the total payments,$5.5 million was classified as interest expense for the 2018. See "Results of Operations-Non-GAAP Financial Measures" for additional information. 48
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Execution of Master Fuel and Lease Agreements with a Third-Party Multi-Site Operator
InJune 2018 , we executed master fuel supply and master lease agreements with a third-party multi-site operator of retail motor fuel stations, to which we transitioned 43 sites inFlorida from DMS in the third quarter of 2018. The master fuel supply and master lease agreements have an initial 10-year term with four 5-year renewal options. During the second quarter of 2018, in connection with this transition, we accrued a$3.8 million contract termination payment, which was paid to DMS during the third quarter of 2018. This payment was approved by the independent conflicts committee of our Board. Additionally, we recorded a$2.4 million charge primarily to write off deferred rent income related to our recapture of these sites from the master lease agreement with DMS. These charges are included in loss on dispositions and lease terminations, net in the statement of income.
FTC-Required Divestitures
InNovember 2017 , we andCircle K jointly acquired the Jet-Pep Assets and inDecember 2017 ,Circle K acquired Holiday. As a result of agreements entered into in connection with these acquisitions, theFTC issued orders requiring us to divest specific sites toFTC -approved third-party buyers. Accordingly, we divested two sites inJuly 2018 that were acquired in the Jet-Pep Assets acquisition and nine Upper Midwest Sites inSeptember 2018 in connection withCircle K's acquisition of Holiday. Since this was a forced divestiture of assets for us, as approved by the independent conflicts committee of the Board,Circle K agreed to compensate us with an amount representing the difference between the value of the nine Upper Midwest Sites and the proceeds of the sale toFTC approved third-party buyers, amounting to$6.3 million .Circle K's payment to us was received during the fourth quarter of 2018. This payment was accounted for as a transaction between entities under common control and thus recorded as a contribution to partners' capital, net of income taxes. These sites were divested inSeptember 2018 , after theJune 15, 2018 deadline specified in theFTC orders. As a result,Couche-Tard and/or the Partnership may be subject to civil penalties, up to a maximum allowed by law of$41,000 per day per violation of theFTC divestiture orders.Circle K has agreed to indemnify us for any such penalties and associated legal costs and as such, we have not accrued any liability.
Acquisition of Jet-Pep Assets
OnNovember 28, 2017 , we closed on the acquisition of the real property and the fuel supply business of 101 commission operated retail sites, including 92 fee simple sites, the leasehold interest in five real property sites and the fuel supply business to four independent commission sites, all located inAlabama , fromJet-Pep, Inc. and affiliated entities, for an aggregate cash consideration of$75.6 million , including working capital. On the same day,Circle K closed on the acquisition of certain related retail and terminal assets fromJet-Pep, Inc. and affiliated entities.
Separation Benefits and Retention Bonuses
During 2017, the Partnership recognized a$5.4 million charge for certain severance and benefit costs associated with certain officers and other employees of CST Services who provided services to the Partnership and who terminated employment upon the consummation of the CST Merger, which constituted a change in control, as defined in the EICP and CST's severance plans. In addition, certain participants in the EICP received retention bonuses that were paid in annual installments that began inJuly 2017 and continued throughJuly 2019 . The Partnership recorded a$1.0 million charge during 2017 in connection with the payments made byCircle K inJuly 2017 . In addition, the Partnership recognized charges of$0.1 million ,$0.8 million and$0.7 million in 2019, 2018 and 2017, respectively, for the payments made inJuly 2018 and July of 2019.
We also incurred a
During 2019, we dealerized the remaining 46 company operated sites in the third quarter of 2019. As a result of communicating a plan to exit the company operated business, we recorded separation benefit costs totaling$0.4 million in the first quarter of 2019, which is anticipated to be paid in the first quarter of 2020.
Separation benefit and retention bonus costs are included in general and
administrative expenses and are included in other long-term liabilities as we
will reimburse Circle
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Results of Operations
We have omitted discussion of the earliest of the three years covered by our
consolidated financial statements presented in this Annual Report because that
disclosure was already included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2018 , filed with the SEC on February 26, 2019 . You are
encouraged to reference Part II, Item 7, within that report, for a discussion of
our financial condition and results of operations for the year ended December
31, 2018 as compared to the year ended December 31, 2017 .
Consolidated Income Statement Analysis
Below is an analysis of our consolidated statements of income and provides the
primary reasons for significant increases and decreases in the various income
statement line items from period to period. Our consolidated statements of
income are as follows (in thousands):
Year Ended December 31,
2019 2018 2017
Operating revenues $ 2,149,429 $ 2,445,917 $ 2,094,827
Cost of sales 1,994,792 2,273,122 1,934,061
Gross profit 154,637 172,795 160,766
Income from CST Fuel Supply equity interests 14,768 14,948
14,906
Operating expenses: Operating expenses 52,554 61,919
61,297
General and administrative expenses 16,849 17,966
27,887
Depreciation, amortization and accretion expense 55,032 66,549
57,470
Total operating expenses 124,435 146,434
146,654
(Loss) gain on dispositions and lease terminations, net (1,648 ) (6,297 ) 3,401 Operating income 43,322 35,012 32,419 Other income, net 524 373 439 Interest expense (27,000 ) (32,872 ) (27,919 ) Income before income taxes 16,846 2,513 4,939 Income tax benefit (1,230 ) (2,733 ) (18,237 ) Net income 18,076 5,246 23,176 Less: net (loss) income attributable to noncontrolling interests - (5 ) 18 Net income attributable to limited partners 18,076 5,251
23,158
IDR distributions (533 ) (1,579 ) (4,337 ) Net income available to limited partners$ 17,543 $ 3,672 $ 18,821
Year Ended
Consolidated Results
Operating revenues decreased
Operating revenues
Significant items impacting these results prior to the elimination of intercompany revenues were:
• A
attributable to the decrease in crude oil prices. The average daily spot
price of WTI crude oil decreased 13% to $56.98 per barrel in 2019,
compared to $65.23 per barrel in 2018. The wholesale price of motor fuelis highly correlated to the price of crude oil. See "Significant Factors
Affecting our Profitability-The Significance of Crude Oil and Wholesale
Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit." In
addition, volume decreased 4% primarily due to the 2018 divestitures
mandated by the FTC orders and the termination of supply contracts (many
of which were low margin).
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• A
attributable to a 23% decrease in volume driven by the 2018 divestitures
of seven company operated Upper Midwest and two commission agent sites
mandated by FTC orders, the conversion of commission sites included in theRetail segment to lessee dealer sites included in the Wholesale segment,
the divestiture of 17 company operated Upper Midwest sites in
connection with the asset exchange with
46 company operated Upper Midwest sites in the third quarter of 2019. In
addition, our average retail motor fuel selling price per gallon decreased
by 5% driven by a 13% decrease in crude oil prices. See "Significant
Factors Affecting our Profitability-The Significance of Crude Oil and
Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross
Profit." Merchandise and services revenues also decreased
(49%) driven by the divestitures and dealerization of company operated
sites noted above.
Intersegment revenues
We present the results of operations of our segments on a consistent basis with
how our management views the business. Therefore, our segments are presented
before intersegment eliminations (which consist of motor fuel sold by our
Wholesale segment to our Retail segment). As a result, in order to reconcile to
our consolidated change in operating revenues, a discussion of the change in
intersegment revenues is included in our consolidated MD&A discussion.
Our intersegment revenues decreased $120 million (28%), primarily attributable
to the 2018 divestitures mandated by FTC orders, the conversion of commission
sites included in our Retail segment to lessee dealer sites included in the
Wholesale segment, the divestiture of 17 company operated Upper Midwest sites in
May 2019 in connection with the asset exchange with Circle K , the dealerization
of 46 company operated Upper Midwest sites in the third quarter of 2019 and the
changes in wholesale prices discussed above.
Cost of sales
Cost of sales decreased
Operating expenses
See "Segment Results" for additional operating expenses analyses.
General and administrative expenses
General and administrative expenses decreased
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense decreased$11.5 million (17%) primarily due to an$8.9 million impairment charge recorded in 2018 related to the two Jet-Pep sites and the nine Upper Midwest sites required to be divested perFTC order as well as a$1.6 million reduction related to removing the property and equipment associated with our previous sale-leaseback transactions from our balance sheet as part of our transition adjustment in connection with the adoption of ASC 842 (see Note 2 to the financial statements for additional details). We recorded$4.5 million of impairment charges related to assets held for sale and certain vacant land sites during 2019. The remaining reduction is primarily driven by assets becoming fully depreciated or amortized. 51 --------------------------------------------------------------------------------
Loss on dispositions and lease terminations, net
During 2019, we recorded a$0.5 million loss on the sale of inventory to Applegreen in connection with the dealerization of the company operated Upper Midwest sites. In addition, we recorded a$0.6 million loss to write off deferred rent income related to DMS giving notice to sever 12 sites in early 2020 from the master lease with us. As a result of replacing dispensers inAlabama as a part of the rebranding effort of those sites, we recorded a$1.0 million loss on disposal. Partially offsetting these losses was a$0.5 million net gain on sales of assets. During 2018, in connection with the transition of 43 sites inFlorida from DMS to a third-party multi-site operator of retail motor fuel stations, we recorded a$3.8 million charge for a contract termination payment paid to DMS. Additionally, we recorded a$2.4 million charge primarily to write off deferred rent income related to our recapture of these sites from the master lease agreement with DMS.
Interest expense
Interest expense decreased$5.9 million (18%) due to a$5.5 million reduction relating to the adoption of ASC 842 and the resulting recharacterization of lease payments on our sale-leaseback transactions from principal and interest expense for periods prior to 2019 to rent expense starting in 2019. See Note 2 to the financial statements for additional information.
Income tax benefit
We recorded an income tax benefit of
IDR distributions
IDR distributions decreased
Segment Results
We present the results of operations of our segments consistent with how our
management views the business. Therefore, our segments are presented before
intersegment eliminations (which consist of motor fuel sold by our Wholesale
segment to our Retail segment). These comparisons are not necessarily indicative
of future results.
52
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Wholesale
The following table highlights the results of operations and certain operating
metrics of our Wholesale segment. The narrative following these tables provides
an analysis of the results of operations of that segment (thousands of dollars,
except for the number of distribution sites and per gallon amounts):
Year Ended December 31,
2019 2018 2017
Gross profit:
Motor fuel-third party $ 45,117 $ 37,323 $ 34,474
Motor fuel-intersegment and related party 26,801 32,696 24,370
Motor fuel gross profit 71,918 70,019 58,844
Rent and other(a) 59,231 62,989 64,197
Total gross profit 131,149 133,008 123,041
Income from CST Fuel Supply equity
interests(b) 14,768 14,948 14,906
Operating expenses (32,618 ) (30,108 ) (29,323 )
Adjusted EBITDA(c) $ 113,299 $ 117,848 $ 108,624
Motor fuel distribution sites (end of
period):(d)
Motor fuel-third party
Independent dealers(e) 369 362 384
Lessee dealers(f) 648 500 438
Total motor fuel distribution-third party
sites 1,017 862 822
Motor fuel-intersegment and related party
DMS (related party)(g) 68 86 146
Circle K(h) 28 43 43
Commission agents (Retail segment) 169 170 181
Company operated retail sites (Retail
segment) (i) - 63 70
Total motor fuel distribution-intersegment
and related party sites 265 362 440 Motor fuel distribution sites (average during the period): Motor fuel-third party distribution 938 834 823 Motor fuel-intersegment and related party distribution 318 408 360 Total motor fuel distribution sites 1,256 1,242
1,183
Volume of gallons distributed (in thousands) Third party 706,759 653,535
655,754
Intersegment and related party 297,235 393,725
376,212
Total volume of gallons distributed 1,003,994 1,047,260 1,031,966 Wholesale margin per gallon$ 0.072 $ 0.067 $ 0.057
(a) See Notes 2 and 21 to the financial statements for additional information
regarding the impact of adopting ASC 842 effective
impacted rent and other gross profit for 2019, resulting in the results 2019
not being comparable to our results for 2018.
(b) Represents income from our equity interest in CST Fuel Supply.
(c) Please see the reconciliation of our segment's Adjusted EBITDA to
consolidated net income (loss) under the heading "Results of
Operations-Non-GAAP Financial Measures."
(d) In addition, as of
13 sub-wholesalers who distributed to additional sites.
(e) The increase in the independent dealer site count from
Transactions with
converted to independent dealer sites, partially offset by the termination or
non-renewal of fuel supply contracts, a significant number of which were low
margin.
(f) The increase in the lessee dealer site count from
DMS and commission agents to lessee dealers, the Closed Asset Exchange
Transactions with Circle K and the dealerization of 46 company operated
sites.
(g) The decrease in the DMS site count from
2019 was primarily attributable to converting DMS sites to lessee dealer
sites.
53
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(h) The decrease in the
31, 2019 was primarily attributable to the Closed Asset Exchange Transactions
with
independent dealer sites.
(i) The decrease in the company operated site count from
asset exchange with
sites.
Year Ended
The results were driven by:
Motor fuel gross profit
The$1.9 million (3%) increase in motor fuel gross profit was primarily due to a$1.5 million improvement in our fuel margin from sites in ourAlabama market driven by the rebranding of these sites beginningNovember 1, 2018 and the concurrent change in terms under our subjobber agreement withCircle K . In addition, the Closed Asset Exchange Transactions generated incremental fuel margin, partially offset by a$1.8 million reduction in Terms Discounts in 2019 as compared to 2018 due to the decrease in motor fuel prices. The average daily spot price of WTI crude oil decreased 13% to$56.98 per barrel for 2019 compared to$65.23 per barrel for 2018. See "Significant Factors Affecting our Profitability-The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit." Volume declined 4% as a result of the 2018 divestitures mandated byFTC orders and the termination or non-renewal of fuel supply contracts (a significant number of which were low margin).
Rent and other gross profit
Rent and other gross profit decreased$3.8 million (6%) primarily as a result of the new lease accounting guidance. Lease payments on our previous sale-leaseback transactions totaling$6.7 million were characterized as principal and interest expense in 2018, whereas such payments were characterized as rent expense in 2019. Partially offsetting this decline was the incremental rent margin from the Closed Asset Exchange Transactions withCircle K , the impact of converting commission sites in the Retail segment to lessee dealer sites in the Wholesale segment and the dealerization of 46 company operated Upper Midwest sites in the third quarter of 2019. Operating expenses Operating expenses increased$2.5 million (8%) primarily as a result of higher insurance costs and a general increase in operating expenses driven by the increase in the number of controlled sites due particularly to the Closed Asset Exchange Transactions and the dealerization of 46 company operated Upper Midwest sites in the third quarter of 2019. 54 --------------------------------------------------------------------------------
Retail
The following table highlights the results of operations and certain operating
metrics of our Retail segment. The narrative following these tables provides an
analysis of the results of operations of that segment (thousands of dollars,
except for the number of retail sites, gallons sold per day and per gallon
amounts):
Year Ended December 31,
2019 2018 2017
Gross profit:
Motor fuel $ 5,147 $ 9,820 $ 7,276
Merchandise and services 11,676 24,106 25,434
Rent and other(a) 6,302 6,314 5,001
Total gross profit 23,125 40,240 37,711
Operating expenses (19,936 ) (31,811 ) (31,974 )
Adjusted EBITDA(b) $ 3,189 $ 8,429 $ 5,737 Retail sites (end of period):
Commission agents 169 170
181
Company operated retail sites(c) - 63 71 Total system sites at the end of the period 169 233
252
Total system operating statistics:
Average retail fuel sites during the period 206 245
168
Motor fuel sales (gallons per site per day) 2,127 2,327
2,620
Motor fuel gross profit per gallon, net of
credit card
fees and commissions$ 0.032 $ 0.047
Commission agents statistics:
Average retail fuel sites during the period 170 177 97
Motor fuel gross profit per gallon, net of
credit card
fees and commissions$ 0.015 $ 0.015
Company operated retail site statistics:
Average retail fuel sites during the period 36 68 71
Motor fuel gross profit per gallon, net of
credit card fees$ 0.101 $ 0.115
Merchandise and services gross profit
percentage, net of credit card fees 23.6 % 24.7 % 24.4 %
(a) See Notes 2 and 21 to the financial statements for additional information
regarding the impact of adopting ASC 842 effective
impacted rent and other gross profit for 2019, resulting in the results 2019
not being comparable to our results for 2018.
(b) Please see the reconciliation of our segment's Adjusted EBITDA to
consolidated net income under the heading "Results of Operations-Non-GAAP
Financial Measures" below.
(c) The decrease in the company operated site count from
asset exchange with
sites.
55
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Year Ended
Gross profit decreased
These results were impacted by:
Gross profit
• Our motor fuel gross profit decreased
23% decrease in volume driven by the 2018 divestitures of seven company
operated Upper Midwest and two commission agent sites mandated by
orders, the conversion of commission sites in our Retail segment to lessee
dealer sites in our Wholesale segment, the divestiture of 17 company
operated Upper Midwest sites in May 2019 in connection with the first
tranche of the asset exchange with Circle K and the dealerization of 46
company operated Upper Midwest sites in the third quarter of 2019. As aresult, the lower retail fuel margins in our commission agent business
comprised a larger percentage of our overall retail fuel margins in 2019
as compared to 2018.
• Our merchandise and services gross profit decreased
a result of the
Upper Midwest sites mandated by
the asset exchange with
operated Upper Midwest sites in the third quarter of 2019.
• Rent and other gross profit had no significant change for the period.
Lease payments on our previous sale-leaseback transactions totaling $0.5
million were characterized as principal and interest expense in 2018,
whereas such payments were characterized as rent expense in 2019. Thedecrease in our rent and other gross profit as a result of converting
commission sites in the Retail segment to lessee dealer sites in the
Wholesale segment was more than offset by the incremental rent margin
generated by our Alabama sites as a result of dispenser upgrades and
rebranding of the sites.
Operating expenses
Operating expenses decreased$11.9 million (37%) due primarily to the 2018 divestitures of seven company operated sites in the Upper Midwest and two commission sites mandated byFTC orders, the divestiture of 17 company operated Upper Midwest sites inMay 2019 in connection with the first tranche of the asset exchange withCircle K , the conversion of commission sites in our Retail segment to lessee dealer sites in our Wholesale segment and the dealerization of 46 company operated Upper Midwest sites in the third quarter of 2019.
Non-GAAP Financial Measures
We use non-GAAP financial measures EBITDA, Adjusted EBITDA, Distributable Cash
Flow and Distribution Coverage Ratio. EBITDA represents net income available to
us before deducting interest expense, income taxes and depreciation,
amortization and accretion (which includes certain impairment charges). Adjusted
EBITDA represents EBITDA as further adjusted to exclude equity funded expenses
related to incentive compensation and the Circle K Omnibus Agreement, gains or
losses on dispositions and lease terminations, net, certain discrete acquisition
related costs, such as legal and other professional fees and severance expenses
associated with recently acquired companies, and certain other discrete non-cash
items arising from purchase accounting. Distributable Cash Flow represents
Adjusted EBITDA less cash interest expense, sustaining capital expenditures and
current income tax expense. Distribution Coverage Ratio is computed by dividing
Distributable Cash Flow by the weighted average diluted common units and then
dividing that result by the distributions paid per limited partner unit.
EBITDA, Adjusted EBITDA, Distributable Cash Flow and Distribution Coverage Ratio
are used as supplemental financial measures by management and by external users
of our financial statements, such as investors and lenders. EBITDA and Adjusted
EBITDA are used to assess our financial performance without regard to financing
methods, capital structure or income taxes and the ability to incur and service
debt and to fund capital expenditures. In addition, Adjusted EBITDA is used to
assess the operating performance of our business on a consistent basis by
excluding the impact of items which do not result directly from the wholesale
distribution of motor fuel, the leasing of real property, or the day to day
operations of our retail site activities. EBITDA, Adjusted EBITDA, Distributable
Cash Flow and Distribution Coverage Ratio are also used to assess the ability to
generate cash sufficient to make distributions to our unitholders.
56
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We believe the presentation of EBITDA, Adjusted EBITDA, Distributable Cash Flow
and Distribution Coverage Ratio provides useful information to investors in
assessing the financial condition and results of operations. EBITDA, Adjusted
EBITDA, Distributable Cash Flow and Distribution Coverage Ratio should not be
considered alternatives to net income or any other measure of financial
performance or liquidity presented in accordance with U.S. GAAP. EBITDA,
Adjusted EBITDA, Distributable Cash Flow and Distribution Coverage Ratio have
important limitations as analytical tools because they exclude some but not all
items that affect net income. Additionally, because EBITDA, Adjusted EBITDA,
Distributable Cash Flow and Distribution Coverage Ratio may be defined
differently by other companies in our industry, our definitions may not be
comparable to similarly titled measures of other companies, thereby diminishing
their utility.
The following table presents reconciliations of EBITDA, Adjusted EBITDA, and
Distributable Cash Flow to net income, the most directly comparable U.S. GAAP
financial measure, for each of the periods indicated (in thousands, except for
per unit amounts):
Year Ended December 31,
2019 2018 2017
Net income available to limited partners(a)
$ 18,821 Interest expense(a) 27,000 32,872 27,919 Income tax benefit (1,230 ) (2,733 ) (18,237 ) Depreciation, amortization and accretion 55,032 66,549
57,470
EBITDA (a) 98,345 100,360
85,973
Equity funded expenses related to incentive
compensation and the Circle K Omnibus
Agreement(b) 1,246 3,781
15,131
Loss (gain) on dispositions and lease
terminations, net(c) 1,648 6,297 (3,401 ) Acquisition-related costs(d) 2,464 2,914 11,374 Adjusted EBITDA(a) 103,703 113,352 109,077 Cash interest expense(a) (25,973 ) (31,338 ) (26,211 ) Sustaining capital expenditures(e) (2,406 ) (2,443
) (1,648 )
Current income tax benefit (expense)(f) 4,799 (1,528 ) 16 Distributable Cash Flow(a)$ 80,123 $ 78,043
Weighted average diluted common units 34,485 34,345
33,855
Distributions paid per limited partner
unit(g)$ 2.1000 $ 2.2025
Distribution Coverage Ratio(a)(h) 1.11x 1.03x 0.97x
(a) As further discussed in Note 2 to the financial statements, we adopted ASC
842 effective
directly comparable to the results for 2018. Most significantly, payments on
our previous failed sale-leaseback obligations were characterized as
principal and interest expense in periods prior to 2019. Starting in 2019,
these payments are characterized as rent expense. These payments for the
Wholesale and Retail segments amounted to approximately
million for 2018, respectively. Of the total payments,
classified as interest expense for 2018.
(b) As approved by the independent conflicts committee of the Board, the
Partnership and
the terms of the Circle K Omnibus Agreement in limited partner units of the
Partnership. All charges allocated to us by
Omnibus Agreement since the first quarter of 2018 have been paid by us in
cash.
(c) In June 2018, we executed master fuel supply and master lease agreements with
a third-party multi-site operator of retail motor fuel stations, to which we
transitioned 43 sites in
master fuel supply and master lease agreements have an initial 10-year term
with four 5-year renewal options. During the second quarter of 2018, in
connection with this transition, we accrued a
termination payment, which was paid to DMS during the third quarter of 2018.
Additionally, we recorded a
deferred rent income related to our recapture of these sites from the master
lease agreement with DMS.
(d) Relates to certain acquisition related costs, such as legal and other
professional fees, separation benefit costs and purchase accounting
adjustments associated with recently acquired businesses. Acquisition-related
costs for 2017 include separation benefit costs and retention bonuses paid to
certain EICP participants associated with acquisitions of our General
Partner.
(e) Under the Partnership Agreement, sustaining capital expenditures are capital
expenditures made to maintain our long-term operating income or operating
capacity. Examples of sustaining capital expenditures are those made to
maintain existing contract volumes, including payments to renew existing
distribution contracts, or to maintain our sites in conditions suitable to
lease, such as parking lot or roof replacement/renovation, or to replace
equipment required to operate the existing business.
(f) Consistent with prior divestitures, the current income tax benefit in 2019
excludes income tax incurred on the sale of sites in connection with the
Closed Asset Exchange Transactions (recorded as a charge against equity).
2019 includes the tax benefit of 100% bonus depreciation on the eligible
assets acquired in the Closed Asset Exchange Transactions as well as the
dispenser upgrades and rebranding costs at our Alabama sites.
57
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(g) On
per unit attributable to the fourth quarter of 2019. The distribution was
paid
(h) The distribution coverage ratio is computed by dividing Distributable Cash
Flow by the weighted average diluted common units and then dividing that
result by the distributions paid per limited partner unit.
The table below shows approximate adjustments to our Net income available to
limited partners, EBITDA, Adjusted EBITDA, Distributable Cash Flow and
Distribution Coverage for 2018 as if ASC 842 had been applied (in thousands,
except for per unit amounts).
Year
Ended
As Reported Adjustments As Adjusted
Net income available to limited partners $ 3,672 $ 7 $ 3,679
Interest expense 32,872 (5,518 ) 27,354
Income tax benefit (2,733 ) - (2,733 )
Depreciation, amortization and accretion expense 66,549 (1,716 ) 64,833
EBITDA 100,360 (7,227 ) 93,133
Equity funded expenses related to incentive
compensation and the Circle K Omnibus Agreement 3,781 - 3,781
Loss on dispositions and lease terminations, net 6,297 - 6,297
Acquisition-related costs 2,914 - 2,914
Adjusted EBITDA 113,352 (7,227 ) 106,125
Cash interest expense (31,338 ) 5,518 (25,820 )
Sustaining capital expenditures (2,443 ) - (2,443 )
Current income tax expense (1,528 ) - (1,528 )
Distributable Cash Flow $ 78,043 $ (1,709 ) $ 76,334
Weighted-average diluted common units 34,345 34,345 34,345
Distributions paid per limited partner unit $ 2.2025 $ 2.2025 $ 2.2025
Distribution Coverage Ratio 1.03x -0.02x 1.01x
The following table reconciles our segment Adjusted EBITDA to Consolidated Adjusted EBITDA presented in the table above (in thousands):
Year Ended December 31,
2019 2018 2017
Adjusted EBITDA - Wholesale segment $ 113,299 $ 117,848 Adjusted EBITDA - Retail segment 3,189 8,429
5,737
Adjusted EBITDA - Total segment$ 116,488 $ 126,277
Reconciling items:
Elimination of intersegment profit in ending
inventory balance 363 (453 ) 14 General and administrative expenses (16,849 ) (17,966
) (27,887 )
Other income, net 524 373
439
Equity funded expenses related to incentive
compensation and the Circle K Omnibus
Agreement 1,246 3,781
15,131
Acquisition-related costs 2,464 2,914
11,374
Net loss (income) attributable to
noncontrolling interests - 5(18 ) IDR distributions (533 ) (1,579 ) (4,337 ) Consolidated Adjusted EBITDA$ 103,703 $ 113,352 $ 109,077 58
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Liquidity and Capital Resources
Liquidity
Our principal liquidity requirements are to finance our operations, fund
acquisitions, service our debt and pay distributions to our unitholders and IDR
distributions. We expect our ongoing sources of liquidity to include cash
generated by our operations and borrowings under the revolving credit facility
and, if available to us on acceptable terms, issuances of equity and debt
securities. We regularly evaluate alternate sources of capital, including
sale-leaseback financing of real property with third parties, to support our
liquidity requirements.
Our ability to meet our debt service obligations and other capital requirements,
including capital expenditures, acquisitions, and partnership distributions,
will depend on our future operating performance, which, in turn, will be subject
to general economic, financial, business, competitive, legislative, regulatory
and other conditions, many of which are beyond our control. As a normal part of
our business, depending on market conditions, we will, from time to time,
consider opportunities to repay, redeem, repurchase or refinance our
indebtedness. Changes in our operating plans, lower than anticipated sales,
increased expenses, acquisitions or other events may cause us to seek additional
debt or equity financing in future periods.
We believe that we will have sufficient cash flow from operations, borrowing
capacity under the revolving credit facility and access to capital markets and
alternate sources of funding to meet our financial commitments, debt service
obligations, contingencies, anticipated capital expenditures and partnership
distributions. However, we are subject to business and operational risks that
could adversely affect our cash flow. A material decrease in our cash flows
would likely produce an adverse effect on our borrowing capacity as well as our
ability to issue additional equity and/or debt securities and/or maintain or
increase distributions to unitholders. See Note 11 to the financial statements
for a discussion of the New Credit Agreement we entered into on April 1, 2019 .
Cash Flows
The following table summarizes cash flow activity (in thousands):
Year Ended December 31,
2019 2018 2017
Net cash provided by operating activities
Net cash used in investing activities (15,509 ) (6,780 )
(60,113 )
Net cash used in financing activities (58,229 ) (83,678 )
(26,300 ) Operating Activities Net cash provided by operating activities decreased$17.4 million for 2019 compared to 2018, primarily attributable to the settling of$14.2 million of omnibus charges withCircle K . Also, we settled$3.3 million of omnibus charges in common units in 2018, whereas all omnibus charges were settled in cash in 2019.
As is typical in our industry, our current liabilities exceed our current assets as a result of the longer settlement of real estate and motor fuel taxes as compared to the shorter settlement of receivables for fuel, rent and merchandise.
Investing Activities
We incurred capital expenditures of$24.6 million for 2019. The increase from 2018 was largely driven by the dispenser upgrades and rebranding of sites in ourAlabama market, as well as capital expenditures to rebuild certain sites inFlorida impacted by Hurricane Michael. Additionally, in 2019, we received$3.1 million in proceeds related to the first and second tranches of the asset exchange withCircle K as a result of the inventory divested at the 17 company operated sites and the security deposits from dealers transferred byCircle K to us. We also received$4.9 million of proceeds on sales of assets. In 2018, we received$6.6 million of proceeds on sales, largely driven by theFTC -mandated divestiture of 11 properties in the third quarter of 2018. We also incurred$13.7 million in capital expenditures.
Financing Activities
In 2019, we paid
In 2018, we paid$77.2 million in distributions and made net repayments on our credit facility of$8.0 million . We also received$6.3 million fromCircle K as a compensating payment related to the nine Upper Midwest sites required to be divested byFTC order. See Notes 7 and 13 to the financial statements for additional information. 59 --------------------------------------------------------------------------------
Distributions
Distribution activity for 2019 was as follows:
Cash Distribution Cash Distribution
Quarter Ended Record Date Payment Date (per unit) (in thousands)December 31, 2018 February 11, 2019 February 19, 2019 $ 0.5250 $ 18,099 March 31, 2019 May 6, 2019 May 13, 2019 0.5250 18,099 June 30, 2019 July 30, 2019 August 6, 2019 0.5250 18,115 September 30, 2019 November 5, 2019 November 12, 2019 0.5250 18,115 December 31, 2019 February 3, 2020 February 10, 2020 0.5250 18,111 The amount of any distribution is subject to the discretion of the Board, which may modify or revoke our cash distribution policy at any time. Our Partnership Agreement does not require us to pay any distributions. As such, there can be no assurance we will continue to pay distributions in the future.
IDRs
We distributed$0.5 million and$1.6 million toCircle K with respect to the IDRs in 2019 and 2018, respectively. See "Recent Developments-Equity Restructuring" for a discussion of the elimination of the IDRs, which closed onFebruary 6, 2020 . Debt
As of
Revolving credit facility $ 519,000
Finance lease obligations 22,630
Total debt and finance lease obligations 541,630
Current portion 2,471
Noncurrent portion 539,159
Deferred financing costs, net 4,300
Noncurrent portion, net of deferred financing costs $ 534,859
Our revolving credit facility is secured by substantially all of our assets. Our
borrowings under the revolving credit facility had a weighted-average interest
rate of 3.73% as of December 31, 2019 (LIBOR plus an applicable margin, which
was 2.00% as of December 31, 2019 ). Letters of credit outstanding at
December 31, 2019 totaled $5.4 million . The amount of availability under the
revolving credit facility at February 21, 2020 , after taking into consideration
debt covenant restrictions, was $79.0 million . The New Credit Agreement also
contains certain financial covenants. For each quarter ending on or after
September 30, 2019 , we are required to maintain a consolidated leverage ratio
for the most recently completed four fiscal quarters of 4.75 to 1.00. Such
threshold is increased to 5.50 to 1.00 for the quarter during a specified
acquisition period (as defined in the New Credit Agreement). Upon the occurrence
of a qualified note offering (as defined in the New Credit Agreement), the
consolidated leverage ratio when not in a specified acquisition period is
increased to 5.25 to 1.00, while the specified acquisition period threshold
remains 5.50 to 1.00. Upon the occurrence of a qualified note offering, we are
also required to maintain a consolidated senior secured leverage ratio (as
defined in the New Credit Agreement) for the most recently completed four fiscal
quarter period of not greater than 3.75 to 1.00. Such threshold is increased to
4.00 to 1.00 for the quarter during a specified acquisition period. We are also
required to maintain a consolidated interest coverage ratio (as defined in the
New Credit Agreement) of at least 2.50 to 1.00. As of December 31, 2019 , we were
in compliance with these financial covenants.
See Note 11 for additional information on the New Credit Agreement we entered
into on
60
--------------------------------------------------------------------------------Capital Expenditures
We make investments to expand, upgrade and enhance existing assets. We
categorize our capital requirements as either sustaining capital expenditures,
growth capital expenditures or acquisition capital expenditures. Sustaining
capital expenditures are those capital expenditures required to maintain our
long-term operating income or operating capacity. Acquisition and growth capital
expenditures are those capital expenditures that we expect will increase our
operating income or operating capacity over the long term. We have the ability
to fund our capital expenditures by additional borrowings under our revolving
credit facility or, if available to us on acceptable terms, issuing additional
equity, debt securities or other options, such as the sale of assets. With the
significant decline in energy prices since 2014, access to the capital markets
has tightened for the energy and MLP industries as a whole, which has impacted
our cost of capital and our ability to raise equity and debt financing at
favorable terms. Our ability to access the capital markets may have an impact on
our ability to fund acquisitions. We may not be able to complete any offering of
securities or other options on terms acceptable to us, if at all.
The following table outlines our capital expenditures and acquisitions for 2019,
2018 and 2017 (in thousands):
Year Ended December 31,
2019 2018 2017
Sustaining capital $ 2,406 $ 2,443 $ 1,648
Growth 22,205 11,274 10,840
Acquisitions - 485 75,627
Total capital expenditures and acquisitions
$ 88,115 As noted previously, the increase in capital expenditures was largely driven by dispenser upgrades and rebranding of sites in theAlabama market as well as capital expenditures to rebuild certain sites inFlorida impacted by Hurricane Michael. Contractual Obligations Our contractual obligations as ofDecember 31, 2019 are summarized below (in thousands): Payments Due by Period 2020 2021 2022 2023 2024 Thereafter Total Long-term debt $ - $ - $ - $ -$ 519,000 $ -$ 519,000 Interest payments on debt 19,203 19,203 19,203 19,203 6,050 - 82,862 Finance lease obligations 3,166 3,266 3,367 3,469 3,573 8,734 25,575 Operating lease obligations 24,359 21,647 20,055 18,019 15,712 66,063 165,855 Other liabilities 6,816 12,671 1,062 2,147 3,932 37,298 63,926 Total consolidated obligations$ 53,544 $ 56,787 $ 43,687 $ 42,838 $ 548,267 $ 112,095 $ 857,218 New Credit Agreement
As discussed previously, we entered into a new credit agreement on
Interest Payments on Debt
Such amounts include estimates of interest expense related to our credit facility assuming a 3.7% interest rate.
Finance Lease Obligations
We have certain retail site properties under finance leases. Finance lease obligations in the table above include both principal and interest. See Note 11 to the financial statements for additional information.
Operating Lease Obligations
The operating lease obligations include leases for land, office facilities and
retail sites. Operating lease obligations reflected in the table above include
all operating leases that have initial or remaining non-cancelable terms in
excess of one year and are not reduced by minimum rentals to be received by us
under subleases. In addition, such amounts do not reflect contingent rentals
that may be incurred in addition to minimum rentals.
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Our principal executive offices are in Allentown, Pennsylvania , in an office
space leased by the Topper Group , for which the rent is charged to us as a cost
under the Topper Group Omnibus Agreement. Future lease payments on this office
lease are included within operating lease obligations.
See Note 12 to the financial statements for additional information.
Other Liabilities
Other liabilities include asset retirement obligations described in Note 10 to the financial statements and exclude other liabilities whose payment period or amount is not determinable. For purposes of reflecting amounts for asset retirement obligations in the table above, we have made our best estimate of expected payments based on information available as ofDecember 31, 2019 . For 2020, the amount includes an estimated cost of$2.2 million for certain EMV upgrades that the Partnership has committed to making at 46 Upper Midwest sites byOctober 1, 2020 . See Note 21 to the financial statements for additional information. For 2020 and 2021, the amount includes$4.6 million in omnibus charges that will be settled with CircleK. See Note 13 to the financial statements for additional information. Under the terms of various supply agreements, the Partnership is obligated to minimum volume purchases measured in gallons of motor fuel. Future minimum volume purchase requirements are 464 million gallons in 2020, reducing to 252 million gallons in 2024. Future minimum volume purchase requirements from 2025 through 2029 total 979 million gallons. The aggregate dollar amount of the future minimum volume purchase requirements is dependent on the future weighted average wholesale cost per gallon charged under the applicable supply agreements. The amounts and timing of the related payment obligations cannot reasonably be estimated reliably. As a result, payment of these amounts has been excluded from the table above. See Note 15 to the financial statements for additional information.
Off-Balance Sheet Arrangements
The Circle K Omnibus Agreement contingently requires us to perform environmental remediation work as further discussed in Note 13 to the financial statements. We also have operating leases and motor fuel purchase commitments as previously discussed in "Contractual Obligations" and in Notes 12 and 15 to the financial statements.
Other Matters Impacting Liquidity and Capital Resources
Concentration of Customers
In 2019, we distributed approximately 8% of our total wholesale distribution volumes to DMS and DMS accounted for approximately 7% of our rental income. In 2019, we distributed 6% of our total wholesale distribution volume toCircle K retail sites that are not supplied by CST Fuel Supply and received 14% of our rental income fromCircle K . For more information regarding transactions with DMS andCircle K , see Note 13 to the financial statements.
Acquisition of Jet-Pep Assets
OnNovember 28, 2017 , we acquired certain assets ofJet-Pep, Inc. and affiliated companies located inAlabama for approximately$75.6 million , including working capital. Contingencies Environmental Matters
See Note 14 to the financial statements for a discussion of our environmental matters.
Legal Matters
See Note 15 to the financial statements for a discussion of our legal matters.
Quarterly Results of Operations
See Note 23 to the financial statements for financial and operating quarterly data for each quarter of 2019 and 2018.
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As noted previously, the prices paid to our motor fuel suppliers for wholesale motor fuel (which affects our costs of sales) are highly correlated to the price of crude oil. The crude oil commodity markets are highly volatile, and the market prices of crude oil, and, correspondingly, the market prices of wholesale motor fuel, experience significant and rapid fluctuations, which affect our motor fuel gross profit. See "Significant Factors Affecting our Profitability-The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit" for additional information.
Our results for 2020 are anticipated to be impacted by the following:
• Transactions effected pursuant to the Asset Exchange Agreement entered into
with Circle K are anticipated to increase motor fuel volume and motor fuel
gross profit.
• The CST Fuel Supply Exchange is anticipated to increase motor fuel volume
and motor fuel gross profit.
• The acquisition of retail and wholesale contracts from the
certain other parties is anticipated to increase gross profit both within
the Wholesale and Retail segments.
• We anticipate that we will continue to realize reductions in our fuel costs
as a result of new or amended fuel purchase contracts.
• We dealerized our remaining company operated sites in the third quarter of
2019, which, ignoring the acquisition of retail and wholesale contracts
mentioned above, will result in the reduction of retail segment fuel margin,
merchandise and services margin and operating expenses and an increase in
rental margin in our wholesale segment.
• We completed the dispenser upgrades and rebranding of substantially all of
the
anticipate continuing to see a positive impact on volume.
We will continue to evaluate acquisitions on an opportunistic basis.
Additionally, we will pursue acquisition targets that fit into our strategy.
Whether we will be able to execute acquisitions will depend on market
conditions, availability of suitable acquisition targets at attractive terms,
acquisition related compliance with customary regulatory requirements, and our
ability to finance such acquisitions on favorable terms and in compliance with
our debt covenant restrictions.
New Accounting PoliciesFor information on recent accounting pronouncements impacting our business, see Note 2 to the financial statements.
Critical Accounting Policies Involving Critical Accounting Estimates
We prepare our financial statements in conformity withU.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note 2 to the financial statements for a summary of our significant accounting policies. Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and results, and require our most difficult, subjective or complex judgments, often because we must make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We believe the following policies to be the most critical in understanding the judgments that are involved in preparing our financial statements.
Revenue Recognition
InMay 2014 , the FASB issued ASU 2014-09-Revenue from Contracts with Customers (ASC 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 underU.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. This guidance was effectiveJanuary 1, 2018 and we applied the modified retrospective method of adoption. There was no material impact on the financial statements other than disclosures. This guidance applies to over 90% of our revenues as the only primary revenue stream outside the scope of this guidance is rental income. 63
-------------------------------------------------------------------------------- Revenues from the delivery of motor fuel are recorded at the time of delivery to our customers, by which time the price is fixed, title to the products has transferred and payment has either been received or collection is reasonably assured, net of applicable discounts and allowances. Incremental costs incurred to obtain certain contracts with customers are deferred and amortized over the contract term and are included in other noncurrent assets on the balance sheets. Amortization of such costs are classified as a reduction of operating revenues.
Revenues from the sale of convenience store products are recognized at the time of sale to the customer.
Revenues from leasing arrangements for which we are the lessor are recognized ratably over the term of the underlying lease.
In transactions in which we sell and lease back property, we apply guidance from ASC 606 in determining whether the transfer of the property should be accounted for as a sale. Specifically, we assess if we have satisfied a performance obligation by transferring control of the property.
See Note 21 for additional information on our revenues and related receivables.
Accounts receivable primarily result from the sale of motor fuels to customers and rental fees for retail sites. The majority of our accounts receivable relate to motor fuel sales that can generally be described as high volume and low margin activities. Credit is extended to a customer based on an evaluation of the customer's financial condition. In certain circumstances collateral may be required from the customer. Receivables are recorded at face value, without interest or discount. The provision for bad debts is generally based upon a specific analysis of aged accounts while also factoring in any new business conditions that might impact the historical analysis, such as market conditions and bankruptcies of particular customers. Bad debt provisions are included in general and administrative expenses. We review all accounts receivable balances on at least a quarterly basis and provide an allowance for doubtful accounts based on historical experience and on a specific identification basis. LGW collects motor fuel taxes, which consist of various pass-through taxes collected from customers on behalf of taxing authorities and remits such taxes directly to those taxing authorities. LGW's accounting policy is to exclude the taxes collected and remitted from wholesale revenues and cost of sales and account for them as liabilities. LGWS's retail sales and cost of sales include motor fuel taxes as the taxes are included in the cost paid for motor fuel and LGWS has no direct responsibility to collect or remit such taxes to the taxing authorities.
Asset Acquisitions and Business Combinations
When closing on an acquisition, we must first determine whether substantially all of the fair value of the set of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If this threshold is not met, we determine whether the set meets the definition of a business. A business is defined as an integrated set of assets and activities that is capable of being conducted and managed for the purpose of providing a return to investors or other owners, members or participants. A business typically has inputs, processes applied to those inputs and outputs that are used to generate a return to investors, but outputs are not required for a set to be a business. A business must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. We account for asset acquisitions (i.e. transactions involving the acquisition of a set of assets that does not meet the definition of a business) in accordance with the guidance under ASC 805-50 and other applicable guidance. Asset acquisitions are generally accounted for by allocating the cost of the acquisition to the individual assets acquired and liabilities assumed on a relative fair value basis. Two of the key differences in accounting for transactions as asset acquisitions as compared to business combination are summarized below:
• Transaction costs are capitalized as a component of the cost of the assets
acquired rather than expensed as incurred;
•
over the fair value of the net assets acquired is allocated on a relative
fair value basis to the identifiable net assets other than certain
non-qualifying assets as defined in the guidance.
We account for business combinations in accordance with the guidance under ASC 805-Business Combinations. The purchase price is recorded for assets acquired and liabilities assumed based on fair value. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired is recorded as goodwill.
The income statement includes the results of operations for each acquisition from their respective date of acquisition.
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Whether we account for a transaction as an asset acquisition or a business
combination, determining the fair value of these items requires management's
judgment, the utilization of independent valuation experts and involves the use
of significant estimates and assumptions with respect to the timing and amounts
of future cash inflows and outflows, discount rates, market prices and asset
lives, among other items. The judgments made in the determination of the
estimated fair value assigned to the assets acquired, the liabilities assumed
and any noncontrolling interest in the investee, as well as the estimated useful
life of each asset and the duration of each liability, can materially impact the
financial statements in periods after acquisition, such as through depreciation
and amortization.
Goodwill
Goodwill represents the excess of the fair value of the consideration conveyed
to acquire a business over the fair value of the net assets acquired. Goodwill
is not amortized, but instead is tested for impairment at the reporting unit
level at least annually, and more frequently if events and circumstances
indicate that the goodwill might be impaired. The annual impairment testing date
of goodwill is October 1 .
In performing our annual impairment analysis, ASC 350-20, Intangibles-Goodwill
and Other, allows us to use qualitative factors to determine whether it is more
likely than not (likelihood of more than 50%) that the fair value of a reporting
unit is less than its carrying amount, including goodwill. We consider
macroeconomic conditions such as developments in equity and credit markets,
industry and market conditions such as the competitive environment, cost factors
such as changes in our cost of fuel, our financial performance and our unit
price.
If, after assessing the totality of events or circumstances, we determine that
it is more likely than not that the fair value of a reporting unit exceeds its
carrying amount, no further testing is necessary. However, if we determine that
it is more likely than not that the fair value of a reporting unit is less than
its carrying amount, then we perform the goodwill impairment test.
In the goodwill impairment test, the reporting unit's carrying amount (including goodwill) and its fair value are compared. If the estimated fair value of a reporting unit is less than the carrying value, an impairment charge is recognized for the deficit up to the amount of goodwill recorded.
AtDecember 31, 2019 and 2018, we had goodwill totaling$88.8 million . Of theDecember 31, 2019 balance,$74.2 million was assigned to the wholesale reporting unit and$14.6 million was assigned to the retail reporting unit. After assessing the totality of events and circumstances, we determined that it is more likely than not that the fair value of our reporting units exceed their carrying amounts and therefore goodwill is not impaired atDecember 31, 2019 or 2018. Asset Retirement Obligations
When we install or acquire USTs, we recognize the estimated future cost to remove our USTs over their estimated useful lives. We record a discounted liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset at the time a UST is installed. We depreciate the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the remaining life of the UST.
We base our estimates of such future costs on our prior experience with removal and include normal and customary costs we expect to incur associated with UST removal. We compare our cost estimates with our actual removal cost experience on an annual basis, and when the actual costs we experience exceed our original estimates, we will recognize an additional liability for estimated future costs to remove the USTs. Because these estimates are subjective and are currently based on historical costs with adjustments for estimated future changes in the associated costs, the dollar amount of these obligations could change as more information is obtained. As ofDecember 31, 2019 and 2018, our liabilities related to the removal of USTs were$35.8 million and$32.9 million , respectively. A 10% change in our estimate of anticipated future costs for removal of USTs as ofDecember 31, 2019 would change our asset retirement obligation by approximately$3.2 million . See Note 10 under the caption "Asset Retirement Obligations" to the financial statements.
Environmental Liabilities
As ofDecember 31, 2019 and 2018, our environmental reserves were$3.4 million and$3.6 million , respectively. These environmental reserves represent our estimates for future expenditures for remediation and related litigation associated with contaminated retail sites as a result of releases (e.g. overfills, spills and releases) and are based on current regulations, historical results and certain other factors. 65 -------------------------------------------------------------------------------- Environmental liabilities that we have recorded are based on internal and external estimates of costs to remediate retail sites. Factors considered in the estimates of the liability are the expected cost and the estimated length of time to remediate each contaminated site. Estimated remediation costs are not discounted because the timing of payments cannot be reasonably estimated. Reimbursements under state trust fund programs are recognized when received because such amounts are insignificant. The adequacy of the liability is evaluated quarterly and adjustments are made based on updated experience at existing retail sites, newly identified retail sites and changes in governmental policy. A 10% change in our estimate of future costs related to environmental liabilities recorded as ofDecember 31, 2019 would change our environmental liabilities and operating expenses by$0.3 million . See Note 14 to the financial statements for additional information.
Tax Matters
As a limited partnership, we are not subject to federal and state income taxes. Income tax attributable to our taxable income, which may differ significantly from income for financial statement purposes, is assessed at the individual level of the unit holder. We are subject to a statutory requirement that non-qualifying income, as defined by the Internal Revenue Code, cannot exceed 10% of total gross income for the calendar year. If non-qualifying income exceeds this statutory limit, we would be taxed as a corporation. The non-qualifying income did not exceed the statutory limit in any period. Certain activities that generate non-qualifying income are conducted through our wholly owned taxable corporate subsidiary, LGWS. Current and deferred income taxes are recognized on the earnings of LGWS. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates. Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset. We consider a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, projections of future taxable income and ongoing prudent and feasible tax planning strategies. The amount of deferred tax assets ultimately realized may differ materially from the estimates utilized in the computation of valuation allowances and may materially impact the financial statements in the future. As a result of a reassessment of the positive and negative evidence supporting whether or not a valuation allowance for deferred tax assets is needed, we released the entire$3.7 million valuation allowance in 2017. See Note 19 to the financial statements for additional information.
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