CAPL US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 financial statements) contained in this report.

MD&A is organized as follows:

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Recent Developments—This section describes significant recent developments, including our acquisition of certain assets from CSS.

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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.

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Results of Operations—This section provides an analysis of our results of operations, including the results of operations of our business segments and non-GAAP financial measures.

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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.

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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.

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Critical Accounting Policies and Estimates—This section describes the accounting policies and estimates that we consider most important for our business and that require significant judgment.

Recent Developments

Acquisition of Assets from CSS

On November 9, 2022, we closed on the acquisition of assets from CSS for a purchase price of $27.5 million plus working capital. The assets consisted of wholesale fuel supply contracts to 38 dealer owned locations, 35 sub-wholesaler accounts and two commission locations (1 fee based and 1 lease). We funded this acquisition through borrowings on the CAPL Credit Facility and cash on hand.

Amendment to CAPL Credit Facility

On November 9, 2022, in connection with our acquisition of assets from CSS, we entered into an amendment (the “Amendment”) to the CAPL Credit Facility. The Amendment, among other things, designates the acquisition of assets from CSS as a specified acquisition (as defined in the CAPL Credit Facility) which results in the maximum leverage ratio increasing to 5.50 to 1.00 through December 31, 2023.

See Notes 3 and 11 to the financial statements for additional information regarding this acquisition and the CAPL Credit Facility.

Change in Segment Reporting

During the fourth quarter of 2022, we changed our segment reporting to simplify the assessment of performance of our segments. Prior to the fourth quarter, the wholesale segment included the wholesale fuel gross profit on intersegment sales by our wholesale segment to our retail segment. Likewise, the wholesale segment included an allocation of operating expenses related to the operation of our retail sites consistent with the allocation of the overall fuel gross profit.

Starting in the fourth quarter of 2022, the wholesale segment includes only the fuel gross profit on sales to lessee dealers and independent dealers and the retail segment includes the entire fuel gross profit on sales at our company operated and commission agent sites. Likewise, operating expenses are allocated to each segment based on estimates of the level of effort expended on our 1) lessee and independent dealer business in our wholesale segment; and 2) company operated and commission site business in our retail segment.

This change simplifies the assessment of performance of our segments and eliminates the intersegment sales inherent in our prior segment reporting.

We have recast the results of our segments for periods prior to October 1, 2022 to be consistent with our new segment reporting.

See Note 22 to the financial statements for additional information.

Acquisition of Assets from 7-Eleven

In February 2022, we closed on the final three properties of our 106-site acquisition from 7-Eleven for a purchase price of $3.6 million (including inventory and working capital), of which $1.8 million will be paid on or prior to February 8, 2027.

We funded these transactions primarily through the JKM Credit Facility, undrawn capacity under our CAPL Credit Facility and cash on hand.

See Note 3 to the financial statements for additional information regarding this acquisition.

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Issuance of Preferred Membership Interests

On March 29, 2022, Holdings issued and sold 12,500 newly created Series A Preferred Interests to each of (i) Dunne Manning JKM LLC (the “DM Investor”), an entity affiliated with Joseph V. Topper, Jr., and (ii) John B. Reilly, III and a trust affiliated with Mr. Reilly (together with Mr. Reilly, the “JBR Investor;” and the JBR Investor, together with the DM Investor, the "Investors" and, each, an “Investor”) at a price of $1,000 per Series A Preferred Interest, for an aggregate purchase price of $25 million in cash (the “Preferred Issuance”), in reliance upon an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act of 1933, as amended. The Preferred Issuance was consummated pursuant to an Investment Agreement, entered into as of March 29, 2022 (the “Investment Agreement”), by and among Holdings and each Investor. Following the Preferred Issuance, the Partnership indirectly retains 100% of the common interests of Holdings, and Holdings remains a consolidated subsidiary of the Partnership.

In light of the relationships between the Investors and the Partnership, the Preferred Issuance was reviewed by, and received the approval and recommendation of, the conflicts committee of the Board prior to execution of the Investment Agreement and consummation of the Preferred Issuance.

In connection with the Preferred Issuance, on March 29, 2022, LGP Operations LLC, a wholly owned subsidiary of the Partnership, each Investor and the Partnership entered into an amended and restated limited liability company agreement of Holdings to, among other things, set forth the rights, preferences, entitlements, restrictions and limitations of the Series A Preferred Interests. The Series A Preferred Interests have an initial liquidation preference of $1,000 per Series A Preferred Interest and are entitled to a preferred return at a rate of 9% per annum on the liquidation preference, compounded quarterly (the “preferred return”). Prior to October 16, 2026, the Series A Preferred Interests will not be entitled to receive distributions, but the preferred return instead will accumulate solely by way of an increase in the liquidation preference of the Series A Preferred Interests. From and after October 16, 2026, the preferred return will be payable in cash, on a quarterly basis. The Series A Preferred Interests are subject to exchange (i) upon a liquidation or deemed liquidation event of Holdings, (ii) upon a change of control of the Partnership, (iii) from and after March 1, 2024, at the option of the Partnership and Holdings, and (iv) on March 31, 2029, if any Series A Preferred Interests remain outstanding on such date (each of (i) through (iv), an “exchange”). Upon an exchange of any Series A Preferred Interests, the holders thereof will surrender each such Series A Preferred Interest in exchange for an amount equal to the then-current liquidation preference of such Series A Preferred Interest plus any preferred return accrued and unpaid with respect to the period from and after October 16, 2026 (the “Exchange Price”). The Exchange Price will be payable in common units of the Partnership or, if any holder of Series A Preferred Interests so elects, in cash. Any common units of the Partnership issued upon any exchange in payment of the Exchange Price will be valued at an amount equal to $23.74 per common unit, which is equal to 115% of the volume weighted average price of a Partnership common unit on the NYSE over the twenty trading-day period ending on March 28, 2022, the trading day immediately prior to the date of the Preferred Issuance.

The net proceeds received by Holdings in its sale of the Series A Preferred Interests were contributed to CAPL JKM Partners, which in turn used such proceeds to prepay a portion of the outstanding indebtedness under the Term Loan Facility. As a result of this prepayment, CAPL JKM Partners does not need to make a principal payment on the Term Loan Facility until April 1, 2023.

See Note 18 to the financial statements for additional information on the preferred membership interests.

COVID-19 Pandemic

During the first quarter of 2020, an outbreak of a novel strain of coronavirus spread worldwide, including to the U.S., posing public health risks that have reached pandemic proportions. We experienced a sharp decrease in fuel volume in mid-to-late March 2020. Although the COVID Pandemic has not significantly impacted our results in 2022, fuel volume recovered throughout 2020 and 2021, which impacts the comparability of our results between periods.

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Significant Factors Affecting our Profitability

The Significance of Crude Oil and Wholesale Motor Fuel Prices on Our Revenues, Cost of Sales and Gross Profit

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. For approximately 61% of gallons sold, we receive a per gallon rate equal to the posted rack price, less any applicable discounts, plus transportation costs, taxes and a fixed rate per gallon of motor fuel. The remaining gallons are either retail sales or wholesale DTW contracts that provide for variable, market-based pricing.

Regarding our supplier relationships, a material amount of our total gallons purchased are subject to Terms Discounts. The dollar value of these discounts varies with changes in 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).

In our retail business, 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.

As previously reported, we did not have any company operated sites for the period from September 30, 2019 through closing on the retail and wholesale acquisition on April 14, 2020, since which we have again been operating company operated sites.

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 components of cost of goods sold, such as fuel, merchandise, and credit card fees. Inflation also affects certain operating expenses, such as labor costs, certain leases, and general and administrative expenses. While our wholesale segment benefits from higher terms discounts as a result of higher fuel costs, inflation could and recently has negatively impacted our cost of goods sold and 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.

Impact of Interest Rates

Recent increases in interest rates (particularly LIBOR) have increased our interest expense as further described below. Although we have hedged $300 million of our variable-rate debt, we are exposed to changes in interest rates on the balance of our variable-rate debt.

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Acquisition and Financing Activity

Our results of operations and financial condition are also impacted by our acquisition and financing activities as summarized below.

2020

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We completed four additional tranches of the asset exchange with Circle K on February 25, 2020, April 7, 2020, May 5, 2020 and September 15, 2020. With the closing of the sixth tranche, the transactions contemplated under the Asset Exchange Agreement were concluded.

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On February 6, 2020, we closed on the Equity Restructuring Agreement that eliminated the IDRs.

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Effective March 25, 2020, we closed on the CST Fuel Supply Exchange.

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On April 14, 2020, we closed on the acquisition of retail and wholesale assets.

2021

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From late June 2021 through December 31, 2021, we closed on the purchase of 103 sites of our 106-site acquisition from 7-Eleven, and in July 2021, we entered into a new credit agreement and amended our existing credit facility as further described in Notes 3 and 11 to the financial statements.

2022

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In February 2022, we closed on the final three properties of our 106-site acquisition from 7-Eleven.

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On November 9, 2022, we closed on the acquisition of assets from CSS.

Results of Operations

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,

Income from CST Fuel Supply equity interests — — 3,202

Operating expenses:

Gain on dispositions and lease terminations, net 1,143 2,037 80,924

Accretion of preferred membership interests 1,726 — —

IDR distributions — — 133

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Year Ended December 31,2022 Compared to Year Ended December 31,2021

Consolidated Results

Operating revenues increased $1.4 billion or 39%, while operating income increased $60 million or 166%. Significant items impacting these results were:

Operating revenues

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A $547 million (26%) increase in our wholesale segment revenues primarily attributable to a 39% increase in the average daily spot price of WTI crude oil to $94.90 per barrel in 2022, compared to $68.14 per barrel in 2021. The wholesale price of motor fuel is 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.” Volume decreased 9% due in part to the loss of independent dealer contracts, which are generally lower margin, as well as our real estate optimization efforts and general economic conditions.

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An $841 million (59%) increase in our retail segment revenues primarily attributable to a 33% increase in the average retail selling price per gallon in 2022 as compared to 2021 generally due to the increase in crude oil prices discussed above. In addition, volume increased 23% from 2021 to 2022 driven by the acquisition of assets from 7-Eleven. Lastly, merchandise revenues increased $71 million (34%) driven by the acquisition of assets from 7-Eleven.

Cost of sales

Cost of sales increased $1.3 billion (39%), which was a result of the increase in wholesale motor fuel prices and the acquisition of assets from 7-Eleven discussed above.

Gross profit

Gross profit increased $99 million (36%), which was primarily due to a $93 million increase in gross profit from our retail segment driven by the acquisition of assets from 7-Eleven along with realizing a higher margin per gallon. See "Segment Results" for additional analyses.

Operating expenses

See “Segment Results” for additional analyses.

General and administrative expenses

General and administrative expenses decreased $5.4 million (17%) primarily due to an $8.0 million decrease in acquisition-related costs driven by a reduction in legal fees incurred in connection with the acquisition of assets from 7-Eleven, partially offset by higher management fees and equity incentive compensation expense.

Depreciation, amortization and accretion expense

Depreciation, amortization and accretion expense increased $2.8 million (4%) primarily from incremental depreciation, amortization and accretion expense from the property and equipment and intangible assets acquired in the acquisition of assets from 7-Eleven. This increase was partially offset by a $4.9 million decrease in impairment charges related to our ongoing real estate rationalization effort and the resulting reclassification of these sites to assets held for sale.

Gain on dispositions and lease terminations, net

During 2022, we recorded a $3.5 million net gain related to sites sold in connection with our ongoing real estate rationalization effort, partially offset by net losses on lease terminations and asset disposals.

During 2021, we recorded a $3.3 million net gain related to sites sold in connection with our ongoing real estate rationalization effort, partially offset by net losses on lease terminations and asset disposals.

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Interest expense

Interest expense increased $13.9 million (76%), primarily driven by a $5.2 million increase in interest expense incurred on the JKM Credit Facility as a result of the timing of borrowings to fund the acquisition of assets from 7-Eleven as well as the increase in the LIBOR rate along with a $0.6 million increase in amortization of deferred financing costs as a result of entering into the JKM Credit Facility. In addition, we incurred $7.7 million more in interest expense on the CAPL Credit Facility (net of the impact of the interest rate swaps) due primarily to the increase in the LIBOR rate and to a lesser degree, higher borrowings primarily to fund a portion of the purchase price for the acquisition of assets from 7-Eleven.

Income tax expense (benefit)

We recorded income tax expense (benefit) of $0.7 million and $(3.2) million for 2022 and 2021, respectively, driven by the income generated (losses incurred) by our taxable subsidiaries.

Accretion of preferred membership interests

In connection with the issuance of preferred membership interests in March 2022 as further discussed in Note 18 to the financial statements, we recorded accretion of $1.7 million in 2022.

Year Ended December 31,2021 Compared to Year Ended December 31,2020

Consolidated Results

Operating revenues increased $1.6 billion or 85%, while operating income decreased $79 million or 69%. Significant items impacting these results were:

Operating revenues

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An $891 million (71%) increase in our wholesale segment revenues primarily attributable to the increase in crude oil prices. The average daily spot price of WTI crude oil increased 74% to $68.14 per barrel in 2021, compared to $39.16 per barrel in 2020. The wholesale price of motor fuel is 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.” Volume increased 8% primarily as a result of the volume generated by the asset exchanges with Circle K, the CST Fuel Supply Exchange and the acquisition of the retail and wholesale assets, as well as continuing recovery from the COVID-19 Pandemic.

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A $756 million (111%) increase in our retail segment revenues primarily attributable to the increase in company operated sites as a result of the April 2020 acquisition of retail and wholesale assets, the March 2020 CST Fuel Supply Exchange and the acquisition of assets from 7-Eleven (the average total system sites increased 27% from 2020 compared to 2021). Volume increased 56% from 2020 to 2021 driven by the acquisitions as well as the continuing recovery from the COVID-19 Pandemic.The average retail fuel price increased 43% between those same periods due primarily due to the increase in wholesale motor fuel prices noted above. In addition, merchandise revenues increased $86 million (70%) driven by the acquisition of retail and wholesale assets and the acquisition of assets from 7-Eleven.

Cost of sales

Cost of sales increased $1.6 billion (92%) as a result of the increase in wholesale motor fuel prices and the impact of the increase in sites acquired in the asset exchanges with Circle K, the CST Fuel Supply Exchange, the acquisition of retail and wholesale assets and the acquisition of assets from 7-Eleven, as well as the continuing recovery from the COVID-19 Pandemic.

Gross profit

The $65 million (31%) increase in gross profit was primarily due to a $51 million increase in gross profit from the retail segment and a $14 million increase in gross profit from the wholesale segment. See "Segment Results" for additional analyses.

Income from CST Fuel Supply equity interests and Operating expenses

See “Segment Results” for additional analyses.

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General and administrative expenses

General and administrative expenses increased $9.9 million (47%) primarily driven by a $6.0 million increase in acquisition-related costs as a result of higher legal fees incurred in connection with the acquisition of assets from 7-Eleven, a $1.9 million increase in management fees related to an increase in headcount, a $1.1 million increase in equity-based compensation expense as a result of more grants being outstanding during 2021 as compared to 2020 and overall higher general and administrative expenses stemming from the April 2020 acquisition of retail and wholesale assets and the acquisition of assets from 7-Eleven, partially offset by a $1.0 million decrease in credit loss expense.

Depreciation, amortization and accretion expense

Depreciation, amortization and accretion expense increased $9.1 million (13%) primarily from the property and equipment and intangible assets acquired in the asset exchanges with Circle K, the CST Fuel Supply Exchange, the acquisition of retail and wholesale assets and the acquisition of assets from 7-Eleven. We recorded $7.7 million of impairment charges in connection with our ongoing real estate rationalization effort and the resulting reclassification of these sites to assets held for sale, as compared to $9.1 million in 2020.

Gain on dispositions and lease terminations, net

During 2021, we recorded a $3.3 million gain related to sites sold in connection with our ongoing real estate rationalization effort, partially offset by net losses on lease terminations and asset disposals.

During 2020, we recorded a $67.6 million gain on the sale of our 17.5% investment in CST Fuel Supply (see Note 3 to the financial statements for additional information). In addition, we recorded $19.3 million in gains related to the properties sold in the asset exchanges with Circle K and $6.4 million in gains related to the sale of sites in connection with our ongoing real estate rationalization effort. Partially offsetting these gains, we recorded a $10.9 million loss on lease terminations, including a write-off of deferred rent income, in connection with the April 2020 acquisition of retail and wholesale assets.

Interest expense

Interest expense increased $1.7 million (10%) primarily due to $1.8 million in interest expense on the JKM Credit Facility along with a $0.8 million increase in amortization of deferred financing costs as a result of entering into the JKM Credit Facility and the amendment to the CAPL Credit Facility. The higher interest expense due to the higher outstanding balance on the CAPL Credit Facility (driven by the borrowings to fund a portion of the purchase price of the acquisition of assets from 7-Eleven) was more than offset by a reduction in the average rate on borrowings under our CAPL Credit Facility from 2.6% to 2.1%.

Income tax benefit

We recorded an income tax benefit of $3.2 million and $7.9 million for 2021 and 2020, respectively. The benefits were primarily driven by losses incurred by our taxable subsidiaries and changes in state apportionment. See Note 20 for additional information.

Segment Results

We present the results of operations of our segments consistent with how our management views the business.

See "Recent Developments" and Note 22 to the financial statements for information regarding a change in our segment reporting. We have recast the results of our segments for periods prior to October 1, 2022 to be consistent with our new segment reporting.

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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,

Gross profit:

Income from CST Fuel Supply equity interests (a) — — 3,202

Motor fuel distribution sites (end of period): (b)

(a)

Represents income from our former equity interest in CST Fuel Supply. The CST Fuel Supply Exchange closed on March 25, 2020.

(b)

In addition, we distributed motor fuel to sub-wholesalers who distributed to additional sites.

(c)

The decrease in the independent dealer site count from December 31, 2021 to December 31, 2022 was primarily attributable to loss of contracts, most of which were lower margin, partially offset by the increase in independent dealer sites as a result of the acquisition of assets from CSS.

(d)

The decrease in the lessee dealer site count from December 31, 2021 to December 31, 2022 was primarily attributable to our real estate rationalization effort.

Year Ended December 31,2022 Compared to Year Ended December 31,2021

Gross profit increased $6.1 million (5%), while operating income increased $6.9 million (8%). These results were driven by:

Motor fuel gross profit

The $3.2 million (4%) increase in motor fuel gross profit was primarily driven by a 15% increase in our average fuel margin per gallon as compared to 2021 due to higher terms discounts as a result of higher crude prices. The average daily spot price of WTI crude oil increased 39% from $68.14 per barrel in 2021 to $94.90 per barrel in 2022. 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.” Additionally, we benefited from better sourcing costs due to our brand consolidation and other initiatives. Lastly, volume decreased 9% due in part to the loss of independent dealer contracts, which are generally lower margin, as well as our real estate optimization efforts and general economic conditions.

Other revenues

Other revenues increased $2.8 million (75%) due to higher take-or-pay income related to minimum purchase quantities in our dealer contracts and higher dealer contract termination fees.

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Gross profit increased $14.3 million (13%), while operating income increased $7.8 million (10%). These results were driven by:

Motor fuel gross profit

The $12.6 million (22%) increase in motor fuel gross profit was primarily driven by a 13% increase in our average fuel margin per gallon as compared to 2020 due to higher terms discounts as a result of higher crude prices. The average daily spot price of WTI crude oil increased 74% from $39.16 per barrel in 2020 to $68.14 per barrel in 2021. 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.” Additionally, we benefited from better sourcing costs due to our brand consolidation and other initiatives. In addition, we saw an 8% increase in volume as a result of the asset exchanges with Circle K, the CST Fuel Supply Exchange, the acquisition of retail and wholesale assets and the continuing recovery from the COVID-19 Pandemic.

Rent gross profit

Rent gross profit increased $0.3 million (1%) primarily due to $0.5 million in rent concessions during the second quarter of 2020 and the positive impact from the CST Fuel Supply Exchange, partially offset by a decrease as a result of terminating leases in connection with the April 2020 acquisition of retail and wholesale assets.

Other revenues

Other revenues increased $1.4 million (59%) primarily due to higher take-or-pay income related to minimum purchase quantities in our dealer contracts.

Income from CST Fuel Supply equity interests

Income from CST Fuel Supply equity interests is no longer generated as a result of the March 2020 CST Fuel Supply Exchange.

Operating expenses

Operating expenses increased $3.3 million (9%) primarily as a result of a $2.7 million increase in environmental costs related to remediation, costs of compliance testing and monitoring and a $1.2 million increase in insurance costs due to the increase in controlled sites as a result of the acquisitions.

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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 and per gallon amounts):

Year Ended December 31,

Gross profit:

Retail sites (end of period):

Total retail segment statistics:

Company operated site statistics:

Margin per gallon, before deducting credit card fees $ 0.426 $ 0.309 $ 0.349

Merchandise gross profit percentage 27.2 % 26.4 % 26.0 %

Commission site statistics:

Year Ended December 31,2022 Compared to Year Ended December 31,2021

Gross profit increased $92.8 million (61%), while operating income increased $51.3 million (91%). These results were impacted by:

Gross profit

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Our motor fuel gross profit increased $67.2 million (85%) attributable to a 50% increase in margin per gallon in 2022 compared to 2021 due to greater volatility in the price of crude oil in 2022 compared to 2021. In addition, volume increased 23% stemming from the sites acquired from 7-Eleven.

•

Our merchandise gross profit and other revenues increased $21.0 million (38%) and $3.4 million (37%), respectively, driven by the sites acquired from 7-Eleven.

•

Rent gross profit increased $1.1 million (13%) due primarily to the sites acquired in the acquisition of assets from 7-Eleven.

Operating expenses

Operating expenses increased $41.5 million (43%) primarily due to a $33.8 million increase driven by the sites acquired from 7-Eleven. The balance of the increase is primarily due to increases in store level payroll costs and maintenance costs.

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Gross profit increased $50.5 million (50%), while operating income increased $10.7 million (23%). These results were impacted by:

Gross profit

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Our motor fuel gross profit increased $21.9 million (38%) attributable to a 56% increase in volume stemming from the increase in company operated and commission sites as a result of the April 2020 acquisition of retail and wholesale assets, the March 2020 CST Fuel Supply Exchange, the acquisition of assets from 7-Eleven as well as the continuing recovery from the COVID-19 Pandemic (the average total system sites increased 27% from 2020 compared to 2021).

•

Our merchandise gross profit and other revenues increased $23.1 million (72%) and $4.5 million (98%), respectively, as a result of the increase in company operated sites driven by the April 2020 acquisition of retail and wholesale assets and the acquisition of assets from 7-Eleven.

•

Rent gross profit increased $1.1 million (14%) due primarily to the company operated and commission sites acquired in the April 2020 acquisition of retail and wholesale assets, the March 2020 CST Fuel Supply Exchange and the acquisition of assets from 7-Eleven.

Operating expenses

Operating expenses increased $39.9 million (71%) primarily due to the increase in company operated and commission sites as a result of the April 2020 acquisition of retail and wholesale assets, the March 2020 CST Fuel Supply Exchange and a $15.8 million increase as a result of the acquisition of assets from 7-Eleven.

Non-GAAP Financial Measures

We use the non-GAAP financial measures EBITDA, Adjusted EBITDA, Distributable Cash Flow and Distribution Coverage Ratio. EBITDA represents net income 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-based compensation expense, gains or losses on dispositions and lease terminations, net and certain discrete acquisition-related costs, such as legal and other professional fees, separation benefit costs 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. The Distribution Coverage Ratio is computed by dividing Distributable Cash Flow by distributions paid.

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.

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.

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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,

Equity-based employee and director compensation expense 2,294 1,311 172

Gain on dispositions and lease terminations, net (b) (1,143 ) (2,037 ) (80,924 )

Sustaining capital expenditures (d) (7,164 ) (4,161 ) (3,529 )

Current income tax (expense) benefit (e) (2,466 ) (548 ) 14,126

Distribution Coverage Ratio (a) 1.77x 1.28x 1.32x

(a)

Beginning in 2022, we reconcile Adjusted EBITDA to Net income rather than to Net income available to limited partners. The difference between Net income and Net income available to limited partners is that, beginning in the second quarter of 2022, the accretion of preferred membership interests issued in late March 2022 is a deduction from Net income in computing Net income available to limited partners. Because Adjusted EBITDA is used to assess our financial performance without regard to capital structure, we believe Adjusted EBITDA should be reconciled with Net income, so that the calculation isn’t impacted by the accretion of preferred membership interests. This approach is comparable to our reconciliation of Adjusted EBITDA to Net income available to limited partners in past periods, as we have not recorded accretion of preferred membership interests in past periods.

In 2022, we updated our calculation of our Distribution Coverage Ratio to divide Distributable Cash Flow by distributions paid, whereas in prior periods, our Distribution Coverage Ratio was calculated as Distributable Cash Flow divided by the weighted-average diluted common units, and then we divided that result by distributions paid per limited partner unit.

As a result of these changes, our Distribution Coverage Ratio for 2020 was adjusted from 1.31x (as previously reported) to 1.32x.

(b)

We recorded gains on the sale of sites in connection with our ongoing real estate rationalization effort of $3.5 million, $3.3 million and $6.4 million in 2022, 2021 and 2020, respectively. In 2020, we also recorded $19.3 million in gains on the sale of sites in connection with the asset exchange with Circle K and a $67.6 million gain on the sale of our 17.5% investment in CST Fuel Supply. Also in 2020, we recorded a loss on lease terminations, including the non-cash write-off of deferred rent income associated with these leases, of $10.9 million.

(c)

Relates to certain acquisition-related costs, such as legal and other professional fees, separation benefit costs and purchase accounting adjustments associated with recent acquisitions.

(d)

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.

(e)

Consistent with prior divestitures, the current income tax benefit in 2022, 2021 and 2020 excludes income tax incurred on the sale of sites. 2020 includes the tax benefit of 100% bonus depreciation on the eligible assets acquired in the asset exchanges with Circle K as well as certain dispenser upgrades and rebranding costs.

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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. We expect our ongoing sources of liquidity to include cash generated by operations, proceeds from sales of sites in connection with our real estate rationalization efforts, borrowings under the CAPL Credit Facility and JKM Credit Facility, and if available to us on acceptable terms, issuances of equity and debt securities. We regularly evaluate alternate sources of capital 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 CAPL Credit Facility and JKM Credit Facility, 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.

Cash Flows

The following table summarizes cash flow activity (in thousands):

Year Ended December 31,

Operating Activities

Net cash provided by operating activities increased $65.8 million in 2022 compared to 2021 primarily attributable to the incremental cash flow generated by the sites acquired from 7-Eleven and the strong fuel margins in 2022. In addition, changes in working capital increased cash flow from operating activities by $16.2 million.

Net cash provided by operating activities decreased $9.0 million for 2021 compared to 2020. Although the acquisitions drove incremental cash flow from operations, changes in working capital and a $6.0 million increase in acquisition costs (primarily the acquisition from 7-Eleven) reduced cash provided by operating activities for 2021 as compared to 2020.

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

In 2022, we incurred capital expenditures of $30.4 million driven by site purchases, site upgrades, including store remodels, car wash build-outs, EMV upgrades and rebranding of certain sites, including the sites acquired from 7-Eleven. We paid $27.7 million in connection with the acquisition of assets from CSS and $1.9 million in connection with the closing of sites acquired from 7-Eleven. We received $13.3 million in proceeds primarily from the sale of sites in connection with our real estate rationalization effort.

In 2021, we incurred capital expenditures of $41.9 million driven by site upgrades, including store remodels, carwash build-outs, EMV upgrades and rebranding of certain sites, including the sites acquired from 7-Eleven. We received $15.4 million in proceeds from the sales of assets, largely driven by our real estate rationalization effort. We paid $273.0 million in connection with our acquisition of assets from 7-Eleven.

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In 2020, we received $23.0 million from Circle K primarily in connection with the CST Fuel Supply Exchange that closed in March 2020. In addition, we received $21.2 million in proceeds from the sale of assets in connection with our real estate rationalization effort and paid $28.2 million in connection with our April 2020 acquisition of retail and wholesale assets. Also, we incurred capital expenditures of $37.1 million in 2020.

Financing Activities

In 2022, we paid $79.8 million in distributions. We made net repayments of $47.9 on our credit facilities. We received $24.4 million in net proceeds from the issuance of preferred membership interests during 2022.

In 2021, we paid $79.7 million in distributions. We made net borrowings of $299.9 million of our credit facilities, primarily to fund the acquisition of assets from 7-Eleven and to pay $9.4 million in acquisition costs and $7.2 million of deferred financing costs.

In 2020, we paid $77.9 million in distributions and made net repayments on our CAPL Credit Facility of $5.8 million.

Distributions

Distribution activity for 2022 was as follows (in thousands):

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 $0.1 million to the Topper Group with respect to the IDRs in 2020. On February 6, 2020, we closed on the Equity Restructuring Agreement that eliminated the IDRs.

Debt

As of December 31, 2022, our debt and finance lease obligations consisted of the following (in thousands):

Finance lease obligations 13,954

Total debt and finance lease obligations 779,071

Deferred financing costs, net 6,282

Noncurrent portion, net of deferred financing costs $ 761,638

Taking the interest rate swap contracts into account, our effective interest rate on our CAPL Credit Facility at December 31, 2022 was 4.2% (our applicable margin was 1.75% as of December 31, 2022). Letters of credit outstanding under our CAPL Credit Facility at December 31, 2022 totaled $3.8 million. The amount of availability under our CAPL Credit Facility at February 23, 2023, after taking into consideration debt covenant restrictions, was $120.5 million.

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The CAPL Credit Facility contains financial covenants related to leverage and interest coverage as further described in Note 11 to the financial statements. These financial covenants and other covenants may restrict or limit our ability to make distributions, incur additional indebtedness, make certain capital expenditures or dispose of assets in excess of specified levels, among other restrictions.

Our effective interest rate on our JKM Credit Facility at December 31, 2022 was 6.5% (our applicable margin was 2.25% as of December 31, 2022). Letters of credit outstanding under our JKM Credit Facility at December 31, 2022 totaled $0.8 million. The amount of availability under the JKM Credit Facility at February 23, 2023, after taking into consideration debt covenant restrictions, was $14.2 million.

Similarly, our JKM Credit Facility contains financial covenants related to leverage and fixed charge coverage as further described in Note 11 to the financial statements. These financial covenants and other covenants may restrict or limit Holdings’ ability to incur additional indebtedness, make certain capital expenditures or dispose of assets in excess of specified levels, among other restrictions.

See “Recent Developments—Amendment to CAPL Credit Facility” and Note 11 to the financial statements for information regarding the amendment of the CAPL Credit Facility.

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 CAPL Credit Facility, JKM Credit Facility, or, if available to us on acceptable terms, accessing the capital markets and issuing additional equity, debt securities or other options, such as the sale of assets. 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 (in thousands):

Year Ended December 31,

Growth capital expenditures decreased in 2022 as compared with 2021, primarily due to a decrease in rebranding of the sites acquired from 7-Eleven.

A significant portion of our growth capital expenditures are discretionary and we regularly review our capital plans in light of anticipated proceeds from sales of sites.

Contractual Obligations, Contingencies, Off Balance Sheet Arrangements and Concentration Risks

Our contractual obligations primarily include payments of debt and finance lease obligations and related interest payments and operating lease obligations.

As discussed previously, our CAPL Credit Facility matures April 25, 2024 and our JKM Credit Facility matures July 16, 2026. In addition, we have finance lease obligations that expire in 2027 and operating leases that expire through 2041. See Note 11 to the financial statements for additional information on our debt and finance lease obligations, Note 12 for information on interest rate swap contracts and Note 13 for information on our operating lease obligations.

See Note 10 for information on AROs, Note 15 for information on environmental matters and Note 16 for information on minimum fuel volume purchase commitments and legal matters.

See Note 2 for information on our concentration risks related to our customers, fuel suppliers and fuel carriers.

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Outlook

As noted previously, 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, which affect our motor fuel gross profit.

Our results for 2023 are anticipated to be impacted by the following:

•

The acquisition of assets from CSS is anticipated to increase gross profit particularly in the wholesale segment.

•

We anticipate that we will continue to realize reductions in our fuel costs as a result of new or amended fuel purchase contracts.

•

Given increases in LIBOR, we anticipate higher interest expense.

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 Policies

No new accounting guidance significantly impacted our business in 2022. For information on our significant accounting policies, see Note 2 to the financial statements.

Critical Accounting Policies and Estimates

We prepare our financial statements in conformity with U.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

The core principle of accounting guidance on revenue recognition 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 applies to over 90% of our revenues as the only primary revenue stream outside the scope of this guidance is rental income.

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–Revenue from Contracts with Customers 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.

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Accounts receivable primarily result from the sale of motor fuels to customers. Our accounts receivable is generally considered as having a similar risk profile. 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 and fuel and lease agreements are generally cross-collateralized when applicable. Receivables are recorded at face value, without interest or discount.

The allowance for credit losses is generally based upon historical experience while also factoring in any new business conditions that might impact the historical analysis, such as market conditions and bankruptcies of particular customers. Credit loss expense is included in general and administrative expenses.

LGW and CAPL JKM Wholesale collect 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 and CAPL JKM Wholesale’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 and Joe’s Kwik Marts’ retail sales and cost of sales include motor fuel taxes as the taxes are included in the cost paid for motor fuel and LGWS and Joe’s Kwik Mart’s have no direct responsibility to collect or remit such taxes to the taxing authorities.

See Notes 5 and 22 to the financial statements for additional information on our revenues and related receivables.

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;

•

Goodwill is not recognized. Rather, any excess consideration transferred 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.

Whether we account for a transaction as an asset acquisition or a business combination, determining the fair value of assets and liabilities 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.

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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, we 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.

At December 31, 2022 and 2021, we had goodwill totaling $99.4 million and $100.5 million, respectively. Of the December 31, 2022 balance, $49.7 million was assigned to the wholesale reporting unit and $49.7 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 at December 31, 2022 or 2021.

Tax Matters

As a limited partnership, we are not subject to federal and state income taxes. However, our corporate subsidiaries are subject to income taxes. Income tax attributable to our taxable income (including any dividend income from our corporate subsidiaries), which may differ significantly from income for financial statement purposes, is assessed at the individual limited partner unitholder level. 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 annual period.

Certain activities that generate non-qualifying income are conducted through our wholly owned taxable corporate subsidiaries, LGWS and Joe’s Kwik Marts. Current and deferred income taxes are recognized on the earnings of these subsidiaries. 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 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risks to which we are exposed are interest rate risk and commodity price risk.

Interest Rate Risk

As of December 31, 2022, we had $606.1 million outstanding on our CAPL Credit Facility. Our outstanding borrowings bear interest at LIBOR plus an applicable margin, which was 1.75% at December 31, 2022.

In 2020, we entered into interest rate swap contracts to hedge against interest rate volatility on our variable rate borrowings under the CAPL Credit Facility. The interest rate swap contracts have a total notional amount of $300 million, an average fixed rate of 0.438% and mature on April 1, 2024. See Note 12 to the financial statements for additional information.

Taking the interest rate swap contracts into account, our effective interest rate on our CAPL Credit Facility at December 31, 2022 was 4.2%. A one percentage point change in LIBOR would impact annual interest expense by approximately $3.1 million.

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As of December 31, 2022, we had $159.0 million outstanding under our Term Loan Facility. Our borrowings under the JKM Credit Facility had a weighted-average interest rate of 6.5% as of December 31, 2022 (LIBOR plus an applicable margin, which was 2.25% as of December 31, 2022). A one percentage point change in LIBOR would impact annual interest expense by approximately $1.6 million.

Commodity Price Risk

We purchase gasoline and diesel fuel from several suppliers at costs that are subject to market volatility. These purchases are generally made pursuant to contracts or at market prices established with the supplier.

We do not currently engage in hedging activities for these purchases due to our pricing structure that allows us to generally pass on price changes to our customers and related parties.

A material amount of our total gallons purchased are subject to Terms Discounts for prompt payment and other rebates and incentives, which are recorded within cost of sales. Prompt payment discounts are based on a percentage of the purchase price of motor fuel. As such, the dollar value of these discounts increases and decreases corresponding with motor fuel prices. Based on our current volumes, we estimate a $10 per barrel change in the price of crude oil would impact our annual wholesale motor fuel gross profit by approximately $2.8 million related to these payment discounts.

Foreign Currency Risk

Our operations are located in the U.S., and therefore are not subject to foreign currency risk.

ITEM 8. FINANCIAL STATEMENTS

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiring most companies that file reports with the SEC to include a management report on such company’s internal control over financial reporting in its Form 10-K. In addition, our independent registered public accounting firm must attest to our internal control over financial reporting.

The management of CrossAmerica is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system was designed to provide reasonable assurance to the company’s management and Board regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. CrossAmerica management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2022. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework, 2013 version. Based on our assessment, we believe that, as of December 31, 2022, the Partnership’s internal control over financial reporting is effective based on those criteria.

Attestation Report of the Independent Registered Public Accounting Firm

Grant Thornton LLP (PCAOB ID No. 248), our independent registered public accounting firm, has audited our internal control over financial reporting as of December 31, 2022. Their report dated February 27, 2023, expressed an unqualified opinion on our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors, General Partner and Limited Partners

CrossAmerica Partners LP

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of CrossAmerica Partners LP (a Delaware partnership) and subsidiaries (the “Partnership”) as of December 31, 2022 and 2021, the related consolidated statements of income, equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule I (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Partnership’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 27, 2023 expressed an unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Classification of Series A Preferred Membership Interests

As described further in Note 18 to the financial statements, the Partnership’s indirect wholly-owned subsidiary CAPL JKM Holdings LLC (“Holdings”) issued and sold 25,000 newly created Series A Preferred Interests at a price of $1,000 per Series A Preferred Interest, for an aggregate purchase price of $25 million on March 29, 2022. The Series A Preferred Interests had an initial liquidation preference of $1,000 per share and are subject to exchange through conversion or redemption (a) upon a liquidation or deemed liquidation event of Holdings, (ii) upon a change of control of the Partnership, (iii) from and after March 1, 2024, at the option of the Partnership and Holdings, and (iv) on March 31, 2029. The Exchange Price will be payable in common units of the Partnership or, if any holder of Series A Preferred Interests so elects, redeemable in cash. We identified the classification of the Series A Preferred Interests as a critical audit matter.

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The determination of the classification of the Series A Preferred Interests involves an evaluation of the relevant terms and provisions within the Series A Investment Agreement, the Holdings Operating Agreement, the CAPL Credit Facility and the JKM Credit Facility. The relevant accounting literature is complex, and required management to consider the economic characteristics and risks of the Series A Preferred Interests, including all of its stated and implied substantive terms and features, to determine whether the nature of the Series A Preferred Interests are more akin to debt or to equity. The interpretation and application of the accounting literature is subjective and requires specialized skills and knowledge. Auditing management’s conclusions related to the classification of the Series A Preferred Interests involved especially challenging auditor judgment to determine whether the nature of the host contract was more akin to debt or to equity and was therefore properly classified.

Our audit procedures related to the classification issuance of the Series A Preferred Interests included the following, among others.

•

We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls related to the accounting for the issuance of the Series A Preferred Interests, which included classification of the Series A Preferred Interests.

•

We utilized personnel with specialized skill and knowledge to assist in evaluating the appropriateness of management’s conclusions by (1) inspecting and assessing the relevant terms and provisions of the Series A Investment Agreement, the Holdings Operating Agreement, the CAPL Credit Facility and the JKM Credit Facility; (2) comparing the relevant terms and provisions to management’s analysis; and (3) assessing the appropriateness of management’s application of the relevant accounting literature.

/s/ GRANT THORNTON LLP

We have served as the Partnership’s auditor since 2011.

Arlington, Virginia

February 27, 2023

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors, General Partner and Limited Partners

CrossAmerica Partners LP

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of CrossAmerica Partners LP (a Delaware partnership) and subsidiaries (the “Partnership”) as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Partnership as of and for the year ended December 31, 2022, and our report dated February 27, 2023 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Arlington, Virginia

February 27, 2023

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CROSSAMERICA PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(Thousands of Dollars, except unit data)

December 31,

ASSETS

Current assets:

Accounts receivable from related parties 743 1,149

Current portion of interest rate swap contracts 13,827 115

Interest rate swap contracts, less current portion 3,401 2,916

LIABILITIES AND EQUITY

Current liabilities:

Current portion of debt and finance lease obligations $ 11,151 $ 10,939

Current portion of operating lease obligations 35,345 34,832

Accounts payable to related parties 7,798 7,679

Accrued expenses and other current liabilities 23,144 20,682

Debt and finance lease obligations, less current portion 761,638 810,635

Operating lease obligations, less current portion 135,220 140,149

Commitments and contingencies (Notes 15 and 16)

Preferred membership interests 26,156 —

Equity:

Accumulated other comprehensive income 16,469 3,030

The accompanying notes are an integral part of these consolidated financial statements.

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CROSSAMERICA PARTNERS LP

CONSOLIDATED STATEMENTS OF INCOME

(Thousands of Dollars, except unit and per unit amounts)

For the Year Ended December 31,

Income from CST Fuel Supply equity interests — — 3,202

Operating expenses:

Gain on dispositions and lease terminations, net 1,143 2,037 80,924

Accretion of preferred membership interests 1,726 — —

IDR distributions — — 133

Basic and diluted earnings per common unit $ 1.63 $ 0.57 $ 2.87

Weighted-average limited partner units:

Supplemental information:

(b) excludes depreciation, amortization and accretion

The accompanying notes are an integral part of these consolidated financial statements.

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CROSSAMERICA PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of Dollars)

For the Year Ended December 31,

Cash flows from operating activities:

Equity-based employee and director compensation expense 2,294 1,311 172

Gain on dispositions and lease terminations, net (1,143 ) (2,037 ) (88,912 )

Cash flows from investing activities:

Principal payments received on notes receivable 203 793 974

Proceeds from sale of assets to Circle K — — 23,049

Cash flows from financing activities:

Borrowings under the Term Loan Facility 1,120 182,460 —

Repayments on the Term Loan Facility (24,600 ) — —

Net proceeds from issuance of preferred membership interests 24,430 — —

Payments of finance lease obligations (2,724 ) (2,604 ) (2,458 )

Payments of deferred financing costs (474 ) (7,201 ) —

Distributions paid on distribution equivalent rights (202 ) (141 ) (40 )

Distributions paid to holders of the IDRs — — (133 )

Net increase (decrease) in cash and cash equivalents 8,406 7,135 (1,267 )

Cash and cash equivalents at beginning of period 7,648 513 1,780

Cash and cash equivalents at end of period $ 16,054 $ 7,648 $ 513

The accompanying notes are an integral part of these consolidated financial statements.

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CROSSAMERICA PARTNERS LP

CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME

(Thousands of Dollars, except unit amounts)

Limited Partners’ Interest

Common Unitholders IDRs AOCI Total Equity

Units Dollars Dollars Dollars Dollars

Other comprehensive income (loss)

Unrealized loss on interest rate swap contracts — — — (2,859 ) (2,859 )

Total other comprehensive loss — — — (2,456 ) (2,456 )

Vesting of equity awards, net of units withheld for tax 2,041 26 — — 26

Other comprehensive income

Unrealized gain on interest rate swap contracts — — — 4,466 4,466

Total other comprehensive income — — — 5,486 5,486

Tax effect from intra-entity transfer of assets — (1,094 ) — — (1,094 )

Vesting of equity awards, net of units withheld for tax 21,688 411 — — 411

Other comprehensive income (loss)

Unrealized gain on interest rate swap contracts — — — 17,336 17,336

Total other comprehensive income — — — 13,439 13,439

Vesting of equity awards, net of units withheld for tax 24,894 510 — — 510

Accretion of preferred membership interests — (1,726 ) — — (1,726 )

The accompanying notes are an integral part of these consolidated financial statements.

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CROSSAMERICA PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. DESCRIPTION OF BUSINESS

Purchase of the General Partner by the Topper Group

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 23, 2023, the Topper Group has beneficial ownership of a 38.5% limited partner interest in the Partnership.

Description of Business

Our business consists of:

•

the wholesale distribution of motor fuels;

•

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

•

the retail sale of motor fuels to end customers at retail sites operated by commission agents and ourselves; and

•

the operation of retail sites, including the sale of convenience merchandise to end customers.

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

•

LGW and CAPL JKM Wholesale, which distribute motor fuels on a wholesale basis and generate Qualifying Income under Section 7704(d) of the Internal Revenue Code;

•

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

•

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

•

Joe’s Kwik Marts, which owns and leases real estate and personal property at certain of our company operated sites. Joe’s Kwik Marts also sells motor fuels on a retail basis and sells convenience merchandise items to end customers. Income from Joe’s Kwik Marts generally is not Qualifying Income under Sections 7704(d) of the Internal Revenue Code.

Note 2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

These consolidated financial statements were prepared in accordance with U.S. GAAP. These financial statements include the consolidated accounts of CrossAmerica and subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

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CROSSAMERICA PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and Cash Equivalents

We consider all short-term investments with a maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which, for cash equivalents, approximates fair value due to their short-term maturity. We are potentially subject to financial instrument concentration of credit risk through our cash and cash equivalents. We maintain cash and cash equivalents with several major financial institutions and have approximately $14.6 million of cash and cash equivalents in excess of FDIC insurance limits at December 31, 2022. We have not experienced any losses on our cash and cash equivalents and do not believe we have significant credit risk.

Receivables and Financial Instrument Credit Losses

Accounting guidance regarding credit losses on financial instruments requires that for most financial assets, losses be based on an expected loss approach which includes estimates of losses over the life of exposure that considers historical, current and forecasted information. Disclosures related to the methods used to estimate the losses as well as a specific disaggregation of balances for financial assets are also required.

The primary financial instrument within the scope of this guidance is our accounts receivable, which mainly result from the sale of motor fuels to customers. Our accounts receivable is generally considered as having a similar risk profile. Credit is extended to a customer, generally a dealer or a commission agent, based on an evaluation of the customer’s financial condition prior to entering into fuel supply and/or lease agreements. In certain circumstances, collateral may be required from the customer and fuel and lease agreements are generally cross-collateralized when applicable. Receivables are recorded at face value, without interest or discount.

The allowance for credit losses is generally based upon historical experience while also factoring in any new business conditions that might impact the historical analysis, such as market conditions and bankruptcies of particular customers. Credit loss expense is included in general and administrative expenses.

Inventories

Motor fuel inventory consists of gasoline, diesel fuel and other petroleum products and is stated at the lower of average cost or net realizable value using the first-in, first-out method. We record inventory from the time of the purchase of motor fuels from third-party suppliers until the retail sale to the end customer.

Retail site merchandise inventory is valued at the lower of average cost or net realizable value using the first-in, first-out method, written down, as necessary, for potentially obsolete or slow-moving inventory.

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, including acquisition costs, to the individual assets acquired and liabilities assumed on a relative fair value basis.

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.

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CROSSAMERICA PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The income statement includes the results of operations for each acquisition from their respective date of acquisition.

Whether we account for a transaction as an asset acquisition or a business combination, determining the fair value of assets and liabilities 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 consolidated financial statements in periods after acquisition, such as through depreciation and amortization.

Property and Equipment

Property and equipment is recorded at cost, which equals fair value in the case of a business combination or generally approximates fair value in the case of an asset acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the related assets, including: 10 to 20 years for buildings and improvements and three to 30 years for equipment. Amortization of leasehold improvements is based upon the shorter of the remaining terms of the leases including renewal periods that are reasonably assured, or the estimated useful lives, which generally range from seven to 10 years.

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Maintenance and repairs are charged to operations as incurred. Gains or losses on the disposition of property and equipment are recorded in the period the sale meets the criteria for recognition.

Intangible Assets

Intangible assets are recorded at fair value in the case of a business combination or at a value that generally approximates fair value in the case of an asset acquisition. Intangible assets associated with wholesale fuel supply contracts and wholesale fuel distribution rights are amortized over 10 years. Trademarks and licenses are amortized over periods from five to 15 years. Covenants not to compete are amortized over the shorter of the contract term or five years. Intangible assets with finite useful lives are amortized over their respective estimated useful lives and reviewed for impairment if we believe that changes or triggering events have occurred that could have caused the carrying value of the intangible assets to exceed its fair value. Intangible assets with indefinite lives are not amortized but are tested for impairment annually or more frequently if events and circumstances indicate that the intangible assets might be impaired. No significant impairment charges relating to intangible assets were recorded for any period presented.

Impairment of Assets

Long-lived assets, which include property and equipment and finite-lived intangible assets, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods. See Note 7 for information regarding impairment charges recorded primarily upon classifying sites within assets held for sale.

Goodwill

Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. Goodwill is not amortized, but instead is tested for impairment at the reporting unit level at least annually, and more frequently if events and circumstances indicate that the goodwill might be impaired. The annual impairment testing date of goodwill is October 1.

In performing our annual impairment analysis, we 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.

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CROSSAMERICA PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

No goodwill was impaired for any period presented.

Debt Issuance Costs

Debt issuance costs that are incurred in connection with the issuance of debt are deferred and amortized to interest expense using the straight-line method (which approximates the effective interest method) over the contractual term of the underlying indebtedness. Debt issuance costs are classified as a reduction of the associated liability unless there is no balance outstanding under a revolving line of credit facility, in which case such costs are classified as an asset.

Environmental Matters

Liabilities for future remediation costs are recorded when environmental assessments from governmental regulatory agencies and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Environmental liabilities are based on best estimates of probable undiscounted future costs using currently available technology and applying current regulations, as well as our own internal environmental policies. Environmental liabilities are difficult to assess and estimate due to uncertainties related to the magnitude of possible remediation, the timing of such remediation and the determination of our obligation in proportion to other parties. Such estimates are subject to change due to many factors, including the identification of new sites requiring remediation, changes in environmental laws and regulations and their interpretation, additional information related to the extent and nature of remediation efforts and potential improvements in remediation technologies. Amounts recorded for environmental liabilities have not been reduced by possible recoveries from third parties.

Asset Retirement Obligations

We record a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to remove USTs used to store motor fuel at owned and leased sites at the time we incur that liability, which is generally when the UST is installed or upon acquiring the site. We record a discounted liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset. We depreciate the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the estimated remaining life of the UST. Accretion expense is reflected in depreciation, amortization and accretion expense. We base our estimates of the anticipated future costs for removal of a UST on our prior experience with removal. Removal costs include the cost to remove the USTs, soil remediation costs resulting from the spillage of small quantities of motor fuel in the normal operations of our business and other miscellaneous costs. We review our assumptions for computing the estimated liability for the removal of USTs on an annual basis. Any change in estimated cash flows is reflected as an adjustment to the liability and the associated asset.

Segment Reporting

We present our segment reporting in accordance with ASC 280–Segment Reporting and engage in both the wholesale and retail distribution of motor fuels, primarily gasoline and diesel fuel. We present our results to our chief operating decision maker segregated between wholesale and retail activities. As a result, we are deemed to conduct our business in two segments: 1) the wholesale segment and 2) the retail segment. See Note 22 for additional information, including regarding a change in our segment reporting.

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CROSSAMERICA PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

The core principle of accounting guidance on revenue recognition 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 applies to over 90% of our revenues as the only primary revenue stream outside the scope of this guidance is rental income.

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 consolidated 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–Revenue from Contracts with Customers 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 Notes 5 and 22 for additional information on our revenues and related receivables.

Cost of Sales

We include in our cost of sales all costs we incur to acquire motor fuel and merchandise, including the costs of purchasing, storing and transporting inventory prior to delivery to our customers. A component of our cost of sales is the discount for prompt payment and other rebates, discounts and incentives offered by our suppliers. Prompt payment discounts from suppliers are based on a percentage of the purchase price of motor fuel and the dollar value of these discounts varies with motor fuel prices. Cost of sales does not include any depreciation of our property and equipment, as these amounts are included in depreciation, amortization and accretion expense on our consolidated statements of income.

Motor Fuel Taxes

LGW and CAPL JKM Wholesale collect motor fuel taxes, which consist of various pass-through taxes collected from customers on behalf of taxing authorities and remit such taxes directly to those taxing authorities. LGW’s and CAPL JKM Wholesale’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 and Joe’s Kwik Marts’ retail sales and cost of sales include motor fuel taxes as the taxes are included in the cost paid for motor fuel and LGWS and Joe’s Kwik Marts have no direct responsibility to collect or remit such taxes to the taxing authorities.

Lease Accounting

We lease certain sites from third parties under long-term arrangements with various expiration dates.

Accounting guidance on leases requires the recognition of lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements. In order to measure our lease liability under our leases as lessee, we are required to discount our minimum rental payments using the rate implicit in the lease, unless such rate cannot be readily determined, in which case our incremental borrowing rate is used. As we do not know the amount of our lessors’ initial direct costs, we are generally unable to determine the rate implicit in our leases. As a result, we generally use our incremental borrowing rate, which is the rate we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment. We considered the rates we paid in previous financing and sale-leaseback transactions, the rates on our borrowings under our prior secured revolving credit facility and mortgage rates on commercial properties for various terms in developing our incremental borrowing rates.

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CROSSAMERICA PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ASC 842–Leases requires leases be evaluated and classified as either operating or finance for financial reporting purposes. The lease term used for lease evaluation includes option periods only in instances in which the exercise of the option period is reasonably certain. Generally, lease payments are expensed on a straight-line basis over the term of the lease including renewal periods that are reasonably certain at the inception of the lease. In addition to these lease payments, certain leases require additional contingent payments based on sales volume or future inflation, which are expensed as incurred.

See Notes 11 and 13 for additional information.

Income Taxes

Our wholly owned taxable subsidiaries recognize deferred income tax assets and liabilities for the expected future income tax consequences of temporary differences between financial statement carrying amounts and the related income tax basis.

Income tax attributable to our earnings and losses, excluding the earnings and losses of our wholly owned taxable subsidiaries, are assessed at the individual level of the unitholder. Accordingly, we do not record a provision for income taxes other than for those earnings and losses generated or incurred by our wholly owned taxable subsidiaries.

Tax positions not meeting the more-likely-than-not recognition threshold at the financial statement date may not be recognized or continue to be recognized under the accounting guidance for income taxes. Where required, we recognize interest and penalties for uncertain tax positions in income taxes.

Valuation allowances are reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset. Management considers 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 consolidated financial statements in the future.

Earnings per Common Unit

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

See Note 21 for disclosure regarding the elimination of the IDRs, which closed on February 6, 2020.

Interest Rate Swap Contracts

Commencing in March 2020, the Partnership started to use interest rate swap contracts to reduce its exposure to unfavorable changes in interest rates. The Partnership accounts for derivative contracts in accordance with ASC 815–Derivatives and Hedging, and recognizes derivative instruments as either assets or liabilities on the consolidated balance sheet and measures those instruments at fair value. The changes in fair value of the derivative transactions are presented in accumulated other comprehensive income and reclassified to interest expense as the interest payments on our CAPL Credit Facility are made.

The portion of derivative positions that are anticipated to settle within a year are included in other current assets and accrued expenses and other current liabilities, while the portion of derivative positions that are anticipated to settle beyond a year are recorded in other assets or other long-term liabilities.

Cash inflows and outflows related to derivative instruments are included as a component of operating activities on the consolidated statements of cash flows, consistent with the classification of the hedged interest payments on our CAPL Credit Facility.

See Note 12 for information related to our interest rate swap contracts.

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CROSSAMERICA PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recently Adopted Accounting Pronouncements – Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met to ease an entity’s financial reporting burden as the market transitions from LIBOR and other interbank offered rates to alternative reference rates. Subsequently, the FASB issued ASU 2021-01 to clarify the scope of Topic 848 and ASU 2022-06 to defer the sunset date of Topic 848. The guidance was effective upon issuance and may be applied through December 31, 2024. The adoption of this guidance did not have a material effect on the Partnership's consolidated financial statements.

Concentration Risks

For 2022, 2021 and 2020, approximately 21%, 19% and 17% of our rent income was from two multi-site operators, respectively.

In 2022, our wholesale business purchased approximately 81% of its motor fuel from four suppliers. In 2021, our wholesale business purchased approximately 80% of its motor fuel from four suppliers. In 2020, our wholesale business purchased approximately 74% of its motor fuel from four suppliers. No other fuel suppliers accounted for 10% or more of our motor fuel purchases during 2022, 2021 or 2020.

Approximately 23%, 27% and 26% of our motor fuel gallons sold were delivered by two carriers for 2022, 2021 and 2020, respectively.

COVID-19 Pandemic

During the first quarter of 2020, an outbreak of a novel strain of coronavirus spread worldwide, including to the U.S., posing public health risks that have reached pandemic proportions.