Sunoco LP annual report, FY2023

Sunoco LP — FY2023 Form 10-K

Reporting period: Year ended December 31, 2023; filed February 16, 2024. This is an annual report, not a standalone fourth-quarter earnings report. Amounts below are in U.S. dollars unless stated otherwise.

Business context and financial performance

Sunoco is a master limited partnership managed by Energy Transfer. Its principal business is wholesale motor-fuel distribution, with retail operations in Hawaii and New Jersey, terminal operations, and related leasing income. It distributed 8.342 billion gallons in 2023, up 8.1% from 2022.

Metric	2023	2022	Change
Revenue	$23.068 billion	$25.729 billion	Down 10.3%
Operating income	$635 million	$678 million	Down $43 million
Net income	$394 million	$475 million	Down $81 million
Adjusted EBITDA (non-GAAP)	$964 million	$919 million	Up $45 million
Operating cash flow	$600 million	$561 million	Up $39 million
Capital expenditures	$215 million	$186 million	Up $29 million

Motor-fuel sales were $22.525 billion, approximately 98% of revenue. Fuel profit averaged 12.7 cents per gallon, versus 12.8 cents in 2022. Net income included a $114 million unfavorable inventory adjustment as fuel prices declined; Adjusted EBITDA excludes inventory adjustments and certain other items. The filing does not present a single gross-margin measure. Calculated operating margin was approximately 2.8% of revenue, compared with 2.6% in 2022; calculated net margin was approximately 1.7%, compared with 1.8%.

Cash, debt and distributions

• Cash and cash equivalents were $29 million at year-end, down from $82 million. Cash flows were $600 million from operations, negative $288 million from investing, and negative $365 million from financing.
• Total debt was $3.605 billion, versus $3.594 billion a year earlier. Debt included $411 million outstanding under the revolving Credit Facility; unused availability was $1.084 billion, and the weighted-average rate on outstanding facility borrowings was 7.54%. Net leverage was 3.66x, and Sunoco reported compliance with financial covenants.
• Interest expense was $217 million, up $35 million, primarily due to higher rates on floating-rate debt. About $411 million of debt was variable-rate; the filing estimates a 100-basis-point rate increase would raise annual interest expense by up to $4 million.
• Cash distributions paid in 2023 totaled $371 million. The quarterly common-unit distribution increased from $0.8255 to $0.8420 during 2023; the $0.8420 distribution for the quarter ended December 31 was declared in January 2024 and paid February 20, 2024. Distributions are not guaranteed.
• 2023 capital spending included $70 million of maintenance and $145 million of growth capital. Management expected approximately $70 million of maintenance and at least $200 million of growth capital spending in 2024.

Changes, outlook and material developments

• Revenue declined while gallons distributed and Adjusted EBITDA increased. Management attributed EBITDA growth mainly to higher fuel volumes and increased throughput, storage margins, and rental income from acquisitions. Higher operating costs and interest expense, along with the inventory adjustment, contributed to lower net income.
• In May 2023, Sunoco acquired 16 refined-product terminals for approximately $111 million. In September, it issued $500 million of 7.0% senior notes due 2028 and used the proceeds to repay Credit Facility borrowings.
• After year-end, Sunoco agreed to acquire NuStar in an all-equity transaction valued at approximately $7.3 billion including assumed debt. NuStar unitholders are to receive 0.400 Sunoco common units per NuStar unit; closing was expected in the second quarter of 2024, subject to conditions. Sunoco expected to assume debt and issue additional debt totaling approximately $4.2 billion in connection with the transaction.
• Also after year-end, Sunoco agreed to sell 204 convenience stores to 7-Eleven for approximately $1.0 billion, with customary adjustments, and to amend the related take-or-pay fuel-supply agreement. It also announced the acquisition of terminals in Amsterdam and Bantry Bay for €170 million, including working capital. These transactions were pending customary conditions at the time of the filing.
• Management said inflation had a minimal impact on results because energy-cost increases are generally passed through to customers. It expects strategic transactions to diversify the business, add scale, and expand cash available for reinvestment and distributions. Results remain exposed to seasonal demand, with volumes typically higher in the second and third quarters.

Risks and unusual items

• Fuel sales depend on demand, fuel prices and margins, supplier availability, customer credit, and competition. Fuel represented about 69% of 2023 profit; the filing identifies 7-Eleven as approximately 20% of both revenue and gallons sold.
• Sunoco faces potential demand and financing effects from the transition to lower-carbon energy, climate regulation, renewable-fuel requirements, and physical weather risks. Environmental laws, spills, underground storage tanks, and remediation may result in costs or liabilities. Recorded environmental remediation liabilities were $18 million; asset retirement obligations for underground storage tanks were $84 million.
• Debt, interest rates, trade-credit availability, acquisition integration, and access to capital may affect liquidity and distributions. NuStar’s expected debt and unit issuance could increase leverage and dilute existing unitholders; the transaction also carries closing and integration risks.
• Energy Transfer owns Sunoco’s general partner and incentive distribution rights and held approximately 33.7% of common units at year-end. Related-party purchases, services, reimbursements, and distribution interests create potential conflicts of interest.
• The filing reports a $1.1 billion working inventory balance in its market-risk discussion, while the year-end balance sheet reports inventories of $889 million; the filing text does not explain this difference. It also gives conflicting descriptions of the year-end commodity-derivative position: one passage reports an $8.6 million unrealized loss and another an $8.6 million unrealized gain. These values require confirmation.
• The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified valuation of property and equipment acquired in the 2023 Zenith terminal acquisition as a critical audit matter; it did not modify its overall opinion.

Investor verification priorities

1. Confirm the 2023 inventory adjustment’s effect on GAAP earnings and reconcile the conflicting derivative gain/loss disclosures and inventory figures.
2. Assess the funding, leverage, dilution, covenant headroom, and integration assumptions for the NuStar acquisition, including the expected $4.2 billion of assumed and additional debt.
3. Verify closing status and proceeds, fuel-supply economics, and continuing customer exposure associated with the 7-Eleven store sale and contract amendment.
4. Review the quality and sustainability of Adjusted EBITDA growth relative to lower net income, rising interest expense, capital spending, and distribution requirements.
5. Evaluate customer concentration, environmental obligations, Energy Transfer-related transactions and governance conflicts, and the risks to fuel demand and capital access.