Sunoco LP — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Sunoco LP is a master limited partnership focused primarily on distributing motor fuel to wholesale customers and retail customers through commission-agent sites; it also earns lease income and operates 78 retail stores. Comparisons below are with Q1 2021 unless noted.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $5.402 billion | $3.471 billion |
| Operating income | $259 million | $204 million |
| Net income | $216 million | $154 million |
| Adjusted EBITDA (non-GAAP) | $191 million | $157 million |
| Net cash from operating activities | $23 million | $152 million |
| Capital expenditures | $26 million | $18 million |
| Cash distributions per common unit | $0.8255 | $0.8255 |
- Motor-fuel gallons sold increased 0.8% to 1.769 billion; motor-fuel gross profit per gallon, excluding inventory adjustments, rose 19.6% to 12.4 cents.
- Total gross profit was $430 million, versus $351 million. Operating margin was approximately 4.8% of revenue, compared with 5.9%; net margin was approximately 4.0%, compared with 4.4%.
- At March 31, cash was $104 million and total debt was $3.706 billion, including $1.012 billion drawn on the revolver. The revolver had $0.5 billion of unused availability; its weighted-average interest rate was 2.40%. Sunoco reported compliance with its financial covenants.
- Operating cash flow fell to $23 million, primarily because cash flows from operating assets and liabilities declined by $208 million year over year, partly offset by higher cash-basis earnings. Investing cash outflow was $285 million, including the $264 million acquisition deposit; financing provided $341 million.
Material changes and unusual items
- Revenue increased approximately 56%, while net income increased approximately 40% and Adjusted EBITDA approximately 22%. Management attributed EBITDA growth mainly to higher motor-fuel gross profit and improved non-fuel and lease gross profit, partly offset by $23 million of higher operating costs. Costs included acquisition-related, employee, credit-card processing, environmental, and maintenance expenses, among others.
- GAAP results included favorable, noncash fuel-inventory valuation adjustments of $120 million, compared with $100 million in Q1 2021, as rising fuel prices reduced LIFO lower-of-cost-or-market reserves. The filing’s Adjusted EBITDA measure excludes these adjustments; it is non-GAAP and should not be treated as a substitute for net income or cash flow.
- On April 1, 2022, Sunoco completed its $264 million acquisition of a transmix processing and terminal facility in Huntington, Indiana. The facility has stated capacity of 23,000 barrels per day and approximately 750,000 barrels of onsite storage. The acquisition deposit was recorded in other current assets at quarter-end.
- On April 7, Sunoco amended and restated its revolving credit agreement, extending maturity from July 2023 to April 2027.
- Total assets rose to $6.605 billion from $5.815 billion at year-end 2021; inventory increased to $704 million from $534 million. Total debt rose to $3.706 billion from $3.281 billion, principally alongside increased revolver borrowings.
Outlook, risks, and contingencies
- Management expected cash from operations and revolver capacity to support 2022 working capital and announced growth spending, and stated that it expected liquidity sources to meet short- and long-term needs. It forecast approximately $50 million of 2022 maintenance capital expenditures and at least $150 million of growth capital expenditures. No specific earnings or revenue guidance was provided.
- Management identified risks including fuel-price and demand volatility, supplier concentration, competition, acquisitions and integration, interest rates and access to financing, economic conditions, regulation, environmental matters, cyberattacks, and conflicts of interest associated with Energy Transfer and the partnership structure.
- Sunoco disclosed no material change to the risk factors in its 2021 Form 10-K. It said known litigation was not expected to have a material adverse impact. The filing also reported fuel inventory exposure and an unrealized commodity-derivative gain of $11 million at March 31; the positions were described as economic hedges, not accounting-designated hedges.
- The board declared a $0.8255 per common-unit quarterly distribution, payable May 19, 2022. The partnership stated that future distributions depend on available cash after reserves and expenses.
Important facts for investors to verify
- How much of reported earnings reflects the $120 million favorable inventory valuation adjustment, and how sustainable are underlying margins and Adjusted EBITDA?
- What drove the working-capital cash outflow, and how might fuel prices and payment timing affect operating cash flow and liquidity?
- How will the Huntington facility contribute to results, and what integration, operating, or additional capital needs may arise?
- How will higher revolver borrowings, floating-rate exposure, and the 2027 facility maturity affect interest expense and financing flexibility?
- Can Sunoco sustain distributions while funding planned growth capital expenditures and servicing debt?