Sunoco LP — 2018 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Sunoco distributes motor fuel across more than 30 states and operates retail stores in Hawaii, New Jersey and Texas. Following the January 23, 2018 sale of 1,030 company-operated fuel outlets to 7-Eleven for approximately $3.2 billion, those operations are reported as discontinued operations. The continuing business includes fuel distribution and marketing, commission-agent locations, and a smaller retail segment. This portfolio change makes comparisons with 2017 less directly comparable.
Financial performance and liquidity
- Q2 revenue: $4.607 billion, versus $2.892 billion in Q2 2017. Motor fuel sales rose to $4.507 billion from $2.685 billion, reflecting higher fuel prices and greater gallons sold. Other revenue declined, primarily after 207 sites shifted to the commission-agent model.
- Q2 earnings: Gross profit was $310 million, up from $259 million. Operating income was $128 million, compared with an operating loss of $20 million. Continuing-operations income was $94 million; net income was $68 million, including a $26 million discontinued-operations loss. Diluted earnings per common unit were $0.58.
- Q2 operating measures: Adjusted EBITDA, a non-GAAP measure, was $140 million versus $220 million; adjusted distributable cash flow was $106 million versus $158 million. Motor-fuel gross profit was 9.9 cents per gallon versus 16.2 cents, with the filing attributing the decline primarily to divestiture of most company-operated sites. These per-gallon data include discontinued operations.
- Six-month results: Revenue was $8.356 billion versus $5.700 billion, and gross profit was $606 million versus $515 million. Net loss was $247 million versus $221 million; this included a $263 million discontinued-operations loss and a $109 million loss on debt extinguishment. Adjusted EBITDA was $249 million versus $375 million; adjusted distributable cash flow was $191 million versus $235 million.
- Cash flow: For the first six months, continuing operating activities provided $255 million versus $19 million. Continuing investing activities used $143 million, including $112 million for acquisitions; continuing financing activities used $2.861 billion. Discontinued operations provided $2.740 billion net cash, largely reflecting the 7-Eleven sale proceeds. Cash ended the period at $19 million.
- Debt and liquidity: June 30 debt principal was approximately $2.632 billion, including $2.2 billion of senior notes, $320 million drawn on the revolving facility and a $110 million sale-leaseback financing obligation. Balance-sheet carrying amounts differ due to current maturities and debt issuance costs. The partnership had $1.2 billion of unused availability on its existing revolver and was in compliance with its covenants. On July 27, it replaced that facility with a $1.50 billion revolver maturing in 2023.
- Distributions: The quarterly common-unit distribution remained $0.8255 per unit. A distribution of $0.8255 was declared July 27 for payment August 15, 2018. The filing cautions that future distributions are not guaranteed.
Material changes, outlook and risks
- In January, Sunoco issued $2.2 billion of new senior notes at coupons of 4.875% to 5.875%, used sale proceeds and financing to refinance prior notes and repay its term loan, redeem approximately $313 million of preferred units, and repurchase 17.3 million common units for approximately $540 million. Debt refinancing and redemptions generated the $109 million six-month extinguishment loss.
- The 7-Eleven transaction includes a 15-year take-or-pay fuel supply agreement for approximately 2.0 billion gallons annually, with up to 500 million additional gallons to be added over the first four years.
- Sunoco acquired Superior fuel-distribution assets for approximately $58 million, including working-capital adjustments, and acquired 26 fuel outlets for approximately $54 million. After quarter-end, it completed the approximately $66 million Sandford Energy and Transportation acquisition.
- Management expects to use the new revolver and operating cash to fund 2018 growth capital and working-capital needs. Excluding acquisitions, estimated 2018 capital spending was approximately $65 million for growth and $30 million for maintenance. The filing does not provide earnings or revenue guidance.
- Key risks identified include fuel-price and demand volatility, supplier dependence, competition, environmental and regulatory obligations, incomplete insurance coverage, acquisition integration, and conflicts of interest with ETE/ETP affiliates. Sunoco reported environmental remediation reserves of $39 million across current and noncurrent liabilities. Management did not believe pending litigation would have a material adverse impact.
- Sunoco adopted revenue-recognition standard ASC 606 in 2018 using the modified retrospective method; 2017 comparatives were not restated. Adoption reduced opening equity by $54 million, and reported Q2 2018 motor fuel revenue was $13 million lower than it would have been without adoption. The company was still evaluating the expected balance-sheet effect of the upcoming lease-accounting standard.
Most important facts for investors to verify
- How the 7-Eleven sale and long-term supply agreement affect ongoing fuel volumes, margins and cash generation.
- Whether adjusted EBITDA and distributable cash flow stabilize after the divestiture and site conversions; assess these non-GAAP measures alongside GAAP cash flow and earnings.
- Current leverage, revolver availability and covenant headroom under the July 2018 credit facility.
- The sustainability of the $0.8255 quarterly common-unit distribution relative to cash flow, debt service and capital needs.
- Final purchase-price allocations and integration results for acquisitions, and any material developments in environmental or legal contingencies.