Sunoco LP — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017. Amounts are in millions unless noted. Sunoco distributes motor fuel and operates convenience stores. Most continental U.S. retail operations were classified as discontinued operations and held for sale; continuing-operations results therefore exclude them.
Financial performance and liquidity
- Third-quarter continuing operations: Revenue was $2,555, up $388 year over year; gross profit was $251, up $59; operating income was $139 versus $54; and income from continuing operations was $132 versus $33. Net income was $138, including $6 from discontinued operations.
- Wholesale fuel revenue growth chiefly reflected higher selling prices (up 17.0%, or $0.25 per gallon) and approximately 17 million additional gallons sold. Wholesale gross profit increased $50, substantially reflecting a $49 favorable year-over-year inventory-adjustment change; excluding that effect, wholesale gross profit per gallon was consistent.
- Nine-month results: Revenue was $7,330 versus $5,918, while gross profit declined to $600 from $628 and operating income to $229 from $245. Net loss was $83 versus net income of $179, mainly due to the $264 loss from discontinued operations, including $364 of goodwill impairment charges. Continuing-operations income was $181 versus $155.
- Cash flow: Continuing-operations operating cash flow for nine months was $222 versus $172; continuing investing cash outflow was $75 versus $248, including $51 of capital expenditures. Continuing financing cash outflow was $319. Cash ended at $86, down $13 from year-end 2016. Discontinued operations generated $159 of net cash over the period.
- Debt and liquidity: Total debt was $4,225, including $644 drawn on the $1.5 billion revolver; unused revolver availability was $847, and cash was $86. The partnership reported compliance with financial covenants at quarter-end. The filing reports $4.3 billion estimated fair value of debt.
- Current assets were $5,262, including $4,147 of assets held for sale; current liabilities were $1,309. These balances are substantially affected by the pending divestiture.
- Distributions and non-GAAP measures: Common-unit distributions were $0.8255 per unit for the quarter. Adjusted EBITDA was $199 for the quarter and $574 for nine months; adjusted distributable cash flow was $132 and $367, respectively. These measures include discontinued operations and are not GAAP measures.
Material changes versus comparable periods
- Third-quarter revenue and operating income rose, but the gross-profit increase was significantly affected by a favorable inventory adjustment. Nine-month gross profit and operating income declined despite higher revenue, while interest expense increased to $162 from $111.
- The $3.3 billion 7-Eleven sale agreement covers approximately 1,112 company-operated retail outlets and related businesses and assets. The sale is subject to customary conditions, regulatory approval and purchase-price adjustments. The company also classified other retail assets as held for sale.
- Goodwill impairment associated with held-for-sale retail assets totaled $364 in the first nine months: $320 recognized in the second quarter and a further $44 in the third quarter. The sale proceeds assumed for remaining sites are an important valuation input.
- ETE purchased $300 of Series A preferred units in March. They carry a 10% annual distribution rate through March 2022, then a floating rate of 8% plus three-month LIBOR.
Outlook, commentary and risks
- Management expected the 7-Eleven transaction to close in the fourth quarter of 2017 or early first quarter of 2018. The partnership agreed to satisfy and discharge its 2020, 2021 and 2023 senior notes at specified redemption prices or make-whole premiums, plus accrued interest, subject to the transaction closing.
- Sunoco was in exclusive negotiations to sell approximately 208 additional Stripes sites, with an anticipated announcement in fourth-quarter 2017 and closing in first-quarter 2018; no assurance was given that the sale would occur or on what terms. Of 97 separately marketed real estate assets, 27 had sold and 14 were under contract at September 30.
- For full-year 2017, management expected approximately $150 of growth capital expenditures and $70 of maintenance capital expenditures. It said liquidity sources were expected to meet near- and long-term needs, while noting financing availability and operating performance could affect that outlook.
- The October 2017 revolver amendment revised leverage covenants and EBITDA definitions, including specified projected fuel-supply margins, and extended the 2.25x interest-coverage covenant through maturity. The partnership reported compliance with covenants at September 30.
- Key risks include execution and timing of retail asset sales, sale-price adjustments, contingent environmental obligations retained by Sunoco, leverage and floating-rate exposure, fuel-price and inventory volatility, supplier dependence, and affiliate-related conflicts. A one-percentage-point change in floating rates was estimated to change annual interest expense by approximately $19.
- Hurricane Harvey caused a $4 property-and-equipment impairment in discontinued operations; insurance proceeds were expected in fourth-quarter 2017. The filing also recorded $12 of transaction costs and $6 of unit-based compensation related to the 7-Eleven transaction in the quarter. A Hawaii environmental notice proposed $0.2 of penalties; management did not expect a material impact.
Important facts for investors to verify
- Whether and when the 7-Eleven sale and the separate Stripes-site and real estate sales close, and the final net proceeds after adjustments.
- The amount and timing of note redemptions, make-whole premiums and resulting debt reduction after any sale closes.
- Whether assumed proceeds for remaining held-for-sale assets are realized and whether further impairments or retained environmental liabilities arise.
- Recurring wholesale margins and cash generation excluding inventory-adjustment effects, discontinued operations and transaction-related items.
- Revolver availability, covenant headroom, interest-rate exposure and the capacity to sustain distributions after the planned divestitures.
- The impact of the 10% preferred distribution and related-party financing on cash available to common unitholders.