Sunoco LP (SUN) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Sunoco distributes motor fuel and operates convenience stores and fuel outlets across the United States, with wholesale and retail reporting segments.
Financial performance
Unless otherwise noted, amounts below are in millions of dollars. Comparisons are with the corresponding 2015 period.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $4,052.2 | $5,126.1 | $7,254.5 | $9,476.9 |
| Gross profit | $580.6 | $545.2 | $1,079.3 | $994.4 |
| Income from operations | $124.2 | $123.7 | $216.0 | $189.0 |
| Net income | $72.1 | $93.5 | $134.1 | $142.8 |
| Net income attributable to partners | $72.1 | $34.9 | $134.1 | $51.9 |
| Net income per common unit | $0.53 | $0.87 | $1.01 | $1.31 |
| Adjusted EBITDA, non-GAAP | $164.0 | $138.4 | $323.1 | $262.6 |
| Adjusted distributable cash flow attributable to partners, non-GAAP | $92.2 | $39.3 | $204.0 | $69.7 |
Q2 gross margin was approximately 14.3% versus 10.6% a year earlier; first-half gross margin was approximately 14.9% versus 10.5%. Revenue fell mainly because motor-fuel selling prices declined, while gross profit improved. Q2 retail and wholesale fuel gross profit per gallon was 24.0 cents and 8.8 cents, respectively; first-half figures were 22.7 cents and 10.0 cents.
- Cash flow: First-half operating cash flow was $199.1 million, compared with $120.9 million. Investing used $2.520 billion, including $2.2 billion for the Sunoco LLC and Sunoco Retail acquisition and $179.9 million of capital expenditures. Financing provided $2.332 billion. Cash ended the period at $83.2 million.
- Debt and liquidity: Gross debt was $4.239 billion at June 30, including $1.243 billion under the term loan, $675 million drawn on the revolver, and $2.2 billion of senior notes. Revolver capacity was $1.5 billion; after $22.2 million of letters of credit, unused availability was $802.8 million. The partnership reported compliance with financial covenants.
- Capital and distributions: Common-unit cash distributions were $0.8255 per unit for Q2, versus $0.6934 in Q2 2015. Class C distributions were fixed at $0.8682 per unit per quarter. Management cautioned that distributions are not guaranteed.
Material changes and business developments
- Revenue declined 21% in Q2 and 23% in the first half, principally reflecting lower fuel prices; first-half wholesale gallons also decreased by about 56.3 million. Retail fuel gallons rose about 21.1 million in the first half, merchandise revenue increased, and gross profit increased in both periods.
- Interest expense rose to $50.6 million in Q2 from $21.2 million and to $78.3 million in the first half from $29.2 million. The filing attributes the increase primarily to the term loan, senior-note issuances, and higher revolver borrowings.
- On March 31, 2016, Sunoco completed the $2.2 billion acquisition of the remaining interests in Sunoco LLC and all of Sunoco Retail, financed in part with debt. These were common-control transactions recorded at carrying values; reported prior-period results were retrospectively adjusted. This affects comparability, including the allocation of 2015 income to the general partner before acquisition.
- June acquisitions added 14 Texas stores and a wholesale business for $37.9 million plus inventory, and 18 upstate New York stores and related assets for $75.6 million plus inventory. Purchase-price allocations remain preliminary.
- After quarter-end, Sunoco agreed to acquire Emerge Energy’s fuels business for $178.5 million, subject to adjustments and closing conditions, and Denny Oil’s East Texas and Louisiana business for about $55 million plus inventory. It also agreed to operate eight Indiana Toll Road travel plazas under a 20-year arrangement with estimated costs of $31 million.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. Full-year 2016 capital spending, excluding acquisitions, was estimated at $480 million to $510 million: $100 million to $110 million maintenance and $380 million to $400 million growth. Growth spending included at least 35 planned new stores.
- Management said expected liquidity sources include operating cash, revolver borrowings and potential debt or equity issuance, and expects them to meet liquidity needs. It noted financing availability and terms are not assured.
- The term loan has a maximum funded debt-to-EBITDA covenant of 6.25:1 through March 31, 2017, then 5.5:1, subject to specified acquisition flexibility. Floating-rate debt exposure was $1.918 billion; a one-percentage-point rate change would change annual interest expense by about $19.2 million.
- Fuel prices and demand, supplier concentration, competition, regulation, environmental matters, acquisition integration, affiliate conflicts, and the partnership structure are identified risks. Some Hawaiian terminal fuel inventory was not hedged; consolidated commodity positions had a negative fair value of $2.8 million.
- Sunoco had not completed required exchange offers for its 2020 and 2023 notes by the stated target dates; additional interest of 0.25% per annum applies for each initial 90-day period of delay, increasing in subsequent periods up to a 1.00% cap.
- Management reported no goodwill impairment in the first half of 2016 and no litigation believed likely to have a material adverse impact. Estimated 2016 costs for relocating employees and opening a Dallas corporate office were about $15 million.
Important facts for investors to verify
- How operating performance and distributable cash flow develop after accounting for higher interest costs, acquisition integration, and working-capital needs.
- Debt levels, covenant headroom, floating-rate exposure, and the use of remaining revolver capacity to fund acquisitions and capital spending.
- Whether cash generation supports common and Class C distributions, especially given the acquisition-related financing and planned growth expenditures.
- Final purchase-price allocations and closing, financing, and integration outcomes for announced and recently completed acquisitions.
- Completion of the 2020 and 2023 note exchange offers and the resulting additional-interest cost.
- Related-party arrangements and governance matters involving ETP and ETE, including their ownership, incentive distribution rights, and commercial relationships with Sunoco.