Sunoco LP 2014 Form 10-K Summary
Business context and reporting period
Sunoco LP, formerly Susser Petroleum Partners LP, reported for the fiscal year ended December 31, 2014. The partnership’s business changed substantially during the year: Energy Transfer Partners (ETP) acquired Susser on August 29, and Sunoco applied push-down accounting from August 31. The filing therefore presents separate Predecessor and Successor financial statements; selected 2014 full-year figures combine those periods on an unaudited basis and are not GAAP results.
Sunoco remained a major wholesale fuel distributor and entered company-operated convenience retail through its MACS and Aloha acquisitions. At year-end it operated 155 retail stores and fuel outlets across five states, and distributed 1.93 billion wholesale gallons during 2014. It changed its name and ticker to Sunoco LP and SUN in October.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue, combined basis | $5.382 billion | $4.493 billion |
| Gross profit, combined basis | $175.9 million | $71.0 million |
| Income from operations, combined basis | $74.5 million | $40.9 million |
| Net income attributable to limited partners, combined basis | $56.7 million | $37.0 million |
| Operating cash flow | $106.0 million | $50.7 million |
| Adjusted EBITDA, non-GAAP | $122.3 million | $51.9 million |
| Distributable cash flow, non-GAAP | $92.5 million | $47.7 million |
Revenue increased 19.8% and gross profit increased 147.9%, with acquisitions contributing significantly. The combined gross margin was approximately 3.3% of revenue; operating margin was approximately 1.4%. Volume-weighted motor fuel gross profit rose to 7.0 cents per gallon from 3.7 cents, reflecting acquired retail operations and improved third-party wholesale margins. Merchandise gross profit was $13.5 million, a 25.7% margin. The 2014 per-unit income figure of $1.96 is also presented on a combined basis and should not be treated as directly comparable GAAP successor-period EPS.
Cash used in investing activities was $891.8 million and cash provided by financing activities was $844.8 million, principally reflecting acquisitions, capital spending, debt financing and an equity offering. Capital expenditures were $176.3 million, including $168.1 million of expansion capital and $4.9 million of maintenance capital, excluding acquired businesses.
At December 31, cash was $67.2 million; total debt was $870.5 million, versus $186.2 million a year earlier. The $1.25 billion revolving facility had $683.4 million drawn, $11.8 million of letters of credit and $554.8 million of unused availability. The partnership reported covenant compliance. Current assets were $225.1 million and current liabilities $154.7 million. Approximately $723.6 million of debt bore variable rates.
Material changes versus the prior comparable period
- MACS was acquired from ETP on October 1 for approximately $768 million, comprising $556 million cash and approximately 4.0 million common units. Its results were included from September 1 for common-control accounting purposes.
- Aloha was acquired on December 16 for an adjusted purchase price of approximately $267 million in cash, plus estimated contingent consideration of $13 million. The acquisitions expanded the business into retail, new regions and fuel storage terminals.
- The 2014 full-year revenue increase of $889.4 million included $534.0 million attributed to MACS and Aloha. Wholesale third-party volumes rose 232.2 million gallons, and affiliated volumes rose 125.4 million gallons.
- Operating expenses rose $71.4 million, primarily due to acquired operations, transaction costs, compensation, rent and higher depreciation and amortization, including push-down accounting effects.
- Sunoco issued 9.1 million common units in an October-November offering for approximately $406 million net proceeds, principally used to repay revolver borrowings.
Outlook, risks and unusual items
- Management expects continued growth through ETP asset drop-downs and third-party acquisitions, and anticipated 35 to 40 new Susser stores during 2015. It expects retail operations to support higher overall fuel gross profit per gallon. These are expectations, not formal financial guidance; ETP is not obligated to contribute assets.
- Sunoco’s largest customer, Susser, accounted for approximately 60% of 2014 revenue and fuel volumes and 20% of gross profit. Its long-term fuel contract has no minimum volume requirement. Related-party arrangements and ETP’s control create potential conflicts of interest.
- The minimum quarterly distribution is $0.4375 per unit, but payment is not guaranteed. The partnership declared $0.60 per unit for the fourth quarter of 2014, payable in February 2015. The IDR structure allocates an increasing share of distributions to ETP above specified thresholds.
- Acquisition integration, fuel-margin volatility, concentrated suppliers, trade-credit access, competition, seasonality and variable-rate debt are key business and financial risks. A 1 percentage-point increase in floating rates was estimated to increase annual interest expense by about $7.2 million.
- Environmental matters include remediation at 38 acquired sites, with $0.8 million reserved. Potential terminal compliance costs in Hawaii could reach $7 million or more. EPA/DOJ matters include alleged Clean Air Act and Clean Water Act violations at an Aloha terminal; disclosed potential penalties include $651,000 and $249,000, with settlement discussions ongoing. Sunoco cited possible indemnification and escrow protections.
- A $13.6 million LIFO inventory write-down was recorded amid falling fuel prices. The MACS rebranding also resulted in a $2.6 million franchise-intangible impairment. The 2014 results include transaction costs and substantial acquisition and push-down accounting effects.
- Management reported effective disclosure controls and internal control over financial reporting. However, acquired MACS and Aloha were excluded from the year-end internal-control assessment while integration was underway.
Important facts for investors to verify
- Reconcile the combined, unaudited 2014 comparisons with the separate audited Predecessor and Successor periods, and assess how purchase accounting affects future earnings and depreciation.
- Track acquired-business performance, integration costs, retail margins and the final purchase-price allocations for MACS and Aloha.
- Review leverage, covenant headroom, variable-rate exposure, refinancing needs and the cash available to support distributions after maintenance capital and debt service.
- Monitor Susser concentration, related-party pricing and transactions, ETP’s future asset contributions, and the effect of IDRs on cash distributions.
- Follow environmental remediation, agency settlements, potential Hawaii terminal capital spending, indemnity recoveries and the adequacy of recorded reserves.