Sunoco LP — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. The filing was signed August 6, 2015. Sunoco distributes motor fuel across more than 30 states and operates convenience retail businesses. Its reporting expanded through acquisitions, including MACS and Aloha in 2014 and a 31.58% interest in Sunoco LLC on April 1, 2015. Sunoco consolidates all of Sunoco LLC because it holds a 50.1% voting interest; the remaining 68.42% is reported as noncontrolling interest.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Revenue | $4.206 billion | $7.730 billion |
| Gross profit | $236.8 million | $398.8 million |
| Income from operations | $115.8 million | $166.2 million |
| Net income, consolidated | $96.0 million | $138.4 million |
| Net income attributable to partners | $34.9 million | $51.9 million |
| Common-unit earnings per unit | $0.87 | $1.31 |
| Operating cash flow | Not separately stated for the quarter | $125.2 million |
| Adjusted EBITDA attributable to partners | $55.5 million | $105.8 million |
| Adjusted distributable cash flow attributable to partners | $39.3 million | $69.7 million |
Reported gross margin was approximately 5.6% for the quarter and 5.2% for the half year. Revenue is dominated by wholesale fuel sales, a high-volume, low-margin business. The filing cautions that EBITDA, Adjusted EBITDA and distributable cash flow are non-GAAP measures and are not substitutes for GAAP results or operating cash flow.
- Cash and liquidity: Cash was $62.8 million at June 30, 2015. Current assets were $905.6 million and current liabilities $604.7 million.
- Debt: Total debt was approximately $1.708 billion, including $800 million of 6.375% senior notes due 2023 and $724.7 million drawn on the revolving facility. The $1.5 billion revolver had $764.2 million of unused availability after $11.1 million of standby letters of credit. Sunoco reported compliance with financial covenants.
- Cash flows and investment: First-half operating cash flow was $125.2 million; investing cash outflow was $939.1 million, including the Sunoco LLC acquisition; financing cash inflow was $809.5 million. First-half capital expenditures, including purchased intangibles, were $151.3 million.
- Distribution: A quarterly distribution of $0.6934 per eligible unit was declared for payment August 28, 2015. The filing reports $28.7 million for this distribution, excluding Class A unitholders.
Changes versus the prior comparable period
Second-quarter revenue rose from $1.376 billion in 2014 to $4.206 billion in 2015, gross profit from $22.2 million to $236.8 million, and operating income from $11.5 million to $115.8 million. First-half revenue increased from $2.593 billion to $7.730 billion and gross profit from $44.3 million to $398.8 million. These comparisons are not like-for-like: the 2015 results include expanded wholesale and retail operations from acquisitions, and the ETP merger introduced successor accounting. Management attributed much of the growth to Sunoco LLC, MACS and Aloha; lower fuel prices reduced legacy third-party wholesale sales.
First-half operating cash flow increased from $11.8 million in 2014 to $125.2 million in 2015, which management attributed primarily to acquired businesses and continued underlying growth. Interest expense increased with the new $800 million notes and higher revolver borrowings. The balance sheet also reflects substantial acquisition-related financing: total debt rose from $870.5 million at year-end 2014 to $1.708 billion at June 30, 2015.
Outlook, risks and unusual items
- Capital plan: 2015 capital spending guidance, excluding acquisitions, was $260 million–$320 million, including $40 million–$50 million maintenance and $220 million–$270 million growth capital. The growth plan includes 35–40 new Stripes stores. On a 100% consolidated basis, management cited maintenance spending of $50 million–$60 million and growth spending of $240 million–$290 million.
- Subsequent transactions: On July 31, 2015, Sunoco acquired 100% of Susser for approximately $966.9 million in cash, subject to adjustments, and issued 21,978,980 Class B units. The cash was funded through a post-quarter $600 million 5.500% notes offering (net proceeds approximately $592.5 million), a July equity offering (net proceeds approximately $212.9 million), and revolver borrowings. Sunoco also expected to acquire 28 Aziz stores for $41.6 million, subject to closing conditions. A proposed transfer of Sunoco’s general partner and incentive distribution rights to ETE was expected to close in August 2015.
- Inventory and adjustments: Fuel-price changes produced a $55.9 million LIFO inventory write-up in the first half, including $50.7 million in the second quarter. Sunoco excludes inventory fair-value adjustments in Adjusted EBITDA; investors should distinguish this adjustment from underlying operating performance.
- Key risks: Fuel-price volatility may affect wholesale and retail margins, demand, customer traffic and trade credit. Other stated risks include acquisition integration, dependence on suppliers and significant affiliate customers, competition, environmental and regulatory requirements, and conflicts of interest with ETP and its affiliates. Debt agreements and note indentures impose restrictions and financial covenants; a breach could accelerate debt. Sunoco reported a $7.64 million annual change in interest expense for a one-percentage-point move in floating rates.
- Contingencies and controls: Management said it knew of no litigation expected to materially adversely affect financial condition or results. Disclosure controls were assessed as effective; evaluation of Sunoco LLC’s internal control structure was ongoing during 2015.
Important facts for investors to verify
- How much of reported earnings and cash generation is attributable to Sunoco’s own 31.58% economic interest in Sunoco LLC versus the 68.42% noncontrolling interest, given full consolidation.
- The comparability of year-over-year results after acquisitions, retrospective common-control accounting and the predecessor/successor accounting change.
- The cash-flow and leverage effects of the Susser acquisition, post-quarter debt and equity issuances, revolver usage, and planned Aziz store purchase.
- The sustainability of distributable cash flow and quarterly distributions relative to operating cash flow, maintenance capital needs, interest costs and debt obligations.
- The effect of fuel-price movements and the $55.9 million LIFO write-up on reported margins and non-GAAP performance measures.