Sunoco LP current report, 19 September 2012

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Business Context and Reporting Period

This Form 8-K, dated September 19, 2012, reports the initial public offering (IPO) and related transactions of Susser Petroleum Partners LP (the "Partnership"). The filing details the entry into material definitive agreements and the completion of asset acquisitions that closed on September 25, 2012. The Partnership operates in the motor fuel distribution and convenience store sector, primarily through its relationship with Susser Holdings Corporation (SHC) and its Stripes convenience store brand.

Key Financial Metrics and Capital Structure

  • Equity Offering: Sold 9,500,000 Common Units at $20.50 per unit, plus a full exercise of an option for 1,425,000 additional units.
  • Net Proceeds: Approximately $206.0 million received after underwriting discounts and expenses.
  • Debt Facilities:
    • Revolving Credit Facility: $250 million (expandable to $350 million), maturing September 25, 2017.
    • Term Loan: $180.7 million, maturing September 25, 2015, fully secured by investment-grade securities.
  • Use of Proceeds: $25.4 million distributed to SHC for capital expenditure reimbursement; $180.7 million used to purchase securities collateralizing the new term loan; $2.4 million drawn from the revolving facility for transaction expenses.
  • Financial Covenants: Must maintain a minimum Consolidated Interest Coverage Ratio of 2.50 to 1.00 and a maximum Consolidated Total Leverage Ratio of 4.50 to 1.00.

Material Changes and Transactions

The filing documents a significant structural change involving the contribution of assets from SHC to the Partnership. Key changes include:

  • Asset Acquisition: The Partnership acquired membership interests in T&C Wholesale, LLC, various lease agreements, vendor agreements, fuel supply agreements, and real property in Texas.
  • Equity Issuance: In exchange for assets, the Partnership issued 14,436 Common Units and 10,939,436 Subordinated Units (representing 50% of the limited partner interest) to SHC affiliates. SHC also received all Incentive Distribution Rights.
  • Subordination Terms: Subordinated Units will convert to Common Units once the Partnership achieves specific distribution thresholds ($1.75 or $2.625 per unit annually) over consecutive four-quarter periods ending after September 30, 2015.

Outlook, Management Commentary, and Risks

Strategic Agreements:

  • Omnibus Agreement: Grants the Partnership a three-year option to purchase up to 75 new Stripes stores at cost and lease them back for 15 years. The Partnership is the exclusive fuel distributor for these stores for 10 years.
  • Distribution Agreement: Establishes a 10-year exclusive fuel distribution arrangement with SHC's existing and future Stripes stores at cost plus a fixed margin of three cents per gallon.
  • Transportation Agreement: SHC will arrange fuel delivery logistics at third-party rates.
Risks and Contingencies:
  • Environmental Indemnification: SHC indemnifies the Partnership for pre-closing environmental liabilities up to $15 million (subject to a $250,000 deductible) for three years. The Partnership indemnifies SHC for post-closing environmental issues.
  • Related Party Transactions: Significant ongoing relationships with SHC, including fuel distribution, store leasebacks, and management services, create dependency risks.
  • Collateral Requirements: The $180.7 million term loan requires the Partnership to maintain a Collateral Account with U.S. Treasuries or investment-grade securities equal to at least 98% of the loan principal.
Management Changes:
  • Rob L. Jones was appointed to the Board of Directors and its audit and conflicts committees.
  • Phantom units were granted to directors and executive officers under the 2012 Long Term Incentive Plan.

Investor Verification Checklist

  • Verify the conversion timeline and distribution thresholds for the 10,939,436 Subordinated Units held by SHC affiliates.
  • Confirm the terms of the exclusive fuel distribution agreement, specifically the fixed margin of three cents per gallon and the 10-year duration.
  • Review the environmental indemnification limits ($15 million cap) and the deductible ($250,000) in the Omnibus Agreement.
  • Monitor the Partnership's ability to maintain the required Collateral Account for the $180.7 million term loan.
  • Assess the impact of the $250 million revolving credit facility covenants (2.50x interest coverage, 4.50x leverage) on future operational flexibility.