Sunoco LP — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Sunoco LP distributes motor fuels and related products and earns rental income; it operates across more than 40 states and territories. Energy Transfer owns the general partner, a 28.3% limited-partner interest, and all incentive distribution rights.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $6.320 billion | $6.594 billion | $17.427 billion | $19.811 billion |
| Operating income | $338 million | $150 million | $678 million | $582 million |
| Net income | $272 million | $83 million | $500 million | $420 million |
| Diluted net income per common unit | $2.95 | $0.75 | $5.14 | $4.27 |
| Adjusted EBITDA | $257 million | $276 million | $728 million | $681 million |
| Operating cash flow | Not stated for the quarter | $416 million | $640 million |
- Q3 motor-fuel volume increased to 2.124 billion gallons from 1.986 billion; fuel profit per gallon declined to 13.0 cents from 13.9 cents. For the nine-month period, gallons rose 6.9% to 6.140 billion and profit per gallon was 12.9 cents in both years.
- Q3 revenue declined 4.2% year over year; nine-month revenue declined 12.0%. Motor-fuel sales were the main revenue category. The filing attributes revenue changes to fuel sales but does not clearly quantify the effect of prices versus volume.
- Cash and cash equivalents were $256 million at September 30, 2023, versus $82 million at year-end 2022. Current assets were $2.482 billion and current liabilities $1.476 billion.
- Total debt was $3.841 billion, including $647 million drawn on the revolving credit facility, versus total debt of $3.594 billion at year-end 2022. Revolver availability was $847 million; its weighted-average rate was 7.34%. The Partnership reported compliance with financial covenants.
- Nine-month capital expenditures were $132 million ($95 million growth and $37 million maintenance). Cash distributions to unitholders totaled $271 million. The declared quarterly common-unit distribution was $0.8420 per unit.
Material changes and unusual items
- Q3 net income increased substantially, while Adjusted EBITDA declined. Management cites $141 million of favorable Q3 LIFO inventory valuation adjustments, driven by higher fuel prices, as a major contributor to reported net income. Adjusted EBITDA excludes these non-cash adjustments.
- Q3 Adjusted EBITDA fell $19 million year over year: lower motor-fuel profit, including a 7% decline in profit per gallon, and $10 million of higher operating costs outweighed $12 million of additional non-motor-fuel and lease profit.
- Nine-month Adjusted EBITDA rose $47 million. Higher fuel gross profit from increased gallons and improved non-motor-fuel and lease profit were partly offset by $22 million of higher operating costs. Nine-month net income also benefited from favorable inventory adjustments, totaling $113 million versus $81 million in the prior period.
- Operating cash flow declined $224 million year over year for the nine months, primarily because of a $235 million decrease in cash flow from operating assets and liabilities.
- On September 20, Sunoco issued $500 million of 7.000% senior notes due 2028 and used the proceeds to repay revolver borrowings. On May 1, it acquired 16 refined-product terminals for $111 million, including working capital.
Outlook, risks and contingencies
- Management expects 2023 maintenance capital spending of approximately $65 million and growth capital spending of at least $150 million. It expects cash from operations and revolver capacity to fund planned growth spending and working capital, while noting financing availability is not assured. No earnings or revenue guidance is provided.
- Key disclosed risks include fuel-price and demand volatility, supplier concentration, competition, interest rates and access to capital, acquisition integration, regulation and environmental matters, cyber risk, operational hazards, and conflicts of interest related to Energy Transfer and the partnership structure.
- A one-percentage-point change in floating interest rates would change annual interest expense by approximately $6.5 million. At September 30, the Partnership held approximately $832 million of petroleum-product inventory and reported commodity derivatives with a 1.5 million-barrel position and $0.8 million unrealized loss.
- Management said known litigation is unlikely to have a material adverse effect based on currently available information; it cautioned that insurance may not cover all future losses. No material change to previously disclosed risk factors was reported.
- Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much Q3 and year-to-date net income reflects non-cash inventory valuation effects, and how those effects compare with underlying fuel margins and Adjusted EBITDA.
- Whether higher fuel volumes and acquisition contributions can sustain operating performance despite lower Q3 profit per gallon and higher operating costs.
- Debt-service capacity and refinancing exposure, particularly the 7.000% notes and floating-rate revolver borrowings.
- Progress toward the 2023 growth and maintenance capital-spending plans, and the cash available for distributions after investment and debt service.
- Integration and returns from the terminal acquisitions, as well as ongoing affiliate transactions and associated governance conflicts.