Sunoco LP — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Sunoco distributes motor fuels through wholesale, dealer, commission-agent and retail channels, and earns income from real estate leases. It operates in approximately 40 states and reported 77 company-operated retail stores.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $7.815 billion | $4.392 billion | $13.217 billion | $7.863 billion |
| Operating income | $173 million | $216 million | $432 million | $420 million |
| Net income | $121 million | $166 million | $337 million | $320 million |
| Adjusted EBITDA (non-GAAP) | $214 million | $201 million | $405 million | $358 million |
| Basic earnings per common unit | $1.22 | $1.76 | $3.56 | $3.37 |
| Cash distributions per common unit | $0.8255 | $0.8255 | $1.6510 | $1.6510 |
Q2 motor-fuel gallons sold were 1.985 billion, up 2.7%; gross profit per gallon, excluding inventory adjustments, was 12.3 cents versus 11.3 cents. For the first half, gallons were 3.755 billion, up 1.8%, and gross profit per gallon was 12.3 cents versus 10.8 cents. Revenue growth largely reflects higher fuel sales values; revenue growth substantially exceeded growth in earnings.
Q2 Adjusted EBITDA increased $13 million, with stronger fuel and non-fuel gross profit partly offset by $27 million of higher operating costs. Net income fell $45 million year over year, in part because the prior-year quarter included a $59 million favorable inventory adjustment compared with $1 million in Q2 2022. First-half net income rose $17 million; favorable inventory adjustments were $121 million versus $159 million in the prior-year period. These adjustments reflect LIFO inventory valuation and are excluded from Adjusted EBITDA.
Cash flow, debt and liquidity
- First-half operating cash flow was $337 million, compared with $275 million a year earlier. Investing activities used $305 million, including the $264 million acquisition payment; financing activities provided $111 million. Cash ended at $168 million, up from $25 million at year-end 2021.
- At June 30, total debt was $3.563 billion, including $869 million drawn on the revolving facility; long-term debt, net of issuance costs, was $3.538 billion. The revolving balance carried a 3.48% weighted-average rate, and a one-percentage-point rate change would affect annual interest expense by approximately $8.7 million.
- The $1.50 billion revolving facility expires in April 2027. Sunoco reported $0.6 billion of unused availability, including the effect of $6 million in standby letters of credit, and compliance with all financial covenants.
- Common-unit distributions paid in the first half totaled $176 million. Management declared a Q2 common-unit distribution of $0.8255, payable August 19, 2022. Class C units receive a fixed $0.8682 quarterly distribution; distributions are not guaranteed.
Changes, outlook and other matters
- On April 1, 2022, Sunoco completed its $264 million acquisition of a transmix processing and terminal facility in Huntington, Indiana. The preliminary allocation included $96 million of intangible assets, $19 million of goodwill, $72 million of fixed assets and $77 million of working capital; the allocation remained under review.
- For full-year 2022, management expected approximately $50 million of maintenance capital spending and at least $150 million of growth capital spending. It expected to use revolver capacity and operating cash flow to fund announced growth spending and working-capital needs, while retaining the option to issue debt or equity.
- Management attributed higher operating costs to recent terminal and transmix acquisitions, employee costs and credit-card fees; first-half cost increases also included environmental, maintenance and acquisition costs. It cited fuel-price and demand volatility, inflation, interest rates, competition, supplier dependence, cyber risks, regulation, and acquisition integration among factors that could affect results and liquidity.
- Fuel inventory was approximately $614 million for market-risk disclosure purposes. Sunoco reported a 0.5-million-barrel derivatives position with an $8.9 million unrealized gain at quarter-end; hedges are not designated as accounting hedges. The filing said fuel hedging positions were not significant to operations.
- Sunoco said known litigation was not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Assess how much revenue growth reflects fuel-price levels versus volume and sustainable per-gallon margins; GAAP revenue and cost of sales are highly influenced by fuel prices.
- Review Adjusted EBITDA alongside GAAP earnings and cash flow, including the effects and reversals of LIFO inventory adjustments and unrealized derivative gains.
- Track revolver borrowings, available capacity, interest-rate exposure, working-capital needs and covenant compliance as rates and fuel prices change.
- Monitor acquisition integration, the final purchase-price allocation for the Huntington facility, and delivery and funding of planned growth capital projects.
- Confirm future distribution decisions and the cash available after operating needs, capital spending, debt service and required reserves.