Sunoco LP — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Sunoco distributes motor fuel and operates retail stores, with operations across more than 30 states and Hawaii. Unless noted otherwise, amounts are in millions of dollars.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2,805 | $4,331 | $8,157 | $12,498 |
| Operating income | $147 | $117 | $273 | $366 |
| Net income | $100 | $66 | $129 | $230 |
| Adjusted EBITDA (non-GAAP) | $189 | $192 | $580 | $497 |
| Net income per common unit, diluted | $0.96 | $0.57 | $0.84 | $2.07 |
| Operating cash flow | Not separately presented for the quarter | $462 | $294 |
- Q3 total gross profit was $308 million versus $292 million; motor-fuel gross profit was $237 million versus $217 million. Motor-fuel gross profit per gallon, excluding inventory adjustments, was 12.1 cents versus 11.6 cents.
- Q3 motor-fuel volume fell 12.2% year over year to 1.853 billion gallons. Nine-month volume fell 13.8% to 5.265 billion gallons; motor-fuel gross profit per gallon rose to 12.9 cents from 10.2 cents.
- Nine-month investing cash outflow was $73 million, including $80 million of capital expenditures. Financing cash outflow was $347 million, including $264 million of distributions. Cash increased $42 million to $63 million.
- At September 30, total debt was $2.992 billion, including $87 million drawn on the revolver; long-term debt, net, was $2.964 billion. The revolver had $1.4 billion of unused availability, and the Partnership reported compliance with financial covenants. Net interest expense was $131 million for the first nine months.
- Total assets were $5.123 billion and total liabilities $4.488 billion. Current assets were $687 million and current liabilities $660 million.
Material changes and notable items
- Revenue declined about 35% in both the quarter and first nine months, reflecting lower fuel prices and reduced volumes. Despite lower Q3 volume, higher per-gallon profit and reduced operating costs largely offset lower fuel gross profit; Q3 Adjusted EBITDA was down $3 million.
- Nine-month Adjusted EBITDA increased $83 million, primarily due to higher fuel gross profit per gallon and a $13 million make-up payment under the 7-Eleven fuel supply agreement, partly offset by lower volumes and reduced non-fuel and lease gross profit.
- Nine-month net income fell to $129 million from $230 million. A $126 million adverse inventory valuation adjustment in 2020, compared with a $71 million favorable adjustment in 2019, was a major factor. These reserve changes are excluded from Adjusted EBITDA.
- Operating costs benefited from lower employee, maintenance, advertising, credit-card and utility expenses; the period included a $16 million charge for expected credit losses associated with COVID-19. Q3 results also included an $11 million favorable inventory adjustment, versus a $26 million adverse adjustment in Q3 2019.
Outlook, risks, and contingencies
- Management expected 2020 capital spending of approximately $30 million for maintenance and $75 million for growth; first-nine-month spending was $15 million and $65 million, respectively. Growth spending primarily related to dealer supply contracts.
- The Partnership expected to fund 2020 growth spending and working capital with operating cash flow and revolver capacity, while noting that financing availability and terms are not assured. It stated that current liquidity sources were expected to meet short- and long-term needs.
- Management cited substantial uncertainty from COVID-19, including effects on fuel demand, customer collections, profitability, access to capital and potential impairment of goodwill or intangible assets. The filing provides no quantified earnings or volume guidance.
- On October 26, 2020, Sunoco declared a $0.8255-per-common-unit quarterly distribution, payable November 19. The filing states distributions are not guaranteed. Class C units carry a fixed quarterly distribution of $0.8682 per unit.
- Known litigation was not expected to have a material adverse effect. Environmental obligations include a $74 million reserve for underground storage tank removal and $15 million of long-term accrued environmental expense. No goodwill impairment was identified in the first-quarter 2020 interim test.
Important facts for investors to verify
- Whether fuel volumes and customer collections recover, and how ongoing COVID-19 effects change demand, credit losses and margins.
- How much of reported earnings and cash generation reflects recurring operations versus inventory valuation adjustments and other excluded items; compare GAAP results with Adjusted EBITDA.
- Whether operating cash flow sustains capital spending, debt service and distributions, and whether revolver availability and covenant compliance remain adequate.
- Execution of planned 2020 capital expenditures and the continued economics of dealer supply contracts and the 7-Eleven agreement.
- Potential changes in environmental obligations, customer credit exposure, and impairment assessments for goodwill or intangible assets.