Sunoco LP — Q3 2018 Form 10-Q
Business context and period. Quarterly report for the three and nine months ended September 30, 2018. Sunoco distributes motor fuel across more than 30 states and operates retail stores in Hawaii, New Jersey, and Texas. In January 2018, it sold 1,030 company-operated fuel outlets to 7-Eleven for approximately $3.2 billion; the divested business is reported as discontinued operations. Results are not fully comparable with 2017 because of the sale and retail-site conversions.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $4.761 billion | $3.064 billion | $13.117 billion | $8.764 billion |
| Gross profit | $333 million | $316 million | $939 million | $831 million |
| Operating income | $159 million | $128 million | $383 million | $164 million |
| Continuing-operations income | $114 million | $121 million | $130 million | $104 million |
| Net income (loss) | $112 million | $138 million | $(135) million | $(83) million |
| Adjusted EBITDA | $208 million | $199 million | $457 million | $574 million |
| Adjusted distributable cash flow | $149 million | $132 million | $340 million | $367 million |
Q3 gross margin was approximately 7.0% versus 10.3% a year earlier; nine-month gross margin was approximately 7.2% versus 9.5%. The filing reports motor-fuel gross profit per gallon of 12.7 cents versus 14.9 cents in Q3 and 11.1 cents versus 15.2 cents for nine months; these measures include discontinued operations. Q3 basic earnings per common unit were $1.13, including a $0.03 loss per unit from discontinued operations. Nine-month basic loss per unit was $2.28, including a $3.12 loss per unit from discontinued operations.
Cash from continuing operating activities was $275 million for nine months, down from $328 million. Continuing investing activities used $240 million, including $202 million for acquisitions; capital expenditures were $62 million. Continuing financing activities used $2.786 billion, reflecting debt refinancing, unit repurchases, preferred-unit redemption, and distributions. Discontinued operations generated $2.738 billion net cash, principally from the 7-Eleven sale. Ending cash was $15 million.
At September 30, total debt was $2.803 billion, including $493 million drawn on the revolver; the balance sheet reports $2.281 billion of long-term debt, net, plus current maturities and revolver borrowings. The $1.5 billion revolver had $999 million of unused availability, with $8 million of standby letters of credit outstanding. The partnership reported compliance with financial covenants. Current assets were $1.331 billion and current liabilities $1.086 billion. The quarterly distribution remained $0.8255 per common unit.
Material changes and notable items
- Revenue rose substantially, primarily from higher fuel prices and increased wholesale fuel volumes following the retail divestment. Management attributed the $1.7 billion Q3 increase to higher average fuel selling prices and approximately 559 million additional gallons in fuel distribution and marketing, partly offset by lower other revenue after converting 207 retail locations to commission-agent sites.
- Fuel distribution and marketing gross profit improved, but total fuel gross profit per gallon declined. Q3 gross profit included an approximately $25 million one-time cash settlement with a fuel supplier. Inventory adjustments were a $58 million unfavorable year-over-year factor in Q3.
- Continuing operating income improved, while Q3 continuing-operations income declined modestly, with higher income-tax expense partly offsetting operating improvement. Nine-month net loss included $265 million of discontinued-operations losses.
- Sunoco issued $2.2 billion of new senior notes in January and used proceeds, together with divestiture proceeds, to redeem $2.2 billion of old notes, repay and terminate its term loan, redeem approximately $313 million of preferred units, and repurchase 17.3 million common units for approximately $540 million. Nine-month debt-extinguishment loss was $109 million.
- Acquisitions included Superior Plus fuel distribution and terminal assets, Sandford’s wholesale fuel business, and 26 retail outlets converted to commission-agent sites. After quarter-end, Sunoco acquired BRENCO’s fuel distribution business for approximately $24 million plus working-capital adjustments.
Outlook, risks, and contingencies
Management said cash from operations and revolver capacity were expected to fund 2018 growth capital expenditures and working-capital needs. Excluding acquisitions, it expected approximately $65 million of full-year growth capital and $30 million of maintenance capital. The filing provides no earnings or revenue guidance and cautions that distributions are not guaranteed. It declared a Q3 distribution of $0.8255 per common unit, payable November 14, 2018.
The 15-year 7-Eleven take-or-pay supply agreement covers approximately 2.0 billion gallons annually, with potential additional aggregate growth volumes of up to 500 million gallons over the first four years. Principal risks cited include fuel price and demand volatility, reliance on limited suppliers, competition, acquisition integration, regulation and environmental exposure, financing and credit-market conditions, and conflicts of interest with Energy Transfer affiliates. The filing says no litigation was expected to have a material adverse impact. Sunoco had adopted ASC 606 in 2018; it expected most lease commitments to be recognized as right-of-use assets and lease liabilities upon adopting lease accounting in 2019, but had not quantified the effect.
Investor verification points
- Assess the continuing business separately from discontinued operations and account for the material change in retail footprint when comparing periods.
- Review the sustainability and composition of adjusted EBITDA and distributable cash flow, including the one-time supplier settlement and inventory adjustments; these are non-GAAP measures.
- Verify the ongoing cash and leverage implications of the debt refinancing, acquisitions, unit repurchase, preferred redemption, and quarterly distributions.
- Evaluate execution and economics of the 7-Eleven take-or-pay contract and integration of acquired fuel businesses; some purchase-price allocations remained preliminary.
- Track revolver covenant headroom, interest-rate exposure, environmental reserves, and the eventual balance-sheet impact of lease-accounting adoption.