Business context and reporting period
Sunoco LP’s Form 10-K covers the fiscal year ended December 31, 2018; quarterly data below includes the three months ended December 31, 2018. Sunoco distributes motor fuel through wholesale, commercial, commission-agent and retail channels, and operates terminals and a smaller retail business in Hawaii and New Jersey. It distributed 7.9 billion gallons in 2018 across more than 30 states.
The year was reshaped by the January 2018 sale of 1,030 company-operated fuel outlets to 7-Eleven for approximately $3.2 billion. Sunoco retained a 15-year take-or-pay fuel supply agreement with 7-Eleven, covering approximately 2.0 billion gallons annually, with potential incremental growth volumes of up to 500 million gallons.
Financial and operating metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $16.994 billion | $11.723 billion |
| Operating income | $345 million | $229 million |
| Income from continuing operations | $58 million | $326 million |
| Net income (loss), including discontinued operations | $(207) million | $149 million |
| Adjusted EBITDA (non-GAAP) | $638 million | $732 million |
| Distributable Cash Flow, as adjusted (non-GAAP) | $455 million | $473 million |
| Continuing operating cash flow | $447 million | $303 million |
| Capital expenditures | $103 million | $103 million |
| Cash and cash equivalents at year-end | $56 million | $28 million |
| Total debt at year-end | $3.008 billion | $4.324 billion |
| Cash distribution per common unit | $3.30 | $3.30 |
Fuel gross profit was $796 million, and motor-fuel gross profit averaged 11.4 cents per gallon, versus 15.2 cents in 2017. Gallons sold were 7.859 billion, compared with 7.947 billion. The filing attributes the lower per-gallon margin primarily to the shift from higher-margin company-operated retail fuel to lower-margin wholesale distribution after the 7-Eleven divestiture.
At December 31, 2018, Sunoco had $700 million drawn on its $1.5 billion revolving facility and reported $792 million of unused availability, including the effect of outstanding letters of credit. Its contractual-obligations table lists $3.008 billion of debt principal and $927 million of interest payments. Continuing investing cash outflow was $469 million, including $401 million of acquisitions; financing cash outflow was $2.684 billion. The 7-Eleven transaction generated approximately $3.2 billion of investing proceeds in discontinued operations.
For fourth-quarter 2018, revenue was $3.877 billion, operating loss was $38 million, and net loss was $72 million. Continuing-operations loss per common unit was $1.11.
Material changes versus the prior comparable period
- Revenue increased 45%, but comparability is affected by the 7-Eleven sale and the subsequent wholesale supply relationship; the company-operated retail business is reported as discontinued operations.
- Adjusted EBITDA fell $94 million to $638 million. Fuel distribution and marketing adjusted EBITDA rose to $554 million from $346 million, while All Other fell to $84 million from $386 million, reflecting the retail divestiture.
- Net income moved from $149 million profit to a $207 million loss. Continuing-operations income declined to $58 million from $326 million, while discontinued operations recorded a $265 million loss.
- Interest expense declined to $144 million from $209 million, partly reflecting refinancing and repayment of the term loan. The company also recorded a $109 million continuing-operations loss on extinguishment of debt and other items.
- Debt fell by approximately $1.316 billion year over year following the divestiture proceeds and repayment/refinancing transactions. Sunoco issued $2.2 billion of new notes, repaid its $1.2 billion term loan and redeemed $2.2 billion of older senior notes.
Outlook, commentary, risks and unusual items
- Management expected 2019 capital spending of approximately $90 million for growth and $45 million for maintenance. It expected to use operating cash flow and revolver capacity for growth spending and working capital; additional financing may be considered. No earnings or distribution-growth forecast is provided.
- The board declared a fourth-quarter distribution of $0.8255 per common unit, paid February 14, 2019. The partnership agreement does not guarantee distributions; payment depends on available cash, reserves, debt service and other needs.
- 2018 acquisitions included terminals and wholesale fuel businesses from American Midstream ($127 million), Schmitt ($46 million), BRENCO ($26 million), Sandford ($93 million), Superior ($58 million), and 26 sites from 7-Eleven ($54 million). Purchase-price allocations for several acquisitions were preliminary.
- After year-end, Sunoco agreed to sell its Fulton, New York ethanol and grain-malting plant for $20 million plus working-capital adjustments, subject to closing conditions; a 10-year ethanol offtake agreement was planned. It also acquired certain Speedway locations for approximately $5 million.
- Unusual items include an $85 million fuel-inventory valuation write-down, a $30 million impairment of contractual rights, and $192 million of income-tax expense in the non-GAAP reconciliation. The filing explains that the tax effects include taxable gain from the 7-Eleven sale. Cash income taxes paid were $501 million.
- Environmental liabilities included estimated remediation liabilities of $35 million and underground-storage-tank asset-retirement obligations of $54 million. Sunoco states it believes it is materially compliant with applicable environmental rules, but remediation, releases, regulation and insurance limitations remain risks.
- Key risks include volatile fuel margins and demand, supplier and trade-credit dependence, competition, severe weather and operational hazards, environmental obligations, acquisition integration, variable-rate debt, covenant constraints, and conflicts of interest arising from Energy Transfer’s control and significant ownership. Approximately $700 million of debt was variable-rate; a one-percentage-point rate change was estimated to affect annual interest expense by about $7 million.
- The 2018 revenue standard was adopted using the modified retrospective method and reduced opening equity by $54 million. Management estimated that adoption of the new lease standard on January 1, 2019 would add approximately $0.6 billion of lease assets and liabilities to the balance sheet, without affecting earnings or cash flows at adoption.
Most important facts for investors to verify
- Reconcile the 7-Eleven divestiture, continuing wholesale supply agreement and discontinued-operation results when assessing revenue, margins and earnings trends.
- Review the drivers and sustainability of the lower per-gallon gross profit, segment EBITDA mix and 2018 cash flow, including the effects of inventory valuation and working-capital movements.
- Confirm debt maturities, revolver availability, covenant headroom, refinancing costs and the capacity to fund planned capital spending and distributions.
- Assess the cash-tax consequences of the sale, remaining environmental and tank-removal exposures, and final purchase-price allocations for recent acquisitions.
- Consider whether the stated 2019 capital-spending plan and distribution are supported by operating cash generation, given the partnership’s stated discretion over reserves and distributions.