Sunoco LP — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Sunoco LP distributes motor fuel and operates or supplies retail locations across more than 30 states and Hawaii.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $3.272 billion | $3.692 billion |
| Operating income (loss) | $(82) million | $152 million |
| Net income (loss) | $(128) million; $(1.78) per common unit | $109 million; $1.08 per common unit |
| Adjusted EBITDA (non-GAAP) | $209 million | $153 million |
| Gross profit | $108 million | $370 million |
| Operating cash flow | $38 million | $37 million |
| Capital expenditures | $41 million | $26 million |
| Cash and cash equivalents | $31 million | $21 million at Dec. 31, 2019 |
| Total debt | $3.197 billion, including $265 million drawn on the revolver | $3.097 billion at Dec. 31, 2019 |
Motor fuel volume sold was 1.898 billion gallons, down 2.2%. Motor fuel gross profit was $21 million versus $285 million; the reported Q1 2020 figure included a $227 million inventory valuation adjustment associated with falling fuel prices. Excluding inventory adjustments, motor fuel gross profit was 13.1 cents per gallon versus 9.9 cents. Adjusted EBITDA rose $56 million, chiefly from higher gross profit per gallon and a $13 million 7-Eleven fuel-supply make-up payment, partly offset by lower volume and $18 million of higher operating costs, including a $16 million expected-credit-loss charge related to COVID-19.
Net cash provided by operating activities was $38 million; investing activities used $40 million and financing activities provided $12 million. The partnership had $1.2 billion of unused revolver availability, with $8 million of standby letters of credit outstanding, and was in compliance with financial covenants. The weighted-average interest rate on revolver borrowings was 2.63%. Net interest expense was $44 million versus $42 million.
Material changes and unusual items
- Revenue declined about 11%, reflecting lower motor-fuel sales; total gallons sold declined 2.2%.
- The $227 million fuel-inventory valuation adjustment materially affected reported results and cash-flow reconciliation. The partnership also recorded $16 million of current expected credit losses after adopting the CECL accounting standard; adoption itself was not material.
- Q1 2019 included a $47 million write-down related to the Fulton, New York ethanol plant, contributing to that period’s $48 million total loss on asset disposals and impairments. Q1 2020 impairment and disposal charges were $2 million.
- Despite the GAAP loss, Adjusted EBITDA increased to $209 million. This non-GAAP measure excludes inventory adjustments and other items and should not be treated as a substitute for GAAP earnings or cash flow.
- Goodwill testing prompted by the pandemic and the decline in market capitalization identified no impairment.
Outlook, risks, and contingencies
Management said the pandemic’s effects on fuel demand, gross profit, and customer collections were highly uncertain and could not be predicted. Sunoco described itself as an essential business and said employee safety and continued operations were priorities. Its risk disclosure cited reduced travel and petroleum demand, customer credit distress, fuel-price volatility, possible asset impairments, and potentially tighter or more costly access to capital.
Management expected to use revolver capacity and operating cash flow for 2020 working capital and announced growth capital needs. It estimated full-year 2020 capital expenditures of approximately $30 million for maintenance and $75 million for growth. The filing gave no earnings or revenue guidance. The partnership declared a quarterly common-unit distribution of $0.8255 per unit, payable May 19, 2020; it cautioned that future distributions are not guaranteed.
Known litigation was described as ordinary-course, and management did not believe it would have a material adverse effect. The filing also disclosed $4.8 million of aggregate unrealized losses on commodity positions at March 31, 2020.
Important facts for investors to verify
- How fuel demand, gallons sold, margins, and customer collections evolved after March 31 as COVID-19 restrictions affected activity.
- Whether the $227 million inventory adjustment and $16 million credit-loss charge were one-time effects or indicators of continuing exposure.
- Whether operating cash flow and revolver availability remained sufficient for debt service, working capital, capital spending, and distributions.
- Whether the $105 million full-year capital-spending estimate and $0.8255 common-unit distribution were maintained.
- How related-party fuel purchases, services, and the unconsolidated pipeline investment affected economics and liquidity.