Sunoco LP — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Sunoco distributes motor fuel and operates convenience stores. The financial statements classify the continental U.S. retail operations being sold or marketed as discontinued operations; continuing-operations revenue therefore excludes those businesses, while certain non-GAAP and operating metrics include them.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Continuing-operations revenue | $2.400B | $2.123B | $4.775B | $3.751B |
| Gross profit | $165M | $227M | $349M | $436M |
| Operating income | $31M | $104M | $90M | $191M |
| Continuing-operations income | $34M | $57M | $49M | $122M |
| Net income (loss), including discontinued operations | $(222)M | $72M | $(221)M | $134M |
| Adjusted EBITDA | $220M | $164M | $375M | $323M |
| Adjusted distributable cash flow | $158M | $92M | $235M | $204M |
- Q2 revenue rose 13%, primarily on higher wholesale fuel prices and volumes, but gross profit fell 27%. Wholesale fuel gross profit was down $66M, largely reflecting a $78M unfavorable year-over-year inventory-adjustment swing. Excluding inventory adjustments, reported wholesale gross profit per gallon was 10.1 cents, versus 8.8 cents.
- Q2 discontinued-operations loss was $256M, including a $320M goodwill impairment charge. This drove the consolidated net loss despite income from continuing operations. Basic net loss per common unit was $2.52 for the quarter and $2.77 for the first half.
- For the first half, continuing operating cash flow was $(14)M, versus $60M in 2016; continuing investing cash outflow was $49M. Cash ended at $97M. Adjusted EBITDA and distributable cash flow are non-GAAP measures and include specified adjustments; they are not substitutes for operating cash flow.
- Debt principal was approximately $4.4B at June 30, including a $1.243B term loan, $825M revolver borrowings, and $2.2B of senior notes. The revolver had $655M of unused availability; Sunoco reported compliance with financial covenants. A one-percentage-point change in floating rates was estimated to change annual interest expense by about $21M.
- Total assets were $8.311B, including $4.194B classified as held for sale. The balance sheet reported $1.141B of current liabilities and $6.210B of total liabilities. These current-asset figures include the disposal group and should be interpreted in that context.
Material changes, outlook and notable items
- On April 6, 2017, Sunoco agreed to sell approximately 1,112 company-operated retail outlets and related businesses to 7-Eleven for $3.3B, plus inventory value and subject to adjustments and assumed liabilities. Closing was expected in Q4 2017, subject to customary conditions, including regulatory approval. The agreement includes a 15-year take-or-pay fuel supply agreement. Sunoco also marketed approximately 208 additional Stripes sites not included in the agreement.
- The sale classification and impairment depend partly on estimated proceeds for remaining sites, approximately 15% of held-for-sale locations, for which no sale agreement had been negotiated at filing. The company recorded a $320M impairment against goodwill allocated to the disposal group. Sunoco said other goodwill impairment was not indicated at quarter-end.
- Sunoco issued $300M of Series A preferred units to ETE and used the proceeds to repay revolver debt. The preferred units carry a 10% annual distribution through March 2022, then a floating rate of 8% plus three-month LIBOR. Q2 preferred distributions were $8M. The common-unit distribution remained $0.8255 per unit; the company cautioned distributions are not guaranteed.
- Management expected 2017 growth capital spending of approximately $150M and maintenance capital spending of approximately $80M. No earnings guidance was provided in the supplied filing text. Management stated that operating cash, revolver availability, and potential debt or unit issuance were expected to meet liquidity needs, while noting financing availability is not assured.
- Identified environmental liabilities were recorded, but the buyer is not assuming certain unidentified environmental obligations at retail sites; Sunoco may incur future costs. Fuel inventory was written down by $44M at June 30 due to fuel-price changes. Sunoco also disclosed leverage-ratio calculation errors in prior compliance certificates; lender waivers deemed the matters remedied, and the company reported current covenant compliance.
- Other risks cited include completion and purchase-price adjustments for the 7-Eleven sale, disposal of remaining retail assets, fuel-price and supplier exposure, interest rates, competition, regulation, and affiliate conflicts. Management reported effective disclosure controls and no material adverse litigation known to it.
Key facts for investors to verify
- Whether the 7-Eleven transaction closed on schedule, its final proceeds and adjustments, required debt-note consents, and the outcome and pricing of sales of remaining sites.
- Actual results against the impairment assumptions for held-for-sale goodwill and any further impairments or environmental liabilities.
- Wholesale fuel margins and inventory adjustments, including their effect on cash generation and the difference between adjusted non-GAAP measures and GAAP cash flow.
- Debt, covenant headroom, floating-rate exposure, revolver availability, and the ability to sustain common and preferred distributions.