Sunoco LP annual report, FY2017

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Sunoco LP — FY 2017 Form 10-K

Reporting period: Year ended December 31, 2017. The filing is an annual report, not a standalone quarterly filing; unaudited fourth-quarter figures are also provided. Sunoco distributed motor fuels wholesale and operated convenience stores and fuel outlets. Its results distinguish continuing operations from retail assets classified as discontinued operations for sale.

Financial performance and liquidity

  • FY revenue: $11.723 billion, up from $9.986 billion in 2016. The filing separately reports $6.964 billion of revenue from discontinued operations in 2017.
  • Profit: Continuing-operations income was $326 million, compared with $56 million in 2016. Including a $177 million loss from discontinued operations, net income was $149 million, versus a $406 million net loss in 2016. Basic earnings per common unit were $0.35 overall and $2.13 from continuing operations.
  • Fourth quarter (unaudited): Revenue was $2.959 billion, gross profit $277 million, operating income $65 million and net income $232 million.
  • Gross profit and fuel economics: Total gross profit declined to $1.108 billion from $1.156 billion. The filing attributes the decrease mainly to a $74 million unfavorable year-over-year change in inventory adjustments. Excluding inventory fair-value adjustments, wholesale fuel gross profit was 10.5 cents per gallon versus 9.8 cents; retail fuel gross profit was 25.5 cents versus 24.0 cents; the volume-weighted average was 15.2 cents versus 14.4 cents.
  • Cash flow: Cash from continuing operating activities was $303 million, down from $466 million. Continuing investing cash outflow was $132 million and continuing financing cash outflow was $339 million; cash decreased by $75 million overall to $28 million.
  • Debt and liquidity at year-end: Total debt was $4.324 billion; cash was $28 million and unused revolving-credit availability was $726 million. The Partnership reported compliance with financial covenants at December 31, 2017.
  • Distributions: Common-unit distributions were $3.30 per unit for 2017, versus $3.29 in 2016. The declared fourth-quarter distribution was $0.8255 per common unit; the filing cautions that distributions are not guaranteed.
  • Non-GAAP measures: Adjusted EBITDA attributable to partners was $732 million versus $665 million; adjusted distributable cash flow was $473 million versus $390 million. These measures are not GAAP and include amounts from discontinued operations.

Material changes and unusual items

  • Wholesale fuel revenue increased mainly because selling prices rose 15.6% and volume increased by approximately 133 million gallons. Total gross profit nevertheless fell, primarily due to inventory adjustments.
  • Operating income increased to $229 million from $145 million. Interest expense rose to $209 million from $161 million, primarily reflecting borrowings and notes issued in 2016.
  • A $306 million income-tax benefit was recorded in 2017, including a $225 million benefit from the reduction in the U.S. corporate tax rate. The tax benefit materially affected reported continuing-operations income.
  • Goodwill and impairment accounting remained significant: the filing reports a $102 million goodwill impairment charge in continuing operations and $387 million of goodwill impairment charges associated with assets classified as held for sale. It also reports $17 million of impairment charges on certain contractual rights and liquor licenses.
  • On January 23, 2018, Sunoco completed the sale of 1,030 company-operated retail fuel outlets and related assets to 7-Eleven for approximately $3.2 billion. The associated retail divestment was reported as discontinued operations. Approximately 207 other sites were expected to transition to a commission-agent arrangement in the first quarter of 2018.
  • Following the sale, Sunoco issued $2.2 billion of new senior notes and used sale and offering proceeds to redeem $2.2 billion of older senior notes, repay and terminate its $1.2 billion term loan, redeem $313 million of preferred units, and repurchase 17.3 million common units from an ETP subsidiary for approximately $540 million. The filing reports debt of $2.3 billion as of January 31, 2018.

Outlook, risks and contingencies

  • Management expected 2018 capital spending of approximately $90 million for growth and $40 million for maintenance. It also stated that cash from operations and the revolving facility were expected to fund anticipated growth spending and working capital; no earnings or distribution guidance is provided.
  • The 7-Eleven fuel-supply agreement is a 15-year fixed-margin, take-or-pay arrangement. Sunoco warned that loss of the agreement or a deterioration in its economics could materially affect results; it expected the arrangement to represent a significant portion of 2018 motor-fuel sales.
  • Fuel demand, purchase costs, pricing and margins are exposed to competition, changing consumer preferences and alternative fuels, economic conditions, seasonality, supply disruptions and severe weather. Fuel sales represented approximately 93% of revenue and 62% of continuing-operations gross profit.
  • Other principal risks include leverage and interest-rate exposure, covenant and refinancing constraints, reliance on supplier trade credit, environmental remediation obligations, litigation, cybersecurity and related-party conflicts associated with the ETE/ETP-sponsored partnership structure.
  • Environmental reserves included $22 million for remediation and $41 million for underground-tank asset retirement obligations at year-end. Aloha settled a Hawaii Department of Health matter for a $0.12 million penalty. The filing also describes the Chapter 11 restructuring of Philadelphia Energy Solutions, a fuel supplier and affiliate-related counterparty; management said existing contracts were expected to continue without impairment.
  • Management concluded disclosure controls and internal control over financial reporting were effective; the auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Reconcile continuing-operations results, discontinued retail results and the unaudited fourth-quarter figures, including the substantial tax benefit and impairment adjustments.
  • Confirm the final proceeds, adjustments, costs and accounting effects of the 7-Eleven sale, and the operating and cash-flow profile of the post-sale business.
  • Review the terms, actual volumes and margins of the 15-year 7-Eleven supply agreement and the status of the approximately 207 commission-agent sites.
  • Verify post-transaction debt, available liquidity, interest costs, covenant headroom and the effect of the unit repurchase and preferred-unit redemption.
  • Assess the sustainability of distributions against cash flow, maintenance investment and the partnership’s incentive distribution structure; distributions are not guaranteed.