Sunoco LP — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; filed November 9, 2016. Sunoco operates wholesale fuel distribution and retail fuel and convenience-store businesses. Results include the Sunoco LLC and Sunoco Retail businesses acquired from affiliates in March 2016, with prior-period results retrospectively presented for common-control accounting.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $4.14 billion | $4.91 billion | $11.39 billion | $14.38 billion |
| Gross profit | $577.4 million | $524.8 million | $1.66 billion | $1.52 billion |
| Income from operations | $104.2 million | $93.4 million | $320.2 million | $282.4 million |
| Net income | $44.6 million | $34.7 million | $178.7 million | $177.6 million |
| Net income per common unit | $0.24 | $0.30 | $1.25 | $0.96 |
| Adjusted EBITDA attributable to partners | $188.9 million | $249.8 million | $511.7 million | $517.3 million |
| Adjusted distributable cash flow | $124.1 million | $112.4 million | $327.7 million | $182.1 million |
Q3 common-unit cash distributions were $0.8255 per unit, compared with $0.7454 a year earlier. The nine-month common-unit distribution was $2.4683 per unit.
- Revenue and margins: Revenue fell 15.7% in Q3 and 20.8% in the first nine months, principally because lower fuel prices reduced reported wholesale and retail fuel sales. Gross profit increased 10.0% in Q3 and 9.1% year to date. Q3 retail fuel gross profit was 27.5 cents per gallon versus 31.2 cents; wholesale fuel gross profit was 10.0 cents versus 12.5 cents. Retail merchandise margin was 31.8% versus 31.4%.
- Cash flow and spending: Operating cash flow was $340.6 million for the first nine months, versus $349.6 million. Investing cash outflow was $2.81 billion, including $2.5 billion for acquisitions. Capital expenditures were $290.6 million, comprising $73.3 million of maintenance and $217.3 million of growth spending.
- Debt and liquidity: September 30 cash was $80.6 million. Revolver borrowings were $958.2 million, with $518.2 million of unused availability; the company reported compliance with financial covenants. Gross debt was approximately $4.52 billion, including a $1.24 billion term loan and $2.2 billion of senior notes. The term loan matures in 2019; the revolver in 2019; senior notes mature in 2020, 2021 and 2023.
Material changes versus comparable periods
- Lower fuel prices outweighed modest volume growth: Q3 wholesale gallons rose approximately 62.4 million and retail gallons approximately 11.6 million year over year; nine-month wholesale and retail volumes also increased modestly.
- Higher wholesale fuel gross profit and merchandise contribution drove gross-profit growth, while retail fuel gross profit declined.
- Interest expense increased to $54.3 million in Q3 from $28.5 million and to $132.6 million for nine months from $57.7 million, reflecting acquisition-related borrowing and additional notes. Q3 general and administrative expense also rose, including relocation and termination costs associated with moving employees to Dallas.
- Q3 Adjusted EBITDA declined despite higher GAAP gross profit. The prior-year quarter included a $90.8 million positive inventory fair-value adjustment, compared with a $1.8 million negative adjustment in 2016. Nine-month Adjusted EBITDA was also lower year over year.
Outlook, risks and unusual items
- Management projected 2016 capital spending, excluding acquisitions, of $460 million to $490 million: $100 million to $110 million maintenance and $360 million to $380 million growth, including at least 35 planned new stores. No earnings or revenue guidance was provided.
- Management said available cash, operating cash flow, revolver capacity and potential debt or unit issuance were expected to meet liquidity needs, while cautioning that financing availability and terms are not assured. Distributions are not guaranteed.
- Key risks include fuel-price and demand changes, supplier concentration, competition, acquisition integration, affiliate conflicts, environmental and regulatory requirements, and debt service. A one-percentage-point change in floating rates was estimated to change annual interest expense by approximately $22 million.
- Acquisitions during 2016 included the Emerge fuels business for $171.5 million and convenience-store businesses from Kolkhorst and Valentine. Purchase-price allocations were preliminary and could change. A $54.6 million Denny Oil acquisition closed after quarter-end.
- After quarter-end, Sunoco established a common-unit sales program of up to $400 million; it had issued 225,834 units for $6.5 million of net proceeds through November 7. Management reported no litigation expected to have a material adverse impact.
Important facts for investors to verify
- Reconcile debt balances, maturities, variable-rate exposure and covenant headroom, particularly following acquisition financing.
- Assess whether distributable cash flow supports common and Class C distributions; these non-GAAP measures are not substitutes for operating cash flow or debt-service analysis.
- Separate sustainable operating performance from fuel-price effects, inventory fair-value adjustments, acquisition contributions and one-time relocation costs.
- Track final purchase-price allocations, integration outcomes, capital spending and potential dilution under the $400 million unit issuance program.