Sunoco LP — Q1 2016 Form 10-Q
Business context and period: Quarterly results for the three months ended March 31, 2016, compared with Q1 2015. Sunoco distributes motor fuel and operates convenience stores. Effective January 1, 2016, it acquired the remaining interests in Sunoco LLC and all of Sunoco Retail from ETP. The acquisitions were accounted for as transactions under common control; the comparative financial statements include the acquired businesses from September 2014.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $3.202 billion | $4.342 billion |
| Gross profit | $498.7 million | $441.1 million |
| Gross margin | 15.6% | 10.2% |
| Operating income | $91.8 million | $65.3 million |
| Net income | $62.0 million | $49.3 million |
| Net income attributable to partners | $62.0 million | $17.1 million |
| Common-unit earnings per unit | $0.47 | $0.44 |
| Adjusted EBITDA | $158.9 million | $128.2 million |
| Adjusted distributable cash flow | $111.5 million | $30.5 million |
| Operating cash flow | $162.3 million | $25.4 million |
| Capital expenditures | $96.2 million | $101.0 million |
Adjusted EBITDA and distributable cash flow are non-GAAP measures defined by the Partnership and are not substitutes for GAAP earnings or cash flow.
Liquidity and debt
- Cash was $76.5 million at March 31, 2016. The $1.5 billion revolver had $675 million drawn, $22.3 million of letters of credit, and $802.7 million of unused availability; the Partnership reported covenant compliance.
- Total debt was approximately $4.235 billion, up from $1.976 billion at December 31, 2015. This included a fully drawn $2.035 billion secured term loan used in part to fund the ETP dropdown, $675 million on the revolver, and $1.4 billion of senior notes.
- Q1 investing cash outflow was $2.308 billion, including the $2.2 billion cash payment for the dropdown. Financing cash inflow was $2.150 billion, including term-loan proceeds.
- On April 7, 2016, Sunoco issued $800 million of 6.25% notes due 2021; net proceeds of $789.4 million repaid part of the term loan.
Changes and management commentary
- Revenue declined $1.140 billion, mainly from lower motor-fuel selling prices and, to a lesser extent, lower wholesale volumes. Wholesale fuel gallons fell about 64 million; retail gallons increased about 19 million. Merchandise sales rose $41 million.
- Gross profit increased $57.7 million, reflecting improved fuel margins and higher merchandise profit. Retail fuel gross profit per gallon rose to 21.3 cents from 18.6 cents; wholesale rose to 11.4 cents from 9.6 cents.
- Operating expenses increased $31.2 million, including higher personnel costs and depreciation and amortization. Net interest expense increased $19.7 million to $27.7 million, primarily due to senior-note issuance and higher revolver borrowings.
- Management expects 2016 capital spending, excluding acquisitions, of $490–$530 million: $100–$110 million maintenance and $390–$420 million growth, including 35–40 planned new stores. It stated expected liquidity sources should meet near- and long-term needs, while noting financing availability and operating performance are uncertain.
Outlook, risks and unusual items
- Sunoco had agreements for approximately $115 million of additional acquisitions, expected to close in Q2 2016 subject to due diligence and closing conditions. It also committed to develop 15 Dunkin’ Donuts locations in Hawaii at an estimated $20 million, and agreed to operate eight Indiana Toll Road travel plazas under a 20-year agreement with estimated costs of $31 million.
- The term loan and revolver include leverage covenants; the term loan’s maximum funded-debt-to-EBITDA ratio is 6.25x through March 31, 2017 and 5.5x thereafter, subject to specified acquisition-related provisions. Floating-rate exposure: a 1 percentage-point rate change was estimated to change annual interest expense by about $7.2 million.
- Fuel-price volatility, supplier concentration, competition, regulation and environmental matters, acquisition execution and integration, and conflicts involving ETP/ETE and the partnership structure are identified risks. Fuel inventory price exposure is partly managed with derivatives; 815 positions covering 34.2 million gallons had a positive fair value of $3.1 million at quarter-end.
- The exchange offer for the 6.375% notes due 2023 had not been completed by its April 1, 2016 target date, triggering additional interest of 0.25% annually, with step-ups for subsequent 90-day periods and a 1.00% annual cap, until completion.
- Management reported no material litigation expected to adversely affect the Partnership. Disclosure controls were assessed as effective. No goodwill impairment was recorded in Q1.
Investor verification priorities
- Assess whether higher fuel margins and merchandise growth can persist as fuel prices, costs and volumes change.
- Review the debt and covenant position after the dropdown financing and the April 2021-note proceeds; verify the timing and cost of further debt reduction.
- Reconcile distributable cash flow with cash distributions, including the fixed Class C distributions and IDR payments; consider that the reported measure is non-GAAP.
- Track integration and performance of the acquired Sunoco businesses, the pending acquisitions and the disclosed development commitments.
- Note the prior-year comparison includes common-control businesses retrospectively, while partner-attributable earnings were also affected by prior-period preacquisition income allocations.