Business context and reporting period
Sunoco LP’s Form 10-K covers the fiscal year ended December 31, 2015. It reports a wholesale motor-fuel distribution business and an expanding retail convenience-store business. At year-end, Sunoco operated approximately 900 stores and fuel outlets and distributed about 7.6 billion gallons during 2015.
The filing also presents unaudited quarterly data, including the fourth quarter of 2015. Comparisons require care: several acquisitions were accounted for as transactions under common control and reflected retrospectively, while 2014 combined-period figures are not GAAP results. Sunoco consolidated 100% of Sunoco LLC despite owning 31.58%, with the remaining 68.42% reported as noncontrolling interest.
Financial results and liquidity
| Metric | 2015 | 2014 comparison |
|---|---|---|
| Revenue | $16.94 billion | $10.32 billion, combined basis |
| Gross profit | $1.46 billion | $441.8 million, combined basis |
| Operating income | $318.3 million | $48.0 million, combined basis |
| Net income attributable to partners | $87.2 million | $56.7 million, combined basis |
| Net income per common unit | $1.11 | $1.87, combined basis |
| Cash from operating activities | $385.8 million | $210.7 million |
| Adjusted EBITDA attributable to partners | $444.1 million | $251.1 million, combined basis |
| Adjusted distributable cash flow attributable to partners | $272.2 million | $98.7 million |
2015 fourth-quarter revenue was $3.67 billion, gross profit $333.2 million, operating income $45.0 million, and net income attributable to partners $7.8 million. Common-unit net income per unit was a loss of $0.13. For fourth-quarter 2014, the corresponding figures were $4.91 billion, $316.0 million, $39.6 million, $30.1 million, and $0.83 per common unit.
At December 31, 2015, cash was $61.8 million, current assets $1.01 billion, and current liabilities $675.6 million. Total debt was approximately $1.98 billion, including $450 million drawn on the $1.5 billion revolving facility; unused availability was $1.03 billion. The partnership reported compliance with financial covenants. Operating leases and interest payments add substantial commitments: total disclosed contractual obligations were $3.27 billion.
Capital expenditures were $428.8 million, including $65.3 million maintenance and $363.5 million growth capital. Cash distributions declared were $2.89 per unit for 2015. The fourth-quarter common-unit distribution was $0.8013 per unit, paid February 16, 2016.
Material changes versus prior periods
- Revenue rose by $6.6 billion and gross profit by about $1.0 billion versus the combined 2014 period, largely reflecting the inclusion and expansion of Sunoco LLC, Susser, MACS, and Aloha retail and wholesale operations. Lower average fuel prices partly offset revenue growth.
- Retail operations materially increased the business’s scale and diversification. Wholesale gross profit rose, principally from Sunoco LLC; acquired retail operations contributed fuel and merchandise gross profit.
- Operating expenses increased by $746.2 million, mainly due to acquired operations and higher depreciation and amortization. Interest expense increased with new senior notes and revolving-credit borrowings.
- Year-over-year comparisons are affected by acquisition timing, common-control retrospective accounting, and 2014 push-down accounting. Fuel inventory write-downs of $84.8 million in 2015, versus $193.4 million in 2014, also affected reported results and adjusted-performance measures.
- Fourth-quarter revenue declined from 2014, while gross profit increased modestly; partner-attributable net income and common-unit earnings were substantially lower.
Outlook, commentary, and risks
Management expected continued growth through acquisitions and organic development. For 2016, it forecast growth capital spending of $390–$420 million and maintenance spending of $100–$110 million, including spending associated with the planned ETP dropdown; it also expected to open 35–40 new stores. These are estimates, not guarantees.
The pending ETP dropdown was expected to close in the first quarter of 2016. Consideration was approximately $2.032 billion in cash, subject to working-capital adjustments, plus 5,710,922 common units, for the remaining 68.42% of Sunoco LLC and specified retail assets. The filing identifies execution, integration, financing, and closing-condition risks.
Key exposures include narrow and volatile wholesale and retail fuel margins, fuel-price and demand changes, seasonal results, competition, supplier and trade-credit dependence, acquisition integration, debt service and interest-rate exposure, and the ability to maintain distributions. Environmental matters include remediation reserves and estimated underground-storage-tank asset-retirement obligations; potential compliance costs at Hawaii terminals were also disclosed. The Aloha EPA/DOJ settlement required a $650,000 penalty and closure of the Hilo East terminal; the penalty was recovered from an indemnification escrow.
The partnership stated that environmental compliance was not expected to have a material adverse effect, but future regulatory changes could increase costs. It also disclosed potential conflicts with ETE and ETP, including affiliate transactions and general-partner control. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the ETP dropdown’s closing, final price and financing, acquired assets, and resulting leverage and unit dilution.
- Assess whether operating cash flow and distributable cash flow support the common and Class C distributions after debt service, capital spending, and acquisition needs. Class C units issued January 1, 2016 have a stated $0.8682 quarterly distribution priority on eligible available cash.
- Review debt maturities, variable-rate exposure, credit-facility covenants, and the effect of financing the dropdown. A one-percentage-point rate change on year-end variable-rate debt was estimated to change annual interest expense by about $4.5 million.
- Check the sustainability of acquired-business earnings and integration assumptions, including the distinction between consolidated Sunoco LLC results and the partnership’s economic ownership.
- Track fuel inventory valuation, the effect of falling fuel prices, and outstanding environmental remediation and terminal-compliance obligations.