Sunoco LP — Q2 2019 Form 10-Q Summary
Business context and reporting period
Sunoco LP filed its quarterly report for the three and six months ended June 30, 2019. The partnership primarily distributes motor fuel through wholesale, dealer and commission-agent channels, and also earns lease income and operates retail stores. Comparisons with 2018 are affected by the January 2018 sale of 1,030 company-operated fuel outlets to 7-Eleven and subsequent conversion of 207 sites to commission-agent locations; the divested operations are reported as discontinued operations.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $4.475 billion | $4.607 billion | $8.167 billion | $8.356 billion |
| Operating income | $97 million | $128 million | $249 million | $224 million |
| Income from continuing operations | $55 million | $94 million | $164 million | $16 million |
| Net income (loss), including discontinued operations | $55 million | $68 million | $164 million | $(247) million |
| Adjusted EBITDA (non-GAAP) | $152 million | $140 million | $305 million | $249 million |
| Distributable cash flow, as adjusted (non-GAAP) | $101 million | $106 million | $200 million | $191 million |
- Q2 diluted earnings per common unit from continuing operations were $0.43, versus $0.90; six-month diluted earnings were $1.50, versus a loss of $0.29.
- Q2 gross profit was $269 million, down from $310 million. Motor-fuel gross profit was $190 million versus $227 million; motor-fuel gross profit per gallon declined to 9.1 cents from 9.9 cents. Gross profit as a share of revenue was approximately 6.0%, versus 6.7%.
- For the six months, continuing operating cash flow was $184 million, versus $255 million. Investing cash outflow was $35 million, including $57 million of capital expenditures; financing cash outflow was $169 million. Cash declined to $36 million from $56 million at year-end.
- At June 30, total debt was approximately $3.03 billion, including $117 million drawn on the revolver; the revolver had $1.4 billion of unused availability. The partnership reported covenant compliance. Cash and cash equivalents were $36 million; current assets were $1.098 billion and current liabilities $887 million.
- Quarterly cash distributions were $0.8255 per common unit, unchanged year over year. The partnership paid $175 million in distributions during the first half.
Material changes versus comparable periods
- Q2 revenue decreased about 2.9% and operating income decreased about 24%; net income decreased from $68 million to $55 million. Adjusted EBITDA increased about 9%, while adjusted distributable cash flow decreased about 5%.
- Six-month revenue decreased about 2%, but operating income rose to $249 million from $224 million. Adjusted EBITDA increased about 22% and adjusted distributable cash flow about 5%. The net-income comparison reflects the prior-year $263 million discontinued-operations loss and significant 2018 transaction-related charges.
- Management attributed the Q2 increase in adjusted EBITDA mainly to $21 million lower operating costs, partly offset by weaker motor-fuel and non-fuel gross profit. Fuel-distribution-and-marketing adjusted EBITDA declined to $119 million from $132 million; All Other increased to $33 million from $8 million.
- Interest expense rose to $43 million in Q2 from $36 million, and to $85 million for the first half from $70 million, primarily due to higher total debt.
- Sunoco adopted lease accounting Topic 842 on January 1, 2019, recognizing approximately $548 million of right-of-use assets and $553 million of operating lease liabilities at adoption. The adoption materially affected the balance sheet but did not materially affect results or cash flows.
Outlook, commentary, risks and unusual items
- Management expected 2019 capital spending of approximately $100 million for growth and $40 million for maintenance, excluding acquisitions. It said operating cash and revolver capacity were expected to fund announced growth spending and working-capital needs; it also noted financing availability is not assured.
- In March, Sunoco issued $600 million of 6.000% senior notes due 2027 and used the proceeds to repay revolver borrowings. The revolver balance fell from $700 million at December 31, 2018 to $117 million at June 30, 2019.
- In May, Sunoco sold its Fulton, New York ethanol plant for $20 million cash, subject to working-capital adjustments, and entered a 10-year ethanol offtake agreement. First-half asset-disposal and impairment charges included a $47 million write-down of assets held for sale and a $3 million ethanol-plant disposal loss.
- Management reported an $8 million one-time charge in Q2 related to a reserve for an open contractual dispute. The filing also reported a $6 million net gain on extinguishment of debt and other for Q2.
- After a June explosion and fire, PES filed for Chapter 11 on July 21, 2019 and announced plans to temporarily cease refinery operations. Sunoco said it had obtained alternative fuel supplies and did not anticipate a material business impact.
- A diesel pipeline joint venture serving West Texas was formed July 1; the pipeline, with expected initial capacity of 30,000 barrels per day, was commissioned in August 2019. These are post-quarter developments.
- Principal risks cited include fuel-price and demand changes, reliance on suppliers and trade credit, competition, environmental and other regulation, financing and credit-market conditions, operational hazards, and conflicts of interest with Energy Transfer affiliates. Sunoco reported no material change to the risk factors in its 2018 Form 10-K and said known litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How much of the Q2 adjusted EBITDA increase reflects durable operating improvement versus lower costs, and whether the weaker fuel gross profit per gallon persists.
- Working-capital effects behind the lower first-half operating cash flow, and cash generation available after capital expenditures and distributions.
- Debt-service capacity, refinancing needs and covenant headroom, including the effect of the new 2027 notes and lease obligations.
- Whether the PES supply disruption, the contractual dispute, or assets held for sale lead to further costs or impairments.
- The assumptions underlying 2019 capital-spending expectations and the sustainability of distributions; adjusted EBITDA and distributable cash flow are non-GAAP measures and are not substitutes for GAAP cash flow or income.