Sunoco LP quarterly report, Q3 FY2014

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Sunoco LP (formerly Susser Petroleum Partners LP) — Q3 2014 Form 10-Q

Business context and reporting period

The filing covers the quarter ended September 30, 2014. Sunoco distributes motor fuel, primarily in Texas and nearby states, to affiliate-operated and independent locations, and also earns rental and other income. On August 29, 2014, Energy Transfer Partners (ETP) acquired the parent, and Sunoco applied push-down accounting from August 31. The filing therefore separates “Predecessor” and “Successor” results; management’s combined operating metrics are the most useful basis for Q3 comparisons. Effective October 27, the partnership changed its name from Susser Petroleum Partners LP to Sunoco LP.

Financial and operating performance

  • Revenue: Combined Q3 2014 revenue was $1.305 billion, up 11.8% from $1.167 billion in Q3 2013. Nine-month revenue was $3.898 billion, up 15.4% from $3.378 billion.
  • Gross profit and margins: Combined Q3 gross profit was $21.9 million, up 19.0%; nine-month gross profit was $66.2 million, up 30.1%. Fuel gross profit averaged 3.8 cents per gallon in Q3 versus 3.7 cents a year earlier; affiliate fuel margin remained about 3.0 cents per gallon. Q3 third-party fuel gross profit included a $2.1 million non-cash LIFO valuation charge.
  • Profit: Combined Q3 net income was $1.0 million, down from $9.6 million. Nine-month net income was $20.8 million, down from $27.5 million. Q3 operating income was $4.7 million; increased operating costs and interest expense weighed on earnings.
  • Non-GAAP measures: Q3 Adjusted EBITDA was $14.0 million versus $13.8 million; distributable cash flow was $11.8 million versus $12.7 million. Nine-month Adjusted EBITDA was $45.2 million versus $37.8 million, and distributable cash flow was $39.5 million versus $35.0 million. These measures are not GAAP and have limitations described in the filing.
  • Cash flow and capital spending: Nine-month operating cash flow was $36.0 million, compared with $48.9 million in 2013, primarily reflecting working-capital changes. Capital expenditures and intangible purchases totaled $106.3 million for the 2014 nine-month period.
  • Liquidity and debt: At September 30, cash was $10.6 million and total debt was $273.6 million, including $270.0 million drawn under the new $1.25 billion revolving facility. The facility had $969.1 million of unused availability, net of $10.9 million in letters of credit; the partnership reported covenant compliance. The balance sheet reported $156.9 million of current assets and $134.9 million of current liabilities.
  • Distributions: A $0.5457-per-unit Q3 distribution was declared November 3, payable November 28. The filing states the partnership has no legal obligation to pay distributions.

Material changes and unusual items

  • Compared with Q3 2013, Q3 fuel volumes rose: third-party gallons increased 26.5% and affiliate gallons increased 12.7%. Lower wholesale selling prices partly offset volume growth.
  • Q3 operating expenses increased 122.2% to $17.2 million. Management cited accelerated vesting of phantom units upon the ETP merger, higher personnel costs, GFI-related costs, and acquisition and transaction expenses. Net income included $5.1 million of charges related to the revolver refinancing, ETP merger, and MACS and Aloha acquisitions.
  • The partnership replaced its prior revolver in September with a $1.25 billion facility due in 2019. Refinancing included a $1.6 million write-off of old loan costs and $7.6 million of new facility costs capitalized; reported Q3 interest expense also included the old-cost write-off.
  • Effective September 1, the partnership adopted LIFO fuel accounting to align with ETP. Management estimated this increased fuel inventory by $0.8 million at September 30; interim LIFO estimates remain subject to year-end valuation.
  • The preliminary ETP push-down allocation recorded $613.7 million of goodwill and $244.2 million of net intangible assets at September 30. Valuation work was incomplete, so material allocation adjustments could follow.

Outlook, transactions, and risks

Management expected liquidity sources—operating cash flow, revolver borrowings, and possible debt or equity issuance—to meet anticipated needs, while noting that future operating performance and access to financing are uncertain. For full-year 2014, excluding MACS and Aloha, it expected $2–$5 million of maintenance capital and $150–$170 million of expansion capital, including 28–33 new Stripes store purchase-and-leaseback transactions. No earnings or distribution guidance was provided.

  • MACS acquisition: On October 1, after quarter-end, Sunoco acquired Mid-Atlantic Convenience Stores from ETP for approximately $768 million, comprising $556 million cash and 3,983,540 newly issued units, subject to working-capital adjustments. The portfolio included about 110 company-operated stores and 200 dealer-operated or consignment sites. The cash portion was initially funded with the revolver.
  • Equity offering: On October 27, Sunoco completed an 8-million-unit public offering at $46.25 per unit, receiving $358.9 million net before other offering expenses. Proceeds were intended to repay revolver borrowings and for general partnership purposes.
  • Aloha: A definitive agreement to acquire Aloha Petroleum for approximately $240 million cash, subject to adjustments and a post-closing earn-out, was signed in September. Closing was expected in Q4 2014, subject to customary conditions.
  • Key risks: The filing highlights dependence on ETP and SUSS, significant affiliate and customer relationships, limited principal suppliers, fuel-price and demand changes, competition, acquisition execution and integration, variable interest rates, regulation, environmental exposure, severe weather, and reliance on trade credit and information systems. A 1-percentage-point increase in floating rates would raise annual interest expense by approximately $2.7 million at quarter-end debt levels.

The filing reported no legal proceedings and stated that disclosure controls were effective. Management noted no material change in internal control over financial reporting during the quarter.

Investor facts to verify

  • Review the final fair-value allocation for the ETP transaction and any resulting goodwill or intangible-asset adjustments.
  • Track post-quarter MACS financing, integration, and realized cash-flow contribution, as well as the status and terms of the Aloha transaction.
  • Reconcile the $5.1 million of Q3 transaction-related charges and assess which costs are recurring versus nonrecurring.
  • Monitor LIFO effects, fuel margins, volume growth, working-capital cash flows, and the relationship between distributable cash flow and distributions.
  • Assess revolver borrowings, interest-rate exposure, covenant headroom, acquisition funding needs, and unit dilution following the post-quarter issuances.