Sunoco LP — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Sunoco LP distributes motor fuel across more than 30 states, operates retail stores in Hawaii and New Jersey, and earns lease income from real estate. Amounts below are in millions unless stated otherwise.
Financial and operating results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $4,331 | $4,761 | $12,498 | $13,117 |
| Gross profit | $292 | $333 | $931 | $939 |
| Operating income | $117 | $159 | $366 | $383 |
| Income from continuing operations | $66 | $114 | $230 | $130 |
| Net income (loss) | $66 | $112 | $230 | $(135) |
| Adjusted EBITDA | $192 | $208 | $497 | $457 |
| Net cash from continuing operating activities | Not separately stated for quarter | Not separately stated for quarter | $294 | $275 |
Q3 motor fuel gallons sold were 2,110 million, up 5.3%; motor fuel gross profit was 11.6 cents per gallon versus 12.7 cents. For the first nine months, gallons were 6,105 million and gross profit was 10.2 cents per gallon, compared with 5,838 million and 11.1 cents in 2018. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Liquidity, debt, and distributions
- At September 30, cash was $13; total debt was approximately $3.1 billion, including $154 outstanding under the revolving facility. Revolver availability was $1.3 billion; the company reported compliance with its financial covenants.
- Cash from continuing operations for the first nine months was $294. Investing activities used $116, including $103 of capital expenditures; financing activities used $221. Cash declined $43 from year-end 2018.
- Capital expenditures for the first nine months included $80 of growth and $23 of maintenance spending. Management expected approximately $115 of growth and $40 of maintenance capital expenditures for full-year 2019, excluding acquisitions.
- Cash distributions were $0.8255 per common unit each quarter. On October 25, the partnership declared the Q3 distribution, totaling $68 for common units, payable November 19, 2019.
- Adoption of the new lease standard added approximately $548 of right-of-use assets at January 1, 2019. At September 30, operating and finance lease liabilities had present values of $542 and $42, respectively.
Changes and notable items
- Q3 revenue fell about 9% year over year, while Adjusted EBITDA fell $16. Management attributed the EBITDA decline mainly to weaker motor-fuel and non-fuel gross profit, partly offset by lower operating costs. The prior-year quarter benefited from an approximately $25 fuel-supplier settlement.
- Nine-month Adjusted EBITDA increased $40, despite lower revenue. Lower operating costs—primarily following the sale of 1,030 retail fuel outlets to 7-Eleven and conversion of 207 sites to commission-agent operations—were partly offset by lower non-fuel gross profit and motor-fuel gross profit. The comparison also includes a prior-year supplier settlement benefit and an $8 contractual-dispute reserve charge in 2019.
- Q3 2019 income from continuing operations was lower than in Q3 2018; nine-month 2019 net income was positive versus a 2018 net loss, which included a $265 discontinued-operations loss and significant tax effects associated with the 7-Eleven divestment.
- Interest expense rose $10 in Q3 and $23 for the nine-month period, primarily due to higher total long-term debt. The partnership issued $600 of 6.000% senior notes due 2027 in March and used the proceeds to repay revolver borrowings.
- The partnership recorded a $47 write-down on assets held for sale and a $3 loss related to disposal of its Fulton, New York ethanol plant. The plant was sold in May for $20 cash plus working-capital adjustments; Sunoco entered a 10-year ethanol offtake agreement.
- Sunoco acquired a 50% interest in the J.C. Nolan diesel pipeline joint venture in July; the pipeline was commissioned in August. The investment was $112 at September 30.
Outlook, risks, and contingencies
- Management said it expected operating cash flow and revolver capacity to fund 2019 growth capital and working-capital needs, and considered available liquidity adequate for short- and long-term needs. No earnings or revenue guidance was provided in the supplied filing text.
- Philadelphia Energy Solutions filed for Chapter 11 in July following a refinery explosion and fire and announced plans to temporarily cease refinery operations. Sunoco said it had secured alternative fuel supplies and did not anticipate a material business impact.
- Key disclosed risks include fuel price and demand changes, supplier concentration, competition, access to credit and financing, environmental and other regulation, fuel storage and transport hazards, and conflicts inherent in the partnership structure. Fuel inventory and derivatives remain exposed to commodity-price movements; the filing reported 517 derivative positions covering 21.7 million gallons with an aggregate unrealized loss of $0.3.
- Management said known litigation was not expected to materially adversely affect financial condition, results, or cash flows. The filing also notes environmental and underground-storage-tank obligations; no clear estimate of total potential exposure is provided in the supplied text.
Investor facts to verify
- Whether higher fuel volumes can sustain gross profit per gallon amid the year-over-year decline and the absence of the prior-year supplier settlement.
- How debt service, interest expense, and quarterly distributions compare with recurring operating cash flow and planned capital spending.
- Whether the PES bankruptcy and refinery shutdown affect supply costs or availability despite management’s mitigation statement.
- The status and recoverability of assets held for sale, and the assumptions behind the $47 write-down and related environmental obligations.
- The impact of the 7-Eleven portfolio changes on period-to-period revenue and operating-cost comparisons.