Sunoco LP — Q1 2018 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2018. Sunoco distributes motor fuel across more than 30 states and operates retail convenience stores. On January 23, it completed the sale of 1,030 company-operated retail fuel outlets to 7-Eleven for approximately $3.2 billion. The sold businesses and certain other assets are reported as discontinued operations; consequently, the 2018 and 2017 comparisons reflect different periods and business mix. Sunoco also entered a 15-year take-or-pay fuel supply agreement with 7-Eleven.
Financial and operating metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Continuing-operations revenue | $3.749 billion | $2.808 billion |
| Gross profit | $296 million | $256 million |
| Operating income | $96 million | $56 million |
| Continuing-operations income (loss) | $(78) million | $12 million |
| Net income (loss), including discontinued operations | $(315) million | $1 million |
| Net loss per common unit | $(3.74) | $(0.22) |
| Adjusted EBITDA (non-GAAP) | $109 million | $155 million |
| Adjusted distributable cash flow (non-GAAP) | $85 million | $77 million |
| Continuing-operations operating cash flow | $440 million | $(14) million |
- Wholesale fuel volume was 1.612 billion gallons, up from 1.313 billion; wholesale fuel gross profit was $161 million versus $122 million. Wholesale gross profit per gallon was 8.4 cents versus 10.6 cents.
- Retail fuel volume, including discontinued operations, was 245 million gallons versus 595 million. Retail gross profit per gallon was 24.4 cents versus 23.1 cents. Merchandise margin was 29.7% versus 31.6%.
- Cash and cash equivalents were $98 million at March 31, versus $28 million at year-end. Current assets were $1.220 billion and current liabilities $1.358 billion.
- Total debt was approximately $2.313 billion, including $2.2 billion of senior notes; net long-term debt was $2.283 billion. The $1.5 billion revolving facility had no borrowings and $8 million of letters of credit outstanding. Sunoco reported compliance with financial covenants.
- Continuing-operations capital expenditures were $19 million. The quarterly common-unit distribution remained $0.8255 per unit.
Material changes and unusual items
- Revenue rose $941 million, primarily from higher wholesale fuel prices and a 299-million-gallon increase in wholesale volume. The revenue comparison is affected by the retail divestiture and should not be read as same-business growth.
- Gross profit increased $40 million, but Adjusted EBITDA declined $46 million. Management attributed the gross-profit increase principally to a favorable year-over-year inventory adjustment; excluding that effect, wholesale gross profit per gallon declined.
- Sunoco recorded a $109 million continuing-operations loss on extinguishment of debt and other, principally from redeeming legacy notes. This contributed to the continuing-operations loss. Interest expense fell to $34 million from $58 million.
- Discontinued operations generated a $237 million net loss, versus an $11 million loss. The 2018 result included $173 million of income tax expense, a $20 million debt-extinguishment loss, and asset-disposal losses; the filing attributes the larger loss largely to the divestiture and partial-period operations.
- Sunoco issued $2.2 billion of new senior notes and used transaction proceeds to repay its term loan and old notes, redeem approximately $313 million of preferred units, and repurchase 17.3 million common units for approximately $540 million.
- Adoption of ASC 606 reduced opening common-unit equity by $54 million. The company used the modified retrospective method, so prior-year figures were not restated; reported Q1 2018 revenue was $10 million lower than it would have been without adoption.
Outlook, risks and contingencies
- Management expected to fund 2018 working capital and announced growth spending with operating cash flow and the revolver. It forecast approximately $90 million of growth capital and $40 million of maintenance capital for full-year 2018. No earnings or revenue guidance was provided.
- The 7-Eleven supply agreement requires approximately 2.0 billion gallons annually, with additional volumes of up to 500 million gallons to be added incrementally over its first four years.
- After quarter-end, Sunoco completed the acquisition of certain Superior Plus assets for approximately $40 million, converted 207 sites to a commission-agent model, and acquired 26 outlets from 7-Eleven for approximately $50 million, also converting them to commission-agent locations.
- Risks identified include fuel-price and demand changes, supplier concentration, competition, environmental and regulatory requirements, operating hazards, financing needs, and potential conflicts with ETE/ETP affiliates. Sunoco noted possible legal proceedings following the 7-Eleven transaction but did not believe current litigation would have a material adverse impact.
- Sunoco reported $1 million of unrealized losses on fuel derivative positions representing 15 million gallons. It also reported environmental remediation and underground-storage-tank reserves of $24 million and $50 million, respectively.
Important facts for investors to verify
- How much of the $440 million operating cash flow reflects timing and working-capital movements rather than recurring cash generation.
- The impact of the retail divestiture, discontinued-operation tax charges, and debt-refinancing costs on ongoing earnings and comparability.
- Whether wholesale volume and margins, particularly the decline in wholesale gross profit per gallon, are sustainable under the 7-Eleven supply contract and other customer agreements.
- Debt-service capacity, covenant headroom, and the use of revolver availability alongside distributions and planned capital spending.
- The eventual impact of ASC 606 and the forthcoming lease-accounting standard, and progress on remaining real-estate dispositions and acquisitions.