Sunoco LP — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Sunoco distributes motor fuel across more than 30 states, operates retail stores, and earns rental income from retail properties.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $4.392 billion | $2.080 billion | $7.863 billion | $5.352 billion |
| Operating income | $216 million | $208 million | $420 million | $126 million |
| Net income | $166 million | $157 million | $320 million | $29 million |
| Adjusted EBITDA (non-GAAP) | $201 million | $182 million | $358 million | $391 million |
| Motor-fuel gross profit per gallon, excluding inventory adjustments | 11.3¢ | 13.5¢ | 10.8¢ | 13.3¢ |
Q2 motor-fuel gallons sold rose 27.6% year over year to 1.933 billion; the higher volume was partly offset by lower gross profit per gallon. Total Q2 gross profit was $353 million versus $358 million. For the first half, gallons sold increased 8.1%, but lower per-gallon profit contributed to a $66 million decline in motor-fuel gross profit.
First-half net income includes a favorable $159 million fuel-inventory valuation adjustment as fuel prices rose; the comparable 2020 period included an adverse $137 million adjustment as prices fell. These unrealized LIFO reserve changes materially affect reported earnings and are excluded from Adjusted EBITDA. First-half Adjusted EBITDA declined $33 million, including a $57 million decrease in All Other segment EBITDA; lower operating costs partly offset weaker fuel and non-fuel results. Q2 net income also benefited from a $59 million inventory adjustment, compared with a $90 million benefit in Q2 2020.
Cash flow, liquidity and debt
- First-half operating cash flow was $275 million, versus $255 million in 2020. Investing cash outflow was $31 million, including $48 million of capital expenditures; financing cash outflow was $254 million.
- Cash was $87 million at June 30, 2021. The 2018 Revolver had $361 million outstanding, $1.1 billion of unused availability, and a 2.08% weighted-average rate; Sunoco reported compliance with financial covenants.
- Total debt was $3.064 billion, compared with $3.139 billion at year-end 2020. In January, Sunoco repurchased $436 million of 4.875% notes due 2023 using revolver borrowings. Guarantees of the 2026 and 2028 notes were assumed by Energy Transfer following its April merger with ETO.
- First-half distributions were $176 million. The common-unit distribution was $0.8255 per quarter; Sunoco declared the same rate for Q2, payable August 19, 2021. Management stated there is no guarantee distributions will continue.
Outlook, developments and risks
- Management expected to use operating cash flow and revolver capacity for 2021 working capital and growth spending. Full-year capital expenditure estimates were approximately $45 million maintenance and $150 million growth. No earnings guidance was provided in the filing.
- After quarter-end, Sunoco agreed to acquire eight NuStar refined-product terminals for $250 million and a Cato terminal for approximately $5.5 million. Both deals were expected to close in Q4 2021, subject to customary conditions; management expected them to be accretive in the first year.
- Principal disclosed risks include fuel-price and demand volatility, supplier concentration, competition, COVID-19 effects, cybersecurity incidents, access to credit, environmental and regulatory obligations, and conflicts associated with Energy Transfer and the partnership structure. Sunoco cited cybersecurity as a risk that could disrupt operations or cause losses not fully covered by insurance.
- Sunoco said known litigation was not expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings reflects non-cash inventory valuation changes, and whether underlying fuel margins and Adjusted EBITDA improve.
- Whether fuel volumes and per-gallon gross profit sustain their trends, and the drivers of the first-half decline in Adjusted EBITDA.
- Debt, revolver usage, financing costs, and distribution coverage as the terminal acquisitions proceed.
- Acquisition closing conditions, purchase-price funding, expected accretion, and integration or operational risks.
- Exposure to Energy Transfer affiliates, including commercial transactions, guarantees, and partnership-related conflicts.