Sunoco LP — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Sunoco distributes motor fuel across more than 30 states and operates retail stores in Hawaii and New Jersey. Its business includes fuel distribution and marketing, retail operations, and rental income from real estate.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $3.692 billion | $3.749 billion |
| Gross profit | $370 million | $296 million |
| Operating income | $152 million | $96 million |
| Income (loss) from continuing operations | $109 million | $(78) million |
| Net income (loss), including discontinued operations | $109 million | $(315) million |
| Adjusted EBITDA | $153 million | $109 million |
| Distributable cash flow, as adjusted | $99 million | $85 million |
| Continuing operating cash flow | $37 million | $440 million |
| Capital expenditures | $26 million | $19 million |
- Revenue declined about 2%, while gross profit increased about 25%. Motor fuel gross profit was $285 million versus $205 million; reported motor fuel gross profit per gallon was 9.9 cents versus 10.5 cents.
- GAAP diluted income per common unit from continuing operations was $1.07, compared with a $1.11 loss. Q1 2018 net loss included $237 million from discontinued operations.
- Operating cash flow fell sharply, primarily because of changes in operating assets and liabilities; management cited a $414 million unfavorable comparison in those changes, partly offset by higher cash-basis earnings.
- At March 31, cash was $23 million. Principal debt was $3.063 billion, including $150 million drawn on the revolver; unused revolver availability was approximately $1.3 billion. The Partnership reported compliance with its financial covenants.
- Sunoco paid $87 million in unitholder distributions during the quarter. The declared common-unit distribution was $0.8255 per unit, unchanged from Q1 2018.
Material changes and unusual items
- Results reflect the 2018 sale of 1,030 company-operated fuel outlets to 7-Eleven and conversion of 207 sites to commission-agent locations. Lower retail merchandise gross profit was more than offset in Adjusted EBITDA by reduced operating costs. These changes make year-over-year revenue and expense comparisons less like-for-like.
- Sunoco issued $600 million of 6.000% senior notes due 2027 and used the proceeds to repay revolver borrowings. Revolver borrowings and repayments during the quarter were $693 million and $1.243 billion, respectively.
- A $47 million write-down on the Fulton, New York ethanol plant and malting operation contributed to $48 million of disposal and impairment charges. The plant was classified as held for sale.
- Sunoco adopted the new lease accounting standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. Adoption increased assets and liabilities by approximately $547 million and did not materially affect earnings or cash flows.
Outlook, risks, and contingencies
- Management expected 2019 capital spending, excluding acquisitions, of approximately $90 million for growth and $45 million for maintenance. It expected cash from operations and revolver capacity to fund operating needs and announced growth spending, while noting that financing needs could change.
- The ethanol-plant sale to Attis Industries was expected to close in Q2 2019, subject to regulatory clearances and customary conditions. Consideration was $20 million cash plus working-capital adjustments; the transaction included a planned 10-year ethanol offtake agreement.
- Management cited risks including fuel-price and demand changes, supplier concentration, competition, credit-market access and ratings, regulation and environmental matters, operating hazards, and potential conflicts with Energy Transfer affiliates. It said risk factors were materially unchanged from the 2018 Form 10-K.
- The filing reported no litigation believed likely to have a material adverse impact. Fuel hedging positions were described as not significant; outstanding positions represented 16 million gallons with an unrealized gain of approximately $0.04 million.
Most important facts for investors to verify
- Whether the ethanol-plant sale closed on the expected terms and whether the impairment affects subsequent results.
- Whether operating cash flow normalizes after the working-capital movements that drove the Q1 decline.
- Debt levels, revolver availability, interest costs, and covenant compliance after the 2027 notes issuance.
- Distribution sustainability relative to distributable cash flow, capital spending, and future liquidity needs.
- The continuing earnings and margin effects of the shift from company-operated retail sites to fuel distribution and commission-agent operations.