Sunoco LP — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Sunoco distributes motor fuel and, following 2014 acquisitions, operates convenience stores through retail and wholesale segments. The comparison with Q1 2014 is not fully like-for-like: the 2014 period is presented as “Predecessor,” while 2015 is “Successor” following ETP’s merger and push-down accounting; MACS and Aloha also expanded the business.
Financial performance and position
| Metric | Q1 2014 | Q1 2015 |
|---|---|---|
| Revenue | $1,216.6 million | $1,129.7 million |
| Gross profit | $22.1 million | $87.0 million |
| Operating income | $11.6 million | $26.9 million |
| Net income attributable to partners | $10.1 million | $17.1 million |
| Net income per limited partner unit | $0.46 | $0.44 |
| Operating cash flow | $(34.2) million | $43.7 million |
| Capital expenditures | $28.4 million | $35.8 million |
Revenue decreased 7.1%, primarily reflecting lower fuel selling prices; wholesale gallons rose, and acquired retail operations added fuel and merchandise sales. Gross profit increased substantially, including contributions from MACS and Aloha and stronger third-party wholesale fuel margins. Management reported Q1 2015 Adjusted EBITDA attributable to partners of $39.7 million and distributable cash flow attributable to partners of $29.6 million; these are non-GAAP measures.
Cash and cash equivalents were $51.0 million at March 31, 2015, down from $67.2 million at year-end 2014. Total debt was $869.9 million, including $684.8 million drawn on the revolving facility. The $1.25 billion revolver had $553.4 million of unused availability at quarter-end, and the Partnership reported compliance with its financial covenants. Total current assets were $211.9 million and current liabilities $168.8 million.
Q1 distributions paid to unitholders were $18.7 million. On May 4, the Partnership declared a $0.6450-per-unit distribution, totaling $23.1 million, payable May 29.
Changes, outlook, and notable items
- Revenue fell despite greater fuel volumes: wholesale third-party gallons increased 50.8% and affiliate gallons increased 9.5%, while lower selling prices reduced reported fuel sales. Q1 total gallons were 606.9 million versus 433.4 million in Q1 2014.
- Per-unit earnings declined to $0.44 from $0.46 even as partner net income rose, reflecting a much larger weighted-average unit count. The acquired retail operations and resulting costs, depreciation, and interest also make year-over-year comparisons less direct.
- Management projected 2015 capital spending, excluding future acquisitions but including spending related to the Sunoco LLC interest, of $195 million to $255 million: $15 million to $25 million maintenance and $180 million to $230 million growth. The growth estimate includes purchase-and-leaseback transactions for 30 to 35 new Stripes stores.
- On April 1, 2015, Sunoco acquired a 31.58% interest in Sunoco LLC for approximately $775 million cash and $40.8 million in common units. The cash consideration was funded through 6.375% senior notes due 2023. On April 10, the revolver commitments were increased by $250 million to a maximum $1.5 billion.
- Management identified future acquisitions and integration, fuel-price and demand volatility, dependence on major suppliers and customers, competition, regulation, and conflicts with ETP and affiliates as risks. Floating-rate debt was $684.8 million on the revolver plus $39.6 million of variable-rate VIE debt; a one-percentage-point rate change was estimated to affect annual interest expense by approximately $7.2 million.
- Aloha faced EPA/DOJ allegations concerning its Hilo East terminal, with stated penalties of $651,000 and $249,000. Aloha disputed the alleged noncompliance and was pursuing settlement; Sunoco said it believed indemnification and escrow arrangements could cover amounts ultimately payable.
- The filing reported preliminary acquisition valuation allocations for the ETP merger and Aloha that could be adjusted. Fuel inventory was written down by $2.0 million in Q1 due to declining prices. No goodwill impairment was recorded.
Investor verification priorities
- Review the Sunoco LLC acquisition’s contribution to earnings and cash flow against its $775 million cash funding, new 6.375% notes, and additional common units.
- Track leverage, revolver availability, interest-rate exposure, and covenant headroom after the acquisition and subsequent facility increase.
- Reconcile non-GAAP Adjusted EBITDA and distributable cash flow to GAAP results, and assess whether cash generation covers distributions and planned growth spending.
- Assess the sustainability of fuel margins and the extent of customer concentration, affiliate transactions, and reliance on Susser, Sunoco Inc., and ETP-related arrangements.
- Follow acquisition integration, final purchase accounting, and resolution or indemnification of the Hilo East environmental and regulatory claims.