Sunoco LP — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Sunoco distributes motor fuels and operates convenience stores through wholesale and retail segments.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $4.394 billion | $3.215 billion |
| Gross profit | $503 million | $511 million |
| Operating income | $48 million | $92 million |
| Net income | $1 million | $62 million |
| Common limited partner unit income (loss) | $(0.22) per unit | $0.47 per unit |
| Adjusted EBITDA | $155 million | $159 million |
| Adjusted distributable cash flow | $77 million | $112 million |
| Operating cash flow | $108 million | $162 million |
| Cash and cash equivalents | $74 million | $119 million |
| Total debt, gross | $4.344 billion | $4.561 billion |
| Revolver availability | $718 million | Not stated for prior date |
Revenue rose 37%, primarily reflecting higher fuel prices and increased wholesale gallons; gross profit declined 2%. Retail fuel gross profit was 23.1 cents per gallon versus 21.3 cents, while wholesale fuel gross profit was 10.6 cents versus 11.4 cents. Retail and wholesale volumes were 595 million and 1.313 billion gallons, respectively. The common-unit distribution was $0.8255, compared with $0.8173 in Q1 2016.
Interest expense increased to $64 million from $28 million, mainly due to debt raised to fund the 2016 dropdown acquisition and higher revolver borrowings. The partnership reported $926 million of current liabilities and $1.203 billion of current assets at quarter-end. It said it was in compliance with financial covenants. Operating cash flow and distributable cash flow were below the prior-year quarter; cash distributions to unitholders were $104 million.
Material changes and notable transactions
- On March 30, Sunoco issued 12 million Series A Preferred Units to affiliate ETE for $300 million and used the proceeds to repay revolver debt. The units carry a cumulative 10% annual distribution through March 2022, then a floating rate of 8% plus three-month LIBOR.
- Sunoco sold 1.269 million common units through its ATM program for $33 million net; $295 million remained available under the program at March 31.
- On January 31, the partnership obtained lender waivers relating to previously miscalculated leverage-ratio compliance certificates and unpaid incremental interest. The interest was remedied; borrowing margins increased until delivery of the next compliance certificates.
- Q1 2016 investing cash outflow included $2.2 billion for acquisitions; Q1 2017 investing cash outflow was $78 million, including $66 million of capital expenditures.
Outlook, risks and contingencies
- Pending retail sale: On April 6, 2017, Sunoco agreed to sell approximately 1,100 company-operated retail fuel outlets and related assets, including Laredo Taco Company, to 7-Eleven for $3.3 billion cash plus inventory value, subject to adjustments and assumption of certain liabilities. Closing was expected in Q4 2017, subject to customary conditions, including regulatory approval. Sunoco was also marketing sites not included in the 7-Eleven deal.
- The sale is not assured. Risks include regulatory or financing-related closing conditions, required noteholder consents or debt redemptions and credit-facility waivers, purchase-price adjustments, possible disruption, and the ability to sell remaining assets.
- Management expected 2017 capital expenditures of approximately $150 million for growth and $90 million for maintenance. It said ongoing liquidity sources, including operating cash and revolver availability, were expected to meet needs, while noting financing availability is not guaranteed.
- A 1 percentage-point change in floating rates would change annual interest expense by approximately $20 million. Fuel-price exposure includes unhedged Hawaiian terminal inventory; consolidated derivatives covered 12 million gallons and had a negative fair value of $0.2 million.
- Environmental reserves included $4 million current and $33 million long-term remediation liabilities, plus a $58 million reserve for underground storage tank removal. Management said it knew of no litigation expected to have a material adverse impact.
- Management identified no Q1 goodwill impairment; it had recorded a $642 million retail goodwill impairment in Q4 2016. Adoption impacts of new revenue and lease accounting standards were still being evaluated.
Key facts for investors to verify
- Whether the 7-Eleven transaction closes on expected terms and timing, including final purchase-price adjustments, required consents, and treatment of remaining retail sites.
- Leverage and covenant calculations after the compliance-certificate corrections, the applicable borrowing margins, and the partnership’s capacity to service debt and distributions.
- Whether cash generation and distributable cash flow can support common, Class C, and preferred distributions, given Q1 2017 distributable cash flow of $77 million and cash distributions of $104 million.
- The continuing effect of higher interest costs, weaker wholesale fuel gross profit per gallon, and retail fuel volume changes on earnings and cash flow.
- Final purchase accounting for recent acquisitions and the eventual impact of new revenue and lease accounting standards.