Sunoco LP — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 24, 2017. This is an annual report, with selected fourth-quarter data, rather than a standalone Q4 filing. Sunoco operates wholesale fuel distribution and retail convenience stores. Results include the full-year operations of Sunoco LLC and Sunoco Retail following the January 1, 2016 dropdown acquisition. Some prior-period figures reflect common-control accounting and may not be directly comparable.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $15.698 billion | $18.460 billion |
| Gross profit | $2.219 billion | $1.984 billion |
| Operating income (loss) | $(248) million | $334 million |
| Net income (loss) attributable to partners | $(406) million | $87 million |
| Adjusted EBITDA attributable to partners | $665 million | $715 million |
| Adjusted distributable cash flow | $390 million | $272 million |
| Cash provided by operating activities | $561 million | $438 million |
| Capital expenditures | $439 million | $491 million |
| Cash and cash equivalents at year-end | $119 million | $73 million |
| Total debt at year-end | $4.561 billion | $1.976 billion |
- Revenue fell 15%, primarily as lower fuel prices reduced wholesale revenue by $2.3 billion and retail fuel revenue by $630 million. Volumes rose modestly: wholesale gallons increased by about 134 million and retail gallons by about 29 million.
- Gross profit increased 12%, led by a $206 million increase in wholesale fuel gross profit and $36 million more merchandise gross profit. Retail fuel gross profit declined $24 million.
- Fuel gross profit per gallon was 9.8 cents wholesale and 24.0 cents retail, versus 9.4 cents and 26.4 cents, respectively, in 2015. Merchandise margin was 31.5%, compared with 31.2%.
- Fourth-quarter 2016 revenue was $4.306 billion and gross profit was $562 million. The quarter recorded an operating loss of $568 million and partner net loss of $585 million, principally reflecting the impairment charges described below.
- Common-unit distributions declared totaled approximately $3.29 per unit for 2016, versus $2.89 in 2015. The February 2017 quarterly distribution was $0.8255 per common unit. Distributions are not guaranteed; Class C units have a fixed $0.8682 quarterly distribution and priority over common units for specified available cash.
Material changes and significant items
- In 2016, Sunoco completed the $2.2 billion dropdown of the remaining Sunoco LLC interest and Sunoco Retail from ETP Retail. It also acquired the Emerge fuels business for $171 million, Valentine Stores for $78 million, Denny Oil for $55 million, and Kolkhorst Petroleum for $39 million.
- Fourth-quarter impairment testing resulted in a $642 million goodwill impairment for the retail reporting unit and a $32 million impairment of the Laredo Taco Company tradename. The retail goodwill charge reflected changed revenue and cash-flow assumptions, organizational and capital structure changes, and revised new-store construction plans.
- Interest expense rose to $189 million from $88 million, primarily due to the term loan, the $800 million 2021 notes, and higher revolving borrowings. Income taxes were a $31 million benefit, compared with $52 million expense in 2015.
- Investing cash outflow was $3.016 billion, including $2.5 billion for acquisitions. Financing provided $2.501 billion, including debt and equity proceeds; the partnership paid $386 million in distributions to unitholders and $50 million to ETP.
- At year-end, the $1.5 billion revolving facility had $1.0 billion drawn and $469 million of unused availability. Approximately $2.2 billion of debt bore variable rates; a one-percentage-point rate increase would add about $22 million to annual interest expense.
Outlook, risks and contingencies
- Management expected to use revolver capacity and operating cash flow for working capital and announced projects through 2017, while noting that future financing may be needed. No earnings or revenue guidance is provided. Planned 2017 capital spending was approximately $200 million for growth and $90 million for maintenance.
- In January 2017, Sunoco began marketing 99 real estate assets for possible sale. It also had commitments to develop eight Indiana Toll Road travel plazas, estimated at $31 million, and 15 Dunkin’ Donuts restaurants in Hawaii, estimated at $20 million.
- On January 31, 2017, lenders granted limited waivers after Sunoco identified leverage-ratio miscalculations in prior compliance certificates and unpaid incremental interest. The interest was remedied; the applicable borrowing margins increased until the next compliance certificates. The filing states Sunoco was in compliance with financial covenants at December 31, 2016.
- Key risks include high leverage and refinancing needs, variable-rate exposure, dependence on supplier trade credit, volatile fuel margins and prices, intense wholesale and retail competition, acquisition integration, seasonality, severe weather, environmental liabilities, and potential shifts toward alternative fuels. The MLP structure also entails sponsor conflicts and distributions depend on available cash.
- Environmental reserves included $40 million for remediation and $53 million for underground-tank asset retirement obligations at year-end. Management reported no litigation it believed would materially adversely affect financial condition or results.
- Management and the independent auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether operating cash flow and distributable cash flow can support common and Class C distributions, debt service, and planned capital spending.
- Current leverage, covenant calculations, borrowing margins, revolver availability, and refinancing plans, particularly following the January 2017 waivers.
- Whether the retail impairment assumptions and acquisition purchase-price allocations remain appropriate, and whether acquired assets deliver expected cash flow.
- Progress, proceeds, and operational effects of the 99-property sale process and the toll-road and Hawaii development commitments.
- Environmental reserve adequacy, supplier credit availability, and the effects of fuel-margin volatility and regional demand conditions.