Sunoco LP — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 9, 2024. Sunoco LP distributes motor fuels and operates related retail, terminal and storage businesses. Unless otherwise stated, financial amounts are in millions of dollars.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $5,499 | $5,362 | +$137 |
| Operating income | $297 | $199 | +$98 |
| Net income | $230 | $141 | +$89 |
| Net income per common unit, diluted | $2.26 | $1.41 | +$0.85 |
| Adjusted EBITDA | $242 | $221 | +$21 |
| Operating cash flow | $286 | $326 | -$40 |
| Capital expenditures | $41 | $37 | +$4 |
- Motor fuel sales were $5,366 million; non-motor fuel sales were $95 million and lease income was $38 million. Motor fuel volumes rose 9% to 2,105 million gallons, while reported motor fuel profit per gallon, excluding inventory valuation adjustments, declined to 11.7 cents from 12.9 cents.
- Approximate operating margin was 5.4% versus 3.7%; net margin was 4.2% versus 2.6%. These ratios are calculated from reported revenue and income.
- Q1 net income benefited from a $130 million favorable inventory valuation adjustment, compared with $29 million in the prior-year quarter. These non-cash adjustments are excluded from Adjusted EBITDA, which increased by $21 million.
- Cash and cash equivalents were $215 million at March 31, up from $29 million at December 31. Operating cash flow was $286 million; investing cash outflow was $223 million, including $185 million for the Zenith terminals; financing cash inflow was $123 million.
- Long-term debt, net, was $3,795 million, versus $3,580 million at year-end. The $1.50 billion revolving credit facility had $625 million drawn, $870 million unused availability and a 7.18% weighted-average rate. Sunoco reported compliance with financial covenants. A one-percentage-point change in floating rates would change annual interest expense by approximately $6.3 million.
- Cash distributions per unit were $0.8756, up from $0.8420. Sunoco declared a $0.8756 quarterly common-unit distribution payable May 20, 2024; the filing cautions that future distributions are not guaranteed.
Changes and notable developments
- Adjusted EBITDA growth reflected $25 million more profit on motor fuel sales, driven mainly by higher volumes, and $11 million more non-motor fuel and lease profit. These gains were partly offset by $15 million higher operating costs, including costs associated with acquisitions. Interest expense increased by $10 million, primarily due to higher average debt and floating rates.
- On March 13, Sunoco acquired liquid-fuels terminals in Amsterdam and Bantry Bay for €170 million, approximately $185 million including working capital.
- After quarter-end, on April 16, Sunoco completed the sale of 204 convenience stores to 7-Eleven for approximately $1.0 billion, subject to customary inventory adjustments. The related assets and liabilities had been classified as held for sale at March 31. Sunoco also amended its fuel-supply agreement with 7-Eleven to incorporate additional fuel gross profit.
- After quarter-end, on May 3, Sunoco completed its NuStar Energy acquisition. It issued approximately 50.6 million common units, valued at approximately $2.8 billion, and assumed approximately $3.4 billion of debt and preferred units valued at approximately $800 million. NuStar’s approximately 9,500 miles of pipelines and 63 terminal and storage facilities are expected to be consolidated beginning May 2024. Initial acquisition accounting was incomplete when the filing was issued.
- On April 30, Sunoco issued $750 million of 7.00% senior notes due 2029 and $750 million of 7.25% notes due 2032; proceeds were intended to fund NuStar-related debt repayment, preferred-unit redemption and expenses. The credit facility was amended in May, extending maturity to May 2029.
Outlook, risks and controls
Management expects cash from operations and credit-facility capacity to fund 2024 growth capital expenditures and working-capital needs, and says current liquidity sources are expected to meet short- and long-term needs. No specific earnings or revenue guidance was provided. Management noted that operating performance and financing needs depend on conditions beyond its control.
Risks highlighted include fuel demand, prices and supply; customer retention and contract renewals; acquisition integration; competition; interest-rate and credit-market conditions; environmental, safety and regulatory obligations; pipeline and terminal utilization; foreign-operation risks; cyber threats; and potential conflicts associated with the partnership structure and Energy Transfer affiliation. Sunoco reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. It said known legal matters were not expected to have a material adverse impact.
Important facts for investors to verify
- How much of Q1 earnings growth reflects the favorable $130 million inventory valuation adjustment, and how underlying margins and volumes perform in subsequent quarters.
- The final purchase accounting, integration costs, financing and operating contribution from NuStar, including the effect of the newly issued units, assumed debt and preferred units.
- Net cash proceeds and uses from the 7-Eleven store sale, and the ongoing economics of the amended fuel-supply agreement.
- Debt, interest expense, credit-facility availability and covenant headroom after the NuStar acquisition and April notes offering.
- Whether operating cash generation can sustain distributions and planned capital spending; distributions remain subject to available cash and reserves.