SUNOCO LP The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. Additional discussion and analysis related to the Partnership is contained in our Annual Report on Form 10-K, including the audited consolidated financial statements for the fiscal year endedDecember 31, 2022 included therein.
Adjusted EBITDA is a non-GAAP financial measure of performance that has
limitations and should not be considered as a substitute for net income or other
GAAP measures. Please see "
Cautionary Statement Regarding Forward-Looking Statements
Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. Statements using words such as "believe," "plan," "expect," "anticipate," "intend," "forecast," "assume," "estimate," "continue," "position," "predict," "project," "goal," "strategy," "budget," "potential," "will" and other similar words or phrases are used to help identify forward-looking statements, although not all forward-looking statements contain such identifying words. Descriptions of our objectives, goals, targets, plans, strategies, costs, anticipated capital expenditures, expected cost savings and benefits are also forward-looking statements. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:
•our ability to make, complete and integrate acquisitions from affiliates or third-parties;
•business strategy and operations of
•changes in the price of and demand for the motor fuel that we distribute and our ability to appropriately hedge any motor fuel we hold in inventory;
•our dependence on limited principal suppliers;
•competition in the wholesale motor fuel distribution and retail store industry;
•changing customer preferences for alternate fuel sources or improvement in fuel efficiency;
•volatility of fuel prices or a prolonged period of low fuel prices and the effects of actions by, or disputes among or between, oil producing countries with respect to matters related to the price or production of oil;
•impacts of world health events, escalating global trade tensions and the
conflict between
•any acceleration of the domestic and/or international transition to a low carbon economy as a result of the Inflation Reduction Act of 2022 or otherwise;
•the possibility of cyber and malware attacks;
•changes in our credit rating, as assigned by rating agencies;
•a deterioration in the credit and/or capital markets, including as a result of recent increases in cost of capital resulting fromFederal Reserve policies and changes in financial institutions' policies or practices concerning businesses linked to fossil fuels;
•general economic conditions, including sustained periods of inflation, supply chain disruptions and associated central bank monetary policies;
•environmental, tax and other federal, state and local laws and regulations;
•the fact that we are not fully insured against all risks incident to our business;
•dangers inherent in the storage and transportation of motor fuel;
•our ability to manage growth and/or control costs;
•our reliance on senior management, supplier trade credit and information technology; and
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•our partnership structure, which may create conflicts of interest between us andSunoco GP LLC (our "General Partner"), and its affiliates, and limits the fiduciary duties of ourGeneral Partner and its affiliates.
All forward-looking statements, express or implied, are expressly qualified in their entirety by the foregoing cautionary statements.
Many of the foregoing risks and uncertainties are, and will be, heightened by any further worsening of the global business and economic environment. New factors that could impact forward-looking statements emerge from time to time, and it is not possible for us to predict all such factors. Should one or more of the risks or uncertainties described or referenced in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K for the year endedDecember 31, 2022 occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. You should not put undue reliance on any forward-looking statements. When considering forward-looking statements, please review the risks described or referenced under the heading "Item 1A. Risk Factors" herein, including the risk factors set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of the filing of this report. We anticipate that subsequent events and market developments will cause our estimates to change. However, we specifically disclaim any obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q, except as required by law, even if new information becomes available in the future.
In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to our structure as a limited partnership, our industry and our company could materially impact our future performance and results of operations.
Overview
As used in this Management's Discussion and Analysis of Financial Condition and Results of Operations, the terms "Partnership," "SUN," "we," "us," or "our" should be understood to refer toSunoco LP and our consolidated subsidiaries, unless the context clearly indicates otherwise. We are aDelaware master limited partnership primarily engaged in the distribution of motor fuels to independent dealers, distributors, and other customers and the distribution of motor fuels to end customers at retail sites operated by commission agents. In addition, we receive rental income through the leasing or subleasing of real estate used in the retail distribution of motor fuels. As ofMarch 31, 2023 , we operated 76 retail stores located inHawaii andNew Jersey .
We are managed by
We believe we are one of the largest independent motor fuel distributors by gallons inthe United States and one of the largest distributors ofChevron ,Texaco , ExxonMobil, and Valero branded motor fuel inthe United States . In addition to distributing motor fuel, we also distribute other petroleum products such as propane and lubricating oil.
We purchase motor fuel primarily from independent refiners and major oil
companies and distribute it across more than 40 states and territories
throughout the
•76 company-owned and operated retail stores;
•501 independently operated commission agent locations where we sell motor fuel to retail customers under commission arrangements with such operators;
•6,904 retail stores operated by independent operators, which we refer to as "dealers" or "distributors," pursuant to long-term distribution agreements; and
•approximately 1,600 other commercial customers, including unbranded retail stores, other fuel distributors, school districts, municipalities and other industrial customers.
Our retail stores operate under several brands, including our proprietary brands APlus andAloha Island Mart , and offer a broad selection of food, beverages, snacks, grocery and non-food merchandise, motor fuels and other services. 15
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Recent Developments
On
Management uses a variety of financial measurements to analyze business performance, including the following key measures:
•Motor fuel gallons sold. One of the primary drivers of our business is the total volume of motor fuel sold through our channels. Fuel distribution contracts with our customers generally provide that we distribute motor fuel at a fixed, volume-based profit margin or at an agreed upon level of price support. As a result, profit is directly tied to the volume of motor fuel that we distribute. Total motor fuel profit dollars earned from the product of profit per gallon and motor fuel gallons sold are used by management to evaluate business performance. •Profit per gallon. Profit per gallon is calculated as the profit on motor fuel (excluding non-cash inventory adjustments as described under "Adjusted EBITDA" below) divided by the number of gallons sold, and is typically expressed as cents per gallon. Our profit per gallon varies amongst our third-party relationships and is impacted by the availability of certain discounts and rebates from suppliers. Retail profit per gallon is heavily impacted by volatile pricing and intense competition from retail stores, supermarkets, club stores and other retail formats, which varies based on the market. •Adjusted EBITDA. Adjusted EBITDA, as used throughout this document, is defined as earnings before net interest expense, income taxes, depreciation, amortization and accretion expense, allocated non-cash unit-based compensation expense, unrealized gains and losses on commodity derivatives and inventory adjustments, and certain other operating expenses reflected in net income that we do not believe are indicative of ongoing core operations, such as gain or loss on disposal of assets and non-cash impairment charges. Inventory adjustments that are excluded from the calculation of Adjusted EBITDA represent changes in lower of cost or market reserves on the Partnership's inventory. These amounts are unrealized valuation adjustments applied to fuel volumes remaining in inventory at the end of the period. Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable financial measure calculated and presented in accordance with GAAP, read "Key Operating Metrics and Results of Operations" below.
We believe Adjusted EBITDA is useful to investors in evaluating our operating performance because:
•Adjusted EBITDA is used as a performance measure under our revolving credit facility;
•securities analysts and other interested parties use Adjusted EBITDA as a measure of financial performance; and
•our management uses Adjusted EBITDA for internal planning purposes, including aspects of our consolidated operating budget and capital expenditures.
Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance. Adjusted EBITDA has limitations as an analytical tool, and one should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:
•it does not reflect interest expense or the cash requirements necessary to service interest or principal payments on our revolving credit facility or senior notes;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect cash requirements for such replacements; and
•as not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Adjusted EBITDA reflects amounts for the unconsolidated affiliates based on the
same recognition and measurement methods used to record equity in earnings of
unconsolidated affiliates. Adjusted EBITDA related to unconsolidated affiliates
excludes the same items with respect to the unconsolidated affiliates as those
excluded from the calculation of Adjusted EBITDA, such as interest, taxes,
depreciation, depletion, amortization and other non-cash items. Although these
amounts are excluded from Adjusted EBITDA related to unconsolidated affiliates,
such exclusion should not be understood to imply that we have control over the
operations and resulting revenues and expenses of such affiliates. We do not
control our unconsolidated affiliates; therefore, we do not control the earnings
or cash flows of such affiliates. The use of Adjusted EBITDA or Adjusted EBITDA
related to unconsolidated affiliates as an analytical tool should be limited
accordingly.
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Results of Operations
The following information is intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.
Three Months Ended
The following table sets forth, for the periods indicated, information concerning key measures we rely on to gauge our operating performance:
Three Months Ended March 31,
2023 2022
Fuel Distribution Fuel Distribution
and Marketing All Other Total and Marketing All Other Total
Revenues:
Motor fuel sales $ 5,103 $ 136 $ 5,239 $ 5,127 $ 150 $ 5,277
Non-motor fuel sales 29 57 86 41 49 90
Lease income 34 3 37 32 3 35
Total revenues $ 5,166 $ 196 $ 5,362 $ 5,200 $ 202 $ 5,402
Cost of Sales:
Motor fuel sales $ 4,835 $ 125 $ 4,960 $ 4,798 $ 140 $ 4,938
Non-motor fuel sales 4 23 27 12 22 34
Lease - - - - - -
Total cost of sales $ 4,839 $ 148 $ 4,987 $ 4,810 $ 162 $ 4,972
Net income and comprehensive income $ 141 $ 216
Adjusted EBITDA (1) $ 195 $ 26 $ 221 $ 174 $ 17 $ 191
Operating Data:
Motor fuel gallons sold 1,930 1,769
Motor fuel profit cents per gallon
(2) 12.9 ¢ 12.4 ¢
________________________________
(1) We define Adjusted EBITDA, which is a non-GAAP financial measure, as described above under "Key Measures Used to Evaluate and Assess Our Business." (2) Excludes the impact of inventory adjustments consistent with the definition of Adjusted EBITDA. The Partnership's results of operations are discussed on a consolidated basis below. Those results are primarily driven by the fuel distribution and marketing segment, which is the Partnership's only significant segment. To the extent that results of operations are significantly impacted by discrete items or activities within the all other segment, such impacts are specifically attributed to the all other segment in the discussion and analysis below.
In the discussion below, the analysis of the Partnership's primary revenue generating activities are discussed in the analysis of Adjusted EBITDA, and other significant items impacting net income are analyzed separately.
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The following table presents a reconciliation of Adjusted EBITDA to net income
for the three months ended
Three Months Ended March 31,
2023 2022 Change
Net income and comprehensive income $ 141 $ 216 $ (75)
Depreciation, amortization and accretion 48 47 1
Interest expense, net 53 41 12
Non-cash unit-based compensation expense 5 5 -
Loss on disposal of assets 1 - 1
Unrealized (gain) loss on commodity derivatives (11) (9) (2)
Inventory adjustments (29) (120) 91
Equity in earnings of unconsolidated affiliates (2) (1) (1)
Adjusted EBITDA related to unconsolidated affiliates 3 2 1
Other non-cash adjustments 5 7 (2)
Income tax expense 7 3 4
Adjusted EBITDA $ 221 $ 191 $ 30 The following discussion compares the results of operations for the three months
ended
Net Income and Comprehensive Income. For the three months endedMarch 31, 2023 compared to the same period last year, net income and comprehensive income decreased primarily due to the impacts of favorable inventory adjustments in the prior period, as discussed further below. Adjusted EBITDA. For the three months endedMarch 31, 2023 compared to the same period last year, Adjusted EBITDA increased primarily due to the net impacts of the following:
•an increase in the profit on motor fuel sales of
•an increase in non-motor fuel sales and lease profit of$8 million , primarily due to increased rental income and higher merchandise gross profit; partially offset by •an increase in operating costs of$3 million , including other operating expense, general and administrative expense and lease expense, primarily due to higher costs as a result of acquisitions of refined product terminals and the transmix processing and terminal facility.
Interest Expense, net. For the three months ended
Unrealized (Gain) Loss on Commodity Derivatives. The unrealized gains and losses
on our commodity derivatives represent the changes in fair value of our
commodity derivatives. The change in unrealized gains and losses between periods
is impacted by the notional amounts and commodity price changes on our commodity
derivatives. Additional information on commodity derivatives is included in
"Item 3. Quantitative and Qualitative Disclosures about Market Risk" below.
Inventory Adjustments. Inventory adjustments represent changes in lower of cost
or market reserves using the last-in-first-out ("LIFO") method on the
Partnership's inventory. These amounts are unrealized valuation adjustments
applied to fuel volumes remaining in inventory at the end of the period. For the
three months ended March 31, 2023 and 2022, an increase in fuel prices reduced
lower of cost or market reserve requirements for the periods by $29 million and
$120 million , respectively, creating a favorable impact to net income.
Income Tax Expense. For the three months ended
Liquidity and Capital Resources
Liquidity
Our principal liquidity requirements are to finance current operations, to fund
capital expenditures, including acquisitions from time to time, to service our
debt and to make distributions. We expect our ongoing sources of liquidity to
include cash generated from operations, borrowings under our revolving credit
facility and the issuance of additional long-term debt or partnership units as
appropriate given market conditions. We expect that these sources of funds will
be adequate to provide for our short-term and long-term liquidity needs.
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Our ability to meet our debt service obligations and other capital requirements, including capital expenditures and acquisitions, will depend on our future operating performance which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. As a normal part of our business, depending on market conditions, we will from time to time consider opportunities to repay, redeem, repurchase or refinance our indebtedness. Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may cause us to seek additional debt or equity financing in future periods. There can be no guarantee that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions. In addition, any of the risks described or referenced under the heading "Item 1A. Risk Factors" herein, including the risk factors set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2022 may also significantly impact our liquidity. As ofMarch 31, 2023 , we had$189 million of cash and cash equivalents on hand and borrowing capacity of$693 million under the Second Amended and Restated Credit Agreement among the Partnership, as borrower, the lenders from time to time party thereto andBank of America, N.A ., as administrative agent, collateral agent, swingline lender and a line of credit issuer (the "Credit Facility"). The Partnership was in compliance with all financial covenants atMarch 31, 2023 . Based on our current estimates, we expect to utilize capacity under the Credit Facility, along with cash from operations, to fund our announced growth capital expenditures and working capital needs for 2023; however, we may issue debt or equity securities prior to that time as we deem prudent to provide liquidity for new capital projects or other partnership purposes.
Cash Flows
Our cash flows may change in the future due to a number of factors, some of which we cannot control. These factors include regulatory changes, the price of products and services, the demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks, the successful integration of our acquisitions and other factors.
Operating Activities
Changes in cash flows from operating activities between periods primarily result from changes in earnings, excluding the impacts of non-cash items and changes in operating assets and liabilities (net of effects of acquisitions). Non-cash items include recurring non-cash expenses, such as depreciation, amortization and accretion expense and non-cash unit-based compensation expense. Cash flows from operating activities also differ from earnings as a result of non-cash charges that may not be recurring, such as impairment charges. Our daily working capital requirements fluctuate within each month, primarily in response to the timing of payments for motor fuels, motor fuels tax and rent. Three months endedMarch 31, 2023 compared to three months endedMarch 31, 2022 . Net cash provided by operations was$326 million and$23 million for the three months of 2023 and 2022, respectively. The increase in cash flows provided by operations was due to an increase in net cash flow from operating assets and liabilities of$323 million compared to the three months endedMarch 31, 2022 and partially offset by a$20 million decrease in cash basis net income compared to the three months endedMarch 31, 2022 .
Investing Activities
Cash flows from investing activities primarily consist of capital expenditures, cash contributions to unconsolidated affiliates, cash amounts paid for acquisitions, and cash proceeds from sale or disposal of assets. Changes in capital expenditures between periods primarily result from increases or decreases in our growth capital expenditures to fund our construction and expansion projects. Three months endedMarch 31, 2023 compared to three months endedMarch 31, 2022 . Net cash used in investing activities was$31 million and$285 million for the first three months of 2023 and 2022, respectively. Capital expenditures were$37 million and$26 million for the first three months of 2023 and 2022, respectively. The three months endedMarch 31, 2022 included the payment of a$264 million cash deposit for a transmix processing and terminal facility acquisition completed inApril 2022 . Distributions from unconsolidated affiliates in excess of cumulative earnings were$3 million and$1 million for the three months endedMarch 31, 2023 and 2022, respectively. Proceeds from disposal of property and equipment were$3 million and$4 million for the first three months of 2023 and 2022, respectively.
Financing Activities
Changes in cash flows from financing activities between periods primarily
result from changes in the levels of borrowings and equity issuances, which are
primarily used to fund our acquisitions and growth capital expenditures.
Distributions increase between the periods based on increases in the number of
common units outstanding or increases in the distribution rate.
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Three months endedMarch 31, 2023 compared to three months endedMarch 31, 2022 . Net cash used in financing activities was$188 million for the first three months of 2023, and net cash provided by financing activities was$341 million for the first three months of 2022.
During the three months ended
•borrowed
•paid
During the three months ended
•borrowed
•paid
We intend to pay cash distributions to the holders of our common units and Class C units representing limited partner interests in the Partnership on a quarterly basis, to the extent we have sufficient cash from our operations after establishment of cash reserves and payment of fees and expenses, including payments to ourGeneral Partner and its affiliates. Class C unitholders receive distributions at a fixed rate equal to$0.8682 per quarter for each Class C unit outstanding. There is no guarantee that we will pay a distribution on our units. InApril 2023 , we declared a quarterly distribution totaling$71 million , or$0.8420 per common unit based on the results for the three months endedMarch 31, 2023 , excluding distributions to Class C unitholders. The declared distribution will be paid onMay 22, 2023 to unitholders of record onMay 8, 2023 . Capital Expenditures
For the first three months of 2023, capital expenditures included
We currently expect to spend approximately
Description of Indebtedness
As of the dates set forth below, our outstanding consolidated indebtedness was
as follows:
March 31, December 31,
2023 2022
Credit Facility $ 800 $ 900
6.000% Senior Notes due 2027 600 600
5.875% Senior Notes due 2028 400 400
4.500% Senior Notes due 2029 800 800
4.500% Senior Notes due 2030 800 800
Lease-related financing obligations 94 94
Total debt 3,494 3,594
Less: debt issuance costs 22 23
Long-term debt, net $ 3,472 $ 3,571
Credit Facility
As of March 31, 2023 , the balance on the Credit Facility was $800 million , and
$7 million standby letters of credit were outstanding. The unused availability
on the Credit Facility at March 31, 2023 was $693 million . The weighted average
interest rate on the total amount outstanding at March 31, 2023 was 6.61%. The
Partnership was in compliance with all financial covenants at March 31, 2023 .
Contractual Obligations and Commitments
Contractual Obligations. We have contractual obligations that are required to be settled in cash. As ofMarch 31, 2023 , we had$800 million borrowed on the Credit Facility compared to$900 million borrowed on the Credit Facility atDecember 31, 2022 . Further, as ofMarch 31, 2023 , we had$2.60 billion outstanding under our Senior Notes. See Note 6 in the Notes to Consolidated Financial Statements in "Item 1. Financial Statements" for more information on our debt transactions. 20
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We periodically enter into derivatives, such as futures and options, to manage our fuel price risk on inventory in the distribution system. Fuel hedging positions are not significant to our operations. On a consolidated basis, the Partnership had a position of 2.2 million barrels with an aggregated unrealized gain of$1.3 million outstanding atMarch 31, 2023 .
Critical Accounting Estimates
The Partnership's critical accounting estimates are described in our Annual
Report on Form 10-K for the year ended
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