Fitch Ratings has affirmed Sunoco LP's (SUN) Long-Term Issuer Default Rating (IDR) at 'BB'.

Additionally, Fitch has affirmed SUN's and Sunoco Finance Corp.'s, which is a co-issuer on SUN's senior unsecured bonds, senior unsecured rating at 'BB'/'RR4.' Fitch has also affirmed SUN's senior secured revolver at 'BB+'/'RR1.' The Rating Outlook has been revised to Positive from Negative.

The Positive Outlook reflects SUN's improving leverage profile and the resiliency demonstrated by the business in the face of the demand destruction wrought by the coronavirus crisis and ensuing economic shutdowns. The ratings are supported by low leverage, healthy margins, and cash flows that benefit from a 15-year take or pay contract with a subsidiary of 7-Eleven, Inc. for approximately 25% of its yearly volumes.

KEY RATING DRIVERS

Lower Leverage: LTM leverage as of Sept. 30, 2020 was approximately 4.0x, down from 4.7x at year-end 2019. Leverage is significantly lower than Fitch previously forecast and is below Fitch's positive rating sensitivity of 4.5x. Fitch now expects YE20 leverage of approximately 4.3x (4.0x on a net leverage basis), and YE21 leverage to be in the 4.0x-4.3x range. Importantly, management has stated that its new target for leverage is 4.0x, down from its prior target of 4.50x-4.75x. SUN's new distribution coverage target is 1.4x, considerably more robust than its previous target of 1.2x. Fitch believes that sustained leverage and distribution coverage at these levels could lead to an upgrade.

EBITDA Growth: Strong EBITDA performance enabled the partnership to meaningfully de-lever through the first nine months of the year. Growth was driven by cents-per-gallon (CPG) margins significantly higher than previous long-term expectations, and supported by the effective cost cutting measures implemented at the onset of the pandemic. Falling sales volumes resulted in higher breakeven levels for many industry players, which necessitated better margins for both retail and wholesale fuel distributors. The partnership continues to benefit from the resulting boost to its margins which has more than offset the cash flow impact of lower volume levels.

Cash Flow Stability: As part of the sale of its retail franchise in 2018, SUN entered into a 15-year take-or-pay fuel supply agreement with 7-Eleven, Inc. (7/11) and SEI Fuel Services, Inc. (NR), a wholly owned subsidiary of 7/11, under which SUN will supply approximately 2.2 billion gallons of fuel annually. This supply agreement has guaranteed annual payments to SUN and provides that 7/11 will continue to use the Sunoco brand at currently branded Sunoco stores. Wholesale revenues from SUN's other distributor, dealer and commercial channel sales are more sensitive to volume demand changes, but should maintain stable cash flow generation through the volume swings and as conditions normalize.

Demand Uncertainty: SUN's wholesale fuel sales, while supported in part by a long-term fixed-rate contract with 7/11, are highly sensitive to demand fluctuations in the regions where it operates. The outlook for U.S. gasoline demand has shifted dramatically due to the coronavirus as cities and states have maintained varying degrees of restrictions to help combat the spread of the virus. Demand is expected to rebound as economies migrate towards complete re-openings and the health crisis abates; however, demand during the intermediate periods remains uncertain.

Cash Flow Conservation: SUN's credit profile benefits from its stable liquidity position, lack of near-term maturities and the measures taken to preserve cash flows as it continues to manage through the current crisis. The partnership implemented effective cost cutting measures and significantly reduced its expected capex spending to maintain flexibility while motor fuel sales volumes remained low.

In November, the partnership paid down half of the senior notes due in 2023 with a new issuance of 2029 notes. The remaining notes due in 2023 are expected to be paid down in January. The transaction offers the partnership greater flexibility in managing through any near-term challenges. SUN can use its retained cash flow and other available liquidity sources to cover its working capital needs.

Highly Fragmented, Competitive Sector: Concerns for SUN include high levels of competition within the fragmented wholesale motor fuel distribution sector. SUN's ability to drive growth after a recovery will depend largely on its ability to acquire wholesale customers organically or grow through acquisitions, which has the potential to weigh on balance sheet metrics, depending on how growth is financed. Fitch believes that management's leverage and distribution coverage targets indicate a willingness to prudently manage growth and distribution policy while maintaining reasonable credit metrics.

Parent Subsidiary Linkage: SUN's ratings reflect its stand-alone credit profile with no express linkage to its parent company. Fitch views Energy Transfer LP (ET; BBB-/Stable; parent company) as possessing the stronger credit profile between the two entities given the size, scale, geographic, operational and cash flow diversity that ET possesses relative to SUN.

SUN is rated on a stand-alone basis with no uplift from the stronger parent based on the weak legal, operational and strategic ties between the two entities. Legal ties are considered weak, due to the absence of contractual items, such as guarantees or cross-defaults, connecting the partnership's debt to the parent. Operational and strategic ties are also deemed to be weak. There is limited operational integration between SUN and ET and SUN, despite providing a decent amount of distributions up to ET, does not represent that meaningful a portion of ET earnings so as to have a significant strategic tie.

Sponsor Relationship: SUN's ratings consider its relationship with its sponsor and the owner of its general partner, Energy Transfer Operating, L.P. (BBB-/Stable) as generally favorable. SUN is part of the ET family of partnerships. ETO owns, directly or indirectly, 100% of SUN's incentive distribution rights, the non-economic general partner interest in SUN, and 34.3% of SUN's outstanding limited partnership units.

Fitch believes SUN's affiliation with its sponsor generally provides modest benefits, particularly in providing an option for financing like SUN's March 2017 preferred equity offering or a potential lever for retaining near-term cash through distribution waivers provided by its sponsor or affiliate partnerships. However, no waivers have been announced or are expected in Fitch's base case forecast. These benefits are not typically available to stand-alone partnerships, and Fitch believes the affiliation with its sponsor ultimately helps lessen event, financing, and operating risks. Energy Transfer and many other publicly traded partnerships have simplified their structures and eliminated incentive distribution payments. SUN has no current plans to eliminate its incentive distribution payments.

DERIVATION SUMMARY

SUN's primary focus on wholesale motor fuel distribution and logistics is unique relative to Fitch's other midstream energy coverage. Wholesale fuel distribution is a highly fragmented market with low operating margins and is largely dependent on motor fuel demand, which can be cyclical and seasonal. Fitch expects SUN to continue to face headwinds in the near term from lower motor fuel demand levels. Earnings have been buoyed through 3Q20 by cents-per-gallon margins higher than management's previous longer-term margin guidance. The partnership is now guiding to a higher margin level and Fitch expects margin strength to continue to counterbalance the cash flow impact of the demand destruction.

SUN's leverage has fallen significantly through the year as cash flow conservation efforts and strong margins have allowed the partnership to de-lever in spite of the challenging environment. Fitch expects that leverage will be between 4.0x-4.3x by yearend 2021, lower than similarly rated AmeriGas Partners, LP (APU; BB/Stable) which is forecast to have leverage around 4.5x-5x by Sept. 30, 2022-Sept. 30, 2023. APU provides retail propane and demand tends to be more seasonally affected (and weather affected) than motor fuel demand.

SUN's size and scale are expected to be consistent with, though slightly larger than, Fitch's view on 'BB' category master limited partnerships, which tend to have EBITDA of roughly $500 million per year and a narrow business focus, such as SUN's focus on wholesale motor fuel distribution.

KEY ASSUMPTIONS

Margins remain in line with management's new public guidance range;

Key contracts are not amended;

Revolver borrowings and retained earnings used to fund capital needs;

Distributions held at current levels throughout forecast;

Total capex, inclusive of growth, acquisition and maintenance spending, of at least $170 million annually from 2021-2023;

Fitch base case commodity price deck including WTI oil prices of $42/bbl in 2021, $47/bbl in 2022, $50/bbl in 2023 and over the long term.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Leverage (total debt with equity credit/operating EBITDA) sustained at or below 4.3x with distribution coverage sustained above 1.1x could lead to an upgrade.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Distribution coverage ratio below 1x, combined with leverage (total debt with equity credit to operating EBITDA) at or above 5.0x on a sustained basis could result in negative rating action;

EBIT Margin at or below 1.5% on a sustained basis could lead to a negative rating action.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Liquidity Adequate: As of Sept. 30, 2020, SUN had $63 million in cash and approximately $1.4 billion available on its $1.5 billion secured revolving credit facility. The revolving credit facility matures on July 27, 2023 and requires the partnership to maintain a net leverage ratio (as defined by the bank agreement) below 5.5x and an interest coverage ratio above 2.25x. The agreement allows for a maximum leverage ratio of 6.0x during a specified acquisition period. As of Sept. 30, 2020, SUN was in compliance with its covenants, and Fitch believes that SUN will remain in compliance with its covenants through its forecast period.

The revolver is secured by a security interest in, among other things, of all SUN's present and future personal property and all present and future personal property of its guarantors, the capital stock of its material subsidiaries (or 66% of the capital stock of material foreign subsidiaries), and any intercompany debt.

SUMMARY OF FINANCIAL ADJUSTMENTS

Fitch applies an 8.0x multiple to operating leases.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

SUN has a relevance score of '4' for Group Structure as a result of significant related party transactions and ownership concentration arising from SUN's GP and incentive distribution rights ownership by Energy Transfer. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

ENTITY/DEBT	RATING	RECOVERY	PRIOR
Sunoco LP	LT IDR	BB 	Affirmed		BB

senior unsecured

LT	BB 	Affirmed	RR4	BB

senior secured

LT	BB+ 	Affirmed	RR1	BB+

Sunoco Finance Corp.

senior unsecured

LT	BB 	Affirmed	RR4	BB

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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