Edited Transcript of SUN earnings conference call or presentation 21-Feb-19 3:30pm GMT

In addition to the wholesale fuel distribution acquisitions, we also expanded our midstream business with the acquisition of 2 product terminals from American Midstream Partners, which closed on December 20. One of the terminals is located northeast of Dallas, Texas and the other is in North Little Rock, Arkansas, and both have pipeline access. This acquisition is consistent with our strategy of adding fee-based logistics assets to provide further portfolio diversification and income stability.

More recently, on January 29, we closed on the acquisition of 5 locations in New York State from Speedway LLC. We funded all acquisitions with cash on hand and amounts available on our credit facility. We expect all of the acquisitions to be accretive to our unitholders in the first year.

Finally, on January 18, we announced the execution of a definitive asset purchase agreement with Attis Industries, Inc. for the sale of our ethanol processing plant in Fulton, New York. Total consideration for the divestiture is $20 million, and we will use the proceeds to repay amounts outstanding on our revolving credit facility.

I will now turn the call over to Tom, who will cover this quarter's financial and operating results. Tom?

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Thomas R. Miller, Sunoco LP - CFO & Treasurer of Sunoco GP LLC [3]

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Thanks, Scott, and good morning, everyone.

We delivered strong financial and operational results again in the fourth quarter. In 2018, we completed the transformation of Sunoco from a retail-centric MLP to a partnership focused on fuel distribution and logistics.

For the quarter, the partnership recorded a net loss of $72 million, which includes a $135 million noncash inventory adjustment. As a reminder, this adjustment does not affect our adjusted EBITDA, DCF or cents per gallon. Adjusted EBITDA was $180 million compared to $158 million a year ago, driving our leverage ratio as defined by our credit agreement down to 4.16. This is down from last year's fourth quarter result of 5.58. Distributable cash flow, as adjusted, was $114 million. Our distribution coverage ratio for the quarter was 1.33 and 1.32 for the full year. In 2017, our coverage ratio was 1.15. We are delivering on the financial goals we outlined for you. On January 25, we declared an $0.8255 per unit distribution, the same as last quarter. We are confident in our ability to sustain this distribution. Our liquidity remains strong with approximately $800 million available on our revolving credit facility at year-end.

Looking at our operational performance. Total fuel volume in the fourth quarter was approximately 2 billion gallons, a slight increase from the third quarter and up 2.5% from a year ago, driven by the contribution from the 2018 acquisitions and other organic growth. The fuel margin environment was particularly strong across all channels in the fourth quarter, largely resulting from declining crude prices. This produced a $0.124 per gallon margin for the quarter and $0.114 for the year. As we've discussed, our strategy of managing multiple fuel distribution channels allows us to balance ratable income streams, such as the 7-Eleven take-or-pay contract and rental income with channels that generate higher margins in certain environments, such as the material and sustained drop in crude prices.

Turning to expenses. We were able to control expenses even with the 5 acquisitions we completed in 2018. G&A expense was $38 million in the fourth quarter and $141 million for the full year, in line with our $140 million annual guidance. Rent expense totaled $18 million for the quarter and $72 million for the year, just under the $75 million annual guidance. During the fourth quarter, other operating expense was $93 million and $363 million for the year. When you remove the $25 million of other operating cost we incurred in the first and second quarters to run the West Texas and FTC retail site prior to their conversion to the commission agent channel of trade, the full number was slightly higher than our 2018 annual run rate guidance. The timing of certain expenses within the operating category will result in quarterly fluctuations.

Moving to capital. We invested a total of $41 million in the fourth quarter, $26 million in growth and $15 million in maintenance capital. During 2018, we invested a total of $103 million, $72 million in growth and $31 million in maintenance capital.

In December, we provided guidance for 2019. I want to take a moment to review those items. We expect total fuel volumes to be between 8 billion and 8.2 billion gallons with annual margins in the $0.095 to $0.105 per gallon range. As we've stated in the past, fuel volume and margins should be evaluated collectively as total gross profit dollars, not individually. 2019 guidance reflects higher gross profit dollars from our fuel distribution business, driven by the impact of completed acquisitions and our profit optimization strategy.

We expect total operating expenses, including any incremental spend from acquisitions already completed, to be approximately flat to our 2018 guidance of $540 million. As a reminder, total operating expenses include G&A, rent and other operating expenses. Our 2019 capital program will increase modestly from 2018 levels.

We expect to spend $45 million on maintenance capital and $90 million on growth capital. Our total 2019 capital spend could exceed $90 million if we find additional organic investment opportunities. And as a reminder, our growth capital does not include third-party acquisitions.

Finally, we also provided you with an adjusted EBITDA range of $610 million to $650 million for 2019. That range includes all announced acquisitions. The anticipated divestiture of our ethanol plant that Scott discussed earlier does not impact this guidance range.

We are confident that this guidance demonstrates our ability over the long term to remain safely within our target leverage of 4.5 to 4.75 and maintain a coverage ratio of at or about 1.2.

I will now turn the call over to Joe for closing thoughts. Joe?

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Joseph Kim, Sunoco LP - President, CEO & Director of Sunoco GP LLC [4]

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Thanks, Tom. Good morning, everyone. The fourth quarter capped a transformative year for Sunoco. We outlined a plan in late 2017, and we delivered on that plan in 2018. Now it's time to execute our focus on this year.

Our underlying business is strong, and we expect this to continue. First quarter results are meeting our expectations and reinforce our guidance for 2019. Our growth pipeline remains robust. First, we have positioned ourselves for additional acquisition opportunities, but we'll only execute on these opportunities if they meet all our financial criteria. We've also positioned ourselves for increased organic growth, having a combination of organic and acquisition opportunities increases our ability to grow in a consistent and balanced manner.

Let me close by stating that we have established a track record of delivering on our targets. We remain confident that we will continue to deliver in 2019 and beyond.

Operator, that concludes our prepared remarks. You may open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Theresa Chen with Barclays.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [2]

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First, just wanted to touch upon that margin optimization efforts you had previously laid out. Can you give us an update on how that's going? What inning we're in? And what do you see from there going forward?

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