NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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1.
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Organization and Principles of Consolidation
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The Partnership was formed in June 2012, and completed its initial public offering (“IPO”) in September 2012.
Effective October 27, 2014, the Partnership changed its name from Susser Petroleum Partners LP (NYSE: SUSP) to Sunoco LP (“SUN,” NYSE: SUN). As used in this document, the terms “Partnership,” “SUN,” “we,” “us,” and “our” should be understood to refer to Sunoco LP and our consolidated subsidiaries, unless the context clearly indicates otherwise.
The consolidated financial statements are composed of Sunoco LP, a publicly traded Delaware limited partnership, and our wholly-owned subsidiaries. We distribute motor fuels across more than
30
states throughout the East Coast, Midwest, and Southeast regions of the United States from Maine to Florida and from Florida to New Mexico, as well as Hawaii. We also operate convenience retail stores across more than
20
states, primarily in Texas, Pennsylvania, New York, Virginia, Florida, and Hawaii.
We operate our business as
two
segments, which are primarily engaged in wholesale fuel distribution and retail fuel and merchandise sales, respectively. On April 6, 2017, certain subsidiaries of the Partnership (collectively, the “Sellers”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with 7-Eleven, Inc., a Texas corporation (“7-Eleven”) and SEI Fuel Services, Inc., a Texas corporation and wholly-owned subsidiary of 7-Eleven (“SEI Fuel,” and, together with 7-Eleven, referred to herein collectively as “Buyers”). With the assistance of a third-party brokerage firm, we previously initiated marketing efforts with respect to approximately
208
Stripes sites located in certain West Texas, Oklahoma and New Mexico markets, which were not included in the 7-Eleven Purchase Agreement. We are currently in exclusive negotiations with a potential purchaser and, subject to completion of successful negotiations, anticipate announcing the transaction in the fourth quarter 2017 and closing the transaction in the first quarter of 2018. On January 18, 2017, with the assistance of a third-party brokerage firm, we launched a portfolio optimization plan to market and sell 97 real estate assets located in Florida, Louisiana, Massachusetts, Michigan, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas and Virginia. The results of these operations (collectively, the “Retail Divestment”) have been reported as discontinued operations for all periods presented in the consolidated financial statements. See Note 4 for more information related to the Purchase Agreement, the marketing efforts and the discontinued operations. All other footnotes present results of the continuing operations.
Our primary operations are conducted by the following consolidated subsidiaries:
Wholesale Subsidiaries
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Susser Petroleum Operating Company LLC (“SPOC”), a Delaware limited liability company, distributes motor fuel, propane and lubricating oils to Stripes’ retail locations, consignment locations, and third party customers in Texas, New Mexico, Oklahoma, Louisiana and Kansas. SPOC was merged with and into Sunoco, LLC on October 1, 2017.
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•
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Sunoco, LLC (“Sunoco LLC”), a Delaware limited liability company, primarily distributes motor fuel in more than
26
states throughout the East Coast, Midwest and Southeast regions of the United States. Sunoco LLC also processes transmix and distributes refined product through its terminals in Alabama and the Greater Dallas, TX metroplex.
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Southside Oil, LLC (“Southside”), a Virginia limited liability company, distributes motor fuel, primarily in Georgia, Maryland, New York, Tennessee, and Virginia. Southside was merged with and into Sunoco, LLC on October 1, 2017.
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Aloha Petroleum LLC, a Delaware limited liability company, distributes motor fuel and operates terminal facilities on the Hawaiian Islands.
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Retail Subsidiaries (Also See Note 4)
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Susser Petroleum Property Company LLC (“PropCo”), a Delaware limited liability company, primarily owns and leases convenience store properties.
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Susser Holdings Corporation (“Susser”), a Delaware corporation, sells motor fuel and merchandise in Texas, New Mexico, Oklahoma, and Louisiana through Stripes-branded convenience stores.
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Sunoco Retail LLC (“Sunoco Retail”), a Pennsylvania limited liability company, owns and operates convenience stores that sell motor fuel and merchandise primarily in Pennsylvania, New York, and Florida.
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MACS Retail LLC, a Virginia limited liability company, owns and operates convenience stores, in Virginia, Maryland, and Tennessee.
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Aloha Petroleum, Ltd. (“Aloha”), a Hawaii corporation, owns and operates convenience stores on the Hawaiian Islands.
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All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain items have been reclassified for presentation purposes to conform to the accounting policies of the consolidated entity. Other than the reclassification of certain balances to assets and liabilities held for sale and certain revenues and expenses to discontinued operations, as discussed in Note 4, these reclassifications had no material impact on gross margin, income from operations, net income and comprehensive income, the balance sheets or statements of cash flows.
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2.
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Summary of Significant Accounting Policies
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Interim Financial Statements
The accompanying interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). Pursuant to Regulation S-X, certain information and disclosures normally included in the annual financial statements have been condensed or omitted. The consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended
December 31, 2016
filed with the SEC on February 24, 2017 and on our Form 8-K filed with the SEC on October 2, 2017.
Significant Accounting Policies
As of
September 30, 2017
, there were no changes in significant accounting policies from those described in the
December 31, 2016
audited consolidated financial statements.
Motor Fuel and Sales Taxes
Certain motor fuel and sales taxes are collected from customers and remitted to governmental agencies either directly by the Partnership or through suppliers. The Partnership’s accounting policy for wholesale direct sales to dealer and commercial customers is to exclude the collected motor fuel tax from sales and cost of sales.
For retail locations where the Partnership holds inventory, including consignment arrangements, motor fuel sales and motor fuel cost of sales include motor fuel taxes. Such amounts were
$29 million
and
$31 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$87 million
and
$90 million
for the
nine months ended September 30, 2017
and
2016
, respectively. Merchandise sales and cost of merchandise sales are reported net of sales tax in the accompanying Consolidated Statements of Operations and Comprehensive Income.
Recently Issued Accounting Pronouncements
FASB ASU No. 2014-09.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, "
Revenue from Contracts with Customers (Topic 606)
" (“ASU 2014-09”), which clarifies the principles for recognizing revenue based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In August 2015, the FASB deferred the effective date of ASU 2014-09, which is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catchup transition method). The Partnership expects to adopt ASU 2014-09 in the first quarter of 2018 and anticipates applying the cumulative catch-up transition method.
We have substantially completed a detailed review of revenue contracts representative of our business segments and their revenue streams; however, we continue to evaluate contract modifications and new contracts that have been or will be entered prior to the adoption date. As a result of the evaluation performed to date, we have determined that the timing and/or amount of revenue that we recognize on certain contracts will be impacted by the adoption of the new standard; however, we are quantifying these impacts and cannot currently conclude whether or not they would be material to our financial statements. In addition, we are in the process of designing and implementing appropriate changes to our business processes, systems and internal controls to support recognition and disclosure under the new standard. We continue to monitor additional authoritative or interpretive guidance related to the new standard as it becomes available, as well as comparing our conclusions on specific interpretative issues to other peers in our industry, to the extent that such information is available to us.
FASB ASU No. 2016-02.
In February 2016, the FASB issued ASU No. 2016-02 “
Leases (Topic 842)
”, which amends the FASB Accounting Standards Codification and creates Topic 842, Leases. This Topic requires Balance Sheet recognition of lease assets and lease liabilities for leases classified as operating leases under previous GAAP, excluding short-term leases of 12 months or less. This ASU is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with
early adoption permitted. We are currently evaluating the effect that the updated standard will have on our consolidated balance sheets and related disclosures. The Partnership expects to adopt ASU 2016-002 in the first quarter of 2019.
We are in the process of evaluating our lease contracts to determine the potential impact of adopting the new standard. At this point in our evaluation process, we have determined that the timing and/or amount of leased assets and respective liabilities that we recognize on certain contracts will be impacted by the adoption of the new standard; however, we are still in the process of quantifying these impacts and cannot currently conclude whether or not they would be material to our financial statements. In addition, we are in the process of designing and implementing appropriate changes to our business processes, systems and internal controls to support recognition and disclosure under the new standard. We continue to monitor additional authoritative or interpretive guidance related to the new standard as it becomes available, as well as comparing our conclusions on specific interpretative issues to other peers in our industry, to the extent that such information is available to us.
FASB ASU No. 2016-15.
In August 2016, the FASB issued ASU No. 2016-15 “
Statement of Cash Flows (Topic 230)
” which institutes a number of modifications to presentation and classification of certain cash receipts and cash payments in the statement of cash flows. These modifications include (a) debt prepayment or debt extinguishment costs, (b) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (c) contingent consideration payments made after a business combination, (d) proceeds received from the settlement of insurance claims, (e) proceeds from the settlement of corporate-owned life insurance policies, (f) distributions received from equity method investees, (g) beneficial interest obtained in a securitization of financial assets, (h) separately identifiable cash flows and application of the predominance principle. This ASU is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our consolidated statements of cash flows and related disclosures.
FASB ASU No. 2016-16.
In October 2016, the FASB issued ASU No. 2016-16 “
Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory
” (“ASU 2016-16”), which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update do not change GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity transfer of inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Partnership is currently evaluating the impact that adoption of this standard will have on the consolidated financial statements and related disclosures.
Certain amounts included within these acquisitions are included in the discontinued operations discussed in Note 4.
Sunoco LLC and Sunoco Retail LLC Acquisitions
On April 1, 2015, we acquired a
31.58%
membership interest and
50.1%
voting interest in Sunoco LLC from ETP Retail Holdings, LLC (“ETP Retail”), an indirect wholly-owned subsidiary of Energy Transfer Partners, L.P. ("ETP"), for total consideration of
$775 million
in cash (the “Sunoco Cash Consideration”) and
795,482
common units representing limited partner interests in the Partnership, pursuant to a Contribution Agreement dated March 23, 2015, among the Partnership, ETP Retail and ETP (the "Sunoco LLC Contribution Agreement"). The Sunoco Cash Consideration was financed through issuance by the Partnership and its wholly owned subsidiary, Sunoco Finance Corp. (“SUN Finance”), of
6.375%
Senior Notes due 2023 on April 1, 2015. The common units issued to ETP Retail were issued and sold in a private transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). Pursuant to the terms of the Sunoco LLC Contribution Agreement, ETP guaranteed all of the obligations of ETP Retail.
On November 15, 2015, we entered into a Contribution Agreement (the “ETP Dropdown Contribution Agreement”) with Sunoco LLC, Sunoco, Inc., ETP Retail, Sunoco GP LLC, and ETP. Pursuant to the terms of the ETP Dropdown Contribution Agreement, we agreed to acquire from ETP Retail, effective January 1, 2016, (a)
100%
of the issued and outstanding membership interests of Sunoco Retail, an entity that was formed by Sunoco, Inc. (R&M), an indirect wholly owned subsidiary of Sunoco, Inc., prior to the closing of the ETP Dropdown Contribution Agreement, and (b)
68.42%
of the issued and outstanding membership interests of Sunoco LLC (the “ETP Dropdown”). Pursuant to the terms of the ETP Dropdown Contribution Agreement, ETP agreed to guarantee all of the obligations of ETP Retail.
Immediately prior to the closing of the ETP Dropdown, Sunoco Retail owned all of the retail assets previously owned by Sunoco, Inc. (R&M), an ethanol plant located in Fulton, NY,
100%
of the issued and outstanding membership interests in Sunmarks, LLC, and all the retail assets previously owned by Atlantic Refining & Marketing Corp., a wholly owned subsidiary of Sunoco, Inc.
Subject to the terms and conditions of the ETP Dropdown Contribution Agreement, at the closing of the ETP Dropdown, we paid to ETP Retail
$2.2 billion
in cash on March 31, 2016, which included working capital adjustments, and issued to ETP Retail
5,710,922
common units representing limited partner interests in the Partnership (the “ETP Dropdown Unit Consideration”). The ETP Dropdown
was funded with borrowings under a term loan agreement. The ETP Dropdown Unit Consideration was issued in a private transaction exempt from registration under Section 4(a)(2) of the Securities Act.
The acquisitions of Sunoco LLC and Sunoco Retail were accounted for as transactions between entities under common control. Specifically, the Partnership recognized the acquired assets and assumed liabilities at their respective carrying values with no goodwill created. The Partnership’s results of operations include Sunoco LLC’s and Sunoco Retail’s results of operations beginning September 1, 2014, the date of common control. As a result, the Partnership retrospectively adjusted its financial statements to include the balances and operations of Sunoco LLC and Sunoco Retail from August 31, 2014. Accordingly, the Partnership retrospectively adjusted its consolidated statement of operations and comprehensive income to include
$2.4 billion
of Sunoco LLC revenues and
$25 million
of net income for the three months ended March 31, 2015,
$1.5 billion
of Sunoco Retail revenues and $11 million of net income for the twelve months ended December 31, 2015 as well as
$5.5 billion
of Sunoco LLC and Sunoco Retail revenues and
$73 million
of net loss for the Successor period from September 1, 2014 through December 31, 2014.
The following table summarizes the final recording of assets and liabilities at their respective carrying values as of August 31, 2014 (in millions):
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Sunoco LLC
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Sunoco Retail
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Total
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Current assets
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$
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1,107
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$
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329
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$
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1,436
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Property and equipment
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384
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710
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1,094
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Goodwill
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—
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1,289
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1,289
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Intangible assets
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182
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294
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476
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Other noncurrent assets
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2
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—
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2
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Current liabilities
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(641
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)
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(146
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)
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(787
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)
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Other noncurrent liabilities
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(7
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)
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(340
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)
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(347
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)
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Net assets
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$
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1,027
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$
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2,136
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$
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3,163
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Net deemed contribution
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(188
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)
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Cash acquired
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(24
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)
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Total cash consideration, net of cash acquired (1)
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$
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2,951
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________________________________
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(1)
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Total cash consideration, net of cash acquired, includes
$775 million
paid on April 1, 2015 and
$2.2 billion
paid on March 31, 2016.
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Goodwill acquired in connection with the Sunoco LLC and Sunoco Retail acquisitions is non-deductible for tax purposes.
Emerge Fuels Business Acquisition
On August 31, 2016, we acquired the Emerge fuels business (the “Fuels Business”) from Emerge Energy Services LP (NYSE: EMES) (“Emerge”) for
$171 million
, inclusive of working capital and other adjustments, which was funded using amounts available under our revolving credit facility. The Fuels Business includes
two
transmix processing plants with attached refined product terminals located in Birmingham, Alabama and the Greater Dallas, TX metroplex and engages in the processing of transmix and the distribution of refined fuels. Combined, the plants can process over
10,000
barrels per day of transmix, and the associated terminals have over
800,000
barrels of storage capacity.
Management, with the assistance of a third party valuation firm, has determined the fair value of assets and liabilities at the date of the Fuels Business acquisition. We determined the value of goodwill by giving consideration to the following qualitative factors:
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synergies created through increased fuel purchasing advantages and integration with our existing wholesale business;
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•
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strategic advantages of owning transmix processing plants and increasing our terminal capacity; and
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•
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competitors processing transmix in the geographic region.
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The following table summarizes the final recording of assets and liabilities at their respective carrying values as of the date presented (in millions):
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August 31, 2016
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Current assets
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$
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27
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Property and equipment
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51
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Goodwill
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53
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Intangible assets
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56
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Current liabilities
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(16
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)
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Net assets
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171
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Cash acquired
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—
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Total cash consideration, net of cash acquired
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$
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171
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Goodwill acquired in connection with the Emerge acquisition is deductible for tax purposes.
Other Acquisitions
On October 12, 2016, we completed the acquisition of convenience store, wholesale motor fuel distribution, and commercial fuels distribution businesses serving East Texas and Louisiana from Denny Oil Company (“Denny”) for approximately
$55 million
. This acquisition included
six
company-owned and operated locations,
six
company-owned and dealer operated locations, wholesale fuel supply contracts for a network of independent dealer-owned and dealer-operated locations, and a commercial fuels business in the Eastern Texas and Louisiana markets. As part of the acquisition, we acquired
13
fee properties, which included the
six
company operated locations,
six
dealer operated locations, and a bulk plant and an office facility. This transaction was funded using amounts available under our revolving credit facility with the total purchase consideration allocated to assets acquired based on the preliminary estimate of their respective fair values on the purchase date. Management, with the assistance of a third party valuation firm, has determined the fair value of the assets at the date of acquisition which has increased goodwill by
$18 million
.
On June 22, 2016, we acquired
14
convenience stores and the wholesale fuel business in the Austin, Houston, and Waco, Texas markets from Kolkhorst Petroleum Inc. ("Kolkhorst") for
$39 million
. The convenience stores acquired include
5
fee properties and
9
leased properties, all of which are company operated. The Kolkhorst acquisition also included supply contracts with dealer-owned and operated sites. This acquisition was funded using amounts available under our revolving credit facility with the total purchase consideration allocated to assets acquired based on the estimate of their respective fair values on the purchase date. Management, with the assistance of a third party valuation firm has determined the fair value of the assets which has increased goodwill by
$19 million
.
On June 22, 2016, we acquired
18
convenience stores serving the upstate New York market from Valentine Stores, Inc. (“Valentine”) for
$78 million
. This acquisition included
19
fee properties (of which
18
are company operated convenience stores and
one
is a standalone Tim Hortons),
one
leased Tim Hortons property and
three
raw tracts of land in fee for future store development. This acquisition was funded using amounts available under our revolving credit facility with the total purchase consideration allocated to assets acquired based on the estimate of their respective fair values on the purchase date. Management, with the assistance of a third party valuation firm, has determined the fair value of the assets at the date of acquisition which has increased goodwill by
$42 million
.
The Denny, Kolkhorst and Valentine acquisitions were all assets acquisitions, and any goodwill created from these acquisitions is deductible for tax purposes.
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4.
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Discontinued Operations
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Pursuant to the Purchase Agreement described in Note 1, Sellers have agreed to sell a portfolio of approximately
1,112
company-operated retail outlets in
19
geographic regions, together with ancillary businesses and related assets, including the Laredo Taco Company (the “Business”), for an aggregate purchase price of
$3.3 billion
, payable in cash, plus the value of inventory at the closing of the transactions contemplated by the Purchase Agreement (the “Closing”) and the assumption of certain liabilities related to the Business by Buyers. The purchase price is subject to certain adjustments, including (i) those relating to specified items that arise during post-signing due diligence and inspections and (ii) individual properties not ultimately being acquired by Buyers due to the failure to obtain necessary third party consents or waivers or because either Buyers or Sellers exercise their respective rights, under certain circumstances, to cause a specific property to be excluded from the transaction. In addition, both the Partnership and Sunoco LLC have guaranteed Sellers’ obligations under the Purchase Agreement and related ancillary agreements pursuant to a guarantee agreement (the “Guarantee Agreement”) entered into in connection with the Purchase Agreement. In connection with the Closing, Sellers and Buyers and their respective affiliates will enter into a number of ancillary agreements, including a 15-year “take-or-pay” fuel supply agreement.
The Closing is expected to occur within the fourth quarter of 2017 or early portion of the first quarter of 2018, subject to the satisfaction or waiver of customary closing conditions for a transaction of this type, including the receipt of any approvals required under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976. As a result of the Purchase Agreement and subsequent to closing, previously eliminated wholesale motor fuel sales to the Partnership's retail locations will be reported as wholesale motor fuel sales to third parties. Also, the related accounts receivable from such sales will cease to be eliminated from the consolidated balance sheets and will be reported as accounts receivable.
With the assistance of a third-party brokerage firm, we previously initiated marketing efforts with respect to approximately
208
Stripes sites located in certain West Texas, Oklahoma and New Mexico markets, which were not included in the 7-Eleven Purchase Agreement. We are currently in exclusive negotiations with a potential purchaser and, subject to completion of successful negotiations, anticipate announcing the transaction in the fourth quarter 2017 and closing the transaction in the first quarter of 2018.
On January 18, 2017, with the assistance of a third-party brokerage firm, we launched a portfolio optimization plan to market and
sell
97
real estate assets. Real estate assets included in this process are company-owned locations, undeveloped greenfield sites and other excess real estate. Properties are located in Florida, Louisiana, Massachusetts, Michigan, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas and Virginia. The properties will be sold through a sealed-bid sale. Of the
97
properties,
27
have been sold and an additional
14
are under contract to be sold.
31
are being sold to 7-Eleven and
10
are being sold in another transaction. The remaining
15
continue to be marketed by the third-party brokerage firm.
The Partnership has concluded that it meets the accounting requirements for reporting the financial position, results of operations and cash flows of the Retail Divestment as discontinued operations.
The following tables present the aggregate carrying amounts of assets and liabilities classified as held for sale in the Consolidated Balance Sheets:
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September 30,
2017
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December 31,
2016
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(in millions)
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Carrying amount of assets held for sale:
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Cash
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$
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24
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$
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20
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Inventories
|
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183
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|
|
188
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Other current assets
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91
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|
|
83
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Property and equipment, net
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2,132
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|
|
2,185
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Goodwill
|
|
1,216
|
|
|
1,568
|
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Intangible assets, net
|
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499
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|
|
503
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Other noncurrent assets
|
|
2
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|
|
2
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Total assets held for sale
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$
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4,147
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|
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$
|
4,549
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Carrying amount of liabilities associated with assets held for sale:
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Other current and noncurrent liabilities
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|
$
|
81
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|
|
$
|
68
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Total liabilities associated with assets held for sale
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|
$
|
81
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|
|
$
|
68
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Upon the classification of assets and related liabilities as held for sale, Sunoco LP’s management applied the measurement guidance in ASC 360,
Property, Plant and Equipment
, to calculate the fair value less cost to sell of the disposal group. In accordance with ASC 360-10-35-39, management first tested the goodwill included within the disposal group for impairment prior to measuring the disposal group’s fair value less the cost to sell. In the determination of the classification of assets held for sale and the related liabilities, management allocated a portion of the goodwill balance previously included in the Sunoco LP retail reporting unit to assets held for sale based on the relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained in accordance with ASC 350-20-40-3. The amount of goodwill allocated to assets held for sale was approximately
$1.6 billion
, and the amount of goodwill allocated to the remainder of the retail reporting unit, which is comprised of Sunoco LP’s ethanol plant, credit card processing services and franchise royalties, was approximately
$188 million
.
Once the retail reporting unit’s goodwill was allocated between assets held for sale and continuing operations, management performed goodwill impairment tests on both reporting units to which the goodwill balances were allocated. No goodwill impairment was identified for the
$188 million
goodwill balance that remained in the retail reporting unit. The result of the impairment tests of the goodwill included within the assets held for sale initially indicated an impairment charge totaling
$320 million
, which was recognized during the three months ended June 30, 2017. Subsequent to June 30, 2017, management continued to evaluate the goodwill for impairment based on additional information on the fair value of the reporting unit, which resulted in an additional impairment of
$44 million
during the three months ended September 30, 2017. The key assumption in the impairment test for the goodwill balance classified as held for sale was the fair value of the disposal group, which was based on the assumed proceeds from the sale of those assets. The announced
purchase and sale agreement includes the majority of the retail sites that have been classified as held for sale; thus, a key assumption in the goodwill impairment test was the assumed sales proceeds (less the related costs to sell) for the remainder of the sites, which represent approximately 15% of the total number of sites. Management is currently marketing the remaining sites for sale and utilized information from that sales process to develop the assumed sales proceeds for those sites. While management believes that the assumed sales proceeds for these remaining held-for-sale sites are reasonable and likely to be obtained in a sale of those sites, an agreement has not been negotiated and therefore the ultimate outcome could be different than the assumption used in the impairment test. Subsequent to the impairment of goodwill included within the assets held for sale, no further impairments of any other assets held for sale were deemed necessary as the remaining carrying value of the disposal group approximated the assumed proceeds from the sale of those assets less the cost to sell.
The Partnership recorded transaction costs of
$12 million
and unit-based compensation of
$6 million
during the three months ended September 30, 2017, as a result of the 7-Eleven Transaction.
The Partnership recorded a
$4 million
impairment charge to property and equipment during the three months ended September 30, 2017, as a result of the effects of Hurricane Harvey on the Partnership's retail operations within discontinued operations.
The results of operations associated with discontinued operations are presented in the following table:
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|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in millions)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Motor fuel sales
|
$
|
1,694
|
|
|
$
|
1,364
|
|
|
$
|
4,810
|
|
|
$
|
3,774
|
|
|
Merchandise
|
599
|
|
|
588
|
|
|
1,712
|
|
|
1,656
|
|
|
Rental income
|
1
|
|
|
1
|
|
|
3
|
|
|
2
|
|
|
Other
|
18
|
|
|
17
|
|
|
55
|
|
|
42
|
|
|
Total revenues
|
2,312
|
|
|
1,970
|
|
|
6,580
|
|
|
5,474
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
Motor fuel cost of sales
|
1,519
|
|
|
1,184
|
|
|
4,312
|
|
|
3,321
|
|
|
Merchandise cost of sales
|
406
|
|
|
401
|
|
|
1,163
|
|
|
1,124
|
|
|
Other
|
2
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Total cost of sales
|
1,927
|
|
|
1,585
|
|
|
5,478
|
|
|
4,445
|
|
|
Gross profit
|
385
|
|
|
385
|
|
|
1,102
|
|
|
1,029
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
57
|
|
|
37
|
|
|
122
|
|
|
74
|
|
|
Other operating
|
216
|
|
|
226
|
|
|
662
|
|
|
658
|
|
|
Rent
|
20
|
|
|
24
|
|
|
65
|
|
|
69
|
|
|
Loss on disposal of assets and impairment charge
|
38
|
|
|
1
|
|
|
367
|
|
|
4
|
|
|
Depreciation, amortization and accretion expense
|
5
|
|
|
47
|
|
|
68
|
|
|
149
|
|
|
Total operating expenses
|
336
|
|
|
335
|
|
|
1,284
|
|
|
954
|
|
|
Operating income (loss)
|
49
|
|
|
50
|
|
|
(182
|
)
|
|
75
|
|
|
Interest expense, net
|
13
|
|
|
7
|
|
|
22
|
|
|
22
|
|
|
Income (loss) from discontinued operations before income taxes
|
36
|
|
|
43
|
|
|
(204
|
)
|
|
53
|
|
|
Income tax expense
|
30
|
|
|
31
|
|
|
60
|
|
|
29
|
|
|
Net income (loss) from discontinued operations
|
$
|
6
|
|
|
$
|
12
|
|
|
$
|
(264
|
)
|
|
$
|
24
|
|
|
|
|
|
5.
|
Accounts Receivable, net
|
Accounts receivable, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
(in millions)
|
|
Accounts receivable, trade
|
$
|
258
|
|
|
$
|
361
|
|
|
Credit card receivables
|
133
|
|
|
133
|
|
|
Vendor receivables for rebates, branding, and other
|
28
|
|
|
21
|
|
|
Other receivables
|
34
|
|
|
27
|
|
|
Allowance for doubtful accounts
|
(2
|
)
|
|
(3
|
)
|
|
Accounts receivable, net
|
$
|
451
|
|
|
$
|
539
|
|
Inventories, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
(in millions)
|
|
Fuel-retail
|
$
|
2
|
|
|
$
|
1
|
|
|
Fuel-wholesale
|
336
|
|
|
364
|
|
|
Fuel-consignment
|
6
|
|
|
5
|
|
|
Merchandise
|
3
|
|
|
4
|
|
|
Other
|
12
|
|
|
11
|
|
|
Inventories, net
|
$
|
359
|
|
|
$
|
385
|
|
|
|
|
|
7.
|
Property and Equipment, net
|
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
(in millions)
|
|
Land
|
$
|
544
|
|
|
$
|
501
|
|
|
Buildings and leasehold improvements
|
417
|
|
|
413
|
|
|
Equipment
|
450
|
|
|
427
|
|
|
Construction in progress
|
120
|
|
|
127
|
|
|
Total property and equipment
|
1,531
|
|
|
1,468
|
|
|
Less: accumulated depreciation
|
340
|
|
|
280
|
|
|
Property and equipment, net
|
$
|
1,191
|
|
|
$
|
1,188
|
|
|
|
|
|
8.
|
Goodwill and Intangible Assets, net
|
Goodwill
Goodwill represents the excess of the purchase price of an acquired entity over the amounts allocated to the assets acquired and liabilities assumed in a business combination. At
September 30, 2017
and
December 31, 2016
we had
$1.0 billion
and
$1.1 billion
of goodwill recorded in conjunction with past business combinations, respectively.
Goodwill is not amortized, but is tested annually for impairment, or more frequently if events and circumstances indicate that the asset might be impaired. In accordance with ASC 350-20-35 “
Goodwill - Subsequent Measurements
”, during the fourth quarter of
2016
, we performed goodwill impairment tests on our reporting units and recognized a goodwill impairment charge of
$642 million
on our retail reporting unit primarily due to changes in assumptions related to projected future revenues and cash flows from the dates the goodwill was originally recorded.
In connection with the reclassification of the retail assets as held-for-sale, Sunoco LP performed interim goodwill impairment testing on the remaining goodwill balance in the retail reporting unit. See Note 4 for more information on the balances reclassified as held-for-sale and the related impairment testing.
Other Intangible Assets
Gross carrying amounts and accumulated amortization for each major class of intangible assets, excluding goodwill, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Gross Carrying
Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
|
(in millions)
|
|
Indefinite-lived
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
$
|
295
|
|
|
$
|
—
|
|
|
$
|
295
|
|
|
$
|
286
|
|
|
$
|
—
|
|
|
$
|
286
|
|
|
Contractual rights
|
43
|
|
|
—
|
|
|
43
|
|
|
43
|
|
|
—
|
|
|
43
|
|
|
Finite-lived
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relations including supply agreements
|
664
|
|
|
234
|
|
|
430
|
|
|
611
|
|
|
198
|
|
|
413
|
|
|
Favorable leasehold arrangements, net
|
4
|
|
|
3
|
|
|
1
|
|
|
4
|
|
|
3
|
|
|
1
|
|
|
Loan origination costs
|
10
|
|
|
6
|
|
|
4
|
|
|
10
|
|
|
4
|
|
|
6
|
|
|
Other intangibles
|
7
|
|
|
3
|
|
|
4
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
Intangible assets, net
|
$
|
1,023
|
|
|
$
|
246
|
|
|
$
|
777
|
|
|
$
|
957
|
|
|
$
|
205
|
|
|
$
|
752
|
|
We review amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such a review should indicate that the carrying amount of amortizable intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value. We review non-amortizable intangible assets for impairment annually, or more frequently if circumstances dictate.
Customer relations and supply agreements have a remaining weighted-average life of approximately
10
years. Favorable leasehold arrangements have a remaining weighted-average life of approximately
5
years. Non-competition agreements and other intangible assets have a remaining weighted-average life of approximately
15
years. Loan origination costs have a remaining weighted-average life of approximately
2
years.
|
|
|
|
9.
|
Accrued Expenses and Other Current Liabilities
|
Current accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
(in millions)
|
|
Wage and other employee-related accrued expenses
|
$
|
42
|
|
|
$
|
42
|
|
|
Franchise agreement termination accrual
|
2
|
|
|
2
|
|
|
Accrued tax expense
|
154
|
|
|
154
|
|
|
Accrued insurance
|
14
|
|
|
23
|
|
|
Reserve for environmental remediation, current
|
6
|
|
|
5
|
|
|
Accrued interest expense
|
58
|
|
|
39
|
|
|
Deposits and other
|
83
|
|
|
107
|
|
|
Total
|
$
|
359
|
|
|
$
|
372
|
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
|
(in millions)
|
|
Term Loan
|
$
|
1,243
|
|
|
$
|
1,243
|
|
|
Sale leaseback financing obligation
|
114
|
|
|
117
|
|
|
2014 Revolver
|
644
|
|
|
1,000
|
|
|
6.375% Senior Notes Due 2023
|
800
|
|
|
800
|
|
|
5.500% Senior Notes Due 2020
|
600
|
|
|
600
|
|
|
6.250% Senior Notes Due 2021
|
800
|
|
|
800
|
|
|
Other
|
24
|
|
|
1
|
|
|
Total debt
|
4,225
|
|
|
4,561
|
|
|
Less: current maturities
|
6
|
|
|
5
|
|
|
Less: debt issuance costs
|
37
|
|
|
47
|
|
|
Long-term debt, net of current maturities
|
$
|
4,182
|
|
|
$
|
4,509
|
|
Pursuant to the Terms of the 7-Eleven Purchase Agreement, as a condition precedent to closing the transaction, we have committed to satisfy and discharge the Senior Notes.
Term Loan
On March 31, 2016, we entered into a senior secured term loan agreement (the “Term Loan”) to finance a portion of the costs associated with the ETP Dropdown. The Term Loan provides secured financing in an aggregate principal amount of up to
$2.035 billion
, which we borrowed in full. The Partnership used the proceeds to fund a portion of the ETP Dropdown and to pay fees and expenses incurred in connection with the ETP Dropdown and Term Loan.
Obligations under the Term Loan are secured equally and ratably with the 2014 Revolver (as defined below) by substantially all tangible and intangible assets of the Partnership and certain of our subsidiaries, subject to certain exceptions and permitted liens. Obligations under the Term Loan are guaranteed by certain of the Partnership’s subsidiaries. In addition, ETP Retail, a wholly owned subsidiary of ETP, provided a limited contingent guaranty of collection with respect to the payment of the principal amount of the Term Loan. The maturity date of the Term Loan is October 1, 2019. The Partnership is not required to make any amortization payments with respect to the loans under the Term Loan. Amounts borrowed under the Term Loan bear interest at either LIBOR or base rate plus an applicable margin based on the election of the Partnership for each interest period. Until the Partnership first receives an investment grade rating, the applicable margin for LIBOR rate loans ranges from
1.500%
to
3.000%
and the applicable margin for base rate loans ranges from
0.500%
to
2.000%
, in each case based on the Partnership’s Leverage Ratio (as defined in the Term Loan). The Term Loan requires the Partnership to maintain a leverage ratio of not more than (i) as of the last day of each fiscal quarter through December 31, 2017,
6.75
to 1.0, (ii) as of March 31, 2018,
6.5
to 1.0, (iii) as of June 30, 2018,
6.25
to 1.0, (iv) as of September 30, 2018,
6.0
to 1.0, (v) as of December 31, 2018,
5.75
to 1.0 and (vi) thereafter,
5.5
to 1.0 (in the case of the quarter ending March 31, 2019 and thereafter, subject to increases to
6.0
to 1.0 in connection with certain specified acquisitions in excess of
$50 million
, as permitted under the Term Loan).
On January 31, 2017, the Partnership entered into a limited waiver to the Term Loan (the “Term Loan Waiver”). Under the Term Loan Waiver, the Agents and lenders party thereto waived and deemed remedied, among other matters, the miscalculations of the Partnership’s leverage ratio as set forth in its previously delivered compliance certificates and the resulting failure to pay incremental interest owed under the Term Loan from December 21, 2016 through the effective date of the Term Loan Waiver. The incremental interest owed was remedied prior to the effectiveness of the Term Loan Waiver. As a result of the restatement of the compliance certificates for the fiscal quarter ended September 30, 2016 delivered in connection with the Term Loan Waiver, the margin applicable to the obligations under the Term Loan increased from (i)
2.75%
in respect of LIBOR rate loans and
1.75%
in respect of base rate loans to (ii)
3.00%
in respect of LIBOR rate loans and
2.00%
in respect of base rate loans, until the delivery of the next compliance certificates.
The Partnership may voluntarily prepay borrowings under the Term Loan at any time without premium or penalty, subject to any applicable breakage costs for loans bearing interest at LIBOR. Under certain circumstances, the Partnership is required to repay borrowings under the Term Loan in connection with the issuance by the Partnership of certain types of indebtedness for borrowed money. The Term Loan also includes certain (i) representations and warranties, (ii) affirmative covenants, including delivery of financial and other information to the administrative agent, notice to the administrative agent upon the occurrence of certain material events, preservation of existence, payment of material taxes and other claims, maintenance of properties and insurance, access to properties and records for inspection by administrative agent and lenders, further assurances and provision of additional guarantees and collateral, (iii) negative covenants, including restrictions on the Partnership and our restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make loans, advances or investments, pay dividends, sell or otherwise transfer assets or enter into transactions with shareholders or affiliates, and (iv) events of default, in each case substantively similar to the representations and warranties, affirmative and negative covenants and events of default in the Partnership’s 2014 Revolver (as defined below). During the continuance of an event of default, the lenders under the Term Loan may take a number of actions, including declaring the entire amount then outstanding under the Term Loan due and payable.
As of
September 30, 2017
, the balance on the Term Loan was
$1.2 billion
. The Partnership was in compliance with all financial covenants at
September 30, 2017
.
6.250% Senior Notes Due 2021
On April 7, 2016, we and certain of our wholly owned subsidiaries, including SUN Finance (together with the Partnership, the “2021 Issuers”), completed a private offering of
$800 million
6.250%
senior notes due 2021 (the “2021 Senior Notes”). The terms of the 2021 Senior Notes are governed by an indenture dated April 7, 2016, among the 2021 Issuers, our General Partner, and certain other subsidiaries of the Partnership (the “2021 Guarantors”) and U.S. Bank National Association, as trustee. The 2021 Senior Notes will mature on April 15, 2021 and interest is payable semi-annually on April 15 and October 15 of each year, commencing October 15, 2016. The 2021 Senior Notes are senior obligations of the 2021 Issuers and are guaranteed on a senior basis by all of the Partnership’s existing subsidiaries and certain of its future subsidiaries. The 2021 Senior Notes and guarantees are unsecured and rank equally with all of the 2021 Issuers’ and each 2021 Guarantor’s existing and future senior obligations. The 2021 Senior Notes and guarantees are effectively subordinated to the 2021 Issuers’ and each 2021 Guarantor’s secured obligations, including obligations under the Partnership’s 2014 Revolver (as defined below), to the extent of the value of the collateral securing such obligations, and structurally subordinated to all indebtedness and obligations, including trade payables, of the Partnership’s subsidiaries that do not guarantee the 2021 Senior Notes. ETC M-A Acquisition LLC (“ETC M-A”), a subsidiary of ETP Retail, guarantees collection to the 2021 Issuers with respect to the payment of the principal amount of the 2021 Senior Notes. ETC M-A is not subject to any of the covenants under the 2021 Indenture.
Net proceeds of approximately
$789 million
were used to repay a portion of the borrowings outstanding under our Term Loan.
In connection with the issuance of the 2021 Senior Notes, we entered into a registration rights agreement with the initial purchasers pursuant to which we agreed to complete an offer to exchange the 2021 Senior Notes for an issue of registered notes with terms substantively identical to the 2021 Senior Notes on or before April 7, 2017. The exchange offer was completed on October 4, 2016.
5.500% Senior Notes Due 2020
On July 20, 2015, we and our wholly owned subsidiary, SUN Finance (together with the Partnership, the “2020 Issuers”), completed a private offering of
$600 million
5.500%
senior notes due 2020 (the “2020 Senior Notes”). The terms of the 2020 Senior Notes are governed by an indenture dated July 20, 2015 (the “2020 Indenture”), among the 2020 Issuers, our General Partner, and certain other subsidiaries of the Partnership (the “2020 Guarantors”) and U.S. Bank National Association, as trustee (the “2020 Trustee”). The 2020 Senior Notes will mature on August 1, 2020 and interest is payable semi-annually on February 1 and August 1 of each year, commencing February 1, 2016. The 2020 Senior Notes are senior obligations of the 2020 Issuers and are guaranteed on a senior basis by all of the Partnership’s existing subsidiaries. The 2020 Senior Notes and guarantees are unsecured and rank equally with all of the 2020 Issuers’ and each 2020 Guarantor’s existing and future senior obligations. The 2020 Senior Notes and guarantees are effectively subordinated to the 2020 Issuers’ and each 2020 Guarantor’s secured obligations, including obligations under the Partnership’s 2014 Revolver (as defined below), to the extent of the value of the collateral securing such obligations, and structurally subordinated to all indebtedness and obligations, including trade payables, of the Partnership’s subsidiaries that do not guarantee the 2020 Senior Notes.
Net proceeds of approximately
$593 million
were used to fund a portion of the cash consideration of the Susser Acquisition, through which we acquired 100% of the issued and outstanding shares of capital stock of Susser from Heritage Holdings, Inc., a wholly owned subsidiary of ETP, and ETP Holdco Corporation, a wholly owned subsidiary of ETP, on July 31, 2015.
In connection with our issuance of the 2020 Senior Notes, we entered into a registration rights agreement with the initial purchasers pursuant to which we agreed to complete an offer to exchange the 2020 Senior Notes for an issue of registered notes with terms substantively identical to the 2020 Senior Notes on or before July 20, 2016. The exchange offer was completed on October 4, 2016 and we paid the holders of the 2020 Senior Notes an aggregate of
$0.3 million
in liquidated damages in the form of additional interest as a result of the delayed registration.
On October 10, 2017, pursuant to the terms of the 2020 Indenture, the Partnership and Sunoco Finance Corp. issued a notice of conditional redemption with respect to all
$600 million
outstanding principal amount of their 2020 Senior Notes. Subject to the condition precedent of the consummation of the Purchase Agreement, the Partnership will redeem the 2020 Senior Notes at a price of
102.750%
of the principal amount thereof, plus accrued and unpaid interest to the redemption date.
6.375% Senior Notes Due 2023
On April 1, 2015, we and our wholly owned subsidiary, SUN Finance (together with the Partnership, the “2023 Issuers”), completed a private offering of
$800 million
6.375%
senior notes due 2023 (the “2023 Senior Notes”). The terms of the 2023 Senior Notes are governed by an indenture dated April 1, 2015 (the “2023 Indenture”), among the 2023 Issuers, our General Partner, and certain other subsidiaries of the Partnership (the “2023 Guarantors”) and U.S. Bank National Association, as trustee (the “2023 Trustee”). The 2023 Senior Notes will mature on April 1, 2023 and interest is payable semi-annually on April 1 and October 1 of each year, commencing October 1, 2015. The 2023 Senior Notes are senior obligations of the 2023 Issuers and are guaranteed on a senior basis by all of the Partnership’s existing subsidiaries. The 2023 Senior Notes and guarantees are unsecured and rank equally with all of the 2023 Issuers’ and each 2023 Guarantor’s existing and future senior obligations. The 2023 Senior Notes and guarantees are effectively subordinated to the 2023 Issuers’ and each 2023 Guarantor’s secured obligations, including obligations under the Partnership’s 2014 Revolver (as defined below), to the extent of the value of the collateral securing such obligations, and structurally subordinated to all indebtedness and obligations, including trade payables, of the Partnership’s subsidiaries that do not guarantee the 2023 Senior Notes. ETC M-A guarantees collection to the 2023 Issuers with respect to the payment of the principal amount of the 2023 Senior Notes. ETC M-A is not subject to any of the covenants under the 2023 Indenture.
Net proceeds of approximately
$787 million
were used to fund the Sunoco Cash Consideration and to repay borrowings under our 2014 Revolver (as defined below).
In connection with our issuance of the 2023 Senior Notes, we entered into a registration rights agreement with the initial purchasers pursuant to which we agreed to complete an offer to exchange the 2023 Senior Notes for an issue of registered notes with terms substantively identical to the 2023 Senior Notes on or before April 1, 2016. The exchange offer was completed on October 4, 2016 and we paid the holders of the 2023 Senior Notes an aggregate of
$2 million
in liquidated damages in the form of additional interest as a result of the delayed registration.
Consent Solicitations
On October 10, 2017, the Partnership and Sunoco Finance Corp. commenced consent solicitations (the “Consent Solicitations”) seeking consents from holders of their outstanding
$800 million
aggregate principal amount of
6.250%
Senior Notes due 2021 (the “2021 Notes”) and
$800 million
aggregate principal amount of
6.375%
Senior Notes due 2023 (the “2023 Notes” and, together with the 2021 Notes, the “Notes”) to amend the respective indentures governing the Notes to, among other things, permit the consummation of the Retail Divestment. On October 18, 2017 the Partnership terminated the Consent Solicitations. Pursuant to its obligations under the 7-Eleven Purchase Agreement, the Partnership will satisfy and discharge the Indentures governing the 2021 and 2023 Senior Notes at their respective make-whole premiums, plus accrued and unpaid interest to the redemption date.
Revolving Credit Agreement
On September 25, 2014, we entered into a
$1.25 billion
revolving credit facility (the “2014 Revolver”) among the Partnership, as borrower, the lenders from time to time party thereto and Bank of America, N.A., as administrative agent, collateral agent, swingline lender and an LC issuer. Proceeds from the revolving credit facility were used to pay off the Partnership’s then-existing revolving credit facility entered into on September 25, 2012. On April 10, 2015, we received a
$250 million
increase in commitments under the 2014 Revolver and, as a result, we are permitted to borrow up to
$1.5 billion
on a revolving credit basis.
The 2014 Revolver expires on September 25, 2019 (which date may be extended in accordance with the terms of the 2014 Revolver). Borrowings under the 2014 Revolver bear interest at a base rate (a rate based off of the higher of (i) the Federal Funds Rate (as defined in the revolving credit facility) plus
0.500%
, (ii) Bank of America’s prime rate or (iii) one-month LIBOR (as defined in the 2014 Revolver) plus
1.000%
) or LIBOR, in each case plus an applicable margin ranging from
1.500%
to
3.000%
, in the case of a LIBOR loan, or from
0.500%
to
2.000%
, in the case of a base rate loan (determined with reference to the Partnership’s Leverage Ratio (as defined in the 2014 Revolver)). Upon the first achievement by the Partnership of an investment grade credit rating, the applicable margin will decrease to a range of
1.125%
to
2.000%
, in the case of a LIBOR loan, or from
0.125%
to
1.000%
, in the case of a base rate loan (determined with reference to the credit rating for the Partnership’s senior, unsecured, non-credit enhanced long-term debt). Interest is payable quarterly if the base rate applies, at the end of the applicable interest period if LIBOR applies and at the end of the month if daily floating LIBOR applies. In addition, the unused portion of the revolving credit facility will be subject to a commitment fee ranging from
0.250%
to
0.500%
, based on the Partnership’s Leverage Ratio. Upon the first achievement by the Partnership of an investment grade credit rating, the commitment fee will decrease to a range of
0.125%
to
0.275%
, based on the Partnership’s credit rating as described above.
On January 31, 2017, the Partnership entered into a limited waiver (the “Revolver Waiver”) of the 2014 Revolver. Under the Revolver Waiver, the Agents and lenders party thereto waived and deemed remedied, among other matters, the miscalculations of the Partnership’s leverage ratio as set forth in its previously delivered compliance certificates and the resulting failure to pay incremental interest owed under the 2014 Revolver from December 21, 2016 through the effective date of the Revolver Waiver. The incremental interest owed was remedied prior to the effectiveness of the Revolver Waiver. As a result of the restatement of the compliance certificates for the fiscal quarter ended September 30, 2016 delivered in connection with the Revolver Waiver, the margin applicable to the obligations under the 2014 Revolver increased from (i)
2.75%
in respect of LIBOR rate loans and
1.75%
in respect of base rate loans to (ii)
3.00%
in respect of LIBOR rate loans and
2.00%
in respect of base rate loans, until the delivery of the next compliance certificates.
Indebtedness under the 2014 Revolver is secured by a security interest in, among other things, all of the Partnership’s present and future personal property and all of the 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. Upon the first achievement by the Partnership of an investment grade credit rating, all security interests securing borrowings under the revolving credit facility will be released. Indebtedness incurred under the 2014 Revolver is secured on a pari passu basis with the indebtedness incurred under the Term Loan pursuant to a collateral trust arrangement whereby a financial institution agrees to act as common collateral agent for all pari passu indebtedness.
As of
September 30, 2017
, the balance on the 2014 Revolver was
$644 million
, and
$9 million
in standby letters of credit were outstanding. The unused availability on the 2014 Revolver at
September 30, 2017
was
$847 million
. The Partnership was in compliance with all financial covenants at
September 30, 2017
.
On October 16, 2017, the Partnership entered into the Fifth Amendment to the Credit Agreement with the lenders party thereto and Bank of America, N.A., in its capacity as a letter of credit issuer, as swing line lender, and as administrative agent (the "Fifth Amendment"). The Fifth Amendment amended the agreement to (i) permit the dispositions contemplated by the Retail Divestment, (ii) extend the interest coverage ratio covenant of 2.25x through maturity, (iii) modify the definition of consolidated EBITDA to include projected margins from the minimum gallons to be purchased under any fuel supply contract entered into in connection with the 7-Eleven transaction, and (iv) modify the leverage ratio covenants. In the event no disposition has been consummated, the Partnership must maintain a leverage ratio of not more than (i) as of the last day of each fiscal quarter through September 30, 2017,
6.75
to 1.0, (ii) as of December 31, 2017,
6.75
to 1.0, (iii) as of March 31, 2018,
6.50
to 1.0, (iv) as of June 30, 2018,
6.25
to 1.0, (v) as of September 30, 2018,
6.00
to 1.0, (vi) as of December 31, 2018,
5.75
to 1.0 and (vii) thereafter,
5.50
to 1.0. In the event either the disposition of the 7-Eleven Assets or the disposition of the West Texas Assets (but not both of them) has been consummated, the Partnership must maintain a leverage ratio of not more than (i) as of the last day of each fiscal quarter through September 30, 2017,
6.75
to 1.0, (ii) as of December 31, 2017,
6.00
to 1.0, (iii) as of March 31, 2018,
5.75
to 1.0, (iv) as of June 30, 2018,
5.50
to 1.0, (v) as of September 30, 2018,
5.50
to 1.0, (vi) as of December 31, 2018,
5.50
to 1.0 and (vii) thereafter,
5.50
to 1.0. In the event both the dispositions of the 7-Eleven Assets and the disposition of the West Texas Assets have been consummated, the Partnership must maintain a leverage ratio of not more than (i) as of the last day of each fiscal quarter through September 30, 2017,
6.75
to 1.0, (ii) as of December 31, 2017,
5.75
to 1.0, (iii) as of March 31, 2018,
5.75
to 1.0, (iv) as of June 30, 2018,
5.50
to 1.0, (v) as of September 30, 2018,
5.50
to 1.0, (vi) as of December 31, 2018,
5.50
to 1.0 and (vii) thereafter,
5.50
to 1.0. Notwithstanding the foregoing, if a specified acquisition period is in effect at any time that the maximum leverage ratio would otherwise be
5.50
to 1.0, such maximum leverage ratio shall be
6.00
to 1.0.
Sale Leaseback Financing Obligation
On April 4, 2013, Southside completed a sale leaseback transaction with
two
separate companies for
50
of its dealer operated sites. As Southside did not meet the criteria for sale leaseback accounting, this transaction was accounted for as a financing arrangement over the course of the lease agreement. The obligations mature in varying dates through 2033, require monthly interest and principal payments, and bear interest at
5.125%
. The obligation related to this transaction is included in long-term debt and the balance outstanding as of
September 30, 2017
was
$114 million
.
Fair Value Measurements
We use fair value measurements to measure, among other items, purchased assets, investments, leases and derivative contracts. We also use them to assess impairment of properties, equipment, intangible assets and goodwill. An asset's fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters, or is derived from such prices or parameters. Where observable prices or inputs are not available, unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.
ASC 820 “
Fair Value Measurements and Disclosures”
prioritizes the inputs used in measuring fair value into the following hierarchy:
|
|
|
|
Level 1
|
Quoted prices (unadjusted) in active markets for identical assets or liabilities;
|
|
|
|
|
Level 2
|
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
|
|
|
|
|
Level 3
|
Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
|
The estimated fair value of debt is calculated using Level 2 inputs. The fair value of debt as of
September 30, 2017
, is estimated to be approximately
$4.3 billion
, based on outstanding balances as of the end of the period using current interest rates for similar securities.
|
|
|
|
11.
|
Other Noncurrent Liabilities
|
Other noncurrent liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31, 2016
|
|
|
(in millions)
|
|
Accrued straight-line rent
|
$
|
5
|
|
|
$
|
5
|
|
|
Reserve for underground storage tank removal
|
16
|
|
|
14
|
|
|
Reserve for environmental remediation, long-term
|
26
|
|
|
35
|
|
|
Unfavorable lease liability
|
10
|
|
|
12
|
|
|
Others
|
42
|
|
|
30
|
|
|
Total
|
$
|
99
|
|
|
$
|
96
|
|
|
|
|
|
12.
|
Related-Party Transactions
|
We are party to the following fee-based commercial agreements with various affiliates of ETP:
|
|
|
|
•
|
Philadelphia Energy Solutions Products Purchase Agreements –
two
related products purchase agreements,
one
with Philadelphia Energy Solutions Refining & Marketing (“PES”) and
one
with PES’s product financier Merrill Lynch Commodities; both purchase agreements contain
12
-month terms that automatically renew for consecutive
12
-month terms until either party cancels with notice. ETP Retail owns a noncontrolling interest in the parent of PES.
|
|
|
|
|
•
|
ETP Transportation and Terminalling Contracts – various agreements with subsidiaries of ETP for pipeline, terminalling and storage services. We also have agreements with subsidiaries of ETP for the purchase and sale of fuel.
|
We are party to the Susser Distribution Contract, a
10
-year agreement under which we are the exclusive distributor of motor fuel at cost (including tax and transportation costs), plus a fixed profit margin per gallon to Susser’s existing Stripes convenience stores and independently operated consignment locations. This profit margin is eliminated through consolidation from the date of common control, September 1, 2014, and thereafter, in the accompanying Consolidated Statements of Operations and Comprehensive Income.
We are party to the Sunoco Distribution Contract, a
10
-year agreement under which we are the exclusive distributor of motor fuel to Sunoco Retail’s convenience stores. Pursuant to the agreement, pricing is cost plus a fixed margin per gallon. This profit margin is eliminated through consolidation from the date of common control, September 1, 2014, and thereafter, in the accompanying Consolidated Statements of Operations and Comprehensive Income.
In connection with the closing of our IPO on September 25, 2012, we also entered into an Omnibus Agreement with Susser (the “Omnibus Agreement”). Pursuant to the Omnibus Agreement, among other things, the Partnership received a
three
-year option to purchase from Susser up to
75
of Susser's new or recently constructed Stripes convenience stores at Susser's cost and lease the stores back to Susser at a specified rate for a
15
-year initial term. The Partnership is the exclusive distributor of motor fuel to such stores for a period of
10
years from the date of purchase. During 2015, we completed all
75
sale-leaseback transactions under the Omnibus Agreement.
Summary of Transactions
Significant affiliate activity related to the Consolidated Balance Sheets and Statements of Operations and Comprehensive Income is as follows:
|
|
|
|
•
|
Net advances from affiliates were
$85 million
and
$87 million
as of
September 30, 2017
and
December 31, 2016
, respectively. Advances to and from affiliates are primarily related to the cash management services that affiliates of ETP provided to Sunoco LLC and Sunoco Retail.
|
|
|
|
|
•
|
Net accounts receivable from affiliates were
$140 million
and
$3 million
as of
September 30, 2017
and
December 31, 2016
, respectively, which are primarily related to motor fuel purchases from us.
|
|
|
|
|
•
|
Net accounts payable to affiliates was
$195 million
and
$109 million
as of
September 30, 2017
and
December 31, 2016
, respectively, which are related to operational expenses and fuel pipeline purchases.
|
|
|
|
|
•
|
Wholesale motor fuel sales to affiliates of
$16 million
and
$28 million
for the
three months ended September 30, 2017
and
2016
, respectively.
|
|
|
|
|
•
|
Wholesale motor fuel sales to affiliates of
$44 million
and
$45 million
for the
nine months ended September 30, 2017
and
2016
, respectively.
|
|
|
|
|
•
|
Bulk fuel purchases from affiliates of
$601 million
and
$494 million
for the
three months ended September 30, 2017
and
2016
, respectively, which is included in wholesale motor fuel cost of sales in our Consolidated Statements of Operations and Comprehensive Income.
|
|
|
|
|
•
|
Bulk fuel purchases from affiliates of
$1.7 billion
and
$1.4 billion
for the
nine months ended September 30, 2017
and
2016
, respectively, which is included in wholesale motor fuel cost of sales in our Consolidated Statements of Operations and Comprehensive Income.
|
|
|
|
|
13.
|
Commitments and Contingencies
|
Leases
The Partnership leases certain convenience store and other properties under non-cancellable operating leases whose initial terms are typically
5
to
15
years, with some having a term of 40 years or more, along with options that permit renewals for additional periods. Minimum rent is expensed on a straight-line basis over the term of the lease. In addition, certain leases require additional contingent payments based on sales or motor fuel volumes. We typically are responsible for payment of real estate taxes, maintenance expenses and insurance. These properties are either sublet to third parties or used for our convenience store operations.
Net rent expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in millions)
|
|
Cash rent:
|
|
|
|
|
|
|
|
|
Store base rent (1)
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
27
|
|
|
$
|
25
|
|
|
Equipment and other rent (2)
|
4
|
|
|
3
|
|
|
10
|
|
|
10
|
|
|
Total cash rent
|
13
|
|
|
12
|
|
|
37
|
|
|
35
|
|
|
Non-cash rent:
|
|
|
|
|
|
|
|
|
Straight-line rent
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Net rent expense
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
38
|
|
|
$
|
36
|
|
________________________________
|
|
|
|
(1)
|
Store base rent includes the Partnership's rent expense for sites subleased to dealers. The sublease income from these sites is recorded in rental income on the statement of operations and totaled
$6 million
and
$6 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$19 million
and
$18 million
for the
nine months ended September 30, 2017
and
2016
, respectively.
|
|
|
|
|
(2)
|
Equipment and other rent consists primarily of store equipment and vehicles.
|
Certain contingent liabilities related to unidentified environmental obligations of the retail operations are not being assumed by 7-Eleven in the Purchase Agreement. The Partnership may incur future liabilities related to currently unidentified environmental obligations related to sites included in the Purchase Agreement. The Partnership has not recorded liabilities for these contingent obligations as the existence of those environmental obligations are not known at this time. Liabilities have been recorded for all identified environmental liabilities.
|
|
|
|
14.
|
Interest Expense, net
|
Components of net interest expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in millions)
|
|
Interest expense
|
$
|
47
|
|
|
$
|
46
|
|
|
$
|
150
|
|
|
$
|
110
|
|
|
Amortization of deferred financing fees
|
4
|
|
|
4
|
|
|
12
|
|
|
8
|
|
|
Interest income
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(7
|
)
|
|
Interest expense, net
|
$
|
51
|
|
|
$
|
47
|
|
|
$
|
162
|
|
|
$
|
111
|
|
As a partnership, we are generally not subject to federal income tax and most state income taxes. However, the Partnership conducts certain activities through corporate subsidiaries which are subject to federal and state income taxes.
Our effective tax rate differs from the statutory rate primarily due to Partnership earnings that are not subject to U.S. federal and most state income taxes at the Partnership level. A reconciliation of income tax expense from continuing operations at the U.S. federal statutory rate to net income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in million)
|
|
Tax at statutory federal rate
|
$
|
31
|
|
|
$
|
3
|
|
|
$
|
23
|
|
|
$
|
47
|
|
|
Partnership earnings not subject to tax
|
(74
|
)
|
|
(21
|
)
|
|
(130
|
)
|
|
(81
|
)
|
|
State and local tax, net of federal benefit
|
(3
|
)
|
|
(1
|
)
|
|
(7
|
)
|
|
(2
|
)
|
|
Statutory tax rate changes
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
11
|
|
|
Other
|
2
|
|
|
(6
|
)
|
|
—
|
|
|
4
|
|
|
Net income tax expense (benefit)
|
$
|
(44
|
)
|
|
$
|
(26
|
)
|
|
$
|
(114
|
)
|
|
$
|
(21
|
)
|
As of
September 30, 2017
, Energy Transfer Equity, L.P. (“ETE”) and ETP or their subsidiaries owned all of our
12,000,000
Series A Preferred Units and
45,750,826
common units, which constitutes
46%
of our outstanding common units. As of
September 30, 2017
, our fully consolidating subsidiaries owned
16,410,780
Class C units representing limited partner interests in the Partnership (the “Class C Units”) and the public owned
53,724,405
common units.
Series A Preferred Units
On March 30, 2017, the Partnership entered into a Series A Preferred Unit Purchase Agreement with ETE, relating to the issue and sale by the Partnership to ETE of
12,000,000
Series A Preferred Units (the “Preferred Units”) representing limited partner interests in the Partnership at a price per Preferred Unit of
$25.00
(the “Offering”). The distribution rate for the Preferred Units is
10.00%
, per annum, of the $25.00 liquidation preference per unit (the “Liquidation Preference”) (equal to $2.50 per Preferred Unit per annum) until March 30, 2022, at which point the distribution rate will become a floating rate of 8.00% plus three-month LIBOR of the Liquidation Preference. The Preferred Units are redeemable at any time, and from time to time, in whole or in part, at the Partnership’s option at a price per Preferred Unit equal to the Liquidation Preference plus all accrued and unpaid distributions; provided that, if the Partnership redeems the Preferred Units prior to March 30, 2022, then the Partnership will redeem the Preferred Units at 101% of the Liquidation Preference, plus all accrued and unpaid distributions. The Preferred Units are not entitled to any redemption rights or conversion rights. Holders of Preferred Units will generally have no voting rights except in certain limited circumstances or as required by law. The Preferred Units were issued in a private transaction exempt from registration under section 4(a)(2) of the Securities Act.
Distributions on Preferred Units are cumulative beginning March 30, 2017, and payable quarterly in arrears, within 60 days, after the end of each quarter, commencing with the quarter ended June 30, 2017. The distribution payable as of
September 30, 2017
was
$7 million
.
The Offering closed on March 30, 2017, and the Partnership received proceeds from the Offering of
$300 million
, which it used to repay indebtedness under its revolving credit facility.
Common Units
On October 4, 2016, the Partnership entered into an equity distribution agreement for an at-the-market ("ATM") offering with RBC Capital Markets, LLC, Barclays Capital Inc., Citigroup Global Markets Inc., Credit Agricole Securities (USA) Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Mizuho Securities USA Inc., Morgan Stanley & Co. LLC, MUFG Securities Americas Inc., Natixis Securities Americas LLC, SMBC Nikko Securities America, Inc., TD Securities (USA) LLC, UBS Securities LLC and Wells Fargo Securities, LLC (collectively, the “Managers”). Pursuant to the terms of the equity distribution agreement, the Partnership may sell from time to time through the Managers the Partnership’s common units representing limited partner interests having an aggregate offering price of up to
$400 million
. The Partnership issued
1,268,750
common units from January 1, 2017 through
September 30, 2017
in connection with the ATM for
$33 million
, net of commissions of
$0.3 million
. As of
September 30, 2017
,
$295 million
of our common units remained available to be issued under the equity distribution agreement.
Activity of our common units for the
nine months ended September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
Number of Units
|
|
Number of common units at December 31, 2016
|
98,181,046
|
|
|
Common units issued in connection with the ATM
|
1,268,750
|
|
|
Phantom unit vesting
|
25,435
|
|
|
Number of common units at September 30, 2017
|
99,475,231
|
|
Allocation of Net Income
Our Partnership Agreement contains provisions for the allocation of net income and loss to the unitholders. For purposes of maintaining partner capital accounts, the Partnership Agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interest. Normal allocations according to percentage interests are made after giving effect, if any, to priority income allocations in an amount equal to incentive cash distributions allocated
100%
to ETE.
The calculation of net income allocated to the partners is as follows (in millions, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Attributable to Common Units
|
|
|
|
|
|
|
|
|
Distributions (a)
|
$
|
82
|
|
|
$
|
79
|
|
|
$
|
246
|
|
|
$
|
236
|
|
|
Distributions in excess of net income
|
25
|
|
|
(55
|
)
|
|
(413
|
)
|
|
(120
|
)
|
|
Limited partners' interest in net income (loss)
|
$
|
107
|
|
|
$
|
24
|
|
|
$
|
(167
|
)
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
|
(a) Distributions declared per unit to unitholders as of record date
|
$
|
0.8255
|
|
|
$
|
0.8255
|
|
|
$
|
2.4765
|
|
|
$
|
2.4683
|
|
Class C Units
On January 1, 2016, the Partnership issued an aggregate of
16,410,780
Class C Units consisting of (i)
5,242,113
Class C Units that were issued to Aloha as consideration for the contribution by Aloha to an indirect wholly owned subsidiary of the Partnership of all of Aloha’s assets relating to the wholesale supply of fuel and lubricants, and (ii)
11,168,667
Class C Units that were issued to indirect wholly owned subsidiaries of the Partnership in exchange for all outstanding Class A Units held by such subsidiaries. The Class C Units were valued at
$38.5856
per Class C Unit (the “Class C Unit Issue Price”), based on the volume-weighted average price of the Partnership’s Common Units for the
five
-day trading period ending on December 31, 2015. The Class C Units were issued in private transactions exempt from registration under section 4(a)(2) of the Securities Act.
Class C Units (i) are not convertible or exchangeable into Common Units or any other units of the Partnership and are non-redeemable; (ii) are entitled to receive distributions of available cash of the Partnership (other than available cash derived from or attributable to any distribution received by the Partnership from PropCo, the proceeds of any sale of the membership interests of PropCo, or any interest or principal payments received by the Partnership with respect to indebtedness of PropCo or its subsidiaries) at a fixed rate equal to
$0.8682
per quarter for each Class C Unit outstanding, (iii) do not have the right to vote on any matter except as otherwise required by any non-waivable provision of law, (iv) are not allocated any items of income, gain, loss, deduction or credit attributable to the Partnership’s ownership of, or sale or other disposition of, the membership interests of PropCo, or the Partnership’s ownership of any indebtedness of PropCo or any of its subsidiaries (“PropCo Items”), (v) will be allocated gross income (other than from PropCo Items) in an amount equal to the cash distributed to the holders of Class C Units and (vi) will be allocated depreciation, amortization and cost recovery deductions as if the Class C Units were Common Units and
1%
of certain allocations of net termination gain (other than from PropCo Items).
Pursuant to the terms described above, these distributions do not have an impact on the Partnership’s consolidated cash flows and as such, are excluded from total cash distributions and allocation of limited partners’ interest in net income. For the
nine months ended September 30, 2017
, Class C distributions declared totaled
$43 million
.
Incentive Distribution Rights
The following table illustrates the percentage allocations of available cash from operating surplus between our common unitholders and the holder of our incentive distribution rights (“IDRs”) based on the specified target distribution levels, after the payment of distributions to Class C unitholders. The amounts set forth under “marginal percentage interest in distributions” are the percentage interests of our IDR holder and the common unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “total quarterly distribution per unit target amount.” The percentage interests shown for our common unitholders and our IDR holder for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal percentage interest
in distributions
|
|
|
Total quarterly distribution per Common Unit target amount
|
|
Common Unitholders
|
|
Holder of IDRs
|
|
Minimum Quarterly Distribution
|
$0.4375
|
|
100
|
%
|
|
—
|
|
|
First Target Distribution
|
Above $0.4375 up to $0.503125
|
|
100
|
%
|
|
—
|
|
|
Second Target Distribution
|
Above $0.503125 up to $0.546875
|
|
85
|
%
|
|
15
|
%
|
|
Third Target Distribution
|
Above $0.546875 up to $0.656250
|
|
75
|
%
|
|
25
|
%
|
|
Thereafter
|
Above $0.656250
|
|
50
|
%
|
|
50
|
%
|
Cash Distributions
Our Partnership Agreement sets forth the calculation used to determine the amount and priority of cash distributions that the common unitholders receive.
Cash distributions paid or payable during
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Partners
|
|
|
|
Payment Date
|
|
Per Unit Distribution
|
|
Total Cash Distribution
|
|
Distribution to IDR Holders
|
|
|
|
(in millions, except per unit amounts)
|
|
November 14, 2017
|
|
$
|
0.8255
|
|
|
$
|
82
|
|
|
$
|
22
|
|
|
August 15, 2017
|
|
$
|
0.8255
|
|
|
$
|
82
|
|
|
$
|
21
|
|
|
May 16, 2017
|
|
$
|
0.8255
|
|
|
$
|
82
|
|
|
$
|
21
|
|
|
February 21, 2017
|
|
$
|
0.8255
|
|
|
$
|
81
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Unit Holder
|
|
Payment Date
|
|
Total Cash Distribution
|
|
|
|
(in millions)
|
|
November 14, 2017
|
|
$
|
7
|
|
|
August 15, 2017
|
|
$
|
8
|
|
|
|
|
|
17.
|
Unit-Based Compensation
|
Unit-based compensation expense related to the Partnership included in our Consolidated Statements of Operations and Comprehensive Income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in millions)
|
|
Phantom common units
|
$
|
9
|
|
|
$
|
3
|
|
|
$
|
18
|
|
|
$
|
8
|
|
|
Allocated expense from Parent
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Total unit-based compensation expense
|
$
|
9
|
|
|
$
|
3
|
|
|
$
|
18
|
|
|
$
|
9
|
|
Phantom Common Unit Awards
The Partnership issues phantom units which have the right to receive distributions prior to vesting. The units vest
60%
after three years and
40%
after five years. The fair value of these units is the market price of our common units on the grant date, and is amortized over the five-year vesting period using the straight-line method. Unrecognized compensation cost related to our nonvested restricted phantom units totaled
$27 million
as of
September 30, 2017
, which is expected to be recognized over a weighted average period of
3.67
years. The fair value of nonvested phantom units outstanding as of
September 30, 2017
totaled
$64 million
.
A summary of our phantom unit award activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Phantom Common Units
|
|
Weighted-Average Grant Date Fair Value
|
|
Outstanding at December 31, 2015
|
1,147,048
|
|
|
$
|
41.19
|
|
|
Granted
|
966,337
|
|
|
26.95
|
|
|
Vested
|
(1,240
|
)
|
|
36.98
|
|
|
Forfeited
|
(98,511
|
)
|
|
39.77
|
|
|
Outstanding at December 31, 2016
|
2,013,634
|
|
|
34.43
|
|
|
Granted
|
20,112
|
|
|
26.27
|
|
|
Vested
|
(37,066
|
)
|
|
42.18
|
|
|
Forfeited
|
(122,826
|
)
|
|
34.64
|
|
|
Outstanding at September 30, 2017
|
1,873,854
|
|
|
$
|
34.14
|
|
Cash Awards
In January 2015, the Partnership granted
30,710
awards that are settled in cash under the terms of the Sunoco LP Long-Term Cash Restricted Unit Plan. An additional
1,000
awards were granted in September 2015. During the
nine months ended September 30, 2017
,
3,400
units were forfeited. These awards do not have the right to receive distributions prior to vesting. The awards vest
100%
after
three years
. Unrecognized compensation cost related to our nonvested cash awards totaled
$0.1 million
as of
September 30, 2017
, which is expected to be recognized during 2017. The fair value of nonvested cash awards outstanding as of
September 30, 2017
totaled
$1 million
.
Segment information is prepared on the same basis that our Chief Operating Decision Maker (“CODM”) reviews financial information for operational decision-making purposes. We operate our business in
two
primary segments, wholesale and retail, both of which are included as reportable segments. No operating segments have been aggregated in identifying the
two
reportable segments.
We allocate shared revenue and costs to each segment based on the way our CODM measures segment performance. Partnership overhead costs, interest and other expenses not directly attributable to a reportable segment are allocated based on segment gross profit.
We report EBITDA and Adjusted EBITDA by segment as a measure of segment performance. We define EBITDA as net income before net interest expense, income tax expense and depreciation, amortization and accretion expense. We define Adjusted EBITDA to include adjustments for non-cash compensation expense, gains and losses on disposal of assets and impairment charges, unrealized gains and losses on commodity derivatives and inventory adjustments.
Wholesale Segment
Our wholesale segment purchases motor fuel primarily from independent refiners and major oil companies and supplies it to our retail segment, to independently-operated dealer stations under long-term supply agreements, and to distributors and other consumers of motor fuel. Also included in the wholesale segment are motor fuel sales to consignment locations and sales and costs related to processing transmix. We distribute motor fuels across more than
30
states throughout the East Coast and Southeast regions of the United States from Maine to Florida and from Florida to New Mexico, as well as Hawaii. Sales of fuel from our wholesale segment to our retail segment are delivered at cost plus a profit margin. These amounts are reflected in intercompany eliminations of motor fuel revenue and motor fuel cost of sales. Also included in our wholesale segment is rental income from properties that we lease or sublease.
Retail Segment
Our retail segment primarily operates branded retail convenience stores across more than
20
states throughout the East Coast and Southeast regions of the United States with a significant presence in Texas, Pennsylvania, New York, Florida, and Hawaii. These stores offer motor fuel, merchandise, foodservice, and a variety of other services including car washes, lottery, automated teller machines, money orders, prepaid phone cards and wireless services. These operations located in the continental United States are included in discontinued operations in the following segment information. The remaining retail segment includes the Partnership's ethanol plant, credit card services, franchise royalties, and its retail operations in Hawaii.
The following tables present financial information by segment for the
three and nine
months ended
September 30, 2017
and
2016
(operating performance related to the retail assets held for sale are included in discontinued operations in segment financial information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
Wholesale Segment
|
|
Retail Segment
|
|
Intercompany Eliminations
|
|
Totals
|
|
Wholesale Segment
|
|
Retail Segment
|
|
Intercompany Eliminations
|
|
Totals
|
|
|
(in millions)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail motor fuel
|
$
|
—
|
|
|
$
|
40
|
|
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
|
|
$
|
36
|
|
|
Wholesale motor fuel sales to third parties
|
2,419
|
|
|
—
|
|
|
|
|
2,419
|
|
|
2,027
|
|
|
—
|
|
|
|
|
2,027
|
|
|
Wholesale motor fuel sales to affiliates
|
16
|
|
|
—
|
|
|
|
|
16
|
|
|
28
|
|
|
—
|
|
|
|
|
28
|
|
|
Merchandise
|
—
|
|
|
19
|
|
|
|
|
19
|
|
|
—
|
|
|
17
|
|
|
|
|
17
|
|
|
Rental income
|
19
|
|
|
3
|
|
|
|
|
22
|
|
|
19
|
|
|
4
|
|
|
|
|
23
|
|
|
Other
|
13
|
|
|
26
|
|
|
|
|
39
|
|
|
13
|
|
|
23
|
|
|
|
|
36
|
|
|
Intersegment sales
|
121
|
|
|
35
|
|
|
(156
|
)
|
|
—
|
|
|
127
|
|
|
38
|
|
|
(165
|
)
|
|
—
|
|
|
Total revenue
|
2,588
|
|
|
123
|
|
|
(156
|
)
|
|
2,555
|
|
|
2,214
|
|
|
118
|
|
|
(165
|
)
|
|
2,167
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail motor fuel
|
—
|
|
|
5
|
|
|
|
|
5
|
|
|
—
|
|
|
6
|
|
|
|
|
6
|
|
|
Wholesale motor fuel
|
181
|
|
|
—
|
|
|
|
|
181
|
|
|
131
|
|
|
—
|
|
|
|
|
131
|
|
|
Merchandise
|
—
|
|
|
5
|
|
|
|
|
5
|
|
|
—
|
|
|
4
|
|
|
|
|
4
|
|
|
Rental and other
|
32
|
|
|
28
|
|
|
|
|
60
|
|
|
27
|
|
|
24
|
|
|
|
|
51
|
|
|
Total gross profit
|
213
|
|
|
38
|
|
|
|
|
251
|
|
|
158
|
|
|
34
|
|
|
|
|
192
|
|
|
Total operating expenses
|
88
|
|
|
24
|
|
|
|
|
112
|
|
|
104
|
|
|
34
|
|
|
|
|
138
|
|
|
Operating income
|
125
|
|
|
14
|
|
|
|
|
139
|
|
|
54
|
|
|
—
|
|
|
|
|
54
|
|
|
Interest expense, net
|
34
|
|
|
17
|
|
|
|
|
51
|
|
|
13
|
|
|
34
|
|
|
|
|
47
|
|
|
Income (loss) from continuing operations before income taxes
|
91
|
|
|
(3
|
)
|
|
|
|
88
|
|
|
41
|
|
|
(34
|
)
|
|
|
|
7
|
|
|
Income tax expense (benefit)
|
(1
|
)
|
|
(43
|
)
|
|
|
|
(44
|
)
|
|
1
|
|
|
(27
|
)
|
|
|
|
(26
|
)
|
|
Income (loss) from continuing operations
|
92
|
|
|
40
|
|
|
|
|
132
|
|
|
40
|
|
|
(7
|
)
|
|
|
|
33
|
|
|
Income from discontinued operations, net of income taxes (See Note 4)
|
—
|
|
|
6
|
|
|
|
|
6
|
|
|
—
|
|
|
12
|
|
|
|
|
12
|
|
|
Net income and comprehensive income
|
$
|
92
|
|
|
$
|
46
|
|
|
|
|
$
|
138
|
|
|
$
|
40
|
|
|
$
|
5
|
|
|
|
|
$
|
45
|
|
|
Depreciation, amortization and accretion (1)
|
23
|
|
|
6
|
|
|
|
|
29
|
|
|
22
|
|
|
56
|
|
|
|
|
78
|
|
|
Interest expense, net (1)
|
34
|
|
|
30
|
|
|
|
|
64
|
|
|
13
|
|
|
41
|
|
|
|
|
54
|
|
|
Income tax expense (benefit) (1)
|
(1
|
)
|
|
(13
|
)
|
|
|
|
(14
|
)
|
|
1
|
|
|
4
|
|
|
|
|
5
|
|
|
EBITDA
|
148
|
|
|
69
|
|
|
|
|
217
|
|
|
76
|
|
|
106
|
|
|
|
|
182
|
|
|
Non-cash compensation expense (1)
|
—
|
|
|
9
|
|
|
|
|
9
|
|
|
2
|
|
|
1
|
|
|
|
|
3
|
|
|
Loss (gain) on disposal of assets and impairment charges (1)
|
(4
|
)
|
|
38
|
|
|
|
|
34
|
|
|
(1
|
)
|
|
1
|
|
|
|
|
—
|
|
|
Unrealized loss (gain) on commodity derivatives (1)
|
(6
|
)
|
|
—
|
|
|
|
|
(6
|
)
|
|
6
|
|
|
—
|
|
|
|
|
6
|
|
|
Inventory adjustments (1)
|
(51
|
)
|
|
(4
|
)
|
|
|
|
(55
|
)
|
|
(2
|
)
|
|
—
|
|
|
|
|
(2
|
)
|
|
Adjusted EBITDA
|
$
|
87
|
|
|
$
|
112
|
|
|
|
|
$
|
199
|
|
|
$
|
81
|
|
|
$
|
108
|
|
|
|
|
$
|
189
|
|
|
Capital expenditures (1)
|
$
|
24
|
|
|
$
|
17
|
|
|
|
|
$
|
41
|
|
|
$
|
35
|
|
|
$
|
76
|
|
|
|
|
$
|
111
|
|
|
Total assets as of September 30, 2017 and December 31, 2016, respectively
|
$
|
3,080
|
|
|
$
|
5,227
|
|
|
|
|
$
|
8,307
|
|
|
$
|
3,201
|
|
|
$
|
5,500
|
|
|
|
|
$
|
8,701
|
|
________________________________
|
|
|
|
(1)
|
Includes amounts from discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
Wholesale Segment
|
|
Retail Segment
|
|
Intercompany Eliminations
|
|
Totals
|
|
Wholesale Segment
|
|
Retail Segment
|
|
Intercompany Eliminations
|
|
Totals
|
|
|
(in millions)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail motor fuel
|
$
|
—
|
|
|
$
|
117
|
|
|
|
|
$
|
117
|
|
|
$
|
—
|
|
|
$
|
102
|
|
|
|
|
$
|
102
|
|
|
Wholesale motor fuel sales to third parties
|
6,944
|
|
|
—
|
|
|
|
|
6,944
|
|
|
5,545
|
|
|
—
|
|
|
|
|
5,545
|
|
|
Wholesale motor fuel sales to affiliates
|
44
|
|
|
—
|
|
|
|
|
44
|
|
|
45
|
|
|
—
|
|
|
|
|
45
|
|
|
Merchandise
|
—
|
|
|
53
|
|
|
|
|
53
|
|
|
—
|
|
|
50
|
|
|
|
|
50
|
|
|
Rental income
|
58
|
|
|
8
|
|
|
|
|
66
|
|
|
57
|
|
|
9
|
|
|
|
|
66
|
|
|
Other
|
37
|
|
|
69
|
|
|
|
|
106
|
|
|
30
|
|
|
80
|
|
|
|
|
110
|
|
|
Intersegment sales
|
340
|
|
|
94
|
|
|
(434
|
)
|
|
—
|
|
|
258
|
|
|
99
|
|
|
(357
|
)
|
|
—
|
|
|
Total revenue
|
7,423
|
|
|
341
|
|
|
(434
|
)
|
|
7,330
|
|
|
5,935
|
|
|
340
|
|
|
(357
|
)
|
|
5,918
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail motor fuel
|
—
|
|
|
16
|
|
|
|
|
16
|
|
|
—
|
|
|
14
|
|
|
|
|
14
|
|
|
Wholesale motor fuel
|
406
|
|
|
—
|
|
|
|
|
406
|
|
|
436
|
|
|
—
|
|
|
|
|
436
|
|
|
Merchandise
|
—
|
|
|
15
|
|
|
|
|
15
|
|
|
—
|
|
|
14
|
|
|
|
|
14
|
|
|
Rental and other
|
87
|
|
|
76
|
|
|
|
|
163
|
|
|
78
|
|
|
86
|
|
|
|
|
164
|
|
|
Total gross profit
|
493
|
|
|
107
|
|
|
|
|
600
|
|
|
514
|
|
|
114
|
|
|
|
|
628
|
|
|
Total operating expenses
|
291
|
|
|
80
|
|
|
|
|
371
|
|
|
283
|
|
|
100
|
|
|
|
|
383
|
|
|
Operating income
|
202
|
|
|
27
|
|
|
|
|
229
|
|
|
231
|
|
|
14
|
|
|
|
|
245
|
|
|
Interest expense, net
|
68
|
|
|
94
|
|
|
|
|
162
|
|
|
41
|
|
|
70
|
|
|
|
|
111
|
|
|
Income (loss) from continuing operations before income taxes
|
134
|
|
|
(67
|
)
|
|
|
|
67
|
|
|
190
|
|
|
(56
|
)
|
|
|
|
134
|
|
|
Income tax expense (benefit)
|
(1
|
)
|
|
(113
|
)
|
|
|
|
(114
|
)
|
|
1
|
|
|
(22
|
)
|
|
|
|
(21
|
)
|
|
Income (loss) from continuing operations
|
135
|
|
|
46
|
|
|
|
|
181
|
|
|
189
|
|
|
(34
|
)
|
|
|
|
155
|
|
|
Income (loss) from discontinued operations, net of income taxes (See Note 4)
|
—
|
|
|
(264
|
)
|
|
|
|
(264
|
)
|
|
—
|
|
|
24
|
|
|
|
|
24
|
|
|
Net income (loss) and comprehensive income (loss)
|
$
|
135
|
|
|
$
|
(218
|
)
|
|
|
|
$
|
(83
|
)
|
|
$
|
189
|
|
|
$
|
(10
|
)
|
|
|
|
$
|
179
|
|
|
Depreciation, amortization and accretion (1)
|
81
|
|
|
74
|
|
|
|
|
155
|
|
|
60
|
|
|
174
|
|
|
|
|
234
|
|
|
Interest expense, net (1)
|
68
|
|
|
116
|
|
|
|
|
184
|
|
|
41
|
|
|
92
|
|
|
|
|
133
|
|
|
Income tax expense (benefit) (1)
|
(1
|
)
|
|
(53
|
)
|
|
|
|
(54
|
)
|
|
1
|
|
|
7
|
|
|
|
|
8
|
|
|
EBITDA
|
283
|
|
|
(81
|
)
|
|
|
|
202
|
|
|
291
|
|
|
263
|
|
|
|
|
554
|
|
|
Non-cash compensation expense (1)
|
1
|
|
|
17
|
|
|
|
|
18
|
|
|
4
|
|
|
5
|
|
|
|
|
9
|
|
|
Loss (gain) on disposal of assets and impairment charges (1)
|
—
|
|
|
367
|
|
|
|
|
367
|
|
|
(1
|
)
|
|
4
|
|
|
|
|
3
|
|
|
Unrealized loss (gain) on commodity derivatives (1)
|
(5
|
)
|
|
—
|
|
|
|
|
(5
|
)
|
|
9
|
|
|
—
|
|
|
|
|
9
|
|
|
Inventory fair value adjustments (1)
|
(8
|
)
|
|
—
|
|
|
|
|
(8
|
)
|
|
(61
|
)
|
|
(3
|
)
|
|
|
|
(64
|
)
|
|
Adjusted EBITDA
|
$
|
271
|
|
|
$
|
303
|
|
|
|
|
$
|
574
|
|
|
$
|
242
|
|
|
$
|
269
|
|
|
|
|
$
|
511
|
|
|
Capital expenditures (1)
|
$
|
50
|
|
|
$
|
89
|
|
|
|
|
$
|
139
|
|
|
$
|
79
|
|
|
$
|
212
|
|
|
|
|
$
|
291
|
|
|
Total assets as of September 30, 2017 and December 31, 2016, respectively
|
$
|
3,080
|
|
|
$
|
5,227
|
|
|
|
|
$
|
8,307
|
|
|
$
|
3,201
|
|
|
$
|
5,500
|
|
|
|
|
$
|
8,701
|
|
________________________________
|
|
|
|
(1)
|
Includes amounts from discontinued operations.
|
Net income per unit applicable to limited partners is computed by dividing limited partners’ interest in net income by the weighted‑average number of outstanding common units. Our net income is allocated to the limited partners in accordance with their respective partnership percentages, after giving effect to any priority income allocations for incentive distributions and distributions on employee unit awards. Earnings in excess of distributions are allocated to the limited partners based on their respective ownership interests. Payments made to our unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of net income per unit.
In addition to the common units, we identify the IDRs as participating securities and use the two-class method when calculating net income per unit applicable to limited partners, which is based on the weighted-average number of common units outstanding during the period. Diluted net income per unit includes the effects of potentially dilutive units on our common units, consisting of unvested phantom units.
A reconciliation of the numerators and denominators of the basic and diluted per unit computations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in millions, except units and per unit amounts)
|
|
Income from continuing operations
|
$
|
132
|
|
|
$
|
33
|
|
|
$
|
181
|
|
|
$
|
155
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Distributions on Series A Preferred units
|
7
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
Incentive distribution rights
|
22
|
|
|
20
|
|
|
64
|
|
|
60
|
|
|
Distributions on nonvested phantom unit awards
|
2
|
|
|
1
|
|
|
5
|
|
|
3
|
|
|
Limited partners' interest in income from continuing operations
|
$
|
101
|
|
|
$
|
12
|
|
|
$
|
97
|
|
|
$
|
92
|
|
|
Income (loss) from discontinued operations
|
$
|
6
|
|
|
$
|
12
|
|
|
$
|
(264
|
)
|
|
$
|
24
|
|
|
Weighted average limited partner units outstanding:
|
|
|
|
|
|
|
|
|
Common - basic
|
99,469,643
|
|
|
95,339,786
|
|
|
99,185,042
|
|
|
92,720,563
|
|
|
Common - equivalents
|
647,373
|
|
|
74,658
|
|
|
396,584
|
|
|
74,658
|
|
|
Common - diluted
|
100,117,016
|
|
|
95,414,444
|
|
|
99,581,626
|
|
|
92,795,221
|
|
|
Income from continuing operations per limited partner unit:
|
|
|
|
|
|
|
|
|
Common - basic
|
$
|
1.03
|
|
|
$
|
0.11
|
|
|
$
|
0.98
|
|
|
$
|
0.98
|
|
|
Common - diluted
|
$
|
1.02
|
|
|
$
|
0.11
|
|
|
$
|
0.98
|
|
|
$
|
0.98
|
|
|
Income (loss) from discontinued operations per limited partner unit:
|
|
|
|
|
|
|
|
|
Common - basic
|
$
|
0.06
|
|
|
$
|
0.13
|
|
|
$
|
(2.66
|
)
|
|
$
|
0.26
|
|
|
Common - diluted
|
$
|
0.06
|
|
|
$
|
0.13
|
|
|
$
|
(2.66
|
)
|
|
$
|
0.26
|
|