Sunoco LP

Greetings and welcome to the Sunoco LP's second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Grishow, Senior Vice President, Finance and Treasurer. Thank you, Scott. You may begin.

Thank you, and good morning, everyone. On the call with me this morning are Joe Kim, Sunoco LP's President and Chief Executive Officer, Carl Fales, Chief Operating Officer, Dylan Bramhall, Chief Financial Officer, Austin Harkness, Chief Commercial Officer, and other members of the management team. Today's call will contain forward-looking statements that include expectations and assumptions regarding the partnership's future operations and financial performance. Actual results could differ materially, and the partnership undertakes no obligation to update these statements based on subsequent events. Please refer to our earnings release as well as our filings with the SEC for a list of these factors. During today's call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Sunoco LP website for a reconciliation of each financial measure. It has been another busy quarter for the partnership, and I'd like to begin my remarks by providing a brief recap. First, on April 16th, we completed the divestiture of 204 convenience stores across West Texas, New Mexico, and Oklahoma to 7-Eleven for approximately $1 billion. Next, on May 3rd, we closed the $7.3 billion acquisition of New Star Energy. We also completed several important financing activities related to the New Star acquisition in the second quarter. On April 30th, we issued $1.5 billion in senior unsecured notes and used the proceeds to repay New Star's credit and receivable financing facilities and fully redeem New Star's preferred equity and subordinated notes. The reduction in interest expense from this refinancing activity will generate approximately $60 million in cash flow annually. Before I turn to second quarter 2024 operational and financial results, I'd like to take a moment to discuss the changes in segment reporting we published in this quarter's earnings release. As we continue to grow and diversify our portfolio of stable income streams, it was now appropriate to modify the way we report our financial and operational results to give our stakeholders better clarity on the performance of the business. To that end, we will now report three segments, field distribution, pipeline systems, and terminals. As a reminder, the partnership previously reported two segments, skill distribution and marketing, and all other. Operations within those prior reportable segments have now been reallocated among the three new reportable segments, and prior periods have been adjusted accordingly to reflect the new segment presentation. In addition, certain operations within NewSTAR's prior standalone reporting have been reallocated based on the post-acquisition internal reporting and management structure. Therefore, segment operating results are not comparable to those previously reported by NewSTAR in its standalone pre-acquisition financial statements due to the reallocation of operations between the segments. In this quarter and moving forward, our fuel distribution segment will include the sale of fuel to third-party customers. This segment will also include lease income, as well as income from our remaining retail operations in Hawaii and along the New Jersey Turnpike, and other fuel distribution-related services, such as credit card processing and franchise royalties. Our pipeline system segment will include the operations of our refined product, crude oil, and ammonia pipelines, as well as other assets that are operated and managed on an integrated basis with our pipeline systems, including certain terminal and storage assets. Finally, our terminal segment will include our storage facilities that provide storage, handling, and other services on a fee basis for refined products, crude oil, specialty chemicals, renewable fuels, and other liquids. This segment will also include the operations of our four TransMix processing facilities. Terminals that are integrated within the operations of the pipeline system segment are not included in this segment. Carl will discuss the results for each of the segments later in the call, but I will first discuss the consolidated results for the partnership. As a reminder, our second quarter results include approximately two months of new start operations, given the May 3rd close date. NOCA delivered a record second quarter adjusted EBITDA of $400 million, excluding approximately $80 million of onetime transaction expenses. Total expenses in the second quarter were $285 million, which includes the $80 million in transaction expenses I just referenced. Roughly three quarters of the transaction expenses this quarter were related to New Star severance payments, and we expect total transaction expenses will be approximately $100 million, the vast majority of which will be spent in 2024. In the second quarter, we spent $52 million on growth capital and $26 million on maintenance capital. We expect to spend at least $300 million of growth capital in 2024 and approximately $120 million in maintenance capital. Second quarter, distributable cash flow as adjusted was $295 million, yielding a current quarter coverage ratio of 1.9 times and a trailing 12-month ratio of 1.8 times. On July 25th, we declared an 87.56 cent per unit distribution, unchanged from last quarter. Our liquidity position and balance sheet remained strong. At the end of the second quarter, we had approximately $1.4 billion of liquidity remaining on our $1.5 billion revolving credit facility. Following the completion of the refinancing activity I mentioned earlier, we now have a balanced debt maturity profile and a fully unsecured capital structure. Leverage at the end of the quarter was 4.1 times, positioning us to deliver on our commitment to a long-term leverage target of four times. I'd now like to spend a few moments discussing the recent announcements we made following the end of the second quarter. First, on July 16th, we announced the formation of a joint venture with Energy Transfer combining our respective crude oil and produced water gathering assets in the Permian Basin. The joint venture will operate more than 5,000 miles of crude oil and water gathering pipelines with crude oil storage capacity in excess of 11 million barrels. Energy Transfer will serve as the operator of the joint venture and hold a 67.5% interest with Sunoco holding a 32.5% interest. The formation of the joint venture has an effective date of July 1st, 2024, and is expected to be immediately accretive to our unit holders. Next, on June 28th, we signed a definitive agreement to acquire a refined product terminal in Portland, Maine. This strategically located terminal provides refined product supply and logistics services to East Coast demand markets and will allow Sunoco to further expand its field distribution business in the region. Similar to our previous terminal acquisitions, we expect a mid-single-digit synergized EBITDA multiple on this investment and to be immediately accretive to our unit holders. We expect the acquisition will close in the third quarter. We remain confident in the strength of the legacy Sunoco business and the contribution from the NuSTAR acquisition, and I'd like to take a moment to review the key elements of our 2024 business outlook we provided in June. First, we continue to expect 2024 adjusted EBITDA to be in a range of $1.46 billion to $1.52 billion. This guidance range excludes transaction expenses and synergies. Second, we increased our synergy expectations from the Neustar acquisition and now expect to achieve approximately $200 million in commercial and expense synergies annually, an increase from our initial estimate of $150 million. Expense synergies will account for over $100 million of this total amount. We expect to achieve approximately $50 million of synergies in 2024, $125 million in 2025, and the full $200 million run rate in 2026. I'd like to conclude my remarks by stating that our financial position continues to be stronger than at any time in Synecdoche's history, which we believe will provide us with the continued flexibility to balance pursuing high return growth opportunities, maintaining a healthy balance sheet, and targeting a secure and growing distribution for our unit holders. With that, I'll now turn it over to Carl to walk through some additional thoughts on our second quarter performance.

Thanks, Scott. Good morning, everyone. As Scott just walked through, our teams have been very busy this quarter, and the operational and financial results highlight the strength of our business and the benefits that come from the new additions to our portfolio. Scott also provided some definitions for the three segments we will be using to report going forward. Let me walk through our results in each of those segments and provide some perspective on each business line. Starting with our fuel distribution segment, volumes remain strong in the second quarter. We distributed 2.2 billion gallons up 4% versus last quarter and up 5% versus the second quarter of last year. Our volume growth continues to outpace industry trends as a result of our investments and profit optimization strategies. Reported margin for the quarter was 11.8 cents per gallon compared to 11 cents per gallon last quarter and 11.9 cents per gallon for the second quarter of 2023. Adjusted EBITDA for the segment was $246 million, excluding $1 million of transaction expenses. This was an 8% increase over the second quarter of last year. There are two notable changes that impacted our segment fuel profit and CPG in the second quarter and will be relevant going forward. First is the divestiture of the West Texas retail assets to 7-Eleven. Since the margin on those gallons was above our average, removing them reduces our reported CPG following the sale. The second impact relates to our introduction of additional segments this quarter. In the past, the profit generated by processing transmics in our facilities was included in our reported fuel CPG. Beginning this quarter, those profit dollars are included in our terminal segment. The combined impact of these two factors means that on an apples-to-apples basis, our reported CPG will be lower by 80 to 120 basis points. this quarter and going forward. This is simply a mixed impact and does not change our strategy or our view of the business. Even with these impacts, our fuel profit performance this quarter was very strong. In addition to continued higher breakeven margins, there were various market tailwinds throughout the quarter that we were able to take advantage of, including improved blend margins and falling gasoline and diesel prices as opposed to rising prices in the first quarter. While market conditions can result in some quarter to quarter variation, we expect that our fuel profit optimization strategies, coupled with our growth plans, will continue to lead to increasing fuel profit over the long run. In our pipeline system segment, we reported nearly 1.3 million barrels per day of throughput. Segment adjusted EBITDA for the second quarter was $111 million, excluding $58 million of transaction expenses. Given our change in reporting segments and the fact that the majority of the assets in this segment came as part of the recent Neustar acquisition, there will not be comparisons to prior quarters or previous year until we cycle through the upcoming quarters. With only a couple of months of ownership, the segment performed in line with our expectations relative to our pre-acquisition analysis. As we look forward, we expect some impacts in the third quarter from planned refinery turnarounds on our system and revenue of a few MVC contracts that we won't recognize until the fourth quarter. Overall, as we look across a full year period, we like the stability of the business. In our terminal segment, we reported over 600,000 barrels per day of throughput and segment adjusted EBITDA of $43 million, excluding $21 million of transaction expenses. Both our legacy Sunoco and our legacy NuSTAR systems performed well with our throughputs and storage revenues in line with expectations. We also received the benefit of a full quarter of volumes and storage revenues from our acquisition of the Zenith Europe assets that we closed on in the first quarter. The overall integration process of our larger business is proceeding well. Scott just reiterated our updated synergy numbers that we shared in June. Most of the synergies that we will capture in 2024 are on the expense side, and we have already made significant progress on those efforts. Now that we have operated the Legacy New Star assets for a few months, we have been able to flip over from the planning process to execution mode on the commercial opportunities that are enabled by the ownership of these high-quality assets. Any capital that we will spend this year to capture these synergies is incorporated in the numbers that Scott shared on our 2024 guidance. One of the biggest steps on the commercial synergy front was the completion of the analysis of our crude system and the recent announcement of the joint venture we entered into with Energy Transfer in the Permian Basin. This partnership leverages our combined footprint to deliver more value to customers and provide additional commercial flexibility. This was a great deal for both Sun and ET with incremental accretion and synergies above and beyond our original deal economics. It is one of the primary reasons we were able to increase our 2026 run rate synergy number to $200 million. Before turning the time over to Joe, I will wrap up by emphasizing that we are off to a strong start to the year. Our fuel distribution business remains strong and resilient, and the focus on profit optimization and growth will continue going forward. We've already begun delivering on synergies in our pipeline systems and terminals businesses. As we fully integrate these business lines, we do expect some quarter to quarter variations as transaction expenses, seasonality, and various contract terms flow through our reported results. What we are very confident in is our ability to deliver on our overall adjusted EBITDA guidance we provided for the year, our ability to deliver on expense reductions, and hit our overall synergy targets. Joe?