Participants

Scott Grischow; Senior Vice President - Investor Relations and Treasury; Sunoco LP

Karl Fails; Chief Operations Officer, Executive Vice President of General Partner; Sunoco LP

Joseph Kim; President, Chief Executive Officer, Director of General Partner; Sunoco LP

Austin Harkness; Senior Vice President - Pricing, Optimization and Supply and Trading; Sunoco LP

Justin Jenkins; Analyst; Raymond James

Teresa Chen; Analyst; Barclays

Spiro Dounis; Analyst; Citi

Jeremy Tonet; Analyst; JPMorgan

Presentation

Operator

Greetings, and welcome to Sunoco LP's fourth-quarter 2024 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce Scott Grischow, Senior Vice President of Finance. Scott, you may begin.

Scott Grischow

Thank you and good morning everyone. On the call with me this morning are Joe Kim, SOCO LP's President and Chief Executive Officer, Carl Fas, Chief Operating Officer, Austin Harkness, Chief Commercial Officer, Brian Hand, Chief Sales Officer, and Dylan Bramhall, Chief Financial Officer.
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 releases as well as our filings with the SEC for a list of these factors.
During today's call, we will also discuss certain non-gap financial measures including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the SNOOP website for reconciliation of each financial measure.
The 4th quarter capped off a record year for Sunoco. The integration of our fuel distribution business with the strong and stable pipeline and terminal network increased our stability, strengthened our financial foundation, and enhanced our opportunities for growth.
In the fourth quarter, the partnership delivered adjusted IBITDA of $446 million excluding approximately $7 million of one-time transaction expenses.
We spent $74 million on growth capital and $58 million on maintenance capital.
Fourth quarter distributable cash flows adjusted was $261 million. Our trailing 12 month coverage ratio at the end of the quarter was 1.9 times.
Turning to some key highlights from our full year 2024 performance, our adjusted IBIA excluding transaction-related expenses was $1.56 billion representing a 62% increase compared to 2023.
I'd like to now take a moment to review how we achieve these record annual results. First, we began 2024 with an adjusted EBITDA guidance range of $975 million to $1 billion.
Even after the strategic divestiture of our West Texas assets in April, the strength of strength of our core business allowed us to maintain this guidance for the Legacy Cynoco operations.
Next, the new star acquisition closed in early May. And we revised our 2024 adjusted EA guidance upwards to be in a range of $1.51 billion to $1.57 billion including approximately $50 million of synergies.
I'm pleased to report that we delivered results at the high end of that adjusted range as a result of an efficient integration process coupled with our ongoing focus on strong operational execution and expense discipline.
Our liquidity position and balance sheet remained strong. At the end of 2024, we had approximately $1.3 billion of liquidity remaining on our revolving credit facility.
Leverage at the end of the year was 4.1 times flat to last quarter. As a reminder, when we announced the new acquisition, we targeted being back at our 4 times leverage target within 12 to 18 months following closing. We accomplished this goal within 5 months post close, which has put us in a position to focus on. Other elements of our capital allocation policy. To that end, on January 27th, we declared an 88.$0.65 per unit distribution, a 1.25% increase over the last quarter.
Strong financial performance, put the partnership in a position to implement this increase one quarter ahead of the typical timing for distribution increases.
As we announced in late January, we are targeting a distribution growth of at least 5% this year. We expect to announce future increases on a quarterly basis.
Our strong long-term financial outlook and track record of delivering accretive growth provide a clear path for continued distribution increases.
I would like to conclude by stating that we are confident in our ability to meet our 2025 adjusted EVEDA guidance range of 1.9 to $1.95 billion. Our financial position remains strong, enabling us to build on our track record of accretive growth while maintaining a healthy balance sheet and targeting a secure and growing distribution for our unit holders. With that, I will now turn it over to Karl to walk through some additional thoughts on our fourth quarter performance.

Karl Fails

Thanks, Scott. Good morning, everyone. Our results this quarter finish out a record year for Sunoco as we strengthened our portfolio and significantly grew our cash flows. With the addition of the new Star assets, we now have a balanced mix between our fuel distribution business and our midstream asset portfolio.
Each of our three segments demonstrated strong performance in 2024 and are set up to materially contribute to delivering on our 2025 guidance.
Let me share some more perspective on our 4th quarter and full year results by segment.
Starting with our fuel distribution segment, adjusted IEA was $192 million compared to $253 million last quarter and $209 million in the fourth quarter of 2023.
We distributed 2.2 billion gallons, up 1% versus last quarter and down 2% versus the fourth quarter of last year.
Reported margin for the quarter was 10.$0.06 per gallon compared to 12.$0.08 per gallon last quarter and 11.$0.08 per gallon for the fourth quarter of 2023.
Let me put the 4th quarter results in perspective.
As I have shared in the past, the basis of our gross profit optimization strategy is to maximize what the market provides. This results in some quarters being higher volume and lower margin, and others presenting higher margin opportunities.
When you look at our 4th quarter performance and adjust for the sale of our West Texas retail business in the 2nd quarter, our results were consistent with the 4th quarter of last year, reinforcing that the segment results were very good this quarter.
When we step back and look at the full year, the strength of our fuel distribution segment is even more apparent.
We reported over $900 million of adjusted IBIDA, and we set a new fuel volume record even with the sale of West Texas and the movement of Transmix processing margin to the terminal segment.
While the 4th quarter was in line with last year, our 2nd and 3rd quarter results were much stronger than last year.
The best thing is that as we enter 2025, the same market dynamics and internal capabilities are in place for us to deliver another record year. We continue to believe in the resiliency of global refined product demand.
Many companies in the sector have understood this for a while, and we think the market is starting to understand that the products that we sell and distribute are going to be around for decades.
In our pipeline systems segment, adjusted IIDA for the fourth quarter was $193 million excluding $5 million of transaction expenses compared to $147 million in the third quarter.
On the volume side, we reported 1.4 million barrels per day of throughput.
This strong performance represents increased volumes across nearly all our major pipeline systems as a result of more consistent refinery operations as well as increases in seasonal demand growth in the midcon region.
In addition, our financial performance was supported by some contractual re-ups.
Our Permian joint venture with Energy Transfer continues to make progress on integrating the combined systems with increases seen this quarter, and we expect that performance will continue to strengthen as we move into 2025.
For the segment as a whole, we are looking forward to having a full year of contributions in 2025 and are confident our assets will continue to perform well.
Moving on to our terminal segment, adjusted IEA for the fourth quarter was $61 million excluding $2 million of transaction expenses compared to $70 million in the third quarter.
We reported around 600,000 barrels per day of throughput with some seasonal decreases relative to last quarter.
Taking a step back and looking at the entire year, this segment delivered consistent and stable income and reliable operations, and we are well positioned for 2025.
Before I wrap up, let me talk a little bit more about 2025.
In December, we shared our guidance for the year.
The growth in adjusted IADA to a range of 1.9 to $1.95 billion represents our confidence in our business, and in the returns we will deliver from the investments that we have made.
That confidence is supported by a strong portfolio of assets that will perform well in a variety of market conditions and proven capabilities of our organization to optimize and grow our asset base.
We feel just as good about this guidance today as we did 2 months ago when we shared it with you.
Even with a larger portfolio of business, our focus remains the same.
Strong operational execution, expense discipline, commercial creativity, and profit optimization, and ensuring we deliver strong returns on capital that we deploy.
I will now turn it over to Joe to share his final thoughts, Joe.

Joseph Kim

Thanks, Carl. Good morning, everyone. We delivered a very strong 2024. We came into the year financially healthy, and we finished the year bigger and stronger than when we started. Within a very eventful year, there are a few highlights that I want to point out. The Newar acquisition was obviously the headliner. This was a home run acquisition. The integration is done. Our balance sheet goals were achieved in less than 6 months. Synergies are flowing to the bottom line and thus for our equity holders we've already delivered double digit accretion within the 1st year of ownership.
This acquisition was obviously our biggest to date, but we have also shown our ability to deliver discipline, value creating growth year after year. Here are a couple of insightful metrics that support this. First, our credit profile continues to improve. We've had multiple credit rating upgrades since 2022.
Second, our DCF per common unit continues to grow. In fact, Sun is the only AMI constituent to grow DCF per common unit for the last 8 consecutive years, and most importantly, we expect both of these metrics to continue on an upward trajectory.
Strategically, the addition of the new assets provide income diversification. We now have three strong stable business segments. Looking forward, we expect the fundamentals for all three segments to remain very attractive in 2025 and beyond. We're off to a strong start, and we expect 2025 to be another record year.
Let me finish with one final thought. We've gained a solid reputation as a thoughtful defensive play within the midstream sector, given our ability to deliver strong results involved the commodity environments, as well as challenging macro environments such as inflation and even pandemics. I think it's well deserved, and we fully expect to positively differentiate ourselves within future challenges. But let's also recognize that we are also a growth play.
The products that we move and distribute will continue to fuel the US and other economies across the world for decades to come. We have positioned ourselves to be a consolidator. We have a strong track record of identifying, delivering on value creating growth. And finally, our strong performance coupled with an equally strong financial outlook has resulted in distribution growth for our unit holders. This is the 3rd year in a row that we have stepped up the percentage increase.
We started with 2%, then 4%, and now we have targeted at least a 5% annual increase for this year. Our ability to creatively grow positions us to increase distributions on a quarterly basis, not only for 2025, but over a multi-year period.
Operator, that concludes our prepared remarks. You may open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Justin Jenkins, Raymond James.

Justin Jenkins

Great, thanks. Good morning everyone. Carl, you hit on a lot of what I wanted to ask on fuel distribution in your opening remarks, but I'd maybe like to unpack some of the 4th quarter here and your early outlook for 2025. It does seem like that lack of volatility that we had in both gasoline and diesel prices. Impacted 4th quarter fuel distribution results, but anything else that you may call out for 4 and and share early thoughts on on 2025 business trends and then if I could just sneak in maybe your thoughts on tariffs and and if or how that would impact business and maybe generate opportunities for you guys.

Austin Harkness

Yeah, Justin, this is Austin, just a couple of quick housekeeping notes I want to make in reference to the CPG reference in your question, but and then I can get into the results and performance trends and kind of outlook going forward, as a reminder, as we've shared and as Carluded to in his prepared remarks, the divestiger of the West Texas business and the move to segment reporting where we moved Transmix out of. A fuel distribution into terminals. It was worth about a penny of reported CPG margins. That's just something to keep in mind going forward and separately, as we've shared in the past, I think the way that we think about the business and certainly the way that we manage the business and maybe a helpful lens to kind of interpret the results is really fuel profit versus volume or margin, which, we really don't target a specific number or, optimize around either one of those variables independently.
Now that said, Looking at results, the 4th quarter was a strong quarter, if we take a step back and look at 2024 overall, it tracks very closely with how we describe the business, right? All the elements were there. So we talk about and Carl mentioned in his prepared remarks, and we've shared in the past, there's going to be quarter to quarter variability in the business, but over a 12 month period we're going to consistently grow, right? And when you look at 2024, that's exactly what happened, right? So we had quarter to quarter variability in fact. I think the harshest criticism maybe you could levy against our fourth quarter results is just the fact that they followed two consecutive record quarters in Q2 and Q3, right? And so when you take the year at a hole, adjusted EBIO for 2024 was up 5% year over year for the segment, and that's without the benefit of our West Texas business for close to 8 months. So the underlying fundamentals are as strong as ever for for our fuel distribution business regarding our outlook for for 2025.
And beyond there's there's a couple of things I'd share. First, the macro environment continues to be constructive.
Break evens remain elevated, and we're seeing some signs of stabilization and recovery in demand for refined products based on the last couple of EIA prints, looking at Sunoco specifically, we entered 2024 from a position of strength and momentum, and now with the new star acquisition under our belts. The business has never had a stronger foundation in terms of our asset base and scale. And so when you take that combined with our commercial teams and track record of execution, I mean the business is really well positioned for growth, not just in 2025 but beyond.

Joseph Kim

Justice is J. Let me take the back half of your question about about tariffs. As everybody knows, it's early. It's still exactly how everything is going to play out still undetermined, but there are a couple of things that we do know.
First is that all variables equal. We know that higher tariffs mean higher prices.
And within a higher inflation scenario, I think, son, we have a very demonstrated good track record of delivering strong results in inflationary period. Our scale, our commercial capabilities, and our ability to manage expenses really pays off in this situation. The second thing that we know is that uncertainty leads to volatility. I think last week, early last week was a good example of that whenever the news came out about the Mexico and Canada tariffs, we saw commodity prices skyrocket, pop really fast, and then as continuous news came out, it dropped right back down. Again, we do very well in volat to commodity environments, and we expect our volatility to remain high on a going forward basis. The bottom line is we see this as an opportunity to distinguish ourselves, and we feel very confident about our guidance that we put out for 2025 and we feel very confident on going for 2026 and beyond.

Justin Jenkins

Awesome, super helpful. Thanks, Joe. Awesome. I guess the second question, if I could is is on growth CapEx of at least $400 million. Maybe you help us understand the cadence of how you expect growth CapEx to be spent and maybe how long you think that growth CapEx runway persist for some here.

Karl Fails

Yeah, Justin, this is Carl.
There's a couple pieces to that related to growth CapEx.
Really, the first point I'll make is our growth CapEx is not made up of a lot of big projects. It's really what I call optimization capital, either signing up new customers in our fuel distribution business or some optimization of our assets, particularly on the newar side, maybe to extract the synergies, some of the commercial synergies we've talked about, so we have flexibility in those numbers. I mean some of you saw that. Our 24 capital spend was a little lighter than our original guidance. We had some slippage of projects into 24. We've already accounted for that in our 24 guidance, but we have additional flexibility to flex that up and down as there are other opportunities. For example, roll up M&A opportunities. If we think that there's more of those, we can adjust that that growth capital.
And then I think the final point is because of that flexibility, the time between when we spend the capital and when we're collecting the EEA, the cash flow from those is, on the shorter side compared to maybe some other midstream.
So I would expect you to see continued growth. I mean we've talked about our our DCF per common unit growth. I think it's the combination of that M&A extracting synergies and us putting growth capital to bed that have delivered that.

Operator

Teresa Chen, Barclays.

Teresa Chen

I wanted to touch on some of your previous comments on the macro outlook on, recent refining earnings calls. There have been comments by management teams indicating their bullishness for refined product demand, or at least stability on a go forward basis and into the next decade. Can you share your outlook on refined product demand across your own assets, please?

Joseph Kim

Hey Teresa, it's Joe. Teresa, as we've been very consistent about our bullish view on the long-term attractiveness of the refined product sector. However, lately, I believe the sector has been somewhat underlooked. Overlooked and undervalued, and one of the reasons could be the investor focus on AI and the impact on the natural gas market. I get it. It makes a whole lot of sense, but strong fundamentals and a strong future outlook matter too.
Currently across the world, over 90% of transportation energy comes from refined products, another 5% comes from renewable, and you know that we also distribute renewables.
However, over the last 5+ years, Energy Transition news has dominated the headlines, making it sound like consumers will be driving EVs all over the place within a decade, and we all know that any attempt to do any major foundational change takes decades and decades.
And also the pendulum of policy direction can change dramatically. Even recent examples really highlight this. There are policy discussions right now around the elimination of EV subsidies and also around rolling back cafe.
With all that said, I strongly believe that refined products will continue to fuel the US and world economies for decades and decades to come, and for some specifically, we're positioned as well as anybody to capitalize on it.

Teresa Chen

Thank you. And then just on the pipeline segment, would you be able to provide some more details on the volume cadence, the, uplift that we saw recently was that primarily trip related and then just the related EIA step up and, how should we think about, forecasting this segment on a go forward basis?
Thank you.

Karl Fails

Yeah, you bet, Teresa. This is Carl again. Yeah, our 4th quarter performance in the pipeline system segment was strong and really I think highlighted what that segment can do when when volumes are higher.
We had some additional help from NBC's in the quarter on the basis.
I think there are a couple of contributions to that.
Are Perm and JV, you already saw some sequential growth from 3rd quarter to 4th quarter. And then on the overall volumes which you referenced, I think the absence of any kind of, major downtime of refineries that feed our pipeline systems really contributed to step up in in Q4 versus Q3 and then in addition. A few of our pipeline systems are really tied to agricultural markets, and so you have some seasonal strength in the 4th quarter.
The only other comment on on forecasting that, I think similar to Austin's comments earlier on fuel distribution, we don't take any of our segments and say, hey, we're going to take a quarterly result multiply by 4, and that's what our our annual result will be. I think we look at all of them. Over a 12 month rolling basis because there are going to be puts and takes, different contracts with with MVCs or different seasonal demand or there's always going to be some downtime, on refineries, especially on these inland systems that feed our pipeline systems. But we now have 8 months under our belt of operating that segment and we like the asset base, we think it's going to be a strong contributor going forward.

Operator

Spiro Dounis, Citi.

Spiro Dounis

Thanks, operator. Good morning team. I wanted to go back to the distribution quickly and Joe, pick up on some of your comments around at least 5% growth. That at least component is a slight change from some of the language in December. And so just curious, kind of what's changed since then and what's the mechanism to accelerate that growth above 5%.

Joseph Kim

It's Joe. Hey, I'll repeat what I say constantly, one of our top capital allocation priorities is maintaining a stable and growing distribution and in my prepared remarks, I talked, more about DCF for common unit. That's really one of the foundations of why we have so much confidence, we just delivered, like I said, our 8 consecutive years of growing DCF for a common unit, and more importantly, we expect that trend to continue. So really us stating, stepping up from 24 to 5 and putting at least on there is really just a reinforcement of the confidence we have in our business that that our fundamentals are looking good, our ability to creatively grow while still managing the balance sheet. We feel confident. We gave guidance in December for 2025. Fast forward to February right now, even with all the questions around terrorists and other things, we feel just as confident or more confident that we're going to deliver in 25. So I think the You should probably take this whole at least 5% the floor for 2025, and we're and the takeaway should be not just for 2025 at least. I think you should take away that this is a multi-year distribution increase that we would start administering on a quarterly basis.

Spiro Dounis

Got it. Got it. Helpful color on that.
Second one, maybe just going into a bit of a cleanup item here. I think first quarter is typically when we see the 7-Eleven makeup payment's been a feature of the last few years. I know you don't explicitly guide to it. Maybe just help us understand to what degree that that could impact one cube.

Austin Harkness

Yeah, this is Austin. It's it's trending a little higher than the last last year. It's going to be approaching approximately $30 million.

Spiro Dounis

All right, perfect. Easy enough. I'll leave it there. Thanks, gentlemen.

Joseph Kim

Thanks.

Operator

(Operator Instructions) Jeremy Tonet, JPMorgan.

Jeremy Tonet

Hey, this is Noah Katz on for Jeremy. Thanks for the question. First, I wanted to touch on any future creative M&A going forward. I know most recently you guys completed the acquisition of the refined products terminal in Portland, Maine, but, you've spoken about opportunities in both Europe and the Caribbean. What is this opportunities set look like and what is the potential size of these opportunities? Thanks.

Karl Fails

Yeah, Noah, this is Carl.
As you mentioned, a couple of our recent deals were in Europe earlier this year, then in the Caribbean a little over a year ago, and I think both of those areas geographies are interesting to us.
But here's how we think about them. We use similar criteria that we use or we have used here in the United States, whether a target has stable cash flows, whether it has synergy op opportunity, whether it has potential for growth, and ultimately the valuation that we pay to acquire the assets and both the peerless deal in Puerto Rico and then the Zenith deal that we did in Europe last year met those criteria. Now whenever you take a step into a new geography like that, the synergy potential is a little smaller just because you don't have density in those in those markets. As we look for future growth, that only increases our possibility for synergies and so those are both areas that we're interested in.
And just to give you a flavor of, what we've done, the peerless deal that we did wasn't very big in the scheme of things of our whole company, but already in about a year and a half we've been able to double, I guess a little over 2 years we've been able to double the IBA that we acquired and so we think there's opportunities both in Europe and in the Caribbean.
One more comment on Europe.
There might even be a parallel with with California where, at least in the United States, it's one of the most stringent low carbon fuel environments, but that also comes with, difficulties in building and expanding and as you look in California right now our our assets that we bought with Newstar, those are some of the most A highly profitable and highly valuable assets that we have in our network and so we think that same possibility exists as we build our terminal network in Europe.

Jeremy Tonet

Thanks for that. And as a follow up, can you provide any update on or, incremental details on the crude and produced water JV with ET? Do you guys have any updated thoughts on e bit of contribution or impact to results? Thanks.

Karl Fails

Yeah, I think I mentioned a couple of comments in my prepared remarks, but I mean, the bottom line is we're super happy with it. I mean we've already seen some sequential growth from 4th quarter to 3rd quarter, and the exciting thing is, all the integration activities between the two systems aren't even complete. They're in progress, but I'd expect as we go into 2025, the value that's unlocked by combining those two systems will become more apparent. And then it just provides a, bigger platform for growth. So we're excited as we look forward to 25 and beyond.

Operator

Thank you.
Thank you.
There are no further questions at this time. I would like to turn the flow back to Scott Burchell for closing remarks.

Scott Grischow

Thanks for joining us on the call today. As we said, there are a lot of great things to look forward to in 2025 for Sunoco, so please feel free to reach out if you have any questions. Thanks for tuning in and, always appreciate your support.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.