Sunoco aims to cut leverage to 4.5 to 4.75 times with sale of most convenience stores, gas stations

By Paul Deckelman

New York, April 6 – Sunoco LP – which operates more than 1,300 company-owned gas stations and convenience stores across the continental United States – announced plans on Thursday to get out of that business so as to better focus on its core wholesale fuels distribution operations, while significantly improving its balance sheet metrics.

The Dallas-based company’s president and chief executive officer, Robert W. Owens, said on a special conference call that on Sunoco’s most recent regularly scheduled earnings conference call several weeks ago, following the release of its financial results for the 2016 fiscal fourth quarter and full-year periods ended Dec. 31, 2016, “we stressed that the leverage metrics of the company had our full attention and focus, and that we were looking at all alternatives to correct the problem and that nothing was off the table in terms of accomplishing that.”

Owens noted that “just last week” – on March 31 – Sunoco had announced that its general partner and corporate parent, Dallas-based Energy Transfer Equity, LP, had made a $300 million cash infusion into Sunoco via a private placement of SUN perpetual preferred units to ETE, with proceeds from that transaction slated to repay some of Sunoco’s outstanding borrowings under its $1.5 billion revolving credit facility due 2019.

“That addressed some short-term concerns around leverage,” Owens said, “but didn’t answer our full needs on an ongoing basis.”

To do that, Sunoco is entering into a far larger transaction, agreeing to sell about 1,100 convenience stores and gas stations, fuel and other inventories to 7-Eleven, Inc., for $3.3 billion in cash. Sunoco would continue to supply those stations with fuel under a 15-year take-or-pay fuel supply agreement with 7-Eleven starting with approximately 2.2 billion gallons annually.

The soon-to-be-divested stores, located mostly in southern and central Texas, Florida and in the U.S. Middle Atlantic states and the Midwest, represent the bulk of Sunoco’s current retail fuel and convenience store operations.

Sunoco at the same time has retained J.P. Morgan to market its remaining 207 company-owned convenience stores and gas stations in the continental United States, including assets in northern and western Texas, New Mexico and Oklahoma. It will continue to itself own and operate another 54 such sites in Hawaii.

The company will continue to supply fuel to an additional 7,800 gas stations and stores operated by franchisees and other third-party operators, many under its well-known Sunoco brand logo.

Sunoco plans to use the deal proceeds to repay debt and for general partnership purposes, which could include funding merger and acquisition activity.

“The credit-enhancing transaction allows for an immediate improvement in our financial profile,” Owens declared.

Its chief financial officer, Thomas R. Miller, told analysts on the conference call that the 7-Eleven transaction, combined with the anticipated sales of the remaining continental U.S. company-owned outlets, “significantly improves our financial position.”

Leverage ratio to drop

He said that the use of the cash proceeds for debt repayment would allow Sunoco to bring its leverage ratio of debt as a multiple of EBITDA down to a long-term target range of 4.5 to 4.75 times.

That would be well under the roughly 6.5 times leverage ratio the company had at the end of 2016 – which was uncomfortably close to the 6.75 times maximum leverage ratio allowed under the terms of its $2.04 billion secured term loan facility due 2019. The maximum allowed leverage ratio is scheduled to decline from that high over time, making a sharp reduction in the leverage ratio a necessity.

Sunoco and its banks entered into that facility a year ago, in April of 2016 – and at the time, set a maximum allowed leverage ratio of 6.25 times though the just-ended 2017 first quarter, declining to 5.5 times after that.

With the actual leverage ratio exceeding 6 times by the end of the 2016 third quarter on Sept. 30, the company was in danger of bumping up against or possibly even breaching the maximum allowed limit.

So the company and its banks agreed in December to changes, raising the maximum allowed leverage to 6.75 times through the remainder of this year, then declining to 6.5 times for the quarter ending next March 31, to 6.25 times for the quarter ending on June 30, 2018 and to 6 times for the quarter ending Sept. 30, 2018.

The maximum allowed leverage is slated to further decline to 5.75 times for the quarter ending Dec. 31, 2018 and finally to 5.5 times for the quarter ending March 31, 2019.

As of Dec. 31, the company’s balance sheet showed $4.56 billion of long-term debt, including the fully utilized $2 billion of term loan debt, outstanding borrowings under its revolver, plus $800 million of 6¼% notes due 2021 that the company sold last April, and two bond issues it entered into in 2015 – $600 million of 5½% notes due 2020 and $800 million of 6 3/8% notes due 2023.

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