Sunoco ends Q4 with 5.6x leverage, eyes 4.5x-to-4.57x; touts January bond deal balance sheet impact

By Paul Deckelman

New York, Feb. 22 – Sunoco LP finished the 2017 fourth-quarter and full-year periods with a leverage ratio of net debt as a multiple of trailing-12-month adjusted EBITDA of just under 5.6 times – a considerable improvement from where that key financial metric was a year earlier.

And the Dallas-based wholesale distributor of gasoline and other motor fuels hopes to bring that down even further, with its chief financial officer, Thomas Miller, reiterating on a Thursday conference call the company’s previously announced leverage target of 4.5-to-4.75 times.

Miller told analysts on that call, following the release of the company’s results for the quarter and year ended Dec. 31, that the year-end 5.58 times leverage ratio, as calculated in accordance with the company’s credit agreement, “was down nearly a full turn from where we ended 2016.”

He said that total debt at Dec. 31 was $4.3 billion, including $765 million drawn under the company’s $1.5 billion revolving credit facility, while unused revolver availability stood at $726 million.

Bond megadeal aids balance sheet

Subsequent to the end of the quarter, Miller said Sunoco undertook several steps to improve its balance sheet.

Central to this effort was its sale of $2.2 billion of new junk bonds in a three-tranche regularly scheduled forward calendar offering that priced on Jan. 9, after having been upsized from an originally announced $1.75 billion.

Sunoco and its co-issuer on that deal, Sunoco Finance Corp., priced $1 billion of 4 7/8% senior notes due 2023 at par, after upsizing that tranche from an originally planned $500 million.

It priced $800 million of 5½% senior notes due 2026 at par after that tranche was enlarged from an originally envisioned $500 million.

And it priced $400 million of 5 7/8% senior notes due 2028, also at par.

Miller said that the company then used the proceeds from that bond deal – along with portions of the $3.2 billion of proceeds the company received from its previously announced sale of more than 1,100 combined gas station and convenience store operations in the U.S. East Coast region and in southeastern Texas to 7-Eleven, Inc. – to restructure its balance sheet.

It called for redemption, or made whole, its three existing series of senior notes totaling $2.2 billion – its $600 million of 5½% notes due 2022, its $800 million of 6¼% notes due 2021 and its $800 million of 6 3/8% notes due 2023.

It also repaid $1.2 billion of remaining term loan debt and paid down all of the then-outstanding revolver borrowings; Miller said following those payments, the latter facility “remains undrawn as of today.”

He added that “importantly, this debt restructuring lowered our weighted-average cost of debt by roughly 100 basis points, and, at the same time, it extended our average maturity profile by approximately four years.”

Miller noted that the master limited partnership company – which is majority owned and managed by Energy Transfer Partners, LP (ETP), the 100% owner of general partner Sunoco, Inc. – also did two equity-related transactions in January.

First, it called for redemption all outstanding series A preferred units held by the ETP-affiliated Energy Transfer Equity LP for an aggregate redemption amount of approximately $312.6 million, which includes the original consideration of $300 million and a 1% call premium plus accrued and unpaid quarterly distributions.

And Sunoco agreed to repurchase nearly 17.287 million of its units owned by ETP for cash consideration of just under $31.24 per unit of, or approximately $540 million total.

Miller declared that “we believe these actions position us to achieve our target leverage ratio of 4.5-to-4.75 times, while delivering a go-forward [equity] distribution coverage ratio of 1.1 times.”

Debt and equity for M&A

During the question-and-answer portion of the conference call following the formal presentations by Miller, by Sunoco’s recently appointed president and chief executive officer, Joe Kim, and by the company’s senior director for investor relations an treasury, Scott Grischow, an analyst – noting that Kim had talked about potential merger and investment opportunities for Sunoco going forward – wanted to know how the company might choose to finance any bolt-on acquisitions that it might plan to do.

Miller replied that “the one thing we’ve talked to people [about] is we’re going to start all of our analysis with a target leverage of 4.5 to 4.75 [times]. We’re also going to look at things on a 50-50 debt-to-equity ratio, and to the extent that we make acquisitions, the numbers have to live within those targets.”

He allowed that if an acquisition were small, “we could open up our ATM” – i.e., do a limited at-the-market follow-on equity offering of newly issued shares at the prevailing market price to raise capital for such a transaction.

“That’s going to be our strategy moving forward.”

Elaborating on its likely M&A financing strategy in answer to another analyst’s question, Miller asserted that “the mistake we made in the past was we didn’t issue the equity when we were spending the money and that pushed our leverage up – and we’re not going to do that again, it’s that simple.”

© 2015 Prospect News.
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