Sunoco LP Q3 FY2025 Earnings Call

Greetings, and welcome to Sunoco's Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Scott Grischow. Thank you. 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; Karl Fails, 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. Please refer to our earnings release and SEC filings for risk factors and reconciliations of non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. It has been another busy quarter for Sunoco, and I'd like to begin my remarks by providing a brief recap. Last week, we successfully completed the acquisition of Parkland Corporation in a transaction valued at approximately $9 billion. This transaction has created the largest independent fuel distributor in the Americas and a leading operator of energy infrastructure. We are confident it will provide compelling financial benefits for our unitholders. As our asset portfolio has evolved over the past several years, we have significantly improved the stability of our income while also strengthening our financial position and scale. Over the past 12 months, Sunoco and Parkland on a combined basis generated over $3 billion in pro forma adjusted EBITDA across our field distribution business and our midstream operations. The Parkland acquisition will be immediately accretive to distributable cash flow per common unit, and we expect over $250 million in synergies by 2028, which will result in greater than 10% accretion. Additionally, our highly successful financing transactions executed in September outperformed our expectations and will deliver approximately $40 million of additional annual cash savings. This transaction, combined with our proven track record of disciplined capital allocation, will create greater financial flexibility for ongoing distribution growth, solid free cash flow, and a strengthened credit profile. Finally, I'm pleased to remind investors that tomorrow, Thursday, November 6, SUNCorp will begin trading on the New York Stock Exchange under the ticker SUNC. This new C corp tracker broadens investment options. As a reminder, SUNC is taxed as a corporation and issues a Form 1099, making it an attractive option for investors outside of the United States, domestic institutional investors, and personal retirement accounts. Now turning to our financial and operating results. The third quarter continued Sunoco's strong financial and operational performance throughout 2025. The partnership delivered a record third quarter with adjusted EBITDA of $496 million compared to $470 million a year ago, both excluding onetime transaction-related expenses. Distributable cash flow as adjusted came in at $326 million for the third quarter. In the third quarter, we spent approximately $115 million on growth capital and $42 million on maintenance capital. This includes the partnership's proportionate share of capital expenditures related to our 2 joint ventures with Energy Transfer of $16 million for growth capital and $4 million for maintenance capital. Turning to the balance sheet. As of the end of the third quarter, a $1.5 billion revolving credit facility had no outstanding borrowings. Leverage at the end of the quarter was approximately 3.9x. Following the closing of the Parkland transaction, our credit facility was increased by $1 billion to $2.5 billion, which will provide greater liquidity for the partnership moving forward. As of today, our credit facility is currently undrawn. On October 20, we declared a distribution for the third quarter of $0.9202 per common unit or approximately $3.68 on an annualized basis. This represents an increase of 1.25% compared with the previous quarter and resulted in a trailing 12-month coverage ratio of 1.8x. This marks the fourth consecutive quarterly increase in Sunoco's distribution and is consistent with an annual distribution growth rate of at least 5%. I would like to conclude my remarks by stating that our financial position continues to be stronger than any time in Sunoco's history. Our legacy business remained strong as exhibited by our record third quarter adjusted EBITDA. Prior to closing the Parkland acquisition last week, we were on a path to achieve our 2025 adjusted EBITDA guidance and intend to provide formal 2026 guidance for the combined company early next year. With that, I will turn the call over to Karl to discuss our operational results.

Thanks, Scott. Good morning, everyone. As Scott 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 accretive growth. We delivered strong results across all 3 segments. So let me walk through some of those details. Starting with our fuel distribution segment. Adjusted EBITDA came in at $238 million excluding $6 million of transaction-related expenses compared to $214 million in the second quarter and $253 million in the third quarter of last year. Volumes came in at 2.3 billion gallons during the quarter, up 5% from last quarter and up 7% compared to the third quarter of last year. This volume growth far outpaces total U.S. volume growth for both gasoline and diesel, showcasing that our investments are yielding tangible results in both our growth capital program and fuel distribution bolt-on transactions. Reported margin for the second quarter was $0.107 per gallon compared to $0.105 per gallon in the second quarter and $0.128 per gallon in the third quarter of 2024. When we look at margins across our system, there are a few perspectives worth pointing out. First, we believe that breakeven margins continue to be supported by many of the same factors that we have discussed over the past few years, including inflation resulting in higher costs, limited overall volume growth across the industry, and higher interest rates. Second, we have seen some tempering of market volatility, which has not produced an outsized fuel profit quarter like we saw during the second and third quarters of last year. Even with that headwind, however, this has been a great year in our fuel distribution business. Once you normalize for the sale of our West Texas retail business in 2024 at a very attractive multiple, we expect that in 2025, we will have grown segment EBITDA for the seventh year in a row. The business continues to deliver very strong results. In our Pipeline Systems segment, adjusted EBITDA for the quarter was $182 million, compared to $177 million for the second quarter and $147 million for the third quarter of last year, all excluding transaction-related expenses. Segment throughput was 1.3 million barrels per day compared to 1.2 million barrels per day in the second quarter and 1.2 million barrels per day in the third quarter of last year. During the quarter, we saw strong performance across all our pipeline systems on both volumes and gross profit. Turning to our Terminals segment. We delivered adjusted EBITDA of $76 million, excluding $1 million of transaction-related expenses compared to $73 million in the second quarter and $70 million in the third quarter of last year, both excluding transaction-related expenses. Segment throughput was 656,000 barrels per day down from 692,000 barrels per day in the second quarter and 694,000 barrels per day in the third quarter of last year. Our transmix business continues to have a strong year supported by good performance in our terminals assets across all regions. We expect to finish the year strong in our 2 midstream segments, highlighting the stability of the underlying assets and the work that our teams have done to optimize the expense structure with a focus on reliability and providing flexibility to our customers. Our third quarter results highlight our strong fuel distribution growth driven by our capital deployment strategy with a good mix of signing up new customers and bolt-on M&A, which continues to deliver market share gains and stable earnings. This strategy is complemented by our midstream operations. With the Parkland transaction now closed, our confidence in its highly accretive value has grown steadily over the past several months. It is another opportunity for us to deliver on our strengths, maintaining reliable operations, disciplined expense management, optimizing gross profit, and effectively and accretively deploying capital. I will now turn the call over to Joe to provide his overall perspective.

Thanks, Karl. Good morning, everyone. We delivered a very strong third quarter. Although 2025 is not quite over, I want to share some perspectives on this year as a whole. On the last earnings call, we stated that the back half of this year will outperform a good first half, with the third quarter results in the books is playing out as we stated and will deliver another record year. All 3 business segments are performing well. Our field distribution business continues to grow and provide stable earnings. Our Pipeline and Terminals segments also continued to perform at a high level. Last year's NuStar acquisition is proving to be outstanding. We have reduced expenses by 25% while improving gross profit and maintaining reliability. As for the Parkland acquisition, let me start off by publicly welcoming the Parkland employees to the Sunoco team. With the closing complete, we posted a new investor presentation earlier this week, and I want to highlight some key insights. Both legacy Sunoco and legacy Parkland are performing as expected. As I said earlier, Sunoco will have another record year. As for Parkland, the 2025 year-to-date results have materially outperformed 2024. When you combine the 2 businesses together, our diversified portfolio spans across the U.S., Canada, the Greater Caribbean, and Europe. We will deliver over 15 billion gallons of refined products. Scale is vital in our business, and we are now the largest fuel distributor in the Americas. Specifically within our midstream and fuel distribution portfolio, the Parkland addition greatly enhanced our position in the Atlantic Basin. We have over 7 billion gallons of contracted fuel demand from Eastern Canada to the U.S. East Coast to the Caribbean to South America. Throughout this footprint, we also have a leading position of terminals and the expertise to manage waterborne and other sourcing options. Bottom line, scale plus key assets equals a leading supply cost advantage. Moving forward, our immediate top 2 priorities are: number one, integrating Parkland; and number two, getting our balance sheet back to 4x leverage. Just like we did with the NuStar acquisition, we'll quickly make key decisions to integrate the 2 companies to achieve synergies as soon as possible. We expect more than $250 million in synergies. We're digging deep into every part of the acquired business. We will provide more precision and timing when we complete the process. As for the balance sheet, we expect to be back to our long-term target leverage of 4x within 12 months. This is faster than the timeline that we provided back in May. Let me wrap up. As Scott mentioned earlier, the Parkland transaction is highly attractive with greater than 10% accretion. Going forward, we expect free cash flow to be over $1 billion a year in the near future. The over 50% increase versus our stand-alone case puts us in a better position to execute on our capital allocation strategy, which is accretive investments, distribution growth, and a strong balance sheet. Operator, that concludes our prepared remarks. You may open the line for questions.

Our first question comes from Spiro Dounis with Citi.

First question, Joe, maybe just to pick up on some of those closing comments around synergies. Looking like the floor now is sort of firmly around over $250 million here. I know you're a few days into this merger, but I also know you've been busy in the background, getting ready for this integration. So curious if you have a sense for just maybe how much above that $250 million we should have in mind? Are these more commercial or cost in nature, maybe how are you thinking about the cadence of realizing those over the next 3 years?

Spiro, this is Karl. Yes, really, to build on Joe's comments in his prepared remarks, there were really 2 updates that we provided in the release and in the investor deck earlier. One was the floor on the synergy number and then the second was tightening our time frame on getting back to the 4x leverage to within 12 months. And really, that comes because of the confidence we have based on the work we've done in the last 6 months. There are material synergies on both the expense and commercial side. I think the best way to think about the expense side of things, whenever you put 2 large companies together, you get to leverage the scale to find efficiencies and we've spent the integration planning period planning that. And I'd say, already a lot of those plans were started to be executed this weekend after we closed. Then you layer on that, we have a very strong track record of good expense discipline. And so we feel there's a lot of opportunity there. But on the commercial side, our scale helps us as well. The teams have begun putting together plans. Most of those are on the supply side, but there are also going to be some opportunities on how we go to market that should yield results, as far as your question on the cadence, you should expect that when we issue guidance early next year that we'll give more details on what that ramp looks like through year 3 where the $250-plus million should be able to be delivered. And as far as your question on the ultimate upside looks like, here's how we think about it. The 2 primary measures on this acquisition that we're going to be focused on and both of them are very visible to the Street, are first, that we meet our commitment on getting leverage back to 4x within 12 months. And second, that we're going to show a double-digit accretion on a DCF per LP unit basis. So synergies clearly are the strongest lever we have to hit those metrics. But at some point in the future, those are going to merge with just improvements in growth in the base business that we've acquired. So bottom line is we feel very confident and we're going to hit on those metrics as we've laid out.

Great. Second one, maybe just going to Sunoco Corp's dividend equivalency looks like the latest update points to minimal taxes for at least 5 years. Just curious, can you put a finer point on what that means for SUNC dividend equivalency over that period? And what's within your control to maybe push that out even further?

Yes, Spiro, this is Scott. Look, there was no change to our 2-year dividend equivalency that we announced with the transaction in May. This was a feature that we granted as part of the Parkland transaction. Our intention is to keep the SUNC distribution very similar to Sunoco LP's past this time period and having minimal corporate income taxes is the foundation for achieving that. As we laid out in our investor materials, we expect this to be the case for at least 5 years. I will continue to pursue opportunities and strategies that allow us to minimize corporate taxes at SUNC on an ongoing basis, namely by deploying capital on organic CapEx and acquisitions, things of that nature, and we'll update investors when appropriate on the outlook past the 5-year period.

Our next question comes from Justin Jenkins with Raymond James.

I guess I'd like to start on the distribution side of things. So obviously, growing at a nice 5% clip, but obviously a much bigger business and a more stable business with a lot of free cash flow with Parkland. Does that give you the potential to eventually maybe push that growth target up over time beyond the at least 5% window that you've looked at here recently?

Justin, it's Joe. Obviously, I think I've said it like a broken record quarter after quarter, the foundation of our capital allocation is having a stable, reliable, and growing distribution. And I think the foundation of that is we continue to grow cash flow. I think we've stated a few times that for the eighth consecutive year, we've grown DCF per common unit, and we expect that to continue for the future. Our coverage is hovering around 1.8. Our balance sheet is in a good position. So when we said, I think, last year that we expect a multiyear distribution increase, we said that pre-Parkland. You add in Parkland with double-digit accretion. So we were in a good place before Parkland, and we're in a better place after Parkland. As far as an exact amount for 2026 and above, we'll provide that as part of our overall guidance early next year. But I think what you can take away is that we're in a better position than we were even last year for meaningful distribution growth on a multiyear path.

Great. I appreciate that, Joe. Second question is on Hurricane Melissa impact. Certainly, you've got some presence in the Caribbean over time and Parkland is a bigger business in the Caribbean. Anything that you want to highlight here in terms of impact from the hurricane itself on the broader Caribbean portfolio for the fourth quarter and into 2026?

Justin, this is Austin. I want to begin by acknowledging the human aspect of the situation. Our thoughts are with the people affected by the storm and the loss of life and property it has caused. This is indeed a significant storm. From a business perspective, the impact on our portfolio was mainly confined to our operations in Jamaica. Thankfully, all employees in that area are safe, which reflects well on our team. They did an excellent job, including thorough preparations before the storm hit, ensuring the area was ready, and responding quickly to bring in the necessary personnel, supplies, and resources to support recovery efforts. To provide some context on the business impact, Jamaica is just one of 25 markets we serve in the Caribbean. Overall, we do not anticipate any significant effects on our fourth-quarter results for this segment or for 2026 and beyond. However, I want to emphasize that this does not downplay the serious human impact and devastation experienced by those in the region.

Our next question comes from Theresa Chen with Barclays Bank.

Looking at your comprehensive asset base at this point, could you share your perspective on potential opportunities for your West Coast terminaling assets as well as any incremental profitability upside for the Burnaby Refinery in light of ongoing California refinery closures?

Yes, Theresa, this is Karl. I think what I would say is that I want to start with the refinery. We are grateful for the results the refinery team has achieved this year in terms of improved reliability, which has been our main focus and will continue to be for the refinery operation. Clearly, there have been numerous refinery shutdowns in California recently. Our strong asset base on the West Coast, while not as extensive as on the East Coast, is expanding, and I believe there will be opportunities. Although I can't predict exactly how the markets will evolve over the next few years, our history demonstrates that when product flows change, we have the scale and expertise to capitalize on those shifts. The refinery serves as the foundation for our fuel distribution business in Western Canada. We have key assets across the Pacific Northwest and into California. If refinery shutdowns persist on the West Coast, and Canada becomes an import market, we should be positioned to supply from our refinery in Canada or have facilities that allow for imports from outside the U.S. Therefore, I believe we are well positioned to take advantage of whatever market conditions arise.

Got it. And what are your expectations regarding how the recently announced refined product pipeline projects could impact or create opportunities for your own Gold Coast to Mid-Continent refined product pipeline infrastructure as well as your fuel distribution assets in pads 2 and 5?

Yes, Theresa. My response is quite similar to what I shared regarding the California question. While we don’t specifically comment on certain competitors' projects, the pipeline open seasons and projects you referred to indicate changes in U.S. refined product flows due to refinery shutdowns in California. The same principles apply here. We have a fuel distribution business with a proven ability to leverage changes in product flows. Our asset portfolio includes terminals on the West Coast and several pipeline systems in the Mid-Continent and Texas, which we can utilize to invest and provide services for our own operations or our customers. Naturally, when there are changes, some assets might be negatively impacted, but others may benefit positively. Overall, we are optimistic about our capacity to collaborate with our customers and meet their strategic needs amid these shifts.

Our next question comes from Jeremy Tonet with JPMorgan.

This is Eli on for Jeremy. I just wanted to start on the outlook. I guess what went into the decision not to update the 2025 guide today to include Parkland contributions? Would that be part of the TanQuid assent closing and just thoughts there. And then maybe on to '26 and kind of early thoughts there. I think you said you'd release guidance earlier next year versus maybe December this year. Just what are the kind of key puts and takes, base business, and synergies to expect as components to the '26 guide?

This is Joe. Let me begin with the outlook for 2025. The main reason for not updating our guidance today to include contributions from Parkland is that we've just finalized the acquisition, and we expect to close on TanQuid in the fourth quarter. It's challenging to provide precise details about future developments right now, but we feel confident in our guidance for next year. Typically, we provide guidance in December, but this year we decided to push it to early next year. We have just reviewed all the budgets that Parkland has prepared, and analyzing that closely will help us understand how our base business is likely to perform, which will significantly influence our guidance for next year. Regarding our initial thoughts for 2026, I can share a couple of points that might be useful. Firstly, the Parkland business is performing better year-to-date compared to 2024, giving us a solid starting point. Secondly, for our legacy Sunoco business, we continue to see year-over-year growth, and 2026 should be no different on its own. Karl discussed in detail the synergies, and we anticipate at least $250 million in synergies from this acquisition. We believe this will be a fantastic acquisition for us. We are in the process of refining the details and timing, and everything will align when we provide further guidance. However, the key takeaway is that we feel even more optimistic about this acquisition now than when we announced it in May, and we are well-prepared for another excellent year in 2026.

Awesome. And then maybe just back to the base business. I think you talked about just steady improvement there. Maybe on the fuel distribution side, just thinking about the CPG margins following the integration of PKI assets, how should we think about those margins trending as we move forward? I know you guys are the largest fuel distributor in North America, and you have a lot of economies of scale. So should we see any kind of upward pressure on those margins going forward?

Yes. Eli, let me give you a couple of thoughts about more on a segment basis. And I'll give you the pieces, and then when we give guidance, all this will kind of tie out together. First of all, we'll start with the PKI Parkland U.S. business, their legacy business. It's been well-documented that they've faced some struggles over the last few years. The exact reason, the detailed insider view. We don't have the exact details yet, but we will. But here's what I think to give you clarity on the U.S. business. We view Parkland's U.S. distribution business just like a bolt-on acquisition we've done time over and over again. So we're going to manage it for income stability. We're going to do gross profit optimization. We're going to cut expenses. So in due time, pretty darn quickly, we expect the Parkland U.S. business that struggled to perform in line with what Sunoco has done year after year. So we feel very positive about that. As far as the Canadian business, the way that I would probably look at it is they had strong third quarter results. I'm not surprised these assets in Canada on fuel distribution have performed well year after year. The Canadian assets have some key elements that I really like. First of all, they've got scale. We've got scale. 1 in 5 fuel stations is fueled by Parkland. Incredible scale in Parkland in Canada. Secondly, the Canadian relative to the U.S., they've had a long history of sustained higher margins than the U.S. We don't think this is going to change. And finally, we have channel management opportunities. We've done that with every acquisition we've done. We've taken the assets, and we'll put it into the right channel where we think we can have the most income stability. So from a Canadian field distribution side, we think this is going to be additive to our overall fuel distribution portfolio. In the Caribbean, we see these as a bunch of niche markets with high margins, and we think this is going to continue. We have history in niche markets like Hawaii and Puerto Rico. Some of these markets also have material GDP growth in some of these areas that we think we'll share in the upside. So if you put it all together, I feel better about our field distribution portfolio, and that's the reason why we thought Parkland was a great fit for us.

Our next question comes from Ned Baramov with Wells Fargo.

I want to stay on the legacy Sunoco U.S. fuel distribution business here. A few factors in play on the one hand, the ongoing government shutdown and some signs of weaker fuel demand don't seem constructive for volumes. But on the other hand, as Karl pointed out, your CapEx program and roll-up transactions year-to-date add gallons to your system. Either way, you've already demonstrated an ability to protect the overall contribution from this segment across different environments. Just wanted to check if there is a change in how you think about the prospects of the fuel distribution business in the next 6 to 12 months?

Yes, this is Austin. I think you hit it. Overall, I think what we're seeing from a fuel volume standpoint is in the U.S. more broadly, demand for refined products is roughly flat year-over-year. There has been maybe some softening in recent months. But our legacy business has outperformed the broader segment, right? We're up mid- to high single digits for Q3 on volumes. A lot of that, as you pointed out, is owed to our capital allocation strategy and growth capital deployment, including growth CapEx and some of the bolt-on accretive M&A that we did in the first half of this year that's yielding benefits in Q3 and beyond. In terms of changes to expectations, we actually see the fundamentals as strong for the segment as they've ever been. The business is healthy, and with our combined now asset base with the Parkland acquisition, we're well positioned to continue our historical trend of growing EBITDA for the segment accretively year-over-year going forward.

Great. And I guess a quick question on growth capital. Could you talk about the key areas of investment for Sunoco in the third quarter other than the $16 million contribution to the gathering joint venture? Are you still primarily spending in support of the fuel distribution business? Or are there organic opportunities in your pipeline and terminals segments?

Yes, Ned, this is Karl. Our growth capital is spread across all of our segments. But really, it is in a best project wins type of mentality. Obviously, we haven't done any large projects in our pipeline systems or terminal segments, but there's plenty of what we call smaller to medium-sized optimization-type projects. Some of them unlock more opportunities with our fuel distribution business. Some of them unlock more ratable income from third-party customers. So really, it's fuel distribution, pipelines, and terminals all have growth capital in addition to our parts of the joint ventures.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Scott Grischow for closing comments.

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

This concludes today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.