SUNOCO LP
Fitch Ratings has assigned a 'BB+'/'RR4' rating to
SUN's ratings reflect its leverage, healthy margins, and resilient business. A challenge for SUN's credit quality is macro uncertainty related to inflation and demand destruction.
Key Rating Drivers
Free Cash Flow: Fitch expects SUN to be FCF positive in 2023, with full-year incremental cash flows from recent acquisitions at the end of 2021, in early 2022 and at the end of 2022. The partnership has a long-term leverage target of 4.0x, and the company's cash flow profile has resulted in leverage coming down from Fitch's forecast of 4.2x for the LTM ending
Stable Margins: A contract with
Leverage Forecast: Fitch's previous leverage forecast projected SUN to delever as the company aimed to follow its own stated 4.0x leverage target. Fitch's forecast for 2022 and 2023 was 4.2x, and through Q2 2023 SUN outperformed this forecast by reaching a Fitch-calculated leverage of below 3.9x. This was due to the nature of its resilient business and its ability to increase profit per gallon and volumes sold. SUN calculates its leverage using a net leverage, which generally leads to a lower leverage number than Fitch's figure.
Volumes and the per unit gross margin remain important rating factors. Inflation remains a topic of general concern and political discussion, which includes the price of gasoline. Fitch believes SUN's management is committed to its leverage policy, and the company has a solid track record of execution, both before and during the pandemic.
Highly Fragmented Sector: SUN is the largest independent distributor of motor fuels in the
Fitch believes that the sector is likely to present attractive acquisition opportunities. In the event a series of new deals are struck, Fitch will monitor acquisition multiples and financing plans. Fitch believes that high credit quality would be inconsistent with the suspension of SUN's 4.0x long-term target policy in most years.
Parent Subsidiary Linkage: SUN's ratings reflect its standalone credit profile with no express linkage to its parent company. Fitch believes
Derivation Summary
SUN's status as a nearly pure play wholesale motor fuel distribution company makes it unique in Fitch's North American midstream energy coverage.
Fitch expects SUN will continue to remain around its 4.0x stated leverage target over the forecast. Fitch expects APU's leverage to be at approximately 5.5x-5.6x by FYE 2023, as the company continues to struggle with elevated operating costs and lower retail volumes.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Fitch oil price deck, which bears, over the long term, a relationship to the price of motor fuels.
Motor fuel sales gallons sold in line with management's forecast.
Cents per gallon (CPG) immaterially lower than management forecast, reflecting mainly the intensity of consumer focus on gasoline prices at a time of general inflation concerns. If the motor fuel sales gallons sold exceeds Fitch's expectations (which, as mentioned are in line with management), then Fitch expects CPG to be below management's outlook.
Distributions to unitholders held level.
Maintenance capital expenditures and growth capex generally in line with management's forecast.
Some small acquisitions, based on the company's demonstrated successful track record, the fragmented nature of the industry, and SUN's versatile operating span of activities.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch does not currently expect an upgrade. However, achievement of EBITDA Leverage forecasted for a sustained period to be at or less than 3.3x could result in an upgrade.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA Leverage at or above 4.3x on a sustained basis could result in negative rating action;
EBIT margin at or below 2.0% on a sustained basis;
A transformative acquisition that increases business risk, unless balanced as to its financing.
Liquidity and Debt Structure
Liquidity Adequate: SUN has a
The revolving credit agreement requires the partnership to maintain a net leverage ratio below 5.5x and an interest coverage ratio above 2.25x. As of
Issuer Profile
Summary of Financial Adjustments
For unconsolidated investees, Fitch incorporates in EBITDA distributions from such entities, not equity-method income, nor pro-rata EBITDA.
Date of Relevant Committee
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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