Sunoco LP (SUN) Earnings Call Transcript & Summary

Greetings, and welcome to the Sunoco LP acquisition of NuStar LP Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Scott Grischow, Senior Vice President, Finance and Treasurer for Sunoco LP. Thank you, sir. You may begin.

Good morning, and thank you for joining our call to discuss today's announcement of Sunoco LP acquiring NuStar Energy L.P. A press release and presentation can be found on Sunoco's Investor Relations website describing the highlights of this transaction. A link to a replay of this call will be available on Sunoco's website shortly after the call is completed. On the call with me this morning are Joe Kim, Sunoco LP's President and Chief Executive Officer; and Karl Fails, Chief Operations Officer. A reminder that today's call will contain forward-looking statements that include expectations and assumptions regarding today's announcement and 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 press release as well as our filings with the SEC for a list of these factors. Also, please refer to the additional legal disclosures in the press release and on Slides 2 and 3 of the presentation. I'll begin today's discussion by providing the details of the acquisition and then turn it over to Joe to discuss why this transaction is a very compelling investment case for unitholders. As we announced Sunoco will acquire 100% of the outstanding NuStar common units in a unit-for-unit exchange with a transaction value of $7.3 billion, including assumed debt. The combined company will have an enterprise value of nearly $16 billion. Each NuStar common unit will be exchanged for 0.4 Sunoco common units, representing a premium of 24% and based upon the 30-day volume weighted average prices of both NuStar and Sunoco as of January 19, 2024. We expect the transaction to generate at least 10% accretion to DCF per LP common unit in the third year after close and approximately 5% in the first year. We expect to realize at least $150 million of annual synergies by the third year after close. We plan to refinance NuStar's Series A, B and C preferred equity subordinated notes and outstanding borrowings on their credit and receivable financing facilities through a fully committed bridge facility that we expect to permanently refinance through a notes offering. We anticipate this refinancing activity will generate approximately $50 million of additional cash flow per year. In addition, we also plan to replace our existing $1.5 billion secured credit facility with an unsecured credit facility of the same size. The combined company will have a materially improved credit profile with greater scale and lower business risk. We expect to be at or below our 4x target leverage ratio within 12 to 18 months of close. Finally, the transaction is subject to customary regulatory approvals and a new star unitholder vote, and we expect to close in the second quarter of 2024. With that, I will now turn the call over to Joe.

Thanks, Scott. Good morning, everyone. Today's announcement marks another milestone for Sunoco as we bring together 2 strong and stable companies. We would not be here today if not for the many talented and hard work and employees of both Sunoco and NuStar. We look forward to working with the NuStar team to take the combined company to new levels of success. When Sunoco became an MLP in 2012, we started off as a fuel retail and convenience company. In 2017, we made a strategic decision to divest a material portion of our retail business. This shift refocused us towards fuel distribution, logistics and infrastructure. The evolution of our strategy enhanced both stability and growth while strengthening the balance sheet. The market rewarded us for executing on our strategy. As a result, Sunoco has consistently outperformed the overall market. As you analyze today's announcement, keep in mind that our strategy has not changed. It remains focused on improving stability, enhancing growth and maintaining a strong balance sheet, resulting in a larger and more importantly, a more compelling investment going forward. From a stability standpoint, the transaction will bring together 2 companies that are stable on their own. Sunoco has delivered superior performance over the last several years during some very challenging economic periods. While NuStar's fee-based pipeline and terminals business has generated attractive and consistent cash flow merging these assets not only creates greater scale, but also diversified and vertically integrate our logistics supply chains, creating synergy opportunities. Turning to growth. We're very excited about the opportunities we expect at least 10% accretion in year 3 when at least $150 million of synergies will be realized. This builds from approximately a 5% accretion in the first year which will benefit from $50 million of savings from refinancing higher cost equity and debt within the NuStar Capital structure. Our capital allocation strategy will also remain the same but with significantly more cash flow. The expanded cash flow will be deployed across a larger set of assets. For example, we'll be able to accelerate attractive expansion opportunities within NuStar's ammonia system. And separately, we'll utilize NuStar's Midwest system to expand Sunoco's fuel distribution business. These are just 2 examples. As we move forward, we will provide more specific opportunities to share with you. The greater cash flow will also support continued distribution growth. Last year, we stated our confidence in executing on a multiyear distribution growth path. This transaction puts us in even a better place to deliver. As for financial foundation, we believe the higher EBITDA, larger asset base and decreased business risk materially improves the credit profile. The pro forma company's metrics would reflect variables that are very similar to investment-grade companies. The sale of our West Texas assets to 7-Eleven announced earlier this month not only allows us to realize a very attractive sales multiple, it positions us well for this acquisition. The $750 million of estimated net proceeds will materially reduce leverage. And as Scott mentioned earlier, we expect to be at 4x leverage in 12 to 18 months following the closing of the transaction. Let me wrap up so that you can ask some questions. We believe this combination creates a stronger, more compelling investment case for the collective stakeholders. Bottom line, the pro forma company will be more stable, stronger financially and better positioned for growth. Sunoco has a proven history of delivering on its commitments. The NuStar transaction will be another opportunity for us to reinforce and build on a record of delivering results. Operator, that concludes our prepared remarks. You may open the line for questions.

[Operator Instructions] Our first question comes from the line of Spiro Dounis with Citi.

Congrats. Maybe just start off with what changes after this deal closes. Joe, you mentioned the last transformational transaction in 2017, really focused on fuel distribution. It seems pretty transformational as well. So as you think about capital allocation going forward and what competes for those dollars, you've been pretty successful with this M&A strategy doing these smaller bolt-ons. Now you've got sort of more choices. And so I'm just curious as you think about diverting capital to that M&A strategy bolt-ons against what is now a bigger midstream suite of assets and opportunities. How do you parse that?

So as I said in my prepared remarks, our strategy remains the same, and I'll hit those points again, is increased stability is a stronger financial foundation and enhance growth. And kind of leading to your question on enhanced growth. Right off the bat, we're going to have more cash flow, significantly more cash flow. We're going to have a good balance sheet. And then I've put up 2 examples in the prepared remarks, the ammonia line in the Midwest system, but we know there's a lot more. So we're going to have more cash, more cash to deploy the growth. But at the same time, we introduced 2 other things on the call talking about it. We believe in the distribution growth path that we have -- that we stated last year. And then -- and we also mentioned that we have a path to a 4.0 leverage within 12 to 18 months. So the way there, I guess, the takeaway from all this is that more cash flow, more has growth but at the same time, we're solving for all 3.

Got you. I appreciate that color, Joe. Second question just on synergies. I was hoping for maybe a little bit more color around that at least $150 million and kind of how you plan on getting there. And really just kind of want to focus in on if you can give us some examples of what you might consider to be low-hanging fruit you kind of capture pretty quickly versus what might take a little bit more time to achieve.

Yes, Spiro, this is Karl. I think if you look at the synergies, it's really going to be a combination of commercial opportunities and expense optimization. So just a couple of examples on the commercial side. If you dial back to our acquisition in NuStar's, East Coast assets a little over 2 years ago, right, we were able to kind of take our fuel distribution business on the East Coast and couple it with an expanded midstream presence on the East Coast. And you kind of get benefits going both ways, where having the fuel distribution business helps keep your midstream assets more full. And often, the midstream assets provide a foundation for additional growth or supply synergies on the fuel distribution side. So the East Coast, for example, we stood up a gasoline blending business in NuStar's Linden terminal, and that's created more value for us and then those midstream assets have continued to perform. So as you fast forward to today, you look at NuStar's current, the whole suite of refined products businesses, I think there are examples of both. So you go to the Midwest, I think Joe just mentioned that. NuStar's pipeline system and networks, maybe in the Western Midwest, Sunoco doesn't have a huge fuel distribution footprint there. So having that asset base will provide a foundation for us to grow that fuel distribution business, which kind of feeds back on the midstream should keep those assets more full. Then you go to maybe another part of the country in South Texas, right? We built our Brownsville terminal a couple of years ago and have been working on kind of providing additional benefits to customers, primarily serving the export business into Mexico, well, NuStar has a system, probably the premier system in that part of the country. And just to give you an example, currently, we've been bringing in our product into our Brownsville terminal on ships. Well, this combination, we're probably going to utilize the NuStar pipeline and the other assets there more. And so again, that's where you'll get a benefit on the fuel distribution side, and we should get increased utilization in the midstream assets. So I mean, I'm sure there are others. And as we work with the NuStar team, we'll be able to uncover some additional opportunities, but those are a couple of examples.

Helpful color, Karl. Appreciate the time guys. Congrats again.

Our next question comes from the line of Gab Moreen with Mizuho Securities.

Congrats on the deal. I wanted to ask about how this also relates to fitting in with your parent company, Energy Transfer and additional commercial opportunities with Energy Transfer, I know you -- some of these assets also kind of quite nicely part of your ET's assets. I'm just wondering how you see commercial synergies and maybe partnering with ET accruing there. And is that a consideration in this transaction, too?

Jay, this is Joe. I think the first thing to state is that this is a Sunoco deal. It is a compelling deal for Sunoco. It makes us more stable stronger. So that's the starting point. As far as looking for other opportunities to optimize this transaction, be it Energy Transfer or anybody else or internally within Sunoco. We're going to look at every avenue to get the most out of this deal. But for now, I think the key point that you should take away is that this is a Sunoco deal.

And you mentioned, I think, Karl, you mentioned in the remarks about getting to IG. And is that an explicit goal at this point for the pro forma company? And if so, do you kind of the time line in mind that, that may occur?

Yes. Gabe, this is Scott. I think the simplification of the balance sheet, the diversification of the business for this combination puts us in a very strong position that we thing the rating agencies have taken note of. Moody's had published our report earlier this morning saying we were on watch for an upgrade at the closing of the transaction. So I think the combined scale, the increased scale, the strong financial pro forma metrics to reduce business risks, improve the credit profile and give us the option to seriously consider the benefits of the past investment grade. So right now, I don't want to say it's something that we're targeting on a specific time line. But I think what this acquisition does for us is give us that option in the future.

Got it.

Our next question comes from the line of Elvira Scotto with RBC Capital Markets.

One question that I had is given that ownership interest that ET has in Sunoco and owning the GP, are there any potential FTC issues with this deal? Or is this just viewed as like you said before, strictly with Sunoco deal that shouldn't come into play?

Yes, Elvi, this is Scott. I think if you take a look at the combined assets of our organizations, they're very complementary, and that there's very little geographic or market overlap that you may typically see in mergers that have historically been of interest to the commission. I think we're optimistic given these facts and look forward to working with them collaboratively to answer any questions that they have.