Fitch Ratings has affirmed
Additionally, Fitch has affirmed
The Positive Outlook reflects SUN's improving leverage profile and the resiliency demonstrated by the business in the face of the demand destruction wrought by the coronavirus crisis and ensuing economic shutdowns. The ratings are supported by low leverage, healthy margins, and cash flows that benefit from a 15-year take or pay contract with a subsidiary of
KEY RATING DRIVERS
Lower Leverage: LTM leverage as of
EBITDA Growth: Strong EBITDA performance enabled the partnership to meaningfully de-lever through the first nine months of the year. Growth was driven by cents-per-gallon (CPG) margins significantly higher than previous long-term expectations, and supported by the effective cost cutting measures implemented at the onset of the pandemic. Falling sales volumes resulted in higher breakeven levels for many industry players, which necessitated better margins for both retail and wholesale fuel distributors. The partnership continues to benefit from the resulting boost to its margins which has more than offset the cash flow impact of lower volume levels.
Cash Flow Stability: As part of the sale of its retail franchise in 2018, SUN entered into a 15-year take-or-pay fuel supply agreement with
Demand Uncertainty: SUN's wholesale fuel sales, while supported in part by a long-term fixed-rate contract with 7/11, are highly sensitive to demand fluctuations in the regions where it operates. The outlook for
Cash Flow Conservation: SUN's credit profile benefits from its stable liquidity position, lack of near-term maturities and the measures taken to preserve cash flows as it continues to manage through the current crisis. The partnership implemented effective cost cutting measures and significantly reduced its expected capex spending to maintain flexibility while motor fuel sales volumes remained low.
In November, the partnership paid down half of the senior notes due in 2023 with a new issuance of 2029 notes. The remaining notes due in 2023 are expected to be paid down in January. The transaction offers the partnership greater flexibility in managing through any near-term challenges. SUN can use its retained cash flow and other available liquidity sources to cover its working capital needs.
Highly Fragmented, Competitive Sector: Concerns for SUN include high levels of competition within the fragmented wholesale motor fuel distribution sector. SUN's ability to drive growth after a recovery will depend largely on its ability to acquire wholesale customers organically or grow through acquisitions, which has the potential to weigh on balance sheet metrics, depending on how growth is financed. Fitch believes that management's leverage and distribution coverage targets indicate a willingness to prudently manage growth and distribution policy while maintaining reasonable credit metrics.
Parent Subsidiary Linkage: SUN's ratings reflect its stand-alone credit profile with no express linkage to its parent company. Fitch views
SUN is rated on a stand-alone basis with no uplift from the stronger parent based on the weak legal, operational and strategic ties between the two entities. Legal ties are considered weak, due to the absence of contractual items, such as guarantees or cross-defaults, connecting the partnership's debt to the parent. Operational and strategic ties are also deemed to be weak. There is limited operational integration between SUN and ET and SUN, despite providing a decent amount of distributions up to ET, does not represent that meaningful a portion of ET earnings so as to have a significant strategic tie.
Sponsor Relationship: SUN's ratings consider its relationship with its sponsor and the owner of its general partner,
Fitch believes SUN's affiliation with its sponsor generally provides modest benefits, particularly in providing an option for financing like SUN's
DERIVATION SUMMARY
SUN's primary focus on wholesale motor fuel distribution and logistics is unique relative to Fitch's other midstream energy coverage. Wholesale fuel distribution is a highly fragmented market with low operating margins and is largely dependent on motor fuel demand, which can be cyclical and seasonal. Fitch expects SUN to continue to face headwinds in the near term from lower motor fuel demand levels. Earnings have been buoyed through 3Q20 by cents-per-gallon margins higher than management's previous longer-term margin guidance. The partnership is now guiding to a higher margin level and Fitch expects margin strength to continue to counterbalance the cash flow impact of the demand destruction.
SUN's leverage has fallen significantly through the year as cash flow conservation efforts and strong margins have allowed the partnership to de-lever in spite of the challenging environment. Fitch expects that leverage will be between 4.0x-4.3x by yearend 2021, lower than similarly rated
SUN's size and scale are expected to be consistent with, though slightly larger than, Fitch's view on 'BB' category master limited partnerships, which tend to have EBITDA of roughly
KEY ASSUMPTIONS
Margins remain in line with management's new public guidance range;
Key contracts are not amended;
Revolver borrowings and retained earnings used to fund capital needs;
Distributions held at current levels throughout forecast;
Total capex, inclusive of growth, acquisition and maintenance spending, of at least
Fitch base case commodity price deck including WTI oil prices of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Leverage (total debt with equity credit/operating EBITDA) sustained at or below 4.3x with distribution coverage sustained above 1.1x could lead to an upgrade.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Distribution coverage ratio below 1x, combined with leverage (total debt with equity credit to operating EBITDA) at or above 5.0x on a sustained basis could result in negative rating action;
EBIT Margin at or below 1.5% on a sustained basis could lead to a negative rating action.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Liquidity Adequate: As of
The revolver is secured by a security interest in, among other things, of all SUN's present and future personal property and all present and future personal property of its guarantors, the capital stock of its material subsidiaries (or 66% of the capital stock of material foreign subsidiaries), and any intercompany debt.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch applies an 8.0x multiple to operating leases.
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
SUN has a relevance score of '4' for Group Structure as a result of significant related party transactions and ownership concentration arising from SUN's GP and incentive distribution rights ownership by Energy Transfer. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
ENTITY/DEBT RATING RECOVERY PRIOR
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VIEW ADDITIONAL RATING DETAILS
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