Scott Grischow - Director, Investor Relations and Treasury Bob Owens - President and Chief Executive Officer Tom Long - Chief Financial Officer, Energy Transfer Partners, L.P..

Andrew Burd - JPMorgan Ben Bienvenu - Stephens, Inc. Ben Brownlow - Raymond James Anthony Kit - Deutsche Bank.

Greetings and welcome to the Sunoco LP First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Scott Grischow, Director of Investor Relations and Treasury. Thank you. You may begin..

Thank you. Before we begin our prepared remarks, I have a few of the usual items to cover. A reminder that today’s call will contain forward-looking statements.

These statements are based on management’s beliefs, expectations and assumptions and may include comments regarding the company’s objectives, targets, plans, strategies, costs and anticipated capital expenditures.

They are subject to the risks and uncertainties that could cause the actual results to differ materially as described more fully in the company’s filings with the SEC. During today’s call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow.

Please refer to this quarter’s news release for a reconciliation of each financial measure. Also, a reminder that the information reported on this call speaks only to the company’s view as of today, May 5, 2016. So, time-sensitive information may no longer be accurate at the time of any replay.

You will find information on the replay in this quarter’s news release. On the call with me this morning is Bob Owens, Sunoco LP’s President and Chief Executive Officer and other members of the management team. I would now like to turn the call over to Bob..

Thanks, Scott. Good morning, everyone and thanks very much for joining us. This morning, we will review the financial and operating results in the first quarter along with other recent accomplishments and cover our growth plans going forward.

Before reviewing the first quarter results, so let me briefly recap the dropdown transaction closed on March 31 of this year. Sun acquired the remaining 68.42% interest in Sunoco LLC and a 100% interest in the legacy Sunoco retail business from Energy Transfer Partners for approximately $2.2 billion.

This transaction was funded with a mix of debt and equity and importantly it completes the transformative dropdown strategy that was first announced in April of 2014 with the Energy Transfer acquisition of the Susser Holdings Corporation.

The structuring of the transaction makes the dropdown immediately accretive to unitholders and it provides future value from additional scale, asset diversity, increased EBITDA and cash flow generation that it will bring to the partnership.

As a reminder, the Sunoco LLC business distributes wholesale motor fuel not only to Sunoco LP company owned and operated sites, but also to over 850 Sunoco branded third-party dealer locations and 3,700 third-party distributor locations as well as nearly 300 commercial customers.

The Sunoco retail business includes approximately 440 locations spanning 14 states on the East Coast and it runs from Maine to Florida and has significant presence on turnpike and toll roads throughout that region.

Equally important, this transaction will simplify our financial statements and operating results, which will reflect the distribution of the entire retail marketing asset base under Sunoco LP for the full year of 2016 starting January 1 of this year.

Please note that the year-over-year comparisons we will discuss today will reflect the fully dropped business for both the first quarter of ‘16 and for comparative purposes 2015.

Scott will come back and comment further on the transaction a bit later in the call, but I would like to say how excited I am about completing this growth strategy that was laid out to investors just over 2 years ago.

It was a significant undertaking for our finance, accounting and legal teams and I would like to personally take this opportunity to publicly thank them for their efforts and congratulate them on this tremendous accomplishment. Okay. Now, let’s turn to the first quarter and how the partnership fared.

I will start by discussing the distribution we announced in late April. The first quarter distribution of $81.73 per unit is an increase of 2% from the prior quarter and up 26.7% versus the year ago.

This was the partnership’s 12th consecutive quarterly increase and reflects our continued progress on growing the partnership’s cash flow organically and through acquisitions and dropdowns. Well, this cuts our approach to future distributions in a minute.

And in terms of performance for the quarter, despite some latent market headwinds for certain parts of our business, Sunoco LP delivered solid overall results for the first quarter of 2016 with year-over-year growth in retail merchandise sales of 8.5% and retail fuel growth of 3.2%.

These year-over-year increases includes the addition of 40 new locations built through our growth CapEx program and about 41 retail sites that we acquired through third-party acquisitions.

Retail merchandise sales totaled $524.1 million and the gross profit percentage on these sales was 31.7%, an increase of 100 basis points from the first quarter of 2015. On a year-over-year basis, total fuel volumes decreased 2.4% to 1.8 billion gallons for the three months ended March 31, ‘16.

This is due largely to inclement weather on the East Coast during the first quarter. Total weighted average cents per gallon was $14.07. This compares to $12.4 in the first quarter of ‘15.

This year-over-year increase was aided by a strong supply and trading activity and was partially offset by rapidly rising refined product costs and as was crude oil price increases experienced toward the end of the first quarter.

Same-store sales fuel gallons decreased by approximately 1% primarily as a result of the inclement weather on the East Coast as well as lower activity in the oil patch areas of Texas. Same-store sales merchandise increased by 2.8% reflecting strong performance across all of our c-store brands.

Excluding the oil producing area zone, South and West Texas, same-store fuel gallons increased 1.1%, while same-store merchandise sales increased 5.9% proving that the business is performing very well outside these oil patch regions.

As I mentioned during the last quarter’s call, these oil patch stores represent about 20% of the portfolio within the State of Texas and just over 10% of the total retail portfolio now that we have the dropdowns complete.

And I continue to be confident that if you consider the performance of our other stores in a very attractive markets such as Hawaii, Washington DC, Nashville, Philadelphia, the many stores we own and operate up and down the I-95 corridor. We feel very comfortable with our exposure in the oil patch. Texas is a large and highly diversified state.

And oil production is only one aspect of its economy. Over the next several years, we believe we will continue to look and find organic growth and expansion opportunities in areas of this state that are less impacted by oil price cycles.

Excluding the oil producing regions, Texas still represents some of our best opportunities within our retail portfolio for continued organic growth. And speaking of growth, we also saw continued expansion of our proprietary food offering, the Laredo Taco Company. As of March 31, Laredo Taco had approximately 450 locations opened and operating.

The majority of which are located in Texas. Every new to industry site we build has a Laredo Taco restaurant inside. I am also pleased to update you on our expansion of the Laredo Taco concept outside of Texas, the first non-Texas location opened up on January 9 outside of Pittsburg.

And since then, we have opened about another 5 additional locations, primarily around the Nashville area and in Pennsylvania. Our plans are to continue to add additional stores throughout 2016. And by the end of the year, we expect to have 20 Laredo Taco company locations outside of the Southwest and give the concept a real test.

So far, the customer response to the new offering in these new markets has been very enthusiastic. As we look to expand, Laredo Taco outside Texas, we look to expand the iconic Sunoco brand within Texas. As of now, approximately 200 locations in Texas are flying the Sunoco flag. This represents its size in this state.

As I have mentioned many times before, the convenience store business is tremendously fragmented. And there are good opportunities to add additional market share with high quality assets at attractive prices. Today, I am happy to briefly touch on several acquisitions that we have entered into since the beginning of the year.

The first is the package of 18 high quality large format company operated convenience stores as well as four land parcels in upstate New York. This opportunity gives some additional scale in our core Northeast market. It’s an area of strong margins and gives us the ability to capture both fuel supply as well as operating and supply chain synergies.

This acquisition also includes nine food service locations, some of which are in existing C-stores and others that are standalone operations. We also entered into an agreement to purchase 14 company operated sites and 37 dealer owned and operated locations in the high growth Central Texas market between Waco, Houston and Austin.

This group of assets will provide additional tuck-in scale in a core Texas market and bolster third party dealer business aligned for future growth in the wholesale segment. Both of these acquisitions will afford us the opportunity for re-branding options to boast Sunoco fuel as well as the Laredo Taco concept.

We anticipate closing on these two acquisitions some time late in the second quarter or early in the third quarter and expect them to be accretive to distributable cash flow during their first year of operation with us.

More recently our Aloha petroleum business entered into a store development agreement with Dunkin' Donuts to be the exclusive developer of Dunkin' Donuts restaurants in the State of Hawaii for an initial term of 8 years. Aloha has committed to building and operating 15 Dunkin' Donuts stores as a start.

We expect approximately half of the restaurants will be built on existing Aloha controlled island mark C-store properties and about half will be standalone restaurants developed on properties that we will acquire in the future.

And finally on Monday, the partnership also finalized a 20-year concession agreement with Indiana Turnpike Authority to operate eight travel plazas along its 150 mile toll road. The agreement is important to us as it completes a series of contiguous sites on turnpikes that run from New York to Illinois.

This first series of plaza reconstruction will being in the third quarter of this year and we expect the total construction period to last about 2 years.

Coming back to distribution for the quarter, we are very pleased that we have been able to continue to provide strong distribution growth through this challenging market and commodity environment where most – many if not most MLPs continue to freeze or reduce their distributions because of the impact of those commodity prices and the broader economy and the impact that that has had on their financial performance.

The partnerships increase reflects our continued confidence in our growth strategy and our ability to weather volatility in both commodity price environments as well as across economic cycles.

As I stated last quarter now that the dropdown transactions are behind us, we will turn our sites on de-levering while continuing to deliver measured impaired distribution growth to our unit holders. We also feel it’s important to maintain a healthy cash coverage ratio and long-term we will continue to manage to a minimum 1.1 ex-coverage ratio.

Finally, as an organizational update on Wednesday, we announced Tom Miller will be joining as Chief Financial Officer. Tom brings with him over two decades of executive leadership and over 30 years of corporate finance experience in the energy industry.

I am delighted to welcome Tom to our senior management team and we look forward to leveraging his skills and expertise as we continue to grow the partnership moving forward.

In a minute I will turn it back over to Scott to provide additional details about the first quarter results, but I would like to wrap up my prepared remarks by saying that now that the era of dropdown acquisitions from Energy Transfer Partners is behind us.

We will continue to focus on growing the business and cash flow for our unit holders whether it’s organically from our new-to-industry program over 124 stores, new stores built in the last 4 years alone or from our best in class operational performance which continues to generate same-store sales growth year in and year out or finally from third party acquisition opportunities.

We have spent over $350 million just since December of 2014. And with that Sunoco LP will continue our efforts to increase not only our size, our scale and our geographic diversity, but ultimately returns to our unit holders. I would now like to turn the call back over to Scott who will cover highlights of the partnership’s first quarter performance.

Scott?.

Thanks Bob. Before I get into details for the quarter, I would like to provide a brief summary of the final dropdown we closed on just over 30 days ago. Energy Transfer Partners sold Sun its remaining interest in the legacy Sunoco wholesale business and 100% of the legacy Sunoco retail business for approximately $2.2 billion plus working capital.

Cash consideration for the transaction was funded through a draw of just over $2 billion on a senior secured term loan facility and $175 million draw on our revolving credit facility.

And additional $194 million worth of Sun units were issued to Energy Transfer Partners at close which brought the overall mix of the transaction to approximately 90% debt and 10% equity. Our April 4, we have promptly termed out a portion of the senior secured term loan facility with a private offering of senior notes which mature in 2021.

This offering was announced at $500 million and was subsequently upsized to $800 million and priced at 6.25%. We were extremely happy with the outcome of this offering and our ability to secure a source of permanent financing for the final dropdown.

With the completion of this final dropdown, Energy Transfer remains Sun’s largest unit holder with approximately 48% of Sun’s public LP units outstanding. We are confident that the Energy Transfer family will continue to be supportive of our business, not only as a general partner, but also as a limited partner.

As Bob stated earlier on the call the final dropdown was effective January 1, 2016 and we now completed over $5.7 billion worth of transactions since the fourth quarter of 2014 increasing Sun’s presence in the 6,800 sites across 30 states from Hawaii to Maine.

Now looking at some key metrics and trends for the first quarter, adjusted EBITDA for the first quarter increased 22.9% from a year ago to $158.9 million. This increase reflects higher fuel margins and increase in merchandise gross margin as well as the impact of acquisitions made and new-to-industry sites opened in 2016.

Distributable cash flow in the first quarter was $111.5 million and that’s our recently announced distribution increase of 2%. Distributable cash flow coverage was 1.14x for the quarter and 1.30x times for the trailing 12 months.

Regarding retail operations, as Bob mentioned retail fuel gallons sold during the first quarter increased more than 3% from a year ago to 608.1 million gallons. Retail margins on these gallons averaged $0.213 per gallon compared to $0.186 per gallon a year ago.

This volume increase reflects the $120 million worth of tuck-in acquisitions made and new-to-industry locations opened since the end of the first quarter of 2015. Sun’s retail merchandise gross profit increased to $166.4 million and increased 12.3% compared to the first quarter of 2015.

More importantly the gross profit margin increased from 30.7% a year ago to 31.7% in the first quarter of 2016. This increase in both merchandise sales and the margin on these sales can be attributed to strong performance across the entire retail portfolio.

Circling back to Bob’s comments about Sun’s exposure in the oil patch, merchandise same-store sales for this subset of stores were up just of 13%, while total fuel gallons sold were up just over 16%. The sharp decrease in fuel was primarily led in by diesel sales which were up over 27%.

Again, excluding these oil producing regions, the business continues to perform very well. The same-store retail fuel sales increasing 1.1% and same-store merchandise sales increasing a solid 5.9%. It is important to call out that same-store merchandise and fuel figures reflect the benefit of the leap day in February.

We estimate that this benefit – that the benefit of this extra day was approximately 110 basis points for both fuel and merchandise. Turning to the wholesale business, gallons sold to third-parties decrease almost 5% to approximately 1.2 billion gallons compared to the first quarter of last year.

This decrease reflects increment weather – inclement weather on East Coast during the first quarter. The wholesale margin on these gallons increased from $0.096 per gallon a year ago to $0.114 per gallon for the current quarter.

This increase reflects strong supply and trading activity, partly offset by rapidly rising refined product costs during the end of the first quarter. As a remainder our affiliate volumes and margin dollars have now been consolidated into our retail segment.

Turning now to our balance sheet, recent financings and capital expenditures, as of March 31, we had $675 million drawn on our $1.5 billion credit facility plus $22.3 million of standby letters of credit, leaving unused availability of just over $800 million.

This level of liquidity provides this flexibility to continue our growth strategy which includes acquisitions of various sizes plus our planned organic growth program to increase penetration in the existing markets where we already have strong scale and marketing position.

Additionally, our plan going forward is to focus our equity efforts on an aftermarket or ATM program subject to favorable market conditions and unit valuation. We expect to launch this program sometime in the third quarter.

At present we remain well within our leverage covenant with net debt to EBITDA of 5.4x pro forma for the full year impacts of dropdowns and acquisitions. Our capital expenditures in Q1 were approximately $96.2 million, which includes approximately $19.6 million in maintenance capital.

Of the $76.6 million of growth capital spend $23.8 million of that was for the construction at new-to-industry sites locations.

Excluding acquisitions, but including the addition capital spending related to the final dropdown assets, we expect maintenance capital for the full year 2016 to be in the range of $100 million to $110 million and growth capital to be between $390 and $420 million.

Approximately $200 million of the growth capital spending will be allocated to the construction of new-to-industry sites. We believe we are adequately positioned with our capital structure to continue organic growth within our existing footprint and also take advantage of strategic third-party acquisitions that will drive long-term unit holder value.

Before I conclude allow me to review the upcoming investor relations schedule. Sunoco LP will be participating in the following upcoming conference.

The Deutsche Bank MLP Midstream and Natural Gas Conference in New York on May 10, the Bank of America Global Energy and Power Leverage Finance Conference in New York on June 7, the Stephen Spring Investor Conference in New York on June 8, and finally the JPMorgan Energy Conference on June 27 through the 29, we have to see you there.

Operator, that concludes our prepared remarks, you may now open the line for any questions..

Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Burd from JPMorgan. Please go ahead..

Hi, good morning and congratulations for wrapping up the entire dropdown strategy?.

Great. Thank you..

On fuel margins, how are they trending so far in the second quarter versus the first quarter.

And then also am I remembering correctly that the second quarter of 2015 you saw fuel margins well below normal?.

Yes. Thanks Andrew. This is Bob.

With respect to the second quarter of 2015 you saw fuel margins well below normal?.

Yes. Thanks, Andrew. This is Bob. With respect to the second quarter, I think if you – what I would direct you to is just publicly available information around crude prices and wholesale prices. And if you look at that, you would rightly conclude that we are kind of at the normalized margins as we sit here very early into the second quarter.

The first quarter was kind of a tail of two cities. We had sort of normalized margins and then actually some probably favorable market conditions early in the quarter, followed up by a quite steep slope as crude oil prices increased right at the end of the first quarter.

That comes through impacting us first on retail margins, where we have the longest lag time getting those pass-through to consumers during times of sharp increases and a bit less on our wholesale side where it’s quicker to pass through to the market.

But that’s a long way around the block for your question to say yes, we are at normalized margins now..

Okay.

And then the question on last year in the second quarter?.

Yes, I think last year in the second quarter looking back if the results that we printed last year and reflect a different business than we have this year, Andy. We had – did not have the Sunoco, excuse me, the strength retail business in.

So, at that point in time, it was a low high and the max business different margin profile there for the retail side of things with Aloha driving the overall retail margin. I think the wholesale margin that we printed was right in the ballpark of the $0.06 to $0.08 guidance for wholesale gallons that we have provided to you.

I think as Bob said we encourage folks to kind of look at publicly available pricing data on [indiscernible] and WTI. So, it’s a benchmark against prior years. But as we stand here today 40 or so days into the quarter, I think we are right in the normalized level..

Okay.

And then a follow-up on the volume side in terms of the volume declines that you clearly talked about in the oil and gas region, has the situation changed meaningfully from the fourth quarter conference call or are we just seeing lapping year-over-year results manifest themselves in the financials in that incrementally from the fourth quarter to the first quarter, it wasn’t such a drastic incremental decline as the year-over-year number would imply?.

Yes, I would say it’s more the latter. We are still a quarter away from cycling the impact.

The one thing I will and on talking backwards back, but at – and it’s – I don’t want to get too enthusiastic here, but just having come from the Energy Transfer call for anybody that was on that Mackie talked about the conversations that we have had with our suppliers, he and Matt Ramsey both mentioned the fact that producers in these areas, while not ecstatic are starting to get a lot more enthusiastic with the uptick in crude oil prices.

And certainly, there is a big difference in attitude in the mid 40s versus the high 20s to low 30s. So I think its way early to declare victory, but we are starting to feel like there could be some increased activity in the oil patch. We will wait and see..

Great, thank you..

Thank you..

Thank you. Our next question comes from the line of Ben Bienvenu from Stephens, Inc. Please go ahead..

Yes, thanks. Good morning, guys.

I spoke to some of your oil patch performance, but could you speak to the stripes stores as a whole, how the same-store sales looked in the quarter and maybe how they trended through the quarter?.

Yes, stripes for the quarter on gallons, Ben, were down.

And again, we do have the Leap Year discussion and we have kind of said across the board that’s about 110 basis points for both merchand sales or excuse me merch and fuel, but for the stripes stores in Texas, gallons were down just over 2% and that’s again pretty much driven – excuse me, gallons overall were down about 2.6%.

If we take those gallons out, we were just slightly up quarter-over-quarter when we compare Q1 of ‘16 versus Q1 of ‘15. If I take a look at retail, again it’s kind of the same story.

We are heavily impacted by those oil producing regions, but if you take those – if you take those oil producing sites out of the – out of the equation, we were up about 5% quarter-over-quarter..

Okay, great.

And then just looking at the acquisition landscape, what is your appetite if you found the large acquisition that was attractive, what’s your appetite to issue equity or are you more focused on limiting M&A activity to something you could finance with just debt capital markets?.

Ben, I think that it would depend on the deal where it’s not escaped our notice, our current cost of capital with our unit price where it is today. We are not going to do something that isn’t accretive to our unitholders.

So, it’s got to make sense long-term and I think we would look at any deal that came up, where we are trying to balance growing income, increasing distributions to our unitholders with improving our leverage statistics. We are trying to balance all those goals right now..

Okay, great. Best of luck. Thanks..

Thanks..

Thank you. [Operator Instructions] Our next question comes from the line of Ben Brownlow from Raymond James. Please go ahead..

Hi, good morning..

Good morning. Good morning..

Just following up on the earlier question with fuel margin, it doesn’t sound like you have any change in your outlook on the wholesale third-party wholesale of being kind of a $0.06 to $0.08 target longer term.

But is there any more color you can provide on what drove that 11.4, I guess is it accurate in that inventory adjustment for value adjustment about a $0.01?.

Well, I think that Scott can provide you more detail probably offline, but we had a very positive contribution from our supply and trading group. And while that’s not all of it, that’s the bulk of the delta that moved us up from the average ranges that we have indicated to the investors..

Okay.

But you are still so comfortable with that $0.06 to $0.08 as appropriate kind of long-term target?.

Yes. That’s a group of very talented people. Our expectation is that they will continue to provide very good value. This was a significant win and not all repeatable..

Okay.

And then on the retail – and on the retail margin, am I accurate and at some point I cannot recall exactly what time, but I remember you guys I think you were targeting kind of a mid $0.20, $0.25 fuel margin, is that accurate and has that changed at all if so with the accounting of moving the affiliate down into the retail?.

No. So, the numbers we have indicated to people in that range has always been for the entire business and we don’t see that changing..

Okay, great. Thank you..

Thank you..

Thank you. Our next question comes from the line of Anthony Kit from Deutsche Bank. Please go ahead..

Hey, guys. Thanks for taking my question. Tom, I just had a quick one on some monetization rumors that we heard earlier in March. There has been some reports that Energy Transfer might monetize their interest in Sun. And obviously, we heard some announcements after the fact that, that’s not going to happen and they are committed to staying with Sun.

With the final drop-down complete, can you just remind me of some of the strategic benefits that’s available to you guys for staying a part of the broader Energy Transfer family please?.

Okay. Well, I guess I would start with this in terms of the rumors. I think that from the time that Energy Transfer acquired Sunoco the marketplace understood the attraction of the GP of Sunoco Logistics, bit little less clear around the retail business.

And I guess from my standpoint, if there was a time it might have made sense to monetize that for Energy Transfer, it would have been early on. Instead, what they did was support us completely with significant activity around acquisitions.

And now from their perspective, we have migrated to the point where we are separately traded with all the assets and its MLP, they enjoy the benefit and the dividends for all that activity in the form of IDRs and IDR growth within ETE. And from our perspective, what we find is a family of partnerships owned by – the GPs of which are owned by ETE.

ETE has been well-funded, well-financed with a strong balance sheet and has historically and even as early as this morning publicly stated their willingness to work with each of the partnerships below them to be really supportive of their efforts in growing earnings.

So, from our perspective, while there are not significant synergistic benefits, there are some in the area of shared services where we get some benefits.

I think the overarching appeal from my perspective is having the GP owned by a really big fan of the Sunoco Company and the Sunoco brand and owned by an entity that has shown support in the past and I anticipate that will continue in the future..

Fantastic. Thank you so much..

Thank you..

Thank you. [Operator Instructions] Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments..

Thanks. And I would like to thank everyone for taking the time to join us this morning. I would like to conclude today’s call by stating that some very exciting things are happening at Sun LP and then we will continue to build strong value for our unitholders.

We are extremely proud of the partnership’s performance since our transformation began just over six quarters ago. While distribution growth at many MLPs has been sluggish, flat, or even decreasing, we have been able to increase our distribution quarter-over-quarter. The benefits of our diversified business model and scale are clearly shining through.

We have demonstrated that we can continue to grow and thrive in the current volatile commodity price environment when other MLPs are struggling. Despite the challenging situation, we are realizing opportunities and we are capitalizing on them.

We appreciate the continued support of our customers and our investors and we sincerely appreciate the hard work of our employees to make all these successes happen. Again, thanks very much for being with us. This concludes this morning’s call..

Thank you, ladies and gentlemen, and thank you for your participation. This does conclude today’s conference. You may now disconnect your lines at this time. Thank you for participation and have a wonderful day..