Scott Grischow - Director of IR and Treasury Robert Owens - President and CEO Thomas Miller - CFO Joe Kim - President and COO.

Andrew Burd - JPMorgan Theresa Chen - Barclays Patrick Wang - Robert W. Baird Sharon Lui - Wells Fargo Ben Brownlow - Raymond James.

Greetings and welcome to Sunoco LP's Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A 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 Scott Grischow, Senior Director of Investor Relations and Treasury. Thank you. Mr. Grischow, 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 that may include comments regarding the company's objectives, targets, plans, strategies, costs and anticipated capital expenditures, and anticipated timing for the completion of the announced and perspective retail divestment transactions.

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 as adjusted.

Please refer to this quarter's news release for a reconciliation of each financial measure. Please note that last quarter some of the operating results, assets, and liabilities of our operations that are part of our retail divestitures, into discontinued operations.

As such the results presented on today's call are based on continuing operations unless otherwise noted. Also I remind you that the information reported on this call speaks only to the company's view as of today, November 8, 2017, 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 earnings release. On the call with me this morning are Bob Owens, Sunoco LP's Chief Executive Officer; Joe Kim, President and Chief Operating Officer; Tom Miller, Chief Financial 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 thank you for joining us. This morning we will review the financial and operating results for the third quarter along with other recent activities. I would like to begin my comments by thanking the Sunoco family for quickly mobilizing efforts that aid those affected by hurricanes Harvey and Irma.

Getting us back in business, provide needed fuel and merchandize in the affected areas. Rarely do two storms hit within such a short time period in markets which we have identity. We are happy to report there were no employee injuries.

Additionally, Sunoco partnered with leading community groups and vendors to provide assistance across affected communities. The financial impact of the two hurricanes was modest in the third quarter.

From a store perspective we had about 150 stores that suffered some point of minimal damage and only about a dozen Sunoco's stores requiring major repairs. While the cost to repair the affected stores will largely show up in the fourth quarter of 2017, we expect the insurance proceeds to get in the first half of 2018.

Now turning to third quarter results; in the third quarter of 2017 the Partnership recorded net income of $138 million, including a $44 million impairment charge. This compared to net income of $45 million a year ago. Tom will provide more detail later in the call.

Total adjusted EBITDA was $199 million, an increase of $10 million from last year mainly due to strong wholesale operations which increased wholesale adjusted EBITDA by $6 million from last year to $87 million. Distributable cash flow as adjusted was $132 million, an increase of $8 million compared to a year ago.

The combination of higher adjusted EBITDA and lower maintenance capital expenditures of $10 million compared to $30 million a year ago, contributed to the increase in distributable cash flow. Sunoco's distribution for the third quarter remained unchanged from the second quarter of 2017, as well as from a year ago, at $82.55 per unit.

This distribution resulted in a 1.28 times coverage ratio in the third quarter and a 1.04 times coverage ratio on a trailing 12 months basis. Now looking at operational performance; total fuel volumes were 2 billion gallons, an increase of 1% versus last year. Retail gallons were 656 million, an increase of 5 million gallons or 0.8%.

Wholesale gallons of 1.4 billion also increased 1% from last year. Total weighted average margin of $14.9 per gallon decreased $0.007 from a year ago due to lower margins in retail. Wholesale margin was $0.10 even, flat from a year ago and retail cents per gallon was $0.253 compared to $0.275 a year ago.

Sunoco's wholesale business typically does not experience a same quarter-to-quarter fluctuations in gross profit cents per gallon margins as a retail business, which we view as favorable for our future. Merchandize sales of $618 million increased 2% from last year with continued market share gains in packaged beverage, beer and restaurant sales.

Merchandize gross profit margin of 32.1% increased by three-tenth of a percent compared to last year and the third quarter margin was consistent with the second quarter. Now turning to total retail same store results; total retail same store gallons declined 2% and same store merchandize sales decreased by one-tenth of a percent.

Sunoco's operations in Florida were negatively impacted by hurricane Irma. That said our Texas operations posted positive same store trends during the quarter despite the impact of hurricane Harvey. Our approximate 140 retail stores in the oil producing regions of Texas are primarily located in the Permian Basin with the remainder in the Eagle Ford.

The market has improved notably over the last six to 12 months. In the third quarter, same store merchandize sales for our sites in the oil producing region increased approximately 11%, getting progressively stronger throughout the quarter. Same store fuel gallons for these sites also increased 8% with particular strength in diesel gallons.

As a reminder, our stores in the oil producing regions turned a corner in the first quarter and have posted positive trends each quarter since. On Monday of this week we put out a press release stating that Joe Kim will take over as CEO starting on January 1st of next year.

Joe joined this Sunoco team in 2015 and has been responsible for business development and M&A activities across the Partnership since that time. He brings a wealth of experience and expertise in strategic planning and execution of growth initiatives and is positioned to lead Sunoco on its transformation into a premier wholesale fuel distributor.

Thus this will be my last Sunoco LP earnings call and I want to take a moment to thank the investors and analysts on the call and also all the Sunoco dealer and distributor partners for their many years of support. And thanks goes to all the Sunoco employees past and present as well. I will now turn the call over to Joe..

Thanks Bob. On behalf of the entire Sunoco team, we want to thank you for your leadership and your 20 years of dedicated service. We're fortunate to have you consult for us for the next two years and we will definitely take advantage of your experience and expertise. As you know we're currently in the process of transforming Sunoco.

Our road map starts with completing an efficient divestment of our company operated stores. The proceeds from these transactions along with any attached long-term supply agreements will allow us to address our leverage and coverage ratios. Our transformation also involved optimizing our overheads.

We will right size our overheads for the going forward business and just as importantly position us for efficient growth in the future. Our initial projections have the post divestment run rate for G&A expenses about 50% less than our historic run rate. Tom will provide more details in his comments.

In addition, we're right sizing our maintenance capital. For 2018 we're projecting maintenance capital to be around $35 million. This is half the run rate as compared to 2017 projections and about 70% less than the 2016 run rate. Growth capital going forward will also be significantly lower than in previous years.

We are projecting around $90 million for 2018. Part of the reduction is from the exit of company operations, but some is from a more stringent return criteria. Based on the aforementioned our new business model is clearly less overhead in capital incentives. Now let me provide you an update on the two divestment packages.

First, the 7-Eleven package; our team continues to work diligently towards closing. We believe the transaction is in the latter stages of the regulatory approval process with the FTC. We continue to work for the closing in late fourth-quarter of 2017 subject to completion of the regulatory process.

However there is a possibility that closing does not occur until early first quarter of 2018. As for the West Texas package we are currently in [final] negotiations with a quality buyer.

Upon the completion of due diligence and final negotiations we estimate to sign purchase agreements sometime in the fourth quarter of this year, which will position us for a close in the first quarter of next year.

Similar to our negotiations with 7-Eleven we are balancing the trade off of a higher purchase price with retained EBITDA to the fuel supply agreement. We're on track to complete both transactions. The combination of the 7-Eleven and West Texas packages will contribute about 2.5 billion gallons of stable income for Sunoco.

In total we will distribute over 8 billion gallons of fuel annually. Scale is vital on this business and we believe we can leverage our scale for accretive growth in the future. With that let me turn it over to Tom..

Thanks, Joe, and morning, everyone. Before I discuss the financial results for the third quarter, I will touch on a couple items related to our exit from retail company operations.

As we have stated in the past the 7-Eleven asset purchase agreement requires us to obtain a consent over the discharge on each series of notes using either the call feature or make whole provision as appropriate. We have issued a conditional call notice for our 2020 notes.

On October 10th we launched a consent solicitation to amend our 2021 notes and our 2023 notes. We terminated that process and instead we intend to make whole on those notes. We believe it is in our stakeholders' best interest to refinance in today's strong high yield market.

Additionally on October 16th, we amended our credit facility agreement satisfying the necessary conditions to close the 7-Eleven transaction. We continue to estimate the combined tax impact of the retail divestures to be roughly 20% of gross proceeds.

We expect to provide additional color on this matter after the sales process for the West Texas assets wraps up. As for use of the proceeds we are committed to reducing debt first. Our leverage target is to carry debt in the amount where it's between 4.5 and 4.75 times adjusted EBITDA.

The remaining proceeds will be used to either repurchase equity or to fund accretive acquisitions. As a reminder, we are required to repurchase the $300 million Series A preferred equity before we can repurchase any common units. If we proceed with the common unit repurchase, we would expect ETP to participate in a meaningful way.

Going forward we will target a distribution coverage ratio of 1.1 times. Moving to liquidity; we ended the quarter with total debt to adjusted EBITDA calculated in accordance with our credit agreements of 5.6 times. This is down from 6 times at the end of the second quarter and down nearly a full term where we started the year.

Total debt as of September 30, was $4.2 billion including $644 million drawn under the revolving credit facility. We also had $9 million in standby letters of credit. This leaves the unused capacity on our credit facility at $847 million. The weighted average cost of debt at September 30, was 5.2%.

As Bob previously mentioned, distribution coverage was 1.28 times in the third quarter and 1.04 times on a trailing 12 month basis. As Scott mentioned earlier, we have classified operating results, assets and liabilities associated with our retail divestitures as discontinued operations.

Revenue from continuing operations for the third quarter was $2.6 billion, an increase of 18%. Gross profit from continuing operations were $251 million, an increase of 31%, driven by wholesale inventory valuation adjustments. Additionally net income from continuing operations for the third quarter was $134 million compared to $33 million a year ago.

Third quarter G&A expense was $30 million, down $15 million from a year ago, which included the cost of relocating headquarters to Dallies. Required overheads going forward will be significantly less than what was previously required. We project annual ongoing G&A expense of approximately $140 million, which is half of our historical run rate.

Revenue from discontinued operations was $2.3 billion, an increase of 17%. Gross profit from discontinued operations was $385 million, flat to last year. GAAP net loss from discontinued operations was $27 million, driven by a $44 million impairment charge. That compares to net income from discontinued operations of $12 million a year ago.

Total adjusted EBITDA for the third quarter was $199 million, an increase of $10 million from a year ago. Adjusted EBITDA from our retail segment was a $112 million, an increase of $4 million from a year ago. Retail fuel margins averaged $0.253 per gallon compared to $0.275 per gallon a year ago.

Retail merchandize gross profit was $198 million, a $7 million increase from the year ago. Gross profit margin was 32.1% compared to 31.8% a year ago. Now turning to the wholesale business; adjusted EBITDA for the third quarter was $87 million, up $6 million from a year ago, primarily due to increased gallons sold.

Wholesale motor fuel margin was flat with a year ago at $0.10 per gallon. In the third quarter, Sunoco invested $41 million in capital expenditures, consisting of $31 million of growth capital and $10 million of maintenance capital.

For 2017, we continue to expect approximately $150 million of growth capital and we are lowering our maintenance capital projections to approximately $70 million. More importantly I would like to restate which I've said earlier; annual maintenance capital for the go forward business will be about $35 million.

Our total reported 2017 and 2018 growth and maintenance capital will depend on when we complete these transactions. Longer-term we will evaluate any capital spending with a capital structure that maintains leverage in that 4.5 to 4.75 times range. Last quarter we promised an update on our wholesale margin guidance.

For the past couple of years, we have consistently been above our $0.06 to $0.08 per gallon guidance. We continue to assess future wholesale margin guidance to reflect the increased radical nature of our post divestiture wholesale focused business.

We expect we will raise that guidance once we have finalized the West Texas sale, but we cannot be more specific at this time. We will provide regular updates to that range as the business growth. Finally, I too would like to thank Bob. He brought me to Sunoco last year from the outside and has thought me about this business, for that I'm grateful.

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

[Operator Instructions] Our first question comes from the line of Andrew Burd from JPMorgan. Please proceed with your question..

Hi, good morning. First off Bob, it's been great working with you over the last couple of years and we were certainly lucky to have you and you will be missed, so thanks. First question, just on the some of the softening fuel volume trends that you have noted in the East Coast.

Can you just clarify on these and expand a little bit, are these competitive pressures or just decline in demand in those markets? And maybe more broadly thinking on the 2018, if you could look in your crystal ball and kind of give a sense to what you're thinking about directionally for virtual volume across your entire footprint? Thanks.

Andy the East Coast is a big area and I guess the biggest impact certainly was the hurricane which hit us pretty hard volume wise in Florida. But, I guess I would start with this. My view is that the correct way for us to think about demand is essentially flat.

I think we will see continued positive trends from a total miles driven standpoint as the economy continues to improve and we see gains in employment and that will be offset by all the trends that we read about, whether it's this year's economy [capage] thing under the sharing economy, you name it. So that's how I view it.

As I look up and down the East Coast, there are various competitive pressures, but I think Sonoco is positioned very well to compete given the brand strength as well as the infrastructure that's in place.

And from my prospective the correct way for us to think about it is essentially, flat demand and driving economies and take advantage of our scale in the area..

Great. And just following up on the hurricanes, overall I think total same store sales or fuel gallons were down 2%.

Appreciate that it's hard to quantify in parts, but do you know roughly what impact the hurricanes had on that 2% down number?.

I don't, Andy. I will -- Scott can get back to you on that. But we were -- I mean it exceeded 10 million gallons overall in Florida. We had just -- well with both hurricanes we had hundreds of locations closed due to either, power outages, flooding, road closures or order closures to municipalities with both Harvey and Irma.

So we can get back to you with a little bit sharper pencil on that. That will be helpful for you..

No, that's helpful. And then the last question maybe for Joe, appreciate the comments on capital light business next year and the reduced growth in maintenance CapEx.

Maybe you could just highlight some of the bigger lumpier items for CapEx and kind what your thoughts are in terms of what that will be targeting as we are just finishing up the Illinois toll road or is there your policy in some sort of other areas as well? Thanks..

Hey, Andy. I will break [indiscernible], on the maintenance capital basis, we got to remember we still have terminals in Hawaii and we still have a retail business in Hawaii and we also have the transmix business in the U.S.

So a lot of the maintenance capital is really dedicated more towards the kind of our hard asset business and also we have in our future environment we have dealer businesses where we own the real estate and the land. That's a really good business for us where we get rent revenue which is incredibly ratable business for us.

So we will expand capital to maintain on our hard asset business and that's really the bulk of our maintenance capital.

On a growth capital basis like Bob said, we have -- I think we're very well positioned on a going forward basis with the wholesale business which is if you look back at the last eight quarters, 12 quarters, they have a very high margin type that we announced there.

Our growth capital really is -- I would call it more of a kind of an organic growth of us signing up new dealers and new distributors on a going forward basis. And with our scale we should be highly competitive in signing people up, a part of that is using some growth capital..

Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question..

Good morning. I would like to go to Andy's comments and thank you Bob for your many years of service and we wish you the best as well. My first question has to do with the modest delay of the closing, for 7-Eleven into early first quarter.

Can you talk about given that you are in the latter stages of the regular process, can you talk about what key considerations are remaining? Any color on why there has been a delay from what you originally expected?.

Theresa this is Joe. Let me give you some color.

First of all, we are -- as I stated in the prepared remarks we are definitely in the latter stages of the regulatory process and the expected remedies we think that we need in order to close we think those are very minor and we think it's just going through the more ordinary FTC process and we expect this to close. We think the remedies are minor.

We think from both parties 7-Eleven and from Sunoco, it's going to be very immaterial. We are just awaiting the process. We want to kind of give you some better guidance..

Can you give any examples of what those minor remedies might consist of?.

With respect to the FTC and the regulatory process we really can't get into details right now other than to provide you kind of the prepared comments that we gave you earlier..

Understand. In terms of -- returning to coverage post the transaction closing on proposed 7-Eleven and West Texas, to Tom's comments earlier about repurchasing common units, would that primarily consist of the units held at your parent given your comments about they will kind of participate in a meaningful way.

Should we read it as, you will purchase up to the maximum taxable threshold at the parent and then the remainder of much smaller portion would be to public unit holders or how do we think about the balance between purchasing at the parent versus the public?.

Theresa, they own 45% of us approximately and that doesn't leave us with a lot of flow. So they will have to participate in a meaningful way. The amount that they are interested in, above sort of their pro rata's is still open and we will be discussing it over time..

In terms of the growth capital guidance for 2018, can you talk about -- Joe, can you talk about on what you meant by more stringent return criteria? What exactly is that criteria going forward versus what have you had thus far?.

I think when we say stringent we obviously will use the traditional measures [MCV] and IRR. But I think the other thing that we got to consider is that we can have a bunch of high net credit and value projects that we want to make sure that not all of those are diluted for the first two to three or four years.

We want to make sure that we balance that off with quicker accretive projects for longer term accretive projects.

And the other part of it is, I see Sunoco as, when we manage a portfolio of different income spends we want to make sure that where we put our growth capital is distributed so that we can manage some volatility and manage some diversity of our income streams. So that's what I meant by a more stringent look at our growth capital..

And then lastly, can you quantify what the expected hurricane costs will be in fourth quarter versus what you will be receiving on the insurance settlement post to that deductible?.

It's a rough estimate, at this point, Theresa, but we are thinking kind of in the range of $20 million..

On a net basis?.

Yeah. Well, gross basis right now as I mentioned in the prepared remarks we are expecting insurance proceeds. Given the policy my expectation right now is that it covers out that. We will see those dollars in the next year..

[Operator Instructions] Our next question comes from the line of Patrick Wang from Baird. Please proceed with your question..

So on the -- so we have the 7-Eleven sale and the West Texas sale, could you just remind us on how many of the stores that were originally included in that 97 site portfolio still remain that haven't either been sold or moved into the two other packages?.

I believe you are referring to the NRC pipe that we have right now and the exact number holds the bulk, I think we still have how many?.

About 20..

It's less than 10 are kind of outstanding, I think around half of them went to the two divestitures. We sold about 80% of the other half, so there is less than 10, I think Patrick that are outstanding at this point..

Okay. Great that's helpful. And then just some more general questions. So earlier you mentioned about [sitting] -- about total fuel demand as being flat longer term.

Does that comment also apply to diesel volumes which seemed to have been a bit more resilient than gasoline? And you have been talking outside of the resurgence you have been seeing in the oil patch..

I guess from my perspective, I'm talking total motor fuel gallons. We've seen over the last decade kind of shifts with diesel popularity waxing and waning for passenger vehicles. Certainly diesel demand tracks the economy pretty well and no better example has happened.

What we're seeing in the oil producing regions where there is a significant surge in demand. So I haven't parsed it between the two, I think overall assume flat from my perspective..

Our next question comes from the line of Sharon Lui with Wells Fargo..

Bob, also wishing you the best of luck for the future.

My question is about I guess the West Texas transaction, just wondering, if that guidance you provided in the 8-K, is still a reasonable assumption of 620 million?.

That estimate was in our consent solicitation and the amount we're looking at is that's in the area is the right way. I'm depending on how the deal is structured. As Joe talked about there is a balancing act of proceeds in future EBITDA..

And Sharon just to support Tom's comment as well, that as we noted was used -- we used 7- Eleven dollar per store metric as a way to put a indicative value in there. So it was not I think related to any outstanding offers or anything like that. It was based on the 7- Eleven metric as a directional estimate..

Okay.

So I guess the pro forma EBITDA does not include I guess a potential benefit from like a fuel supply agreement?.

Sharon this is Joe. Let me kind of give you guidance. Again like I think the key point is we didn't have a deal in place for West Texas and we underwent the consent process. So at the most, I think it was a good guidance as to use the 7- Eleven process. You take 3.3 divided by [indiscernible].

You look at over 1,100 stores you come to $3 million, [8] times out times [208] and you are right at that 600 number out there. So and then we also use the same type of math to talk about potential fuel distribution contracts.

And again [congressionally] as Tom stated, I think and it is definitely the ball park but to use that as a -- that we have a firm deal and we are using that as the number going forward, I kind of think that wouldn't be that for size.

Does that help?.

That's helpful, thank you.

And [indiscernible] can have I just an estimate on the make whole premium on the bonds at this point?.

That's going down. I think it's currently about $95 million if we make whole today, and that goes down roughly $6 million a month..

And just perhaps, an update on the M&A market and the pursuit of more traditional type of midstream assets?.

So I think I will start kind of -- well it's kind of two parts. As far as Bob mentioned the scale is so wide on this business and then we were going to distribute 8 billion gallons. So from an M&A standpoint kind of sticks in with what our core businesses right now, fuel distribution.

We have incredible scale and the market remains still very incredibly fragmented. So if you think about sales and trades at a very reasonable multiple fee, fuel distribution area kind of trades somewhere about between 5x to 10x.

You add our synergies on top of that, now you can see us going out there and doing M&A activities post synergies definitely in the single digits which would be accretive acquisitions for us. So that's one area. The obvious area that where we look at. The other area is more on I would say more traditional fee based types of activities.

And a prime example probably would be product terminals. Given that we have 8 billion gallons stored, if you want to think of it that way, we bring our shorts to some particular markets out there and connect it with the product terminal. Then you can kind of see that there are some additional synergies for us.

So we are definitely looking at our core business to fuel distribution, but at the same time we want to diversify and we want to look at more fee-based to kind of balance off our portfolio. And we think that we have the synergies that we can bring. And while -- the whole time making sure that we maintain our balance sheet goal going forward..

Our next question comes from the line of Ben Brownlow with Raymond James. Please proceed with your question..

Just looking at the redemption on the 2021 and '23 notes prior to the close, any color how you are thinking about that refinance rate or would you consider utilizing the revolver in the short-term?.

We would expect to refinance these with long-term notes. The high-yield market is particularly hot right now and we would like to be able to take advantage of that. One of the good things here is we have a clean balance sheet coming out of here. We have no long-term debt, any short floating-rate debt. We can always adjust as appropriate.

So that will be one of the things we consider moving forward..

Is it fair to say that given the redemption on the notes really the balance between where you are targeting on equity or repurchases versus debt it really hasn't changed overall?.

As I mentioned we will target a debt level that's a multiple of our go forward adjusted EBITDA. And then what falls out of that is what we have to either invest in projects or to repurchase equity including the preferreds..

And any color around same store sales kind of demand trends quarter to-date?.

Well you just saw kind of the numbers that we reported by different regions. Again kind of echoing my remarks earlier around the impact of the hurricanes, certainly that was felt in the stores as well.

But our view going forward is that the convenience store remains, well not immune, certainly one of the best retail offerings in the new economy to be resilient going forward. We've seen decades of demand growth.

People today -- one of their dearest resources is time and the convenience store offering continues to have a feel and we don't see that trend changing in the near-term. So our view -- my view is, it will grow with the CPI and pick a number or 1% better than that -- 0.5% better than that going forward..

There are no further questions in the queue. I would like to hand the call back over to Bob Owens for closing comments..

Thanks everybody certainly for your kind comments and your continued support and this concludes our call. Thanks..

Ladies and gentlemen this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day..