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Rating Action:

Moody's rates Sunoco LP proposed notes issue B1

09 Nov 2020

New York, November 09, 2020 -- Moody's Investors Service ("Moody's") assigned a B1 rating to Sunoco LP's (SUN) proposed offering of senior unsecured notes due 2029. The Ba3 Corporate Family Rating (CFR), the Ba3-PD Probability of Default Rating (PDR), SGL-3 Speculative Grade Liquidity (SGL) rating and stable outlook are not affected by this action. The notes will be fully and unconditionally guaranteed by all of SUN's material domestic subsidiaries and are co-issued by Sunoco Finance Corp.

Proceeds of the proposed notes offering will be used to refinance a portion of upcoming near-term debt maturities.

Assignments:

..Issuer: Sunoco LP

....Senior Unsecured Notes, Assigned B1 (LGD4)

RATINGS RATIONALE

The proposed senior notes issue is unsecured and guaranteed by substantially all of SUN's domestic subsidiaries. The notes are rated B1, or one notch below the Ba3 CFR, reflective of their junior position relative to the priority claim of its $1.5 billion secured revolving credit facility.

As one of the largest distributors of motor fuels in the US, SUN benefits from the strength of the Sunoco retail brand and the geographic reach and revenue stability accruing from the wholesale distribution of motor fuel which has become its dominant business. This followed the January 2018 sale of the majority of its company-operated retail fuel outlets for $3.2 billion to 7-Eleven, Inc. (Baa1 review down). Earnings and cash flow derived from wholesale motor fuels distribution, while generating lower margins, are less volatile than that derived from the retail sales of motor fuels and merchandise. SUN generates a fixed margin, which it expects to average 9.5-10.5 cents per gallon over the medium term on a significant portion of its gallons distributed and is no longer exposed to the volatility of retail fuel and merchandise margins associated with its retail businesses. While third quarter 2020 motor fuels volumes sold were down 12% to 1.9 billion gallons compared to 2019's third quarter due to the pandemic-related downturn in transportation, they were up 22% sequentially on a partial recovery in demand. The gross profit margin on third quarter gallons sold averaged 12.1-cents compared to 11.6-cents in the year-ago quarter, and 13.5-cents in 2020's second quarter. Largely as a result of margin expansion and somewhat improved second-half demand conditions, SUN expects full-year 2020 EBITDA to be at or above $740 million, up at least 11% over 2019's $665 million.

SUN distributed 8.2 billion gallons of wholesale fuel volumes in 2019. Wholesale fuels distribution requires materially lower capital expenditures than retail; prior to its sale of the retail sites, capital spending on maintenance and facility upgrading had consumed a disproportionate amount of cash from operations. Reflecting the uncertainty of 2020's operating environment, SUN has cut 2020's projected growth capital spending by 42% to $75 million.

Moody's believes that SUN will look to grow to gain additional size through acquisitions and economies of scale. Acquisitions could potentially extend upstream into logistics assets. Notwithstanding growth aspirations, Moody's expects that SUN will adhere to its recently updated publicly stated long term leverage target of around 4x (about 4.5x including Moody's standard adjustments), about where it operated in 2020's third quarter. Distribution coverage at 2020's third quarter was 1.6x; comfortably in excess of the company's 1.2x publicly stated targeted level.

The rapid spread of the coronavirus outbreak, a weak global economic outlook, low oil and natural gas prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. SUN's exposure to volumetric risk in the wholesale distribution of motor fuels leaves it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions. Environmental considerations also have a growing impact on Moody's credit analysis for midstream energy companies, indirectly related to potential carbon dioxide regulations. A strong financial position and low financial leverage are important characteristics for managing these environmental and social risks.

Moody's regards SUN as having adequate liquidity as indicated by its SGL-3 Speculative Grade Liquidity rating, principally a function of its $1.5 billion secured revolving credit facility. At September 30, $87 million was outstanding under SUN's revolver, down from $158 million at June 30. The revolving credit facility has a July 2023 scheduled maturity date. SUN's next upcoming debt maturity is its $1.0 billion 4.875% notes issue due January 2023. Proceeds from the proposed notes issue will be used to redeem a portion of these notes.

SUN's outlook is stable reflecting Moody's expectation of the stability in earnings and cash flow associated with the company's wholesale motor fuels distribution operations.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ratings could be upgraded if SUN's debt/EBITDA consistently remains under 4.5x and interest coverage exceeds 4x. Ratings could be downgraded should leverage increase above 5.5x or should distribution coverage fall below 1x.

Sunoco LP is a master limited partnership (MLP) that distributes motor fuels on a wholesale basis to convenience stores, independent dealers, commercial customers and distributors situated in over 30 states. Its general partner is Energy Transfer Operating, L.P. (Baa3 negative), who owns 100% of SUN's Incentive Distribution Rights (IDRs) and 34.4% of SUN's common units. ETO is a wholly-owned subsidiary of Energy Transfer LP (not rated). Sunoco LP is headquartered in Dallas, Texas.

The principal methodology used in these ratings was Midstream Energy published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Andrew Brooks
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​
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