Sunoco LP (SUN) 2016 Q2 法說會逐字稿

Greetings and welcome to the Sunoco LP conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host 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.

They 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 information reported on this call speaks only to the Company's view as of today August 4, 2016. The 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 are Bob Owens, Sunoco LP's President and Chief Executive Officer; Tom Miller, Chief Financial Officer; and other members of the management team. I'd 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 second quarter along with other recent accomplishments and our growth plans.

I'd like to start my comments off by stating that our second-quarter results demonstrate continued execution on our strategy to grow and diversify the business. Solid fuel margins and the contribution from our organic and third-party growth initiatives helped drive year-over-year growth and ultimately resulted in the distribution increase we were able to nominate for Q2.

We announced last week a distribution of $0.8255 per common unit or $3.30 per unit on an annual basis. This represents a 1% increase from the prior quarter and a 19.1% increase from a year ago. This also marked the 13th consecutive quarter that SUN has increased its distribution and demonstrates our continued confidence in both the overall business both from an operational and financial standpoint.

Based on the distributable cash flow as adjusted of $92.2 million this reflects a coverage ratio of 0.93 times for the second quarter and 1.2 times for the trailing four quarters. While the rapid growth and distributable cash flow from the Energy Transfer dropdowns transactions is behind us, the SUN business continues to grow both organically and also from third-party acquisitions, which I will touch on a bit later in the call. As we have previously communicated, the stepchange in the growth profile of the business has resulted in a similar change in the distribution profile of the Partnership.

Through the dropdown period in 2014 and 2015, through that time period we significantly increased both our assets and distributable cash flow to support growth in our distributions by over 33% annually. We now see future distribution increases following the general cash flow growth profile of the Partnership. We continue to target an average coverage ratio of 1.1 times over the long term and we believe that the stability of our business and our approach to distributions will help us comfortably achieve that coverage target.

SUN completed the final dropdown with an escalated leverage profile. But it also closed on the final dropdown with greater diversification, geographic penetration and economic scale that has set the Partnership up for great success in the future. Tom will discuss our approach to deleveraging in a bit but in the meantime I encourage investors not to view our current leverage situation as a potential readthrough to our philosophy and approach to distribution policy moving forward.

Let's switch now to second-quarter results. Total fuel volumes increased by 1.7% to 1.9569 billion gallons, reflecting modest growth in both retail and wholesale gallons, particularly in the legacy Sunoco businesses. Retail gallons increased by 2.1 million gallons to 641.2 million gallons and wholesale gallons increased 2.4% to 1.3 billion gallons due to the benefit of third-party acquisitions and new-to-industry locations opened during the last 12 months.

We saw year-over-year increases in fuel margins for both business segments. Wholesale fuel margins increased from $0.086 per gallon last year to $0.088 per gallon in the second quarter of 2016. Retail margins grew from $0.214 per gallon in the second quarter of 2015 to $0.24 per gallon this year, and this during a quarter when WTI prices increased approximately 26%.

Meanwhile, merchandise sales increased 2.8% year over year to $576.6 million as a result of stores acquired or built over the last 12 months. Merchandise gross profit percentage increased from a year ago by 100 basis points to a strong 32.5%.

In the second quarter, same-store gallons declined by 2.8% while same-store merchandise sales decreased by 1.8%. This weakness was a result of continued market headwinds in Texas, particularly in the oil-producing regions as well as inclement weather in May in both Texas and on the East Coast. Excluding the results from the locations in the oil-producing regions same-store sales fuel gallons decreased 1% while same-store merchandise sales increased 6/10 of a percent.

As a reminder, the oil-producing region locations represent roughly 10% of our total retail portfolio or about 140 locations in the Permian and Eagle Ford basins. We continue to review our labor models and monitor expenses at these locations and focus our efforts on advertising and marketing initiatives to drive business. As a result some of the stores in the oil-producing regions are still some of the most profitable stores in our portfolio even though same-store comps lag other locations.

As I mentioned earlier in the call, one of the benefits completing the dropdowns is the asset diversity it brought to our portfolio. The stores outside of the Stripes banner, the APluses, the Aloha Marts, the MACS, the Tigermarket locations collectively delivered same-store sales growth of 1.3%, demonstrating solid growth in their respective markets while same-store gallons in these businesses were also up slightly positive by 1/10 of a percent.

Moving on to discussion on the growth plans for the Partnership, in the second quarter we opened six new stores bringing the year-to-date openings to 10 locations. Nine of the 10 were in Texas focused primarily in the South and Southeast regions of the state. We currently have another 23 sites under construction and plan to open at least 35 new-to-industry locations during calendar year 2016.

All of the new industry sites open this year include a Laredo Taco Company offering, bringing the number of LTCs to 452. We have also opened 10 LTCs outside of Texas earlier this year with plans to open approximately 10 additional locations by the end of 2016. The initial customer feedback has been positive in these pilot sites.

As a reminder, margins in the Laredo Taco Company business are in the high 40s and are a key contributor to the strong merchandise gross profit margins we see in our Stripes locations. Despite struggling restaurant industry sales throughout the state of Texas, Laredo Taco margins have remained steady. And we anticipate commodity and food costs to remain stable through the rest of 2016.

In addition to our organic growth program we strengthened our market position in upstate New York and the Central Texas markets through acquisitions completed in the second quarter. At the end of June we closed on the Rattlers retail and wholesale business which included 14 company-operated sites and supply contracts, 38 dealer owned and operated sites in the high-growth Central Texas market between Waco, Houston and Austin. In addition to a strong geography from an economic standpoint, these are attractive assets that will provide additional scale in a core Texas market while bolstering the third-party dealer business. They also give us the opportunity to leverage the existing customer base and introduce them to the Sunoco fuel brand as well as Laredo Taco Company restaurant locations.

In late June we also closed on the acquisition of Valentine Stores, Inc. which includes 18 high-quality large-format company-operated convenience stores plus three bare land parcels in upstate New York. This gives us additional scale in the core Northeast market, strong margins and the ability to capture both fuel supply and operational synergies. The Valentine acquisition includes nine service location, some of which are in existing C-stores, others that are standalone operations.

We expect to rebrand the stores to APlus and to rebrand the fuel to Sunoco over time. Both the Rattlers and Valentine acquisitions were funded using our revolver and are expected to be immediately accretive to SUN's distributable cash flow.

In late June SUN agreed to purchase the fuels business from Emerge Energy Services LP for $178.5 million subject to working capital adjustments. This business comprises two processing and storage plants: the Dallas-based Direct Fuels LLC and Birmingham Alabama-based Allied Energy Company LLC. The Dallas facility has the capacity to process 7,000 barrels per day of transmix and also has over 300,000 barrels of storage capacity.

The Birmingham facility currently processes 5,000 barrels per day of transmix and has over 500,000 barrels of storage capacity. Both these locations are strategically located close to the refineries and/or pipelines.

The Emerge acquisition is an example of a transaction that helps us diversified by moving into the mainstream space, a strategy we first discussed with you over a year ago. We see this transaction as a beachhead for future income diversification.

The transaction is expected to be immediately accretive to SUN's distributable cash flow. And we expect to close on it by the end of the third quarter subject to customary clearances and the satisfaction of other usual closing conditions.

Finally, in July, SUN agreed to purchase six C-stores and fuel supply contracts with 127 wholesale dealers in 500 commercial customers in Eastern Texas and Louisiana from Denny Oil Company for approximately $55 million. This is a group of attractive, well-run assets in a geography where there will not be much geographic overlap with our current operative profile. And we're pleased to expand into the area.

Third-party acquisition activity has added significant scale to the Partnership over the last two years. Excluding assets acquired from the dropdown transactions from Energy Transfer, Sunoco has completed or announced transactions totaling about $700 million, adding approximately 125 retail locations, over 600 million total gallons and expanded our terminaling and processing assets. We continue to view the Partnership as a consolidator and we'll look for opportunities to add well-run assets in attractive geographies and take advantage of the fragmented nature of the C-store market to drive growth for the Partnership and returns for our unitholders.

I'd now like to turn the call over to and to publicly welcome, Tom Miller who joined the Partnership as Chief Financial Officer in May. He will cover highlights of the Partnership's second-quarter performance.

Tom?

Thanks, Bob. And it's great to be part of the Sunoco team.

Good morning investors. Let me start off by summarizing the Partnership's second-quarter 2016 financial result.

Yesterday we reported second-quarter net income of $72.1 million versus $93.5 million last year. The majority of this decrease can be attributed to additional interest expense from the dropdown financings.

Adjusted EBITDA was $164 million compared to $138 million year ago. This increase reflects increased fuel volumes, higher retail and wholesale fuel margins, an increase in merchandise margin, the impact of acquisitions made and new-to-industry sites opened over the past year.

Comparing the second-quarter 2016 to the second-quarter 2015, revenues were down $1 billion from $5.1 billion to $4.1 billion, largely a function of the $0.605 decrease in the average selling price of fuel, offset slightly by an increase in merchandise sales, rental and other income. Gross profit for the quarter increased almost 7% last year. Increased gallons sold is the primary driver behind this increase.

Higher fuel margins and increased merchandise sales also contributed. For the retail division, fuel represented approximately 40% of gross profit for the second quarter. On a consolidated basis, fuel represented 55% of gross profit with rental income, merchandise and other inside sales accounting for the remainder of the gross profit.

G&A was up $7.8 million year over year with the majority of this increase due to the transition of employees from Houston, Corpus and Philly to our new office in Dallas. Other operating expenses increased by 7% to $267 million compared to the second quarter last year. This reflects an increase in operating expenses at new retail and third-party dealer sites added over the past 12 months.

Turning to retail operations, the 100 days of summer, the period stretching between Memorial Day and Labor Day, tend to be our strongest period as miles driven increases during the summer. For the second quarter our adjusted EBITDA from our retail segment was $86.7 million, which is a 7.2% increase from the second quarter last year. This increase reflects stronger fuel margins, increased merchandise margins and the impact of locations either acquired or built in the last 12 months.

Retail fuel margins averaged $0.24 per gallon compared to $0.214 per gallon a year ago. SUN's retail merchandise gross profit was $187.3 million, an increase of 5.9% compared to the same quarter a year ago. Our gross profit margin on merchandise increased by 100 basis points from a year ago to 32.5%.

Turning to the wholesale business, for the second quarter adjusted EBITDA was $77.3 million, up 25.7% from the second quarter in 2015. Wholesale gallons sold totaled 1.3 billion gallons compared to 1.29 billion gallons last year, an increase of just over 2%. The wholesale margin on these gallons was $0.088 per gallon versus $0.086 per gallon a year ago.

Turning to our balance sheet, recent financings and capital expenditures, let me begin by addressing our current leverage. We are generally comfortable with the current level of debt. Adjusting for the impact of dropdowns and recent acquisitions, debt to EBITDA was 5.2 times at the end of the second quarter.

This is down from the 5.4 times we reported at the end of the first quarter. We remain well within the leverage ratio covenant and our term loan and revolving credit agreement. These agreements allow us to temporarily flex the ratio to 6.25 times through the first quarter of 2017 before it decreases to 5.5 times.

Further, if we consummate an acquisition with the transaction value of at least $50 million, the ratio increases to 6 times for the three quarters following that transaction. With the recently announced acquisitions we would expect the 6 times to be effective through the second quarter of 2017. The purpose of this clause is to allow us the opportunity to digest meaningful transactions.

With over $6 billion in transactions since the fourth quarter of 2014, we have transformed the Partnership by increasing scale, diversity of cash flow and geographic reach in a very short time period. As you would expect, with these changes the balance sheet has also changed. We have stated in the past that leverage will increase during this time frame and that there would be a digestion period following the completion of the final dropdown which occurred in March.

We also communicated that our long-term plan is to decrease leverage below 5 times and this delevering will happen over time. We are, however, focused on growing into the balance sheet we created. The path towards delevering will be carved through organic growth, focus on expenses and driving returns on the capital we deploy.

As we have discussed in the past, we plan to initiate an ATM program this year. Use of the proceeds from the program will supplement the delevering process and fund growth.

In the second quarter we spent $23.9 million on maintenance capital expenditures and $50.3 million on growth capital expenditures. Of the $50.3 million in growth capital, $24.7 million was for the construction of new stores while the remainder was spent on remodeling existing sites.

As Bob mentioned, we opened six locations in the second quarter which brings the year-to-date total to 10. We expect to open at least an additional 25 new-to-industry sites by the end of 2016.

For the year, we would expect to spend between $100 million and $110 million on maintenance capital and between $380 million and $400 million on growth capital. Approximately $200 million of the growth capital goes toward building new industry sites.

Moving on to liquidity, as of June 30, we had $675 million drawn on our $1.5 billion credit facility. We also had $22 million of standby letters of credit. That leaves unused availability on the credit facility of just over $800 million.

As we discussed on last-quarter's call we completed an $800 million private offering of senior notes that mature in 2021 with an interest rate of 6.25%. The proceeds repaid a portion of the senior secured term loan which matures in 2019.

We continue to seek opportunities in favorable market windows to secure permanent financing for this piece of debt. We are comfortable with our current weighted average cost of debt which at the end of the second quarter was 4.65% and our maturity profile with maturities between 2019 and 2023.

Before we take questions, we will be meeting investors at the following upcoming conferences: Goldman Sachs Power Utilities, MLP and Pipeline Conferences in New York next week on the 11th, Citi MLP/Midstream Infrastructure Conference in Vegas on August 17 and 18, Barclays CEO Energy and Power Conference in New York on September 6, JPMorgan's Midwest Energy Infrastructure MLP 1x1 Forum in Chicago on September 21, the Credit Suisse Global Credit Product Conference in Miami on September 22 and the Deutsche Bank Leveraged Finance Conference in Phoenix on September 26. I look forward to meeting many of you at these conferences. As always feel free to reach out to Scott if you would like additional information or to talk with management.

Operator, we will move to the Q&A session. Thank you.

(Operator Instructions) Andrew Burd, JPMorgan.

Hi, good morning. In light of the sub-1 times coverage in the second quarter, should we view the recent distribution increase as a demonstration around your confidence in Sunoco's coverage outlook for the rest of this year?

Hey, Andrew, Bob Owens. Yes, there is seasonality to our business.

As we've discussed with investors many times we carefully analyze our view of earnings over a year's period. And I think that you can correctly conclude that the action we took at the end of the second quarter around distributions reflects our continued confidence in the business.

Okay. And then a follow-up to that on current-quarter performance to date now that we're a month into it, any indication of how fuel margins trended in July?

And also how are the year-over-year declines in the oil patch activity looking in the third quarter versus what they looked like in the second quarter? Are we starting to lap some of the weakness already from last year?

Well the first part of your question I think if you take a look at what's happened to crude oil prices during the second quarter it would not be unreasonable to conclude that it's been quite constructive from a fuel margin standpoint. As we sit here four days into August with July behind us that's certainly what we've experienced so far. The second part of the question was?

It was about the oil patch.

What I would tell you is it doesn't appear to be getting any better but it doesn't appear to be getting any worse.

Okay great. Then just the last question for me on the leverage side, for the Emerge deal, can you just walk us through the thought process in discerning the balance between adding more leverage versus the attractiveness of the assets and the accretion that they give? Or I guess said differently, is there some type of cushion internally that provides you a strong degree of comfort around your covenants that enables you to go forward with an acquisition like this despite your leverage?

Well, we are balancing the desire to grow earnings with our desire to reduce leverage and we feel that we've got a good plan in place to achieve both those. The Emerge acquisition itself ticked a number of boxes. The first was the additional benefit of diversification.

We've talked to investors in the past. We think that our investors are well served with our geographic diversification. I don't have to point to an example beyond Texas where Texas was really going and investors were enjoying that in years past, as the slowdown in the oil patch has occurred we benefited from the geographical diversification in the performance of the units on the East Coast and in Hawaii.

What Emerge gives us is moving more into the midstream, the benefit of that additional diversification and stability of earnings around processing, transmix, the income from terminal operations and the synergies with our existing wholesale business. We think in both these cases they provide platforms for additional short-term growth in wholesale and longer-term potentially retail, as well. So when we balance the two we felt good about the decision.

And lastly, what I would tell you on Emerge, it's kind of a 7X multiple that we were able to do the transaction at. So when we balance that with our desire to delever it appeared very favorable to us.

Great. So 7 times for terminal assets. And that's post-synergies, I would assume?

That is correct.

Great. Thanks for taking my questions.

Ben Bienvenu, Stephens.

Thanks, good morning. Just sticking on the Emerge acquisition, in the processing of transmix I think you guys have some exposure to RINs.

I would just be curious as a processor are you an obligated party and thereby have to turn those RINs into the EPA? Or are you not obligated and you can sell those RINs, thus realizing a benefit from what we're seeing with pretty elevated RIN prices? Just any clarity there would be helpful.

Ben, no, as a processor of transmix we do not become an obligated party. In fact, it's kind of the opposite. When we do blending across our entire system we are a creator of RINs.

And this might be something we could talk through off-line, but just roughly estimated impacts of that RIN exposure, do you have a sense or would hazard a guess as to what that might be?

We're happy to have some off-line discussions. I don't think they will be particularly fruitful.

My view of the RINs is the bulk of it gets passed through to the end consumer. However, the market isn't 100% efficient and as a blender and creator of RINs we do benefit. We do not, however, quantify it.

Fair enough. And then looking at retail margins, your retail margins accelerated sequentially over 1Q which bucks the trend of what we've seen in the broader C-store space. I'd just be curious if you have anything, any detail on unique landscapes that may have played out across your geographies and/or are there any pricing strategies that you may have taken that contributed to that?

I think one of the differentiating factors with us is the ownership of our own fuel brand and the continued high appeal of that fuel brand. And I think that does come through in terms of margin harvest.

Okay. Then on the expense side, expenses were a little bit heavier than we were expecting in the quarter.

What is a reasonable expense run rate for the balance of the year and then maybe further out what sort of growth rate might we expect? And then looking at your current pool of expenses, what are the greatest areas of opportunity for optimizing your current expense structure?

I think we look at it expenses dividing it between OpEx and G&A. If you look at OpEx I think some of the misses in terms of me taking a look at some of the models we've seen to date I think people missed the increase, pretty significant increase in number of retail sites and some additions in our wholesale business. And Scott and the guys would be happy to walk you through that.

On the G&A side, we did see -- we have had increases. And as Tom mentioned in his prepared remarks as we are consolidating office positions into Texas, we are in a period of time where we have additional cost associated with both the relocation of employees and upgrading of systems. As we complete the process of getting people moved in and getting the systems improvements in place, we are comfortable that the end result will be additional synergies and reduced run rate going forward.

Thanks so much. Thanks for taking my questions.

Shneur Gershuni, UBS.

Hi, good morning. I got a couple of follow-ups on some of the previous questions, but maybe I just wanted to start first with the cash on the balance sheet right now.

When I think about the coverage ratio below 1 in the theoretical negative impact on cash, when I look at the trend in your balance sheet there's a surprise build of cash. I was wondering if you can square the circle on this.

Is this a working capital relief, is there some benefit from treasury shared services? I'm trying to understand this positive trend that sort of seems to be offsetting what I would expect from the operational results.

Yes, the uptick in cash from Q1 to Q2 there is a lot of, as you can imagine with the retail platform we have a lot of field cash out in the network of 1,400 stores, retail stores that we have. So the uptick you saw on a quarter-over-quarter basis is really just the result of additional polling that occurred through those retail sites.

I wouldn't say there's any readthrough or impact to coverage or anything like that. It's just a function of I think what you are alluding to working capital.

I'm actually viewing it as a positive. It's just when I look at it there's this advance to affiliates that was a liability and then it flipped.

I was wondering if you can walk through that? Because it looks like you've got a couple hundred million dollars of extra cash. I'm trying to understand that.

Yes, and we can follow up with you off-line. I think it's best on the advances from affiliates that was created in this quarter which was not on the balance sheet last quarter. It was actually in advances to affiliates instead of the advances from.

That is really the result of cash between the different entities and that's what was held at the former ETP retail operations that were then dropped in Q1 into Sunoco LP. So there is some intercompany cash movement that went on there that flipped from advances from affiliates to advances -- excuse me, advances to affiliates to advances from affiliates in Q2. But I can walk you through that off-line.

Absolutely. Just to simplify, can I think of it as basically you are lending excess cash to an affiliate and then you've now received it back? Is that the simple way to think about it?

Yes. Simplistically, that's exactly right.

Okay. So it's a one-time step-up in cash. Okay, cool.

Secondly, you were talking -- your margins in ops were overall positive. The expense jump, I just want to clarify if I understood some of your responses earlier. This seems to be one time-ish in nature or is there something that we should expect going forward?

It's not one time specific to Q2. We will have continued expenses through the end of the year and into next year as we continue to upgrade our computer systems and get the transition team fully in place in Dallas.

So once you complete that then that expense item drops down basically?

That's correct.

Okay. The second part, the acquisition that you were just talking about and so forth and the expected improvement in multiple, are you able to identify in a dollar value the expected synergies you're hoping to generate and exactly what the timeline is on it?

Yes, we've modeled that out. It's not something that we've disclosed, it's not guidance we give. But we have a clear path.

I think as I've had questions from other investors I'm assuming you're talking about the Emerge acquisition. The questions, I think one of the big confusions has been people looking at this as a projected hockey stick and, in fact, you have to remember that these two plants did not have any hydrotreating previously. And as a consequence when they were dealing with the distillate products, they couldn't sell ultralow sulfur diesel.

The market for low sulfur diesel has essentially just evaporated. So the completion of these two capital projects provide a clear stepchange just having the ability to sell the 15 parts per million distillate. So that is the biggest single component.

Beyond that we've identified some synergies with our existing operations and other opportunities. But we feel we've got very clear line of sight to get us to the kind of multiple that I talked about I think when Andrew asked me.

Okay. So basically follow the construction time schedule and then from there we should see the improvement.

One final question we've seen or been hearing that the refiners are moving towards already a winter blend at this stage right now. Gasoline prices seem to be coming down.

How do we think about how it impacts the lumpiness that we've seen, whether it's LIFO impacts or inventory adjustments and so forth? Should we expect a positive benefit or negative benefit if this trend continues to the end of the quarter as we think about next quarter?

Well, overall falling prices are constructive to margins. You will get some noise around inventory valuations but it's swamped by the benefit of the price movement.

Just so I don't -- we don't get too excited about falling prices remember year in, year out our business reverts to a mean. I believe that will be the case in 2016 as it has been for the 10 years prior.

Perfect. Thank you very much, guys. I appreciate the color.

Sharon Lui, Wells Fargo.

Hi, good morning. You talked about using the Emerge transaction as a stepping stone for other opportunities. Is that really focusing more on transmix type of midstream assets or more storage?

No, I think the reference was more around what has traditionally been viewed as midstream assets. You saw our first step with the Aloha Petroleum purchase where we acquired six terminals in Hawaii.

This follows up with two very sizable terminals and a transmix arm with it. But it's not a specific targeting of transmix operations. The appeal is largely around storage.

Okay, thank you. You've been very active in the M&A market. Just wondering it's I guess roughly about $350 million for just the first half of the year, what additional opportunities do you see out there and can we expect acquisitions post-dropdowns in that $700 million range annually going forward?

No. I think that would be that would surprise me if we find opportunities that would amount to that. I guess I will start with this, our leverage is higher than we would like it to be and we have a desire to reduce that leverage and a plan to do it and we are working that plan.

That is causing us to be a bit more selective in the M&A area right now. The M&A area, though, continues to provide us with opportunities and when you look at the industry itself, we've talked previously about how fragmented it is.

We think we will be able to thread the needle, finding opportunities that still are very attractive and very accretive but at the same time enable us to delever. So you put that all together and I would say don't plan on us doing $700 million year in, year out.

Okay. And just a last question on the NTIs. Maybe if you could just provide some comments on the performance of the NTIs placed in service over the last 12 months, has fuel sales and merchandise sales trended in line with expectations?

Yes, they have. We're pleased -- we post audit pretty aggressively and we are pleased with the units we built in the last 12 months, last 24 months, the last 36 months.

Okay great. Thank you.

Barrett Blaschke, MUFG Securities.

Hey guys, just a quick question on the way we view the fair value adjustments on inventory. Is this a trend we're just going to have to watch? Is there anything we can tie to it to get a better handle on it on a go-forward basis?

Barrett, this is Scott. You know, what you're going to see in that adjustment that gets you from EBITDA to adjusted EBITDA will really be based upon the movement of our underlying inventory in the period. So in an environment in Q2 in which we sought an increase over that period of time you're going to see the step-up in adjustment.

It's really just to get down to a true CPG. So in terms of tracking it, the direction you saw in Q2 you'll see that in an environment in which we see rising crude. You will see the opposite in a falling crude environment.

Okay, thanks.

Ray Fu, Bank of America Merrill Lynch.

Good morning. Most of my questions have already been answered so I will just ask one more on the delevering process.

Obviously ETE just announced a pretty material IDR waiver for ETP. Now I know you guys are confident in the distribution coverage through 2016 but is it possible for Sunoco to get something similar from ETE temporarily to help along the delevering process?

Ray, this is Bob. I would tell you there are a lot of things I like about our position in terms of the nature of our assets, our brands, our geographical diversification, our diversified types of operations. One of the additional things I think serves our investors well is being a member of the Energy Transfer family.

We have a very supportive parent. And while I'm not going to tell you that there's anything imminent I am confident that should we find the need with an acquisition or should we find the need because of business conditions we are well-positioned with Energy Transfer Equity to have those conversations.

Got it. Understood. Thank you.

Theresa Chen, Barclays.

Good morning. Bob, following up on your earlier comments about seasonality in the business, if I'm not mistaken I thought second and third quarters were supposed to be the strongest quarters of the year. And given the sub-1 times coverage this quarter, despite strong margins per gallon, can you tell us if that's an indication of a bleedthrough to volumes in third quarter and how we should think about that?

Yes, Theresa, typically Q2 is stronger, Q3 is historically our best quarter. However, and remember we did have a 26% increase in crude oil prices that occurred during Q2 and continued softness in the Texas market. We feel better about Q3.

Okay. Would it be fair to say that you're still comfortable with the EBITDA run rate for the entire entity? I think previously the number was around like $750 million, assuming a normalized margin.

Yes.

Okay. Then given that you have all your dropdowns behind you and you can focus on executing your NTI and third-party acquisition strategy, can you talk about how you're thinking about managing distribution growth in light of also managing your balance sheet in the near-term and the rest of 2016, 2017?

Well, I guess, Theresa we don't give guidance to the market. What I would point people to is if you want to know what we're going to do in the future, look at what we've done in the past.

And what we're seeing, we're threading a needle here both rewarding our owners with a distribution policy as we grow income but at the same time we clearly have the objective to reduce leverage and plan to do that. So I think if you look at where we landed in Q2 all those factors were carefully considered and you can see what our decision was relative to the distribution policy.

Thank you.

Patrick Wang, Baird.

Hey, good morning. Moving over really quick to the merchandising side, earlier on the call you mentioned the positive reception on the Laredo Taco pilot to date and then overall there was that comment that LTC generates gross margin in the high 40s. I just want to confirm here if that's the new de facto long-term margin profile of this business or if the historical comment, the gross margins of over 49% still stands?

On Laredo Taco specifically we've been in the mid to high 40s for some time. We're working to constantly take advantage of supply chain economics and our scale. So I think for the near-term that mid to high 40s is a good number to model in.

Okay, got it. Then if we could shift over really quick to the oil patch business.

It sounded like at least from a macro standpoint we're well into cycling the year-over-year fuel volume headwinds in this region. Can we expect the year-over-year comps to turn more flattish in the third quarter and going forward until some sort of activity recovery?

Yes, as we look at it we think from a comp standpoint the biggest delta is now behind us with Q2. Q3 we're working against when we first saw the big impact of lower crude oil prices this time last year.

Got it. That's helpful. Thank you. That's it for me.

Ladies and gentlemen, due to time constraints our final question will come from the line of Chris Sighinolfi, Jefferies.

Hey Bob. Thanks for the color this morning. I was just curious, congratulations first off on the 2Q margin realization and sequential growth.

I think it was highlighted by a previous caller, it was a little surprising to us just given some of the visible headwinds and some of the margins reported by peers. You had mentioned that fuel brand ownership was one principal driver of that, but I'm wondering if we can get a little bit more detail about what happened in Q2 to help drive that sequential growth, particularly with the loss of that supply and trading benefit you mentioned last quarter?

Well, that supply and trading benefit flows through primarily on the wholesale side and you guys saw the delta there quarter to quarter. Relative to the delta between this time last year, I think I would point you to the strength of the brand that I mentioned.

Beyond that the benefits of the geographical diversification and we have continued strength in the Northeast primarily or especially in the Mid-Atlantic region. Hawaii with Aloha Petroleum continues to be strong. And when you add that altogether from a blended margin standpoint, it more than overcame the weakness that we have experienced in the oil patch.

Unfortunately, in the oil patch we have had not only the impact of reduced sales but a competitive environment where people have been reluctant to raise prices as we're all kind of fighting over a smaller pie than we used to. So as a consequence what I would point you to is again the benefits of diversification.

Okay, and I guess with regard to what you were talking about in the Texas regions, thinking about the weakness there just some of the visible headwinds, but then thinking about the ongoing acquisitions in that region and the organic growth being deployed in that region, how should we think about the profile of the returns maybe on the near-term returns on the capital deployed there? Are there things that you are doing that maybe insulate you from those effects or is that something to be concerned about or not?

Well, Chris, it's certainly something on our radar screen and remember Texas is a big state. When you look at the geography of where we've done acquisitions, they've all been outside the oil patch.

When you look at the new-to-industry sites, we've got some bare ground sites in the oil patch that we feel really good about. But for the most part we've put them all on hold and deferred the construction with I think a couple of exceptions where just the overall market conditions still remain strong enough to support the construction, the balance of which we are going to defer until we see more of a recovery. So absent a significant decline in the Texas economy beyond the oil patch, we feel good about the additional spending both from an M&A standpoint and from a new-to-industry standpoint.

Okay, perfect. I guess final question for me and maybe this is one for Tom.

With regard to the ATM, just wondering what we could expect to see in terms of a filing size there? And then any color on your expectations perhaps end of this year into 2017 for usage there, just thinking about the acquisition, the cost of both the Denny acquisition and the Emerge deal?

Right. First of all, internally when we look at projects we look at them on a 50/50 capital basis. So we're looking for projects that are accretive meeting and value meeting that hurdle.

We've talked about a reasonable size ATM program and we're working towards getting that in place sometime here in the third quarter. And it depends on how fast we can execute it in market conditions, etc., on that.

Okay. And then I guess one final thing -- sorry, I lied -- One final question, with leverage in 2Q you had mentioned it was sort of net for some adjustments and for the pending acquisitions.

Just curious do you have it on a GAAP basis? Or is the number that you reported is that how -- is that consistent with the credit facility?

It is consistent with our credit facility, the number we reported.

Okay, thanks a lot guys. I appreciate the time.

We have reached the end of the question-and-answer session. Mr. Owens, I would now like to turn the floor back over to you for closing comments.

Thanks very much. Thank you everybody for taking time this morning. We appreciate the continued support and look forward to seeing many of you at the conferences that Tom outlined. Thank you.

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