Fitch Ratings has affirmed Sunoco LP's (SUN) Long-Term Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook, following the company's acquisition announcement of NuStar Energy, L.P. (NuStar; BB/Stable).
Fitch has also affirmed the senior unsecured bonds co-issued by SUN and Sunoco Finance Corp. at 'BB+'/'RR4' and the senior secured revolver rating at 'BBB-'/'RR1'.
Fitch believes the acquisition of NuStar will improve SUN's business risk profile through an increase in geographic and business line diversity. Fitch considers the announced financing plan to be balanced and expects leverage to return to the low 4x range within two years of transaction close.
The Stable Outlook reflects Fitch's expectation for supportive fundamentals underlying the combined entity's businesses including expectations for resilient demand for refined products across North America, continued crude oil production growth in the Permian Basin, further increased demand for renewable fuels and other products supporting the energy evolution.
Key Rating Drivers
Improved Business Mix and Geographic Diversity: NuStar will contribute crude terminals and pipelines, refined products terminals and pipelines, a large ammonia pipeline, and exposure to renewable fuels on West Coast. Of the pro-forma EBITDA, approximately 45% will come from fuel distribution, 25% from crude oil, and 25% from refined products, with the balance from other services. The ammonia pipeline and renewables presence on the West Coast provides for near-to-medium-term growth opportunities in the energy evolution. Prior to the acquisition, a large majority of EBITDA came from fuel distribution.
NuStar has a substantial asset footprint in the Midwest, where it has refined products terminals and pipelines and its ammonia pipeline. The company also has some refined products terminals and storage on the West Coast. This increased geographic diversity is credit positive, as it decreases exposure to region specific events that could negatively impact operations.
Stable Cash Flows: SUN currently has a contract with 7-Eleven, Inc. with 10 years remaining provides a fixed price for a fixed number of gallons per annum. The specified base gallonage currently accounts for a little over 25% of the partnership's run rate total, and is expected to increase as part of a recently announced sale of SUN's West Texas assets to 7-Eleven. In addition, the entire value chain stretching from retail stores (where the partnership is a lessor, and, in small numbers, a retailer) to wholesaling (the partnership core) features elements that make for resilient margins. The product is a necessity of most U.S. citizens' everyday lives, and the value chain in aggregate generally adjusts its selling price when volumes fall, like at the onset of the pandemic, to preserve a gross margin dollar value.
Fitch believes the combined entity will have improved cash flow stability. NuStar's EBITDA is made up of roughly one-third of each of the following: take-or-pay contracts with largely high creditworthy or large private/international counterparties, fixed-fee contracts for the only pipelines into and out of location advantaged and highly utilized Valero Energy Corporation (BBB/Stable) refineries, and fixed-fee volume exposed contracts that are almost entirely exposed to Permian Basin crude oil dynamics. In volume exposed contracts, exposure to the Permian is somewhat mitigated because it is in the basin with the lowest breakevens in the U.S.
Leverage Target Unchanged: Within about two years of acquisition close, Fitch expects SUN to be back around its 4.0x leverage target, a target that remains unchanged with the acquisition. SUN's acquisition of NuStar is being financed in a balanced manner and will include the assumption of NuStar debt. Expensive pieces of subordinated debt and preferred units at NuStar are expected to be replaced with senior unsecured notes. SUN calculates its leverage using a net leverage, which generally leads to a lower leverage number than Fitch's figure.
Fragmented Motor Fuels Distribution Sector: Sunoco is the largest independent distributor of motor fuels in the U.S. The overall sector, including both independents and non-independents, is highly fragmented. Sunoco's current business has a wide range of activities, from being the bridge between credit card banks and Sunoco credit card customers, to wholesaling to other wholesalers at its terminals. Terminal ownership continues to grow as the company makes acquisitions, and over the years, the company has demonstrated its ability to smoothly integrate new acquisitions.
Fitch believes the sector is likely to present attractive acquisition opportunities. In the event a series of new deals are struck, Fitch will monitor acquisition multiples and financing plans. Fitch believes Sunoco's 4.0x long term-leverage target policy is important to its rating.
Parent-Subsidiary Linkage: Sunoco's ratings reflect its Standalone Credit Profile with no express linkage to its parent company. Fitch believes Energy Transfer LP (ET; BBB-/Positive), the general partner and owner of a minority but meaningful stake in the limited partnership units, has the stronger credit profile of the two entities, given ET's size; scale; and geographic, operational and cash flow diversity relative to Sunoco. No uplift is provided to Sunoco's ratings, as Fitch considers strategic, operational and legal (e.g., cross-defaults) incentives weak. Certain Sunoco board members are designated as independent board members and serve on a conflicts committee.
Derivation Summary
Pro-forma for the acquisition of NuStar, Sunoco's leading peer is Plains All American Pipeline, L.P. (Plains; BBB/Stable). Within our coverage, SUN's combination of its wholesale motor fuel distribution segment and to be acquired crude oil and refined products segments makes it unique in Fitch's North American midstream energy coverage.
Similar to SUN, Plains is a company that covers many regions, with operations in all of the major production basins and most of the critical demand centers in the U.S. and Canada. After SUN merges with NuStar, SUN and Plains will have similar scale. About 20% of Plains' EBITDA comes from NGL, with the remainder from a crude oil segment with a large Permian presence and an asset base that covers the entire crude oil midstream value chain. SUN's EBITDA will largely come from wholesale motor fuel distribution and crude oil and refined products terminals and pipelines. Both companies have fairly predictable cash flows, with Plains having substantial operations in the strongest U.S. basin and SUN selling a highly demanded product (gasoline) and also having various MVC or MVC-like contracts in its contract portfolio.
Fitch expects Plains will remain within its 3.25x-3.75x leverage target and Sunoco will deleverage back to around its 4.0x stated leverage target by about two years after the acquisition close. Due to higher business risk and higher leverage, SUN is rated two notches below Plains.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer Include:
Fitch's oil price deck, which bears, over the long term, a relationship to the price of motor fuels and production of crude and refined products;
Motor fuel sales gallons sold in line with management's guidance, with cents per gallon (CPG) immaterially lower than management guidance;
Volume growth on NuStar's acquired Permian pipeline system and incremental growth projects on its ammonia pipeline system;
Increasing distributions to unitholders;
Maintenance capex and growth capex generally in line with management's guidance;
Some small acquisitions in the wholesale motor fuel distribution segment;
Meaningful financial and operating synergies realized by outer years of the forecast;
Refinancing rate for new debt of 8%;
SUN units issued to NuStar unitholders at a value of 0.4 to 1;
Base interest rates in line with Fitch's Global Economic Outlook.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
After successful integration of the two companies, EBITDA leverage expected to be at or below 3.8x on a sustained basis;
A meaningful increase in the percentage of EBITDA coming from take-or-pay type contracts.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
EBITDA leverage expected to be at or above 4.8x on a sustained basis;
Sustained deterioration in motor fuel margins;
An acquisition or pursuit of organic growth strategy that significantly increases business risk.
Liquidity and Debt Structure
Sufficient Liquidity: Sunoco has a $1.5 billion secured revolving credit agreement that matures in April 2027. Prior to the acquisition, SUN had no upcoming maturities until 2027, and pro forma for the NuStar acquisition, the nearest bond maturity is in October 2025. Fitch expects the pro-forma entity's maturity schedule is manageable over the forecast period. As of Sept. 30, 2023, Sunoco had $256 million in cash and around $850 million in revolver availability.
Both companies currently have $2.5 billion in aggregate revolving commitments, with neither company meaningfully using its revolvers in the normal course of business, outside of SUN using its revolver for small acquisitions. The pro forma entity will have $1.5 billion in revolving commitments, which Fitch deems sufficient.
The revolving credit agreement requires the partnership to maintain a net leverage ratio below 5.5x and an interest coverage ratio above 2.25x. As of Sept. 30, 2023, Sunoco was in compliance with its covenants, and Fitch believes that Sunoco will remain in compliance with its covenants through its forecast period. The revolver is secured by a security interest in, among other things, all its present and future personal property and all present and future personal property of its guarantors, the capital stock of its material subsidiaries (or 66% of the capital stock of material foreign subsidiaries), and any intercompany debt.
Issuer Profile
SUN is a wholesale motor fuels distributor that distributes diesel and gasoline to retail service stations throughout the U.S., with a focus on the Northeast. Pro forma for the NuStar acquisition, SUN will have an increased presence in the Midwest, crude terminals and pipelines, refined products terminals and pipelines, a large ammonia pipeline, and exposure to renewable fuels on West Coast.
Summary of Financial Adjustments
For unconsolidated investees, Fitch incorporates in EBITDA distributions from such entities, not equity-method income, nor pro-rata EBITDA.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
SUNOCO LP 
