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SXL > SEC Filings for SXL > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for SUNOCO LOGISTICS PARTNERS L.P.

Form 10-K for SUNOCO LOGISTICS PARTNERS L.P.


27-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements of Sunoco Logistics Partners L.P. Among other things, those consolidated financial statements include more detailed information regarding the basis of presentation for the following information. Overview
We, Sunoco Logistics Partners L.P. or "SXL," are a Delaware limited partnership which is principally engaged in the transport, terminalling and storage of crude oil, refined products and natural gas liquids ("NGLs"). In addition to logistics services, we also own acquisition and marketing assets which are used to facilitate the purchase and sale of crude oil, refined products and NGLs. Our portfolio of geographically diverse assets earns revenues in more than 30 states located throughout the United States. Revenues are generated by charging tariffs for transporting crude oil, refined products and NGLs through our pipelines as well as by charging fees for various services at our terminal facilities. Revenues are also generated by acquiring and marketing crude oil, refined products and NGLs. Generally, our commodity purchases are entered into in contemplation of or simultaneously with corresponding sale transactions involving physical deliveries, which enables us to secure a profit on the transaction at the time of purchase.
On October 5, 2012, Sunoco, Inc. ("Sunoco") was acquired by Energy Transfer Partners, L.P. ("ETP"). Prior to this transaction, Sunoco (through its wholly-owned subsidiary Sunoco Partners LLC) served as our general partner and owned a two percent general partner interest, all of our incentive distribution rights and a 32.4 percent limited partner interest in SXL. In connection with the acquisition, Sunoco's general and limited partner interests in us were contributed to ETP, resulting in a change in control of our general partner. As a result, we became a consolidated subsidiary of ETP and elected to apply "push-down" accounting, which required our assets and liabilities to be adjusted to fair value on the closing date, October 5, 2012. The effective date of the acquisition for accounting and reporting purposes was deemed to be October 1, 2012. Due to the application of "push-down" accounting, our consolidated financial statements and certain footnote disclosures are presented in two distinct periods to indicate the application of two different bases of accounting during those periods. The periods prior to the acquisition date, October 5, 2012, are identified as "Predecessor" and the periods from October 5, 2012 forward are identified as "Successor," and our operating results for the years ended December 31, 2013, 2012 and 2011 are presented in comparative periods. We performed an analysis and determined that the activity from October 1, 2012 through October 4, 2012 was not material in relation to our financial position, results of operations or cash flows. Therefore, operating results between October 1, 2012 and October 4, 2012 have been included within the "Successor" period ended December 31, 2012.
In July 2013, the limited liability agreement of Sunoco Partners LLC was amended to reflect the addition of ETE Common Holdings, LLC ("ETE Holdings") as an owner of a 0.1 percent membership interest in our general partner. ETE Holdings is a wholly-owned subsidiary of Energy Transfer Equity, L.P., and an affiliate of ETP. This change in the ownership of the general partner did not impact our consolidated financial statements. Subsequent to the amendment, we remain a consolidated subsidiary of ETP. In addition, the 33.5 million common units owned by Sunoco Partners LLC were assigned to ETP. Strategic Actions
Our primary business strategies focus on generating stable cash flows by increasing pipeline and terminal throughput, utilizing our crude oil gathering assets to maximize value for producers, pursuing economically accretive organic growth opportunities, and continuing to improve operating efficiencies and reduce costs. We also utilize our pipeline systems to take advantage of market dislocations. We believe these strategies will result in continuing increases in distributions to our unitholders. As part of our strategy, we have undertaken several initiatives including the acquisitions and growth capital programs described below.
Acquisitions
Since December 31, 2010, we completed five acquisitions for a total of $554 million.
2013 Acquisition

         Marcus Hook Facility-In the second quarter 2013, we acquired Sunoco's
          Marcus Hook facility and related assets (the "Marcus Hook Facility").
          The acquisition of terminalling and storage assets located in
          Pennsylvania and Delaware included underground storage caverns with a
          capacity of approximately 2 million barrels, deep water berths, rail
          access and trucking capabilities, and advantageous pipeline access. In
          addition, the acquisition included commercial agreements, including a
          reimbursement agreement under which Sunoco will reimburse us


$40 million for certain operating expenses of the Marcus Hook Facility through March 31, 2017. Since the transaction was with an entity under common control, we recorded the assets acquired and liabilities assumed at Sunoco's net carrying value. The acquisition was included within the Terminal Facilities segment. 2011 Acquisitions

         East Boston Terminal-In August 2011, we acquired a refined products
          terminal, located in East Boston, Massachusetts, from affiliates of
          ConocoPhillips. The terminal is the sole service provider to Logan
          International Airport under a long-term contract to supply jet fuel.
          The terminal includes a 10-bay truck rack and approximately 1 million
          barrels of capacity. The terminal was included in the Terminal
          Facilities segment from the date of acquisition;


         Crude Oil Acquisition and Marketing Business-In August 2011, we
          acquired a crude oil acquisition and marketing business from Texon L.P.
          ("Texon"). The purchase consisted of a lease crude business and
          gathering assets in 16 states, primarily in the western United States.
          The crude oil volume of the business consisted of approximately 75,000
          barrels per day at the wellhead. The business was included in the Crude
          Oil Acquisition and Marketing segment from the date of acquisition;


         Eagle Point Tank Farm-In July 2011, we acquired the Eagle Point tank
          farm from Sunoco. The tank farm is located in Westville, New Jersey and
          consists of approximately 5 million barrels of active storage for
          refined products and dark oils. The tank farm was included in the
          Terminal Facilities segment from the date of acquisition; and,


         Controlling Financial Interest in Inland Corporation-In May 2011, we
          acquired an 83.8 percent equity interest in Inland Corporation
          ("Inland"), which is the owner of 350 miles of active refined products
          pipelines in Ohio. The pipeline connects three refineries in Ohio to
          terminals and major markets in Ohio. We acquired our equity interest
          through a purchase of a 27.0 percent equity interest from Shell Oil
          Company and a 56.8 percent equity interest from Sunoco. The pipeline
          was included in the Refined Products Pipeline segment from the date of
          acquisition.

Growth Capital Program
In 2013, we invested $965 million in organic growth capital projects to improve operational efficiencies, reduce costs, expand existing facilities and construct new assets to increase storage, throughput volume or the scope of services we are able to provide. These included projects to: invest in our crude oil infrastructure by increasing pipeline capabilities through previously announced expansion capital projects in Texas and Oklahoma; expand upon refined products acquisition and marketing services; upgrade the service capabilities at the Eagle Point and Nederland terminals; and invest in the previously announced Mariner and Allegheny Access projects. We continued to expand our operations into pipeline transportation, storage and acquisition and marketing of NGLs in the northeastern United States with the successful launch of our pipeline project to deliver ethane from the Marcellus Shale Basin to Ontario ("Project Mariner West") and the acquisition of the Marcus Hook Facility. The results of the NGL pipeline transportation operations are included in the Refined Products Pipelines segment and the results of the NGL acquisition, storage and marketing activities are included in the Terminal Facilities segment. While these activities have not had a material impact on our operational results to date, we will continue to expand our NGL platform through previously announced growth projects that are expected to commence operations throughout 2014 and 2015. During 2014, we expect to invest at least $1.3 billion in expansion capital expenditures related to organic growth, excluding major acquisitions. This includes spending to capture more value from existing assets such as the Marcus Hook Facility, the Nederland Terminal and our patented blending technology. Expansion capital expenditures in 2014 will also include continued progress on our previously announced growth projects:
Allegheny Access
In 2012, we completed a successful Open Season for our project to transport refined products from the midwest to eastern Ohio and western Pennsylvania markets. This project will utilize new and existing assets and is expected to transport 85,000 barrels per day, with the possibility for expansion to meet further demand. The project is expected to commence operations during the third quarter 2014.
Eaglebine Express
In the second quarter 2013, we completed a successful Open Season for our Eaglebine Express pipeline. An existing portion of our MagTex refined products pipeline will be converted into crude service and its flow reversed, to provide takeaway capacity for the growing production in the Eaglebine and Woodbine crude areas. Eaglebine Express is expected to transport approximately 60,000 barrels per day from Hearne, Texas to Nederland, Texas starting in the third quarter 2014.


Granite Wash Extension
In the third quarter 2013, we completed a successful Open Season for our Granite Wash Extension pipeline. The pipeline is expected to provide 70,000 barrels per day of crude oil takeaway capacity for the growing production from the Granite Wash Shale in the northeastern Texas panhandle and portions of western Oklahoma. We will construct approximately 200 miles of new pipeline, originating in Wheeler County, Texas and terminating in Ringgold, Texas, and new pump stations and truck unloading facilities. At Ringgold, the new pipeline will connect with our existing pipelines, which have the ability to transport to Corsicana, Texas. From Corsicana, access to multiple SXL and third-party pipelines will provide producers the ability to reach various markets and refineries on the Gulf Coast and in the MidContinent. The pipeline is expected to be operational in the third quarter 2014.
Permian Express 2
In the fourth quarter 2013, we completed a successful Open Season for our Permian Express 2 pipeline. The Permian Express 2 pipeline project involves the construction of approximately 300 to 400 miles of new crude oil pipelines, with origins in multiple locations in West Texas: Midland, Garden City and Colorado City. With an expected initial capacity of approximately 200,000 barrels per day, Permian Express 2 is expected to deliver to multiple refiners and markets beginning in the second quarter 2015.
Mariner East
In September 2012, we announced a successful Open Season for our project to deliver NGLs produced in the Marcellus Shale Basin to the Marcus Hook Facility ("Project Mariner East 1"). This pipeline and marine terminal project will allow us to transport NGLs, primarily utilizing modified existing pipelines, from western Pennsylvania to the east coast where approximately 2 million barrels of NGLs can be stored in our underground caverns and loaded on waterborne vessels for third-party transport to other United States ports or exported to international markets. The project is expected to support the transportation of approximately 70,000 barrels per day. The transportation of propane is expected to commence in the second half of 2014, with the transportation of ethane expected to commence in mid-2015. As a result of substantial interest expressed by producers, marketers and industrial consumers for long-term transportation of Marcellus and Utica Shale NGLs to the Marcus Hook Facility, we launched an Open Season for Project Mariner East 2 during the fourth quarter 2013. Mariner South
In May 2013, we announced that sufficient binding commitments had been received to move forward on our joint project with Lone Star NGL LLC ("Lone Star"). This Mariner South Pipeline will transport export-grade propane and butane from Lone Star's Mont Belvieu, Texas storage and fractionation complex to our marine terminal in Nederland, Texas. The pipeline is expected to have an initial capacity of approximately 200,000 barrels per day and can be scaled to support higher volumes as needed. In addition to export-grade propane and butane, the pipeline will be available to transport other NGLs and petroleum products depending on shipper interest. The pipeline is expected to be operational in the first quarter 2015.
Conservative Capital Structure
Our goal is to maintain substantial liquidity and a conservative capital structure. In 2013, Sunoco Logistics Partners Operations L.P. (the "Operating Partnership"), our wholly-owned subsidiary, increased our borrowing capacity by entering into a five-year $1.50 billion unsecured credit facility (the "$1.50 billion Credit Facility"). The $1.50 billion Credit Facility contains an "accordion" feature, under which the total aggregate commitment may be extended to $2.25 billion under certain conditions. We will maintain our conservative capital structure by utilizing a combination of our operating cash flows and debt and equity issuances to finance our future growth. Cash Distribution Increases
As a result of our continued growth, our general partner increased our cash distributions to limited partners in all quarters in the three years ended December 31, 2013. For the quarter ended December 31, 2013, the distribution increased to $0.6625 per common unit ($2.65 annualized). The distribution for the fourth quarter 2013 was paid on February 14, 2014.


Results of Operations
                                                Successor                                           Predecessor
                                                                Period from          Period
                                Three                           Acquisition           from            Three
                                Months         Nine Months      (October 5,        January 1,         Months         Nine Months
                                Ended             Ended           2012) to           2012 to          Ended             Ended
                             December 31,     September 30,     December 31,       October 4,      December 31,     September 30,
                                 2013             2013            2012 (1)          2012 (1)           2011             2011
                                   (in millions, except per unit data)                  (in millions, except per unit data)
Statements of Income
Sales and other operating
revenue:
Unaffiliated customers      $      3,907     $      11,166     $      2,989       $     9,460     $      3,325     $       7,148
Affiliates                           381             1,185              200               461               51               381
Gain on divestment and
related matters                        -                 -                -                11                -                 -
Total revenues                     4,288            12,351            3,189             9,932            3,376             7,529
Cost of products sold              4,040            11,534            2,885             9,214            3,144             7,009
Operating expenses                    30                87               48                97               34                77
Selling, general and
administrative expenses               23               100               34                86               23                67
Depreciation and
amortization expense                  69               196               63                76               25                61
Impairment charge and
related matters (2)                    -                 -                -                (1 )             42                 -
Total costs and expenses           4,162            11,917            3,030             9,472            3,268             7,214
Operating income (3)                 126               434              159               460              108               315
Net interest expense                 (19 )             (58 )            (14 )             (65 )            (26 )             (63 )
Other income                           5                16                5                18                4                 9
Income before provision for
income taxes                         112               392              150               413               86               261
Provision for income taxes            (7 )             (23 )             (8 )             (24 )             (7 )             (18 )
Net Income                           105               369              142               389               79               243
Net Income attributable to
noncontrolling interests              (3 )              (8 )             (3 )              (8 )             (3 )              (6 )
Net Income attributable to
Sunoco Logistics Partners
L.P.                        $        102     $         361     $        139       $       381     $         76     $         237
Net Income attributable to
Sunoco Logistics Partners
L.P. per Limited Partner
unit:
Basic                       $       0.64     $        2.63     $       1.11       $      3.15     $       0.60     $        1.96
Diluted                     $       0.63     $        2.62     $       1.10       $      3.14     $       0.60     $        1.95

(1) The effective date of the acquisition for accounting and reporting purposes was deemed to be October 1, 2012. The activity from October 1, 2012 through October 4, 2012 was not material in relation to our financial position, results of operations or cash flows.

(2) We recognized a $42 million charge in the fourth quarter 2011 for certain crude oil terminal assets which would have been negatively impacted in connection with Sunoco's exit from the refining business. The charge included a $31 million non-cash impairment for asset write-downs at the Fort Mifflin Terminal Complex and $11 million for regulatory obligations. In September 2012, Sunoco contributed the refining assets of its Philadelphia refinery to Philadelphia Energy Solutions ("PES"), a joint venture between The Carlyle Group and Sunoco, which enabled the Philadelphia refinery to continue operating. As a result, we reversed $10 million of regulatory obligations during 2012 which were no longer expected to be incurred.

(3) During the first quarter 2013, we adjusted our presentation of operating income to conform to the presentation utilized by ETP. Other income, which is comprised primarily of equity income from our unconsolidated joint-venture interests, is presented separately and is no longer included as a component of operating income. These changes did not impact our net income. Prior period amounts have been recast to conform to current presentation.

Non-GAAP Financial Measures
To supplement our financial information presented in accordance with United States generally accepted accounting principles ("GAAP"), management uses additional measures that are known as "non-GAAP financial measures" in its evaluation of past performance and prospects for the future. The primary measures used by management are earnings before interest, taxes, depreciation and amortization expenses and other non-cash items ("Adjusted EBITDA") and distributable cash flow ("DCF"). Adjusted EBITDA and DCF do not represent and should not be considered alternatives to net income or cash flows from operating activities as determined under GAAP and may not be comparable to other similarly titled measures of other businesses.
Our management believes Adjusted EBITDA and DCF information enhances an investor's understanding of a business's ability to generate cash for payment of distributions and other purposes. Adjusted EBITDA calculations are also defined and


used as a measure in determining our compliance with certain revolving credit facility covenants. However, despite compliance with our credit facility covenants, there may be contractual, legal, economic or other factors which may prevent us from satisfying principal and interest obligations with respect to indebtedness and may require us to allocate funds for other purposes. During the fourth quarter 2012, we changed our definition of Adjusted EBITDA and DCF to conform to the presentation utilized by our general partner. During the first quarter 2013, we also changed our measure of segment profit from operating income to the revised presentation of Adjusted EBITDA. This change did not impact our reportable segments. Prior period amounts have been recast to conform to current presentation.
The following table reconciles the differences between net income, as determined under GAAP, and Adjusted EBITDA and DCF.

                                                             Successor                                                            Predecessor
                                  Three Months         Nine Months                                                                 Three Months         Nine Months
                                      Ended               Ended           Period from Acquisition            Period from              Ended                Ended
                                  December 31,        September 30,         (October 5, 2012) to         January 1,  2012 to       December 31,       September  30,
                                      2013                 2013            December 31, 2012 (1)         October 4, 2012 (1)           2011                2011
                                                           (in millions)                                                         (in millions)
Net Income                      $           105     $          369       $                142           $             389        $           79     $           243
Interest expense, net                        19                 58                         14                          65                    26                  63
Depreciation and amortization
expense                                      69                196                         63                          76                    25                  61
Impairment charge                             -                  -                          -                           9                    31                   -
Provision for income taxes                    7                 23                          8                          24                     7                  18
Non-cash compensation expense                 4                 10                          2                           6                     1                   5
Unrealized losses/(gains) on
commodity risk management
activities                                   11                (12 )                       (3 )                         6                     6                  (8 )
Amortization of excess equity
method investment                             1                  1                          -                           -                     -                   -
Proportionate share of
unconsolidated affiliates'
interest, depreciation and
provision for income taxes                    4                 16                          5                          16                     4                  12
Non-cash accrued liability
adjustment                                  (10 )                -                          -                           -                     -                   -
Adjustments to commodity hedges
resulting from "push-down"
accounting                                    -                  -                        (12 )                         -                     -                   -
Adjusted EBITDA                             210                661                        219                         591                   179                 394
Interest expense, net                       (19 )              (58 )                      (14 )                       (65 )                 (26 )               (63 )
Provision for income taxes                   (7 )              (23 )                       (8 )                       (24 )                  (7 )               (18 )
Amortization of fair value
adjustments on long-term debt                (6 )              (17 )                       (6 )                         -                     -                   -
Distributions versus Adjusted
EBITDA of unconsolidated
affiliates                                   (6 )              (21 )                       (3 )                       (25 )                  (4 )               (13 )
Maintenance capital
expenditures                                (16 )              (37 )                      (21 )                       (29 )                 (22 )               (20 )
Distributable Cash Flow
attributable to noncontrolling
interests                                    (4 )              (11 )                       (2 )                        (9 )                  (2 )                (8 )
Contributions attributable to
acquisition from affiliate                    3                  6                          -                           -                     -                   -
Distributable Cash Flow         $           155     $          500       $                165           $             439        $          118     $           272

(1) The effective date of the acquisition for accounting and reporting purposes was deemed to be October 1, 2012. The activity from October 1, 2012 through October 4, 2012 was not material in relation to our financial position, results of operations or cash flows.

Analysis of Consolidated Operating Results Net income attributable to Sunoco Logistics Partners L.P. ("net income attributable to SXL") was $102 and $139 million for the fourth quarter 2013 and the period from October 5, 2012 to December 31, 2012, respectively. The $37 million decrease was driven by decreased operating performance from the Crude Oil Acquisition and Marketing and Refined Products Pipelines segments, increased depreciation expense and the absence of $12 million of adjustments on commodity hedges that were recognized in connection with push-down accounting. These decreases were partially offset by improved operating


performance in the Crude Oil Pipelines segment and decreased selling, general and administrative expenses primarily attributable to a non-cash accrued liability adjustment. Net interest expense increased due largely to the $700 million Senior Notes offering in January 2013 and was partially offset by . . .

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