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SXL > SEC Filings for SXL > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for SUNOCO LOGISTICS PARTNERS L.P.

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


8-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations
The following table summarizes our consolidated operating results for the
periods presented:
                                                               Three Months Ended March 31,
                                                                 2014                   2013
                                                            (in millions, except per unit data)
Revenues
Sales and other operating revenue:
Unaffiliated customers                                   $           4,171         $       3,098
Affiliates                                                             306                   414
Total Revenues                                                       4,477                 3,512
Costs and Expenses
Cost of products sold                                                4,210                 3,224
Operating expenses                                                      34                    26
Selling, general and administrative expenses                            37                    33
Depreciation and amortization expense                                   69                    64
Total Costs and Expenses                                             4,350                 3,347
Operating Income                                                       127                   165
Interest cost and debt expense, net                                    (26 )                 (24 )
Capitalized interest                                                    10                     5
Other income                                                             4                     2
Income Before Provision for Income Taxes                               115                   148
Provision for income taxes                                              (5 )                  (6 )
Net Income                                                             110                   142
Less: Net income attributable to noncontrolling
interests                                                               (3 )                  (2 )
Net Income Attributable to Sunoco Logistics Partners
L.P.                                                     $             107         $         140
Net Income Attributable to Sunoco Logistics Partners
L.P. per Limited Partner unit:
Basic                                                    $            0.66         $        1.09
Diluted                                                  $            0.66         $        1.09

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 that 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. The following table reconciles the differences between net income, as determined under GAAP, and Adjusted EBITDA and DCF.


                                                              Three Months Ended March 31,
                                                                2014                  2013
                                                                      (in millions)
Net Income                                               $          110         $          142
Interest expense, net                                                16                     19
Depreciation and amortization expense                                69                     64
Provision for income taxes                                            5                      6
Non-cash compensation expense                                         5                      4
Unrealized gains on commodity risk management
activities                                                           (1 )                   (3 )
Proportionate share of unconsolidated affiliates'
interest, depreciation and provision for income taxes                 4                      4
Adjusted EBITDA                                                     208                    236
Interest expense, net                                               (16 )                  (19 )
Provision for income taxes                                           (5 )                   (6 )
Amortization of fair value adjustments on long-term
debt                                                                 (4 )                   (6 )
Distributions versus Adjusted EBITDA of unconsolidated
affiliates                                                           (6 )                   (3 )
Maintenance capital expenditures                                    (18 )                   (4 )
Distributable cash flow attributable to noncontrolling
interests                                                            (4 )                   (3 )
Contributions attributable to acquisition from
affiliate                                                             3                      -
Distributable Cash Flow                                  $          158         $          195

Analysis of Consolidated Operating Results Net income attributable to Sunoco Logistics Partners L.P. was $107 and $140 million for the three months ended March 31, 2014 and 2013, respectively. The decrease was primarily attributable to lower operating results from the Crude Oil Acquisition and Marketing segment. This was partially offset by improved operating performance from the Crude Oil Pipelines, Terminal Facilities and Refined Products Pipelines segments, and a decrease in net interest expense which was primarily attributable to higher capitalized interest associated with the expansion capital program.
Analysis of Operating Segments
We manage our operations through four operating segments: Crude Oil Pipelines, Crude Oil Acquisition and Marketing, Terminal Facilities and Refined Products Pipelines.
Crude Oil Pipelines
Our Crude Oil Pipelines segment consists of crude oil trunk and gathering pipelines in the southwest and midwest United States, including those owned by our joint-venture interests. Revenues are generated from tariffs and the associated fees paid by shippers utilizing our transportation services to deliver crude oil and other feedstocks to refineries within those regions. Rates for shipments on these pipelines are regulated by the Federal Energy Regulatory Commission ("FERC"), Oklahoma Corporation Commission and the Railroad Commission of Texas.


The following table summarizes the operating results and key operating measures for our Crude Oil Pipelines segment for the periods presented:

                                                                 Three Months Ended March 31,
                                                                    2014                2013
                                                                (in millions, except for barrel
                                                                           amounts)
Sales and other operating revenue:
Unaffiliated customers                                       $             75     $           54
Intersegment revenue                                                       56                 41
Total sales and other operating revenue                      $            131     $           95
Depreciation and amortization expense                        $             24     $           22
Adjusted EBITDA                                              $             93     $           61
Pipeline throughput (thousands of barrels per day ("bpd"))              2,041              1,582
Pipeline revenue per barrel (cents)                                      71.6               67.0

Adjusted EBITDA for the Crude Oil Pipelines segment increased $32 million to $93 million for the three months ended March 31, 2014, as compared to $61 million for the three months ended March 31, 2013. The increase in Adjusted EBITDA was due primarily to higher throughput volumes ($28 million) largely attributable to expansion projects supporting the demand for West Texas crude oil which began operating in 2013. Higher pipeline tariffs ($8 million) and the timing of maintenance and pipeline integrity costs ($3 million) also contributed to the increase. These improvements were partially offset by lower pipeline operating gains, increased utility expenses associated with higher throughput volumes and increased environmental remediation costs ($7 million). Crude Oil Acquisition and Marketing
Our Crude Oil Acquisition and Marketing segment reflects the sale of gathered and bulk purchased crude oil. The crude oil acquisition and marketing operations generate substantial revenue and cost of products sold as a result of the significant volume of crude oil sold and purchased. Although crude oil price levels significantly impact the revenue and cost of products sold for the Crude Oil Acquisition and Marketing segment, the absolute price levels of crude oil normally do not bear a relationship to gross profit. As a result, period-to-period variations in revenue and cost of products sold are not generally meaningful in analyzing the variation in gross profit for the segment. The operating results of the Crude Oil Acquisition and Marketing segment are affected by overall levels of supply and demand for crude oil and relative fluctuations in market related indices. Generally, we expect a base level of earnings from our Crude Oil Acquisition and Marketing segment that may be optimized and enhanced when there is a high level of market volatility, favorable basis differentials and/or a steep contango or backwardated market structure. Our management believes gross profit, which is equal to sales and other operating revenue less cost of products sold and operating expenses, is a key measure of financial performance for the Crude Oil Acquisition and Marketing segment. Although we implement risk management activities to provide general stability in our margins, these margins are not fixed and will vary from period-to-period.


The following table summarizes the operating results and key operating measures for our Crude Oil Acquisition and Marketing segment for the periods presented:

                                                             Three Months Ended March 31,
                                                                 2014                2013
                                                            (in millions, except for barrel
                                                                       amounts)
Sales and other operating revenue:
Unaffiliated customers                                   $            3,824     $      2,891
Affiliates                                                              269              368
Intersegment revenue                                                      1                -
Total sales and other operating revenue                  $            4,094     $      3,259
Depreciation and amortization expense                    $               12     $         12
Adjusted EBITDA                                          $               12     $        112
Crude oil purchases (thousands of bpd)                                  840              750
Gross profit per barrel purchased (cents) (1)                          21.1            172.0
Average crude oil price (per barrel)                     $            98.61     $      94.34

(1) Represents total segment sales and other operating revenue less cost of products sold and operating expenses, divided by crude oil purchases. Adjusted EBITDA for the Crude Oil Acquisition and Marketing segment decreased $100 million to $12 million for the three months ended March 31, 2014, as compared to $112 million for the three months ended March 31, 2013. The decrease in Adjusted EBITDA was driven primarily by lower crude oil margins ($114 million) driven by significantly contracted crude differentials compared to the prior year period. This impact was partially offset by increased crude oil volumes ($14 million) resulting from higher market demand and the expansion in our crude oil trucking fleet. Terminal Facilities
Our Terminal Facilities segment consists of crude oil, refined products and natural gas liquids ("NGL") terminals, as well as a refined products and NGL acquisition and marketing business. The Terminal Facilities segment earns revenue by providing storage, terminalling, blending and other ancillary services to our customers, as well as through the sale of refined products and NGLs.
The following table summarizes the operating results and key operating measures for our Terminal Facilities segment for the periods presented:

                                                             Three Months Ended March 31,
                                                                2014                2013
                                                           (in millions, except for barrel
                                                                       amounts)
Sales and other operating revenue:
Unaffiliated customers                                   $             237     $        132
Affiliates                                                              32               38
Intersegment revenue                                                    18               13
Total sales and other operating revenue                  $             287     $        183
Depreciation and amortization expense                    $              26     $         24
Adjusted EBITDA                                          $              86     $         54
Terminal throughput (thousands of bpd):
Refined products terminals                                             413              414
Nederland terminal                                                   1,322              850
Refinery terminals                                                     226              325

Adjusted EBITDA for the Terminal Facilities segment increased $32 million to $86 million for the three months ended March 31, 2014, as compared to $54 million for the three months ended March 31, 2013. The increase in Adjusted EBITDA was due primarily to higher volumes and increased margins from our refined products acquisition and marketing activities ($32 million) and improved contributions from the Nederland terminal ($9 million) attributable to higher throughput volumes. These improvements were partially offset by lower results from the refined products terminals and the Marcus Hook facility ($10 million).


Refined Products Pipelines
Our Refined Products Pipelines segment consists of refined products and NGL pipelines, including a two-thirds undivided interest in the Harbor pipeline and joint-venture interests in four refined products pipelines in selected areas of the United States. The Refined Products Pipeline System primarily earns revenues by transporting refined products from refineries in the northeast, midwest and southwest United States to markets in six states and Canada. Rates for shipments on these pipelines are regulated by the FERC and the Pennsylvania Public Utility Commission.
The following table summarizes the operating results and key operating measures for our Refined Products Pipelines segment for the periods presented:

                                                             Three Months Ended March 31,
                                                                2014               2013
                                                           (in millions, except for barrel
                                                                       amounts)
Sales and other operating revenue:
Unaffiliated customers                                   $             35     $          21
Affiliates                                                              5                 8
Intersegment revenue                                                    1                 1
Total sales and other operating revenue                  $             41     $          30
Depreciation and amortization expense                    $              7     $           6
Adjusted EBITDA                                          $             17     $           9
Pipeline throughput (thousands of bpd)(1)                             521               522
Pipeline revenue per barrel (cents)(1)                               88.3              62.9

(1) Excludes amounts attributable to equity interests which are not consolidated. Adjusted EBITDA for the Refined Products Pipelines segment increased $8 million to $17 million for the three months ended March 31, 2014, as compared to $9 million for the three months ended March 31, 2013. The increase in Adjusted EBITDA was due primarily to operating results from the Mariner West project ($11 million), which commenced operations in the fourth quarter 2013. This improvement was partially offset by higher operating expenses which included increased utility and maintenance costs ($2 million). Liquidity and Capital Resources
Liquidity
Cash generated from operations and borrowings under our $1.54 billion in credit facilities are our primary sources of liquidity. At March 31, 2014, we had a net working capital surplus of $449 million and available borrowing capacity of $550 million under our revolving credit facilities. The primary drivers of our working capital surplus were an increase in accounts receivable and increased crude oil inventory related to operations, partially offset by an increase in accounts payable and lower advances to affiliated companies. Our working capital position reflects crude oil and refined products inventories based on historical costs under the last-in, first-out ("LIFO") method of accounting. If the inventories had been valued at their current replacement cost, we would have had a working capital surplus of $520 million at March 31, 2014. We periodically supplement our cash flows from operations with proceeds from debt and equity financing activities.
Credit Facilities
We maintain a $1.50 billion unsecured credit facility (the "$1.50 billion Credit Facility"), which matures in November 2018, to fund our working capital requirements, to finance acquisitions and capital projects, to pay distributions and for general partnership purposes. 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. Outstanding borrowings under this credit facility were $950 and $200 million at March 31, 2014 and December 31, 2013, respectively.
The $1.50 billion Credit Facility contains various covenants, including limitations on the creation of indebtedness and liens, and other covenants related to the operation and conduct of our business. The credit facility also limits us, on a rolling four quarter basis, to a maximum total consolidated debt to consolidated Adjusted EBITDA ratio, as defined in the underlying credit agreement, of 5.0 to 1, which can generally be increased to 5.5 to 1 during an acquisition period. Our ratio of total consolidated debt, excluding net unamortized fair value adjustments, to consolidated Adjusted EBITDA was 3.0 to 1 at March 31, 2014, as calculated in accordance with the credit agreement.


West Texas Gulf Pipe Line Company, our consolidated subsidiary, maintains a $35 million revolving credit facility (the "$35 million Credit Facility") which expires in April 2015. The facility is available to fund West Texas Gulf's general corporate purposes including working capital and capital expenditures. The $35 million Credit Facility contains various covenants limiting West Texas Gulf's ability to grant certain liens; make certain loans, acquisitions and investments; make any material changes to the nature of its business; or enter into a merger or sale of assets. The credit facility also limits West Texas Gulf, on a rolling four quarter basis, to a minimum fixed charge coverage ratio of 1.00 to 1, as defined in the underlying credit agreement. In addition, the credit facility limits West Texas Gulf to a maximum leverage ratio of 2.00 to 1. At March 31, 2014, West Texas Gulf's fixed charge coverage ratio and leverage ratio were 1.11 to 1 and 0.84 to 1, respectively. Outstanding borrowings under this credit facility were $35 million at March 31, 2014 and December 31, 2013. Senior Notes
We had $175 million of 8.75 percent senior notes which matured and were repaid in February 2014.
In April 2014, we issued $300 million of 4.25 percent Senior Notes and $700 million of 5.30 percent Senior Notes (the "2024 and 2044 Senior Notes"), due April 2024 and April 2044, respectively. The terms and conditions of the 2024 and 2044 Senior Notes are comparable to those of our other outstanding senior notes. The net proceeds from these offerings were used to repay outstanding borrowings under the $1.50 billion Credit Facility and for general partnership purposes.
Equity Offerings
In the first quarter 2014, we filed a registration statement and established an at-the-market equity offering program. The program allows us to issue up to $250 million of common units directly to the public and raise capital in a timely and efficient manner to finance our growth capital program, while supporting our investment grade credit ratings. We have not yet issued equity under the program.
Cash Flows and Capital Expenditures
Operating Activities
Cash flows from operating activities are primarily driven by earnings, excluding the impact of non-cash items; the timing of cash receipts and disbursements related to accounts receivable and payable, and the timing of inventory transactions and changes in other working capital amounts. Non-cash items include depreciation, amortization and certain compensation expenses. See the Analysis of Consolidated Operating Results, above, for more information on changes in our consolidated earnings.
Net cash used in operating activities for the three months ended March 31, 2014 of $125 million was primarily related to a $296 million increase in working capital attributable to increased inventories and accounts receivable, partially offset by increased accounts payable. This was partially offset by net income of $110 million and non-cash charges for depreciation and amortization of $69 million. Net cash used in operating activities for the three months ended March 31, 2013 of $4 million was primarily related to a $206 million increase in working capital, which was largely offset by net income of $142 million and non-cash charges for depreciation and amortization of $64 million. The change in working capital was primarily the result of an increase in crude oil inventory related to contango positions and operating activities. Investing Activities
Cash flows used in investing activities relate primarily to our capital expenditures, including expansion and maintenance capital expenditures and major acquisitions. See "Capital Requirements," below, for additional details on our investing activities.
In addition to $423 million of cash used for expansion and maintenance capital expenditures, net cash used in investing activities for the three months ended March 31, 2014 included the $42 million acquisition of additional ownership interests in Explorer Pipeline Company. Net cash used in investing activities of $140 million for the three months ended March 31, 2013 was related to expansion capital projects and maintenance capital expenditures on our existing assets. Financing Activities
Cash flows from financing activities relate primarily to the payment of distributions to partners; borrowings and repayments under our credit facilities; the cash impacts of debt and equity activities; and changes in advances to affiliated companies, which represents our cash held by Sunoco, Inc. ("Sunoco") in connection with our participation in Sunoco's cash management program.
Net cash provided by financing activities for the three months ended March 31, 2014 of $691 million resulted primarily from the $750 million of borrowings under our $1.50 billion Credit Facility and the $225 million decrease in advances to affiliates. This source of cash was partially offset by $104 million in distributions paid to limited partners and the general partner and the $175 million repayment of the 8.75 percent Senior Notes in February 2014. Net cash provided by


financing activities in 2013 resulted primarily from $691 million of net proceeds related to the January 2013 offering of the 2023 and 2043 Senior Notes. This source of cash was partially offset by a $359 million increase in advances to affiliates, $80 million in distributions paid to limited partners and the general partner and $106 million of net repayments under our credit facilities. Capital Requirements
Our operations are capital intensive, requiring significant investment to maintain, upgrade and enhance existing assets and to comply with environmental and operational regulations. The capital requirements have consisted, and are expected to continue to consist, primarily of:

        Expansion capital expenditures to acquire and integrate complementary
         assets to improve operational efficiencies or reduce costs and to expand
         existing and construct new facilities, such as projects that increase
         storage or throughput volume,


        Maintenance capital expenditures that extend the usefulness of existing
         assets, such as those required to maintain equipment reliability,
         tankage and pipeline integrity and safety, and to address environmental
         regulations, and


        Major acquisitions to acquire and integrate complementary assets to grow
         the business, to improve operational efficiencies or reduce costs.

The following table summarizes our capital expenditures for the periods presented:

                                                Three Months Ended March 31,
                                                       2014                    2013
                                                       (in millions)
Expansion                               $           465                       $ 136
Maintenance                                          18                           4
Investment in joint venture interests                42                           -
Total                                   $           525                       $ 140
. . .
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