Welcome to Sunoco LP's Fourth Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Scott Grischow, Director of Investor Relations and Treasury for Sunoco LP. Thank you, Mr. Grischow, you may now 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 the information reported on this call speaks only to the Company's view as of today, February 23, 2017. So 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 earnings 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 would 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 of the fourth quarter, along with other recent accomplishments. Before I get into my comments on the quarter, I would like to briefly recap 2016 which was really a transformative year for the partnership. We began the year with the completion of the final drop-down from Energy Transfer Partners late in the first quarter. Shortly thereafter, we announced the opening of our corporate headquarters in Dallas, Texas which consolidated our corporate infrastructure close to that of our parent, ETE. Integration efforts also continued to be a focus in 2016, as we consolidated offices, people and systems across the Company. And while these efforts did increase our expense structure during 2016, we're confident these figures will decrease in 2017 as synergies and benefits from the 2016 consolidation initiatives come online. Tuck-in acquisition activity also continued in 2016 with the addition of both retail store locations and new dealer and distributors under the Sunoco umbrella. In fact, I was able to meet many of our new partners earlier this month when we hosted over 1,000 people, including a number of our top wholesale customers, at our biannual dealer and distributor meeting. Turnout was strong and appreciated and this bodes well for future growth in our wholesales channels. Now turning to the partnership's results for the fourth quarter of 2016. The partnership recorded a net loss of $585.2 million during the fourth quarter compared to net income of $16.5 million a year ago due to impairment charges that were recorded. Tom will cover this in more detail in the financial results later in the call. Total adjusted EBITDA for Q4 decreased approximately $35 million year over year to $153.6 million. Distributable cash…

Thanks Bob and good morning everyone. Before I get into the financial results for the fourth quarter, let me address the issue on most of your minds, leverage and distribution coverage ratios and how we're going to attack the issues. In December we announced amendments to both our credit facility and term loan. The amendment increases the leverage covenant to 6.75 times beginning in the fourth quarter of 2016 through year-end 2017. At that point the leverage covenant steps down a quarter turn each quarter until the covenant reaches 5.5 times in the first quarter of 2019. The amendment also adds two new financial covenants. A senior secured leverage which is set at 3.75 times beginning in the fourth quarter of 2016 and continues through year-end 2017 with a step down to 3.5 times starting in the first quarter 2018. This covenant falls away upon repayment of our term loan. The other new covenant is a fixed charge coverage ratio set at 2.25 times starting in the fourth quarter of 2016. This financial covenant falls away once the total leverage falls below 5.5 times. Roughly 90% of our lending group approved the amendment. We put the amendment in place to allow the partnership additional time and flexibility to pursue our deleveraging initiatives. For the fourth quarter we reported a leverage ratio of 6.5 times, up from the revised third quarter number of 6.18 times. The drivers were a fourth quarter increase in debt of approximately $40 million to fund growth capital and the Denny acquisition, partially offset by ATM proceeds and $35 million lower year-over-year EBITDA. Our quarterly distribution coverage was 0.61, driven by lower quarter-over quarter EBITDA and a $27 million delta in cash taxes. Both leverage and coverage have moved the wrong way in recent quarters. We remain…

[Operator Instructions]. Our first question is from Andrew Burd of JPMorgan. Please go ahead.

Regarding the sites that you selected for sale, do you anticipate that all together that they'll fetch proceeds that represent a higher multiple on EBITDA then where SUN units are currently valued in the market?

Yes Andrew, this is Bob. Certainly that's the case or we wouldn't be selling them.

Okay, great. Then how many of the roughly 100 sites are in operation now versus just real estate or in the land bank?

Active sites are around 75% to 80%, I believe.

Yes. I think Scott can get back to you with a specific number. I haven't looked at the list recently andrew, but I think it's about 75 of the 100.

Yes, just a ballpark estimate is close enough.

75, 78.

Great. Then looking at EBITDA for the year, if I just take your year-end debt that you reported in the press release and divide it by 6.5 times leverage, I get to a little over $700 million. And acknowledging there's probably some rounding in there, how should we reconcile that $700 million to the lower full-year number? Is this just assigning pro forma credit for acquisitions or is there something else or am I just not thinking about it correctly?

No, you are thinking about it correctly. There is the acquisition adjustment. There is also the expense adjustment for financing costs.

Okay, great. So that might be a better run rate number for the full year than the reported number?

At this point, yes.

Okay.

Obviously the merger acquisition numbers will roll off over time.

Sure. Great. And then last question, clarification on the growth CapEx budget for 2017. Would you be able to break off the portion that's currently earmarked for the Indiana Tollway and the Hawaii initiatives versus normal course NTI or normal course growth CapEx?

I haven't really thought about it that way. I would think that the one NTI plus the Indiana Toll Roads which are big sites which will cost a little bit more and Hawaii, you're probably looking somewhere around a quarter of the $200 million that we've talked about.

Okay, that's helpful. And then last follow-up, back to the divestiture plan for the 100 sites. Can you just elaborate a little bit more on the opportunity to sell those locations and then sign the customers up to a dealer distributor agreements and kind of in general how that process might work? Any clarity there would be helpful. That's my last question. Thank you.

Yes. Well, I'll start with, we're pretty early in the process here. We've done this, though, a number of times. What we do is we have a bid process, Bids are due, I think next week, towards the end of next week and then we sit down and evaluate those. Our history is that as we've gone through this process over the last decade, we wind up with in excess of 95% of the volume moving from retail over to wholesale. And I expect that we will see similar kind of results this time.

Our next question is from John Edwards of Credit Suisse. Please go ahead.

Yes, good morning. Thanks for taking my question. Just kind of following up on divestitures. Is one of the other things that you might be looking at is instead of outright sale of sites but sort of partial sales of sites? Then also kind of looking through the list of the sites that you are putting up for sale, would you describe those as more non-core locations or just how we should think about some of these different things and options?

Well, I guess I'll start with, I'm not sure what you mean by partial sale. The way we look at it, I guess, a partial sale could be a class of trade change from a company to a dealer. We, as a part of our ongoing business, take a look at each of our sites and make a decision where we think our partnership will earn the best return and move them between Company op and dealer or from dealer to Company op. So I'm not sure what you mean there. If you mean sale leaseback, we have looked at that in the past and haven't concluded that was materially helpful. Then with respect to how we pick the locations in terms of core, non-core, we do economic analysis on each of the properties where we have a real estate investment, whether they are a dealer operation or a Company operation. We take a look at the cash flow associated with it and we compare that to market value of the real estate. And if, in fact, we can get a higher return by selling the real estate, we do that. As I've answered with Andrew, our history has been that we've been successful, not only pulling back in the capital associated with the real estate investment, but having success at signing them up, generally with the distributors and having continued cash flow from the wholesale fuel that's sold. We generally get a 15-year supply contract with sites that we sell. And that's our objective this time as well.

All right. That's helpful. And then, I'm curious, I mean, it looked like the merchandise margins this quarter, they came in about 200 basis points or so below average or -- was that a mix issue in the merchandise margins? I mean, any -- it was just kind of curious to us because that looked like it was a big contributor to at least the EBITDA numbering coming in below what we were estimating. So any insight there would be helpful.

You bet. Well, I guess as we said in the remarks, it was driven by promotional activity primarily. To give you a little more color around that, we'd opened a number of new sites. We did some promotions, primarily in the restaurant side of our business in an effort to drive sales. We increased the amount of inventory that we had for sale. When you do that, you wind up with higher shrink and spoilage numbers which we did see. Quarter in, quarter out, depending upon where the quarter hits, rebates come in or out. And it was a combination of kind of all those factors which took a run rate north of 31%, kind of in the 31.5% down for this quarter down to the 30%. We don't think this is -- there certainly not any step change here; in fact, it's kind of the opposite. I'm more optimistic about our capture of margins going forward.

Okay, that's helpful. And just to follow up that, were there any particular regions that received more promotional activity then others? Was it targeted or was it completely across the business?

It was -- the biggest driver was across the business in the restaurant area, no geographic specific area.

Okay. And then, do you think the promotional activity was effective? Then to what extent will the promotional activity continue?

Well, the promotional activity is over. We certainly hope the promotional activity it was effective. I can tell you that, for example, the new test sites we opened on the East Coast, we did see increases in sales there and are pleased with the way they are tracking in our core business. We get a lot of noise, particularly in Texas. All restaurant sales are under pressure and while our sales are down versus prior year, our sales are holding up better than the averages reported by competitors in the state. So to that degree, I think yes, we're successful or have been successful, holding customer accounts, holding sales. I think that the activity in Q4 reinforced that and we're hopeful that we don't have continued need for this type of activity on an ongoing basis.

Okay. Okay, I'm just trying to gauge what would be, then, the trigger or the benchmark you look at for deciding whether to have to resume promotional activity. How should we think about that?

Well, John, we watch customer accounts. We watch merchandise sales. We have added additional technology into all of our convenience stores and watch item level specific sales on an ongoing basis and we make decisions based on optimizing gross profit dollars both in the short term and the long term. So the trigger for anything additional would be competitive activity that takes place in an area, sales results in a certain geography. I can't tell you that we won't be running promotions in the future. What I can tell you is that we will strive to optimize gross profit dollars going forward and we're confident that we're both growing the business and merchandise and in restaurant sales and working to increase margins over time.

Okay, that's helpful. Then final one is just in terms of your perception with regard to market share in your various areas and I guess it sort of relates to the promotion, do you think you were able to hold onto share, actually grow share? Or do think the promotional -- how do you think about that?

But so I'll break it down between fuel and merchandise. We watch fuel sales all the time and we're making pricing decisions multiple times a day. As we look at specific geography, our best feel is that we're optimizing gross profit dollars there and we're holding market share across our geographies. Where you see some significant same-store sales declines, primarily in the Texas area, that is a reflection of employment and economic activity in those geographies. And I don't see evidence that tells me we've ceded market share there in any appreciable way. From the standpoint of, then, merchandise, similarly I think actually we've grown some market share there. We've seen success in the Northeast which we pointed to. Texas has been challenged, but again, while we see same-store sales declines driven largely in the oil-producing areas, compared to others in the geography we feel we're holding market share. From a restaurant standpoint, I would say that we have grown market share, exclusive again of the oil-producing areas. But when I look at Texas in total, whether it's sales tax receipts, whether it's restaurant associations reporting sales results, whether it's looking at analysis provided to us by the consumer goods companies that give us their statistics by geography, if anything we're slightly gaining market share and we've not ceded market share.

Okay. That's great. Just with the turnaround and the pick-up in drilling activity and the obviously large increase in rig deployments, how are you seeing that being reflected in your activities in Texas now?

Yes. I'll tell you, I think that it's peoples -- we'll see how long memories are and we'll see where crude oil prices go, but my view is that the activity we saw previously where as crude oil had walked up significantly and people were throwing all resources at drilling activity, particularly in the Permian but also in the Eagle Ford, I think with the reset, it is -- with the reset in terms of crude oil pricing in at least our view that we're going to trade in a band, I think those days are over. I think we'll see increased rig counts but they will be done with significantly fewer people. Just to kind of level set here, while rig counts are up significantly, as we pointed out earlier, given that rig count of over 300 last Friday, still down 60%-some and the guys that are drilling are doing it with lots more automation and a lot fewer employees. I think that's the reality of what we're dealing with. The last point I'll make on this, John, is while from a same-store sales basis versus the height of activity when we had literally lines out the door, guys in coveralls and with muddy boots fueling up white pickup trucks or smaller commercial vehicles. While we've seen decreased activity there, these sites are still some of our most profitable locations and they are still highly productive. So same-store sales are down, but we're making good money on those sites.

Our next question is from Ben Brownlow of Raymond James. Please go ahead.

On the expected OpEx reduction for 2017, that $75 million, I guess around $27 million is not lapping the relocation and M&A transaction expenses, but can you give some additional detail around how you're going to deliver that, just a split between G&A site level? The second part of the question is, do you feel like all the opportunity's been identified at this point to reduce the OpEx or do you think there's possibly some greater reductions as you work through the year?

I think the answer to your question is, yes, we believe we have a path to the $75 million. If you just compare the absolute total of OpEx to G&A, there's obviously more room in the OpEx. But we do have a path to that, but quite frankly we're going to keep working harder on increasing it, increasing the reduction.

Yes, this is Bob. I'll just tell you that if you look at us in total, right, we're a Company that has grown both quickly and we grew through acquisitions. And as you do that, we identify our expected synergies each time we pull the trigger on one of those and we delivered on those, but the delivery has come largely as a result of supply chain economics. What has been stickier has been getting at expense and the driver there has been largely around systems work, complicated by moving headquarters to Dallas which caused additional expenses. We've got that largely behind us. We now have the benefit of consolidated employee group and headquarters here in Dallas. We have systems work that's ongoing. We're now all on the same instance of a single platform for all of our Company operated locations. We've installed new software on our wholesale supply and trading businesses and we're working all the bugs out of those things. I think that each of those will give us opportunities to extract more cost in 2017 and then beyond. This is an area of intense focus in 2017. As I said in my remarks, we came through 2016 completing the drop-down, getting the move behind us. We thought hard when we cut capital for 2017 and we've identified this as a year to really tighten up across all measures in the Company.

Our next question is from Theresa Chen of Barclays. Please go ahead.

My first question is related it to RINs. Bob, one of your competitors on the C-Corp side recently made the comment that the fluctuations of RIN prices are more or less baked into the refining margins and that ultimately everything is passed onto the end user. It seems a bit surprising and counterintuitive, given that the entire refining industry has been up in arms about the issue and documenting vocally the detriment to their businesses while RIN prices are high. I'd love to get your perspective on this. Broadly based on what you've seen in your business, how much of the change in RIN prices do think is actually passed on?

I've said in the past, Theresa, that I agree with whoever made that comment. And as somebody who has dealt with RINs as a refiner and now as a marketer, I think when you look at the cracks, you see RINs reflected. The independent refiners have been quite vocal about this, but my view is it's impossible to completely quantify it but if you look at our margins and you look over a decade when RINs were $0.02 or $0.03, so on a 10% blended basis, $0.002 to $0.003 per gallon, then you look at it when RINs were $1.48 so arguably $0.148 or $0.15 a gallon. Surprisingly or not surprising to me, our retail margins have stayed within a very tight band. So we're not in favor of changing who the obligated party is. I think the market isn't 100% efficient. I'm happy that we're a blender and a grader of RINs, but it's, as you started your question, I agreed that it's mostly all passed through to the end consumer.

Okay. Turning to GP support. Tom, I appreciate your candidness about all options being on the table. Can you just possibly provide additional color on the comments made during your parent's call? What do you think needs to happen fundamentally at your business before your parent would consider stepping in?

Well, I was there for a portion of that call and then came down, we're on a different floor. Our conversations with Energy Transfer continue to be positive and supportive. We're working our way through all the changes I described with -- in terms of Ben's question previously. We have lots of options on the table that we're looking at from a self-help standpoint and unfortunately we're not in a position to give any additional color on that. But I think that's what was referred to by Kelcy's comment.

Our next question is from Sharon Lui of Wells Fargo. Please go ahead.

Just trying to follow up on the question about your CapEx program. I think you indicated that a quarter of the spending is related to the NTIs and also the rebuild of the locations. Just wondering what the other spending is related to? And with regards to the rebuild of locations, what type of returns do typically earn on those types of projects?

All right. Let's answer the easy one. We normally see mid-teens type returns on those kind of investment. What's outside of the other is when we sign up a new customer for going to a dealer or distributor, we have to provide incentives, rebranding, et cetera. It doesn't sound like capital but it is treated as capital in the -- and we do focus on getting new customers and in building them into the model.

Into the system.

Yes.

Okay. So it sounds like none of the costs could be deferred in terms of those types of projects?

Those types of projects we don't want to defer, you're correct. I think going down to one NTI this year certainly allowed us to defer it.

Okay. I guess in terms of thinking about the proceeds that you could raise in the process, if you have, I guess, 100 locations and ballpark it's about $5 million to develop the cost. And if you make a mid-teens return on that, is that the way the math should work in terms of potentially fetching close to $750 million of potential proceeds?

Are you asking, is it -- will we get $750 million for 100 sites?

Well, just thinking about potentially what the max? If you have 100 sites and it costs $5 million to build and let's just say you make -- .

Correct. Well, understand that first off it's too early for us to estimate what the proceeds will be, but it will be significantly less than that. These are sites that are not our highest and best retail sites, right? These are sites that we've selected that will be very good income producing opportunities for a dealer or for a distributor, but they are not the kind of sites that would be reflective of something we've just recently completed.

Our next question is from Chris Sighinolfi of Jefferies. Please go ahead.

Top, was Just curious, obviously had some tax expense in the fourth quarter. I was wondering if you could help us think about how that might take shape over the course of 2017 or in future periods, what the NOL balance is right now and any guidance you could provide would be helpful.

Morning, Chris. I think you should probably look at taxes over the entire year. So we had a $15 million good guy last quarter. We have a $12 billion bad guy, but for the year we essentially paid no taxes. We'll see variations as we do true-ups and over the -- throughout the year but I was still point you to a very low tax rate.

Okay. So pretty muted for 2017, at least what you guys are expecting?

Yes.

Okay. Then also was just curious, would you touch back on margin expectations? Bob, I think you said for retail $0.23 to $0.25. Just curious, any updated views on wholesale margins going forward? And then if you could offer any color on 1Q to date, there's obviously been some movement in the crude market and then the gasoline crack.

Yes. I think the range we've given on the retail side is a good one to stick with in terms of your forward look. We have been outperforming the range on wholesale. Here recently there've been a number of factors that have driven that geography, different classes of trade included in that kind of mix and we'll take a look at that. We haven't moved the guidance up on wholesale to date, Chris, but I think it's a fair question that we owe that as our mix has -- it's changed pretty significantly. With respect to the first quarter, we've seen a fair amount of movement in terms of retail prices as a result of commodity prices underneath. What I would tell you is that we're not seeing anything different in the first quarter than we've seen relative to what happens when commodity prices changes. We're not seeing any difference this quarter than in times past.

Okay. I guess final one, if I could slip another question in, is just with regard to, Tom, you had outlined a bunch of actions meant to cut costs and generate cash and help delever. Appreciate all the color on that. You also mentioned that might be insufficient to hit the target, so sort of everything beyond that remains on the table. I appreciate your comment about not wanting to delve too much into detail on what that might mean, so want to be respectful of that. But just trying to figure out, what is the decision tree, I guess, we should expect from you guys as you evaluate what those options are? I am assuming all options are inclusive of your distribution too? How do we think about how you'll evaluate the steps beyond those you outlined?

Carefully.

Certainly to be a little flippant here, we're going to evaluate it carefully. But it comes down to the metrics we started off the discussion with which is leverage. We certainly don't want to be running leverage anywhere close to where we want. We want to get down below 5 and the coverage ratio is also at 0.61 or 1 for the year. We want to improve upon that. So as you're looking at about how to get that, those will be the criteria we look at going forward.

This is Bob. Look, I think we're frustrating people and have been for a while. I guess the message we'd like you to take away is that this has our full attention. This is not something we're just talking about. We're deeply searching through the best path for the partnership in total and it's our hope that we will have something to announce here before too much longer. But we're just not in a position to give additional detail at this point.

Our next question is from Robert Balsamo of FBR. Please go ahead.

My question is on looking forward 2017, you've given good color on margins in retail and wholesale and some expectations on operating costs improvement. Could you talk a little bit about volumes and how you think about volumes on a normalized year kind of on a run rate, given there's been some accusations during the year and it's going to be thoughts versus 2016 full-year results?

Yes. Well, I think I'll start with this. My view is that demand is essentially flat. That the positive factors around the improved economy, improved employment which drive total miles driven, the lower fuel prices which have influenced consumers' buying behavior more toward SUVs and light trucks than cars that get better mileage, but that's all largely offset by cafe standards and the fact that an SUV may use more gasoline than a Prius but an SUV today gets a lot better mileage than an SUV did 5 or 10 years ago. So all those factors coupled with the length of time that people own their vehicles, currently 11 to 12 years average, argue for pretty good stability. Our view is that our base volume will -- and we budget for it to be flat. Then we add in the acquisitions and we give details as we do those acquisitions in terms of what the volumes are. As Tom mentioned when we do a raise and rebuild, we will get a -- we've experienced kind of mid-teens returns. Those returns are driven by increases in both fuel volume and ancillary volume, whether it's restaurant and/or merchandise or just merchandise, depending on the facility. But that's how I would answer the question on volume, assume it's going to be flat.

Okay, that's helpful. I hate to beat a dead horse. You made some -- there were some comments just now about potentially the actions to reduce leverage and timing might be -- there might be some announcements in the short term. Can you maybe elaborate on what you mean by what timing is expected as far as updates or are going to wait to see some of the operating expense improvements and margin improvement kind of play out throughout the year before a decision is made?

I didn't say and I'm not going to say when there will be an announcement. We'll have an announcement when we got something to announce. Again, I'm not trying to be flippant. What I -- the other part of your question, though, this is not a situation where we're waiting to see how we do in terms of the actions we're taking around expenses. We're working this hard and it's not conditioned on any outcomes there.

[Operator Instructions]. Our next question is from Patrick Wang of Robert W. Baird. Please go ahead.

So we've covered the oil patch and border location headwinds, but beyond these and looking at the first quarter, can you comment around fuel trends you are seeing at your stores versus what we've been hearing from the EIA around just that muted fuel demand entering the year? Are we seeing anything outside of the typical seasonal moves here?

Our numbers reflect what you're seeing elsewhere. We're off to a slow start on fuel demand as reflected by the reports and we're seeing that in our geography as well, particularly in the Northeast. Some of its weather driven. Some of it is associated with, I think, economic activity in the Northeast. But we're seeing the same thing.

Okay, thanks for the color there. Then moving over, so it seems like the Emerge fuel business is continuing to ramp up nicely. Can you help us size up how it much that business contributed to your 4Q numbers? And is, call it the 24-month ramp outlook, is that still intact?

Yes, I think it was $7 million-ish numbers in Q4 and we're pleased with this acquisition. As I said in my remarks, we've got the Hydrotreater being plumbed up and wired up. The units have been set and are in place. We're looking to get that thing onstream here shortly by the end of this quarter and online into the second quarter. That will be somewhat helpful. But I think, Scott, we've given people sort of the $25 million-ish -- .

Yes, $25 million.

$25 million-ish is our expectation annually.

Okay. Got you.

We hope to exceed that.

Got you, okay. Then the last one from me is, can you just remind us what are your ATM program expectations? Do you still expect to pretty much utilize that by year end?

We're going to continue to hit the ATM and we have not given the timing. You've got a feeling for how much we used it in the fourth quarter and so far this quarter we'll look and see how the market's doing. We're not going to get too cute in trying to time it. But it will be -- it's easier to trade on a day like today when there's volume which by the way we can't do. But we'll keep looking at it and see what opportunities there are.

At this time I would like to turn the conference back over to management for any closing remarks.

Thanks very much, everybody, for taking time to join us this morning. We appreciate the continued support. This concludes our remarks and this will end the call. Thanks very much.