Greetings and welcome to Sunoco LP's Fourth Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Scott Grischow. You may begin.

Thank you and good morning everyone. On the call with me this morning are Joe Kim, Sunoco LP's President and Chief Executive Officer; Karl Fails, Chief Operations Officer; Dylan Bramhall, Chief Financial Officer; and other members of the management team. Today's call will contain forward-looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the partnership's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic. Actual results could differ materially, and the partnership undertakes no obligation to update these statements based on subsequent events. Please refer to our earnings release as well as our filings with the SEC for a list of these factors. During today's call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Sunoco LP website for a reconciliation of each financial measure. Before I turn the call over to Dylan, I want to briefly cover the results for the fourth quarter of 2021. The partnership recorded net income of $100 million compared to $83 million in the fourth quarter of 2020. Adjusted EBITDA was $198 million compared to $159 million in the fourth quarter of 2020. The partnership sold 1.9 billion gallons in the fourth quarter, up 3% from the fourth quarter of last year. Fuel margin for all gallons sold was $0.12 per gallon compared to 9.2 cents per gallon a year ago. Total fourth quarter operating expenses of $123 million were higher on a year-over-year basis. Fourth quarter distributable cash flow as adjusted was $143 million compared to $97 million in the fourth quarter of 2020, yielding a coverage ratio of 1.7x. The coverage ratio for the full year 2021 was 1.6x. Finally, on January 26, we declared $0.8255 per unit distribution, consistent with last quarter. The durability of our business and history of delivering results continues to support a stable and secure distribution for our unitholders. I will now turn the call over to Dylan to discuss the full year results and our outlook for 2022.

Thanks, Scott. Before I walk you through our 2021 full year results and accomplishments, I'd like to make a few comments on our recently announced acquisition of the 23,000 barrel a day transmix facility in Huntington, Indiana. This acquisition represents another really exciting opportunity to continue to build out our midstream asset base with a low-risk solid return deployment of capital. Our strong distribution coverage and balance sheet continue to allow SUN to invest in these types of opportunities, which will contribute additional value to our stakeholders for years to come. Now shifting over to our full year 2021 results and accomplishments, we recorded adjusted EBITDA of $754 million, above the midpoint of our 2021 guidance range and up 2% from 2020. Distributable cash flow as adjusted was $542 million, up 5% versus the prior year. We improved our already strong distribution coverage ratio to 1.6x, up from 1.5x in 2020 and 1.3x in 2019. Our balance sheet and liquidity position remains strong with leverage at the end of the year of 4.17x and availability on our credit facility of approximately $930 million. Finally, our strong financial position allowed us to take advantage of a diversified set of growth opportunities in 2021, including the acquisition of nine refined products terminals and the construction of a greenfield terminal in Brownsville, Texas. With all of these accomplishments as the backdrop, we enter 2022, poised to continue to deliver strong results. In December, we provided guidance for 2022 adjusted EBITDA of between $770 million and $810 million. Underpinning this guidance are the following assumptions: fuel volumes in the range of 7.7 billion to 8.1 billion gallons, annual fuel margin between $0.105 and $0.115 per gallon, total operating expenses of between $490 million and $500 million, maintenance capital of $50 million and growth capital of approximately $150 million. The free cash flow generating capability of our operations allows us to focus on the pillars of our capital allocation strategy: first, to maintain stable and secure distribution for our unitholders; second, to protect our balance sheet through debt paydown when prudent; and third, to pursue disciplined investment in our growth opportunities like the acquisition, which we announced today. We will be financially disciplined with a target coverage ratio of at least 1.4x and a target leverage ratio of 4.0x. Sunoco's consistent financial results throughout commodity cycles have become a hallmark of our partnership and we expect 2022 will bring more of the same. With that, I'll now turn the call over to Karl to walk through some additional thoughts on volumes, expenses and our outlook for 2022. Karl?

Thanks, Dylan. Good morning everyone. We delivered another strong quarter, supported by continued strength in margins and expense discipline. In addition, the contribution from our recently completed acquisitions have been in line with our expectations. Volumes for the quarter were up 3% from last year. We did see some weakness creep into the end of the quarter as a result of the Omicron variant spreading in the United States. This carried over into the beginning of January, but in the last couple of weeks, we have seen volumes returning. Turning to margins. In the fourth quarter, we delivered strong margins of $0.12 per gallon, our strongest margin quarter in 2021. Increased volatility contributed. While RBOB prices were flat from the beginning to the end of the quarter, there was over a $0.50 per gallon spread from low to high during the quarter. In addition, we continue to see the benefit of higher breakeven margins, including when volumes softened near the end of the quarter. That same market dynamic has carried into the beginning of this year. Turning to 2022. We expect another year of solid growth and we are confident in achieving our EBITDA guidance despite potential impacts to volumes from the Omicron variant, high crude prices, supply chain and labor issues and general inflation, all of which we considered when we issued guidance. With respect to volumes, first quarter volumes are typically the lowest of the year primarily due to the lower number of days in the quarter. I mentioned earlier some impact from Omicron. Again, I would remind everyone that if volume weakness were to sustain for a period of time, that we would expect it to be offset to some extent by higher breakeven margins as we've experienced for the last two years. As mentioned on last…

Thanks, Karl. Good morning everyone. We delivered very strong results in 2021. We came into the year financially healthy and we finished the year stronger than where we started. A few financial highlights from last year. We delivered record EBITDA and DCF. Our business remains highly resilient and our capital expenditures continue to provide incremental EBITDA and DCF growth. Our LTM coverage ratio is now around 1.6x while our leverage ratio continues to decrease towards our 4x target. Year after year we continue to deliver on our guidance and demonstrate the resilience of our business model. Looking forward we expect to have another good year. We're about a month and a half into the new year, Karl provided some insights into volume and margin environment we're currently experiencing, factoring in the impact of the Omicron variant. We're learning to live with the virus and we expect our volume to continue to grow as the year progresses. As you think about our business for 2022, keep in mind the following. The first quarter is performing in the profitability range that we expected when we provided guidance back in December. Underlying the first quarter as well as the rest of the year, industry breakevens continue to be high. We're seeing this play out as the market is passing on price increases to the Rack and Street. There will be times when short-term margin pressure exists. However, we believe the floor on overall margin is higher than historical averages. And finally, we have a proven track record of optimizing gross profit in both headwind and tailwind environment. We also have a proven track record of managing overall expenses. Bottom line, we expect to have another good year. Moving on to growth. We continue to strengthen our business by growing our midstream assets. With the future addition of the Gladieux acquisition and the start-up of the Brownsville terminal, we continue to vertically integrate our business. Terminals are a critical part of the field distribution value chain and owning these assets helped us vertically integrate and capture a larger portion of the overall fuel distribution margin. If you look at our midstream acquisitions and projects, they've all been part of an integrated play. The field distribution business helps keep the terminals at a higher utilization rate and the terminals provide our field distribution business further ability to grow. Financially, we executed these transactions at very attractive valuations, especially after adding synergies. On the field distribution side, we'll continue to grow organically as well as capitalize on acquisition opportunities. Let me close by stating that our current and future growth plans will build on our history of maintaining financial discipline, which means protecting the security of our distributions while also protecting our balance sheet. Operator that concludes our prepared remarks. You may open the line for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Theresa Chen with Barclays. Please proceed with your question.

Good morning and thank you for taking my questions. I'd love to ask a couple of more questions of clarification on the economics related to the Gladieux acquisition. So maybe first, going back to that 7x multiple with synergies. Can you share with us what the LTM multiple was? And from there to getting to 7x, are you primarily looking at cost synergies as if you're paying a third-party terminal right now, you can take those volumes and put them through your captive system? Or are they, in part, revenue related, will you be able to sell additional product as a result of this acquisition?

Yes, Theresa, thanks for your question. Let me start off a little bit about the economics, and then I'll let Karl walk through a little bit more detail on the synergies here. Yes, that 7 or sub-7, which is really a sub-7 once we get full synergies up and running here. There is only a very modest amount of synergies really getting us there. We're not too much higher than that on a multiple basis right out of the gate. But the synergies really are it is a mix of kind of the various activities that we undertake on these. And so, Karl, do you want to give a little more detail on this?

Yes, sure. Thanks, Dylan. If you look at it, Gladieux was operating as a separate company. So there clearly are some expense synergies we'll get just by folding that into our operation. the transmix business is really a regional business where you have transmix that is kind of aggregated through the supply chain, a mix of gasoline and diesel and then the transmix plant separate it back out. So this really serves the Midwest part of the country and is a good fit for us. There are some commercial opportunities where, as Joe mentioned in his prepared remarks, having physical assets is a good fit with our fuel distribution business and provides a platform for us to grow. We already have some Midwest business, not as much as in Indiana. So this should be a good opportunity for us to grow that.

Thank you. And I'd also like to follow up on some of Joe's comments about the first quarter outlook. I understand that demand has bounced back and remains resilient, although we are in what seems like a relentless upward take on wholesale gasoline prices, which typically is inversely correlated with your margins. But also understand that breakeven margin the floor is higher as a result of the dynamics that you've discussed. I was wondering, in the first quarter, you typically get that annual 7-Eleven makeup payment and since it reflects 2020 – I'm sorry, 2021, and that's over now, can you share with us how much you expect from that and what kind of boost to the CPG that could be?

Yes. Sure, Theresa. On the 7-Eleven, as you pointed out, we get that makeup payment at the end of the first quarter. And if – it's really related to overall volumes. So I would say it will be closer to the payment we received in 2020 than the one we received last year. As far as your comment on overall first quarter outlook, the only thing I'd add to what Joe and I said in the prepared remarks is clearly the market provides some headwinds as it rises, but there has been a decent amount of volatility along the way, which I mentioned contributed positively in the fourth quarter. So that helps us with some of our gross profit optimization strategies, deliver more solid results even in the face of some of those upward movements.

Thank you.

Our next question comes from Gabe Moreen with Mizuho. Please proceed with your question.

Good morning everyone. If I can just follow up on the transmix acquisition, can you just talk about contractually how that's structured in terms of fee-based versus commodity, any commodity sensitivity, appreciating that you may be hedged naturally further downstream? And then also from, I guess, the transmix supply standpoint, kind of how long do the contracts run with, I think, some of these pipelines? And is there any competition in the area?

Yes, Gabe, thanks for the questions. The transmix processing business is, I'd say, you take a margin on the processing. It's not really a fee-based. But it is really stable because most of the transmix that we purchased, we purchased at a discount to gasoline and diesel. So when you're actually purchasing the product on a pricing structure tied to what you're going to make, you can imagine how that provides more stability. As far as competition, really, there are, call it, about a dozen transmix processing plants across the country and sometimes transmix is processed in refineries with other feedstocks. And so I think, naturally, the business has built up to where you have these plants spread out and situated where transmix aggregates. So in theory, yes, there can be competition, but really, this is the premier Midwest transmix operation.

Great. Understood. And then maybe if I can just follow up in terms of that. I think the nonfuel margin for 4Q ticked up pretty nicely relative to prior quarters. Is there anything kind of going on there in the numbers?

Yes, Gabe, this is Scott. Yes, what's going on there is really the contribution from the NuStar acquisition. So, all of the terminaling fees, throughput fees, et cetera, flowing into that, which were not there in the third quarter.

Got it. Okay. Thanks guys.

[Operator Instructions] Our next question comes from the line of John Royall with JPMorgan Chase. Please proceed with your question.

Hi, good morning guys. Thanks for taking my questions. Most of mine have been asked. So, just one follow-up on the 7-Eleven makeup payment that you guys are pretty clear on the expectations for this quarter. I'm just thinking into next year. So the 1Q 2023 payment, given that your volume guidance remains below pre-pandemic levels and you've got some acquisitions in there. I think it's fair to assume from the guidance that we should be seeing a payment next year as well. Is that affecting to be modeling?

Yes, John, I think that's a reasonable expectation.

Okay. That was all I had. Thank you.

You bet.

Our next question comes from Selman Akyol with Stifel. Please proceed with your question.

Thank you. Good morning. Just wanted to follow up on the acquisition. As I said there, I look at it, your tankage there is like 30x plus your throughput. Was all of that – did it have a high utilization as you look back over the last 12 months? Or are you thinking you might be able to increase utilization on the tankage for your distribution?

Yes, Selman, I think you look at tankage associated with transmix processing and the terminal associated with it. There's some of that where you're going to aggregate and maybe even segregate some different flavors of transmix, maybe segregated by sulfur content. So that uses some of the tankage. And the rest of the tankage, yes, as you point out, is really on us commercially to be able to optimize. And I'd say, I won't necessarily comment as much on the previous operation. But clearly, we feel that that's a strong suit of ours is being able to take advantage of commercial opportunities. And like I said earlier, hopefully, grow our fuel distribution business to all things being equal, yes, I think we're going to find value in that.

All right. And then just one little thing there. Is there also room there for expansion then if you wanted to increase your tankage there?

There's some room, if that makes sense.

Okay. All right, thank you, Karl.

Thanks, Selman.

Our next question comes from Elvira Scotto with RBC Capital Markets. Please proceed with your question.

Hi, good morning. Just one question from me. Just I'd love your thoughts on – with gasoline prices high, overall inflation, kind of pinching the consumer. Would love your thoughts on how you think about potential demand destruction? And I know the breakeven margins are higher, so if volumes go down for SUN, but just broader macro thoughts around that.

Yes, Elvira, this is Karl. I'll share a few thoughts on gasoline prices and maybe inflation in general. I mean the first one you already commented on is that in many ways, the inflationary pressures are pass-through in that they increased the breakeven margins and for our business model. It really provides stability. The other component from our standpoint is it really is looking at it on a relative level. And so we think about the size and scale that we bring to the table really enables us in the face of those to maybe even capture a little bit more margin than some of the competitors. As far as the macro push, I'd say in – or the macro look, in the short-term, we don't see a big impact on demand but clearly, higher prices, history has shown that higher prices can change discretionary travel or choices like that. We haven't seen a lot of that. In fact, we think there's some pent-up demand as we go into spring and summer, just like we saw last year, that's what we're expecting. But the real answer there is how long and how high the sustained prices are. So my crystal ball is not perfect in that area, but we haven't seen anything in the short-term.

Great. Thank you very much.

You bet.

Our next question comes from Ned Baramov with Wells Fargo. Please proceed with your question.

Hi. Good morning. Thanks for taking the question. Now that you've operated the NuStar and Cato assets for a few months, could you maybe talk about potential investment opportunities in and around these assets?

Sure, Ned. This is Karl again. You heard me mention on last quarter's call that, if anything, we had identified maybe a few more opportunities since we gained ownership than we initially had planned on. That's still true. I'll say there's no sizable or material investment or opportunities. They're all incremental on the margin, but generally positive relative to what we originally assumed.

Got it. And then just one clarification on the transmix deal. Is the transaction immediately accretive or accretive in the first year of operation?

Yes. It's immediately accretive. Like I said, coming right out of the gate, we're kind of sub-8x multiple before synergies. And so we're going to start picking up accretion day one on this acquisition.

Great. Thank you. That's all I had.

We have reached the end of the question-and-answer session. I will now turn the call back over to Scott Grischow for closing comments.

Well, thanks for joining us on the call today. As always, please feel free to reach out with any questions. Have a great day.

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.