Greetings, and welcome to Sunoco LP Second Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Scott Grischow, Vice President of Investor Relations and Treasury.

Thank you, and good morning, everyone. On the call with me this morning are Joe Kim, Sunoco LP's President and Chief Executive Officer; Tom Miller, Chief Financial Officer; Karl Fails, Chief Operations Officer and other members of the management team. A reminder that today's call will contain forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially. 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 Tom, I will provide an update on JC diesel pipeline joint venture with Energy Transfer that we announced on our first quarter earnings call. We signed final agreements on July 1st, successfully commissioned the pipeline in August and completed our first deliveries to customers this week. As a reminder, Energy Transfer operates the pipeline for the joint venture which transports diesel fuel from Hebert, Texas to a terminal in the Midland Texas area. The joint venture splits the profits from midstream operations. Both parties benefit through a sharing agreement on the marketing side, capitalizing on the West Texas to Gulf Coast differentials. Sunoco LP's cash investment is approximately $50 million, $5 million of that is growth capital with the balance comprised of line fill and working capital. I will now turn the call over to Tom who will cover this quarter's financial and operating results. Tom?

Thanks, Scott and good morning, everyone. Again this quarter we delivered quality results. For the quarter, the partnership recorded net income of $55 million. Second quarter 2019 adjusted EBITDA was $152 million, compared to second quarter 2018 of $140 million. Our second quarter leverage of 4.2x was lower than last year second quarter leverage of 4.5x. Second quarter DCF as adjusted was a $101 million, yielding a second quarter coverage ratio of 1.17 and the trailing 12-month coverage ratio of 1.35. As noted in the earnings release, these results include a one-time expense of $8 million related to a reserve for an open contractual dispute from prior periods. If you remove this one-timer, adjusted EBITDA would have been a $160 million; DCF as adjusted $108 million. Second quarter coverage would have been 1.26 trailing 12-month coverage of 1.37 and leverage of 4.16x. Another solid quarter no matter how you look at it. On July 25th, we declared a $0.8255 per unit distribution, the same as last quarter. Looking at our operational performance, fuel volume in the second quarter totaled a record high of over 2 billion gallons that's up 4% from a year ago. It was driven by contribution from 2018 acquisitions, organic growth and gross profit optimization efforts. Fuel margin was $0.091 per gallon which was impacted by the aforementioned one-time expense, as well as the mid June Philadelphia Energy Solutions Refinery fire. Spot gasoline prices ran up in the response, pressuring margins in the back half of June and into early July PES is one of our largest suppliers on the East Coast; however, given our size we have multiple other options with good long-standing suppliers. All told without the one-time contractual dispute and the margin impact from PES, we would have been toward the lower end of…

Thanks, Tom. Good morning, everyone. Quarter-after-quarter, we continue to deliver quality results. Our second quarter performance is a good example of the resilience of our business. We face an upward commodity price environment in both April and June. We're also negatively impact by the PES refinery issues. Furthermore, we had a one-time an $8 million expense that Tom mentioned earlier. Even with these headwinds, we delivered another solid quarter. Our underlying business remains strong. And we expected to continue into the foreseeable future. We're building a business model to withstand various headwinds, yet at the same time our business model can also take advantage of select tailwind, like we saw in the fourth quarter of last year. Looking forward, the third quarter is off to a good start. And more importantly, we expect to deliver on our annual guidance. Moving on to growth, the JC Nolan pipeline was placed into service this month. Although the dollar amount is not exceedingly large, this is a prime example of our ability to create accretive growth outside of fuel distribution. Since last year, we have shifted personnel and dollar resources to build our midstream business. And is paid off with the acquisition of two terminals in December of last year. And the completion of the JC Nolan project. We have temporarily slowed our field distribution acquisitions; however, our pipeline remains strong. When the right opportunity comes at the right price, we'll act on it. To balance the short-term decrease in acquisitions, we have increased our organic growth as Tom detailed earlier. Let me close by stating we continue to establish the track record of delivering on our targets. We remain confident that we will continue to deliver in 2019 and beyond. Operator that concludes our prepared remarks. You may open the line for questions.

[Operator Instructions] Our first question comes from the line of Shneur Gershuni with UBS. Please proceed with your question.

Hi, good morning, guys. Maybe we can start off with your outlook for margins for the back half of this year as sort of think about your full your guidance are above, moving in the right direction this quarter. Any color around your expectations for margins for 3Q and 4Q?

Hi, Shneur. This is Karl. Yes, as you mentioned the fallen prices definitely provides a tailwind like we saw in Q4 of last year. That's very constructive for us. I think in general as we've talked over the last number of quarters, we look at -- we don't look at margins and volume separately. We look at them together with as gross profit. I think our gross profit optimization efforts have yielded results in Q2. It was a little more towards a volume side than the CPG margin side. But we're very comfortable with our guidance as Tom and Joe mentioned on our prepared remarks. And Q3 is shaping up nicely.

Hi, Shneur. This is Joe. Let me add a little bit to that. I think the way, if you look at 2019 and to kind of look at what's that for 2019, there are some similarities. If you look at 2018 on the first half of the year, I think our average margin was somewhere just north of $0.098. And if you look at this year even with the $8 million in refinery issue, we're averaging somewhere around $0.095 for the first half of the year. I think the important thing that Karl mentioned is that our volume is going to be up. We're still going to do gross profit optimization and with the RBOB drop, I think we're in very good shape for the back half of this year.

That makes great sense, guys. And I was wondering given the success that you've had with optimizations, I was wondering if you can sort of give sense to us what inning you're in? Are we in the fifth inning? Are we in the ninth inning? I'm just getting considering how long it's taken place. And then I was also wondering as part that if you can talk about the PES closure. Whether that actually presents an opportunity to enhance your optimization opportunities as well.

I'll take, this is Karl. I'll take the PES piece first and then I think Joe might be able to comment on the other. As far as PES goes, as we mentioned earlier, I mean they were one of our larger suppliers on the East Coast. I think we saw the market a very quickly find alternate supply coming into the Philadelphia area. So it's very well supplied. I think what we saw is that there was some impact. We estimate probably in the $5 million to $10 million range split between Q2 and Q3 as the logistics costs of getting that supply where it needs to get needed to rebalance. And that's still working through. I mean from our standpoint it was enough to notice, but not enough to be material. So we're one of the largest shorts in that part of the country. And we were before, we're still going to be a large -- have a large demand for fuel. And so, yes, as you stated I think it creates opportunities for us going forward.

Shneur, as far as the question about price optimization, I think at the last conference call I mentioned that as far as our base business, we're pretty deep into it. And I think the real opportunity for us is really when it comes to organic growth and optimizing the gross profit on those opportunities that we are ramping up. And also on future acquisitions. Our ability to price optimize, we believe with our skill and our brand. We bring that to the table. As far as our base business is a continuous process. So I think that we have other opportunities in terms of, yes, we have some but using a baseball analogy we're probably deeper into the latter innings when it comes to our internal base.

And just to paraphrase the first comment. So essentially 2Q earnings could have actually been higher headed up in for PES because of that higher expense. Is that what you are saying as part of the first part to your answer?

Yes. I think as we've stated, I mean we look at-- we look at our business as a whole. So we think overall that's not a forecast that we don't think that we're going to hit our overall guidance for the year on both EBITDA and coverage. It's just a statement that was a headwind force in Q2 and probably a little bit in Q3. And right now there is other tailwind in Q3 that should overcome that.

Okay, go ahead.

No, go please finish.

I think I think I have a little bit more depth to the PES issue. If you want to try to do an analysis internally as kind of keep all variables equal, what's the PES impact us in the second quarter and what did impact us in the third quarter? We think it's somewhere between $5 million to $10 million that kind of lapped over both the second and third quarter in combination. So if you want to just call it right down in the middle somewhere between 2.5 to 5 each quarter. And so it did have an impact on the second quarter. As far as the third quarter, yes, it had a little bit of leftover impact. But I think all of that has pretty much been worked out through the system. And our optimism on the back half of this year factors that in. And as you mentioned earlier, the drop in RBOB prices is definitely jumped over that variable.

Okay and one final question. Do you see an opportunity to take some capacity on Mariner East 2X when it starts up? Is there a potential solution to filling supply into the former PES market?

Yes. I think as we look at Philadelphia, I mean the East Coast has always been supplied by pipe primarily from the Gulf Coast. It's been supplied by refineries in the area. And it's supplied with imports from Europe or other parts of the world. That's going to continue to be the case. I'd say we're always interested in looking at pipeline opportunities into certain markets. So depending on how that shapes out that's definitely something we'll look at.

Our next question comes from the line of Ethan Bellamy with Baird. Please proceed with your question.

Hey, guys. Good morning. With respect to the joint venture line in West Texas could you give us some context on how big that market is? If you think that pipe will impact the spread from the Gulf Coast and then potentially if we see a big downturn in oil and gas development out there. Does that put volumes at risk on the line?

Yes. This is Karl. I'll be happy to take that. I think as we look at the diesel demand in that area of Texas, there's definitely been diesel that's come in by truck and by rail and pipeline economics should beat that every day of the week. And so we're comfortable that the market can absorb the capacity of the 30,000 barrels a day of the JC Nolan line. Obviously, as more supply comes in the market that can impact differentials, but we're --we bake that into -- as we looked at the JV with Energy Transfer, those economics. So we're comfortable with how that looks. As far as to the downturn in the Permian, as we look at that market and how it impacts our business, we think there's a lot of upside. It's never going to be smooth quarter-to-quarter as things happen as take away capacity comes on as crude prices move around. But we think there's a lot of runway in that market. And as far as downside from our EBITDA perspective, we operated if you recall the West Texas stores that we now have a large commission agent, operator's commission agent with a large customer. We operated those as company operated stores during the downturn in 2015-2016. So we know what that looks like from an EBITDA perspective. And so we see a potential slowdown in the Permian more as limiting our upside not as a significant downside to this company.

Got it, that's very helpful. Should we view this as a template for future transactions or operability with, in concert with Energy Transfer? Or is this more of one off?

Hi, Ethan. This is Joe. I kind of play off with Shneur's comments earlier about kind of using a baseball analogy. And I'd say that as far as looking at midstream, traditional midstream organic growth projects, we're definitely in the first or second inning. And the JC Nolan was kind of our first yield. So we're looking at vast opportunities that are out there either with Energy Transfer or without Energy Transfer. And the way that we're looking at it is we have an $8 billion, 8 billion gallon plus fuel distribution business. So working further upstream is going to create some synergy opportunities for us. We feel confident that we're going to find other opportunities. The question for us how many. So I'll say early stages, but we think there are definitely some opportunities for us to move further upstream.

Okay and last question. Since the last quarter, we've seen yet IDR elimination from one of your partnership peers. Just got to ask the question, when you see that does it make that more of a pressing concern?

Ethan, I think what I've said in the past is that there's no efforts being spent by Energy Transfer or Sunoco on IDR elimination. We have a plan that we're executing. And we think that we can create value. And as for currently we don't see IDRs as a prohibitor for us growing, given our excess coverage and our ability to stay within our targeted leverage. And I think right now we're hovering somewhere around 4.2. So right now we don't see this as a prohibitor.

Our next question comes from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

Hey, good morning. This is Charlie on for Jeremy. First one was I just wanted to seek out any color on the potential reinstatement of the biodiesel blenders tax credit. I've just been hearing some rumblings in the news on that. I'm curious if you've got any color there and, really, how much of an impact that would be for SUN.

Yes. This is Karl. I would say our guess on what Congress is going to do there is probably as good as yours. We obviously follow that and look at that. I would not say it's a material either way that goes for us.

Okay. And then I just wanted to follow up on West Texas here. I just wanted to make sure I understand. On the demand side, I mean, I guess your expectations there for the balance of this year and then maybe thinking more in 2020 as the differentials come in and there might be maybe less pull from -- on the trucking side, I guess it doesn't sound like it's maybe as much of a negative to you, at least in the near term.

Yes. That's right. I think backing out truck and rail diesel into West Texas is going to be beneficial to us and beneficial to the joint venture project we've entered into with Energy Transfer. And then as you look at the production growth in the area for every frac or rig that is in operation, you need diesel to run that. So we're very comfortable and excited about the forward projections as it relates to diesel and our business in West Texas.

I'll add a little bit of commentary to the Karl's comments. I think in my prepared remarks I said our investments not exceedingly large. It's about $50 million. So I think the way to look at it from a Sunoco perspective is we were paying pipeline tariffs to begin with. Now we're part of a joint venture. So now at least we are paying ourselves, so picking up half of that, for the other half, there is some marketing exposure. But we had that market exposure to begin with because we have the 207 stores and a commission agent. And we have other diesel distribution in that market. So from our standpoint we flipped over some of our revenues into more ratable pipeline revenue for ourselves.

Our next question comes from the line of Sharon Lui with Wells Fargo. Please proceed with your question.

Hi, good morning. I just wanted to touch on I guess your guidance for growth CapEx. It looks like the opportunities that are a little bit more robust. Maybe if you talk about some of the opportunities that you guys are exploring.

Sure. Hi, Sharon. This is Karl. I'd say we mentioned that that part of that increase in the growth CapEx related to about $5 million towards our contribution to JC Nolan. The other portions of our contribution in JC Nolan really come as investment in working capital. As far as the other growth in our growth capital, it's in the same areas that we've talked about before. I think on our fuel distribution side, our sales organization is really ramping up. And so a lot of those projects are in signing up new customers or renewing other customers and expanding their business. And then as Joe mentioned before, we are we are spending time and money to increase our opportunity set in the midstream world. And so we have -- we don't have the next project to announce, but we're definitely working on that and that's a component of our growth capital going forward.

Great. And just a question on that one-time charge. Is it -- is the impact potentially just isolated to this particular quarter? Maybe you can give some color on that contract dispute?

Well, pardon me, this is Tom. We really can't provide any additional color. It is an open contractual suit, as you said. So we spent a lot of time looking at this. And we feel we are appropriately reserved on this.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Scott for closing remarks.

Well, thanks again for joining us on the call this morning. Feel free to reach out to me with any questions. Have a great day. And this concludes today's call.

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