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Why Sunoco Decided to Sell Most of Its Retail Business

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Sunoco LP’s retail business

Sunoco LP’s (SUN) retail business will become a small part of its overall offering following the completion of its announced convenience store divestitures. Sunoco LP’s retail fuel business hasn’t been doing well in recent quarters despite an increase in retail sales volumes because of lower gasoline prices, which resulted in lower gross margins per gallon. The merchandise business saw 3.8% YoY sales growth in the recent quarter. However, the merchandise gross margins fell by 1.2 percentage points during the same timeframe.

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Sunoco LP’s leverage position

Sunoco LP’s high leverage has remained a major concern for quite some time. The company reported a debt-to-EBITDA multiple of 6.5x at the end of 4Q16, which is above industry standards. MLPs generally target a ratio between 4.0x to 4.5x. Energy Transfer Equity (ETE) recently announced a preferred equity investment in Sunoco. The proceeds from this transaction are expected to strengthen SUN’s balance sheet.

However, this transaction wasn’t enough to bring down its considerably high leverage. As a result, the partnership decided to sell most of its low-profitability retail business. SUN is expected to use the proceeds from convenience store divestitures mainly for debt repayment and funding growth projects. The partnership expects its leverage ratio to lie between 4.50x and 4.75x following the completion of this transaction.

MLP qualified business

The partnership intends to focus on its MLP qualifying business after the sale of the convenience stores. For details on MLPs’ qualified income sources, read What You Should Know about Master Limited Partnerships.

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