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Edited Transcript of SUN earnings conference call or presentation 9-May-19 2:30pm GMT

Q1 2019 Sunoco LP Earnings Call

Houston Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Sunoco LP earnings conference call or presentation Thursday, May 9, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph Kim

Sunoco LP - President, CEO & Director of Sunoco GP LLC

* Karl R. Fails

Sunoco LP - Senior VP & COO of Sunoco GP LLC

* Scott D. Grischow

Sunoco LP - Senior Director -- IR & Treasury

* Thomas R. Miller

Sunoco LP - CFO & Treasurer of Sunoco GP LLC

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Conference Call Participants

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* Dennis Paul Coleman

BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD

* Sharon Lui

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Spiro Michael Dounis

Crédit Suisse AG, Research Division - Director

* Theresa Chen

Barclays Bank PLC, Research Division - Research Analyst

* Vikram Bagri

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Sunoco First Quarter 2019 Earnings Conference 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. You may begin.

Thank you for standing by. The conference will begin momentarily.

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Scott D. Grischow, Sunoco LP - Senior Director -- IR & Treasury [2]

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Thank you. Before we begin our prepared remarks, I have a few of the usual items to cover. 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 as adjusted. Please refer to this quarter's news release for a reconciliation of each financial measure.

A reminder that the information reported on this call speaks only to the company's view as of today, May 9, 2019. The 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 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.

I will now turn the call over to Tom, who will cover this quarter's financial and operating results. Tom?

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Thomas R. Miller, Sunoco LP - CFO & Treasurer of Sunoco GP LLC [3]

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Thanks, Scott, and good morning, everyone. We delivered quality results again in the first quarter. For the quarter, the partnership recorded net income of $109 million, which includes a $47 million noncash write-down on assets held for sale and a $93 million noncash inventory adjustment. As a reminder, these types of adjustment do not affect adjusted EBITDA, DCF or cents per gallon.

Comparing 2019 to 2018. First quarter 2019 adjusted EBITDA of $153 million exceeds first quarter 2018 adjusted EBITDA of $109 million. The stronger quarter results in March 31st leverage, as defined by our credit agreement, of 4.24x. First quarter distributable cash flow, as adjusted, increased over last year's by $14 million to $99 million. Our trailing 12-month coverage ratio of 1.36 exceeds last year's of 1.22.

As a reminder, because of its lower seasonal fuel demand and fewer calendar days, Q1 tends to be our weakest quarter. On April 25th, we declared a distribution of $0.8255 per unit, the same as last quarter. On March 14th, we closed on $600 million of 6% 8-year senior unsecured notes. We used the proceeds to repay a portion of the outstanding borrowings under our revolving credit facility, leaving us with $1.3 billion in capacity.

Looking at our operational performance. Fuel in the first quarter totaled nearly 2 billion gallons. That's up 4.6% from a year ago, driven by the contribution from 2018 acquisitions and organic growth. Even with rising gasoline prices, we remain within our annual guidance range with a Q1 margin of $0.099 per gallon. As we've discussed the last several quarters, we manage gallons and margin together to produce the highest possible long-term gross profit and encourage you to not think of them as independent variables. We continue to focus on controlling G&A and other operating expenses.

Meeting our cost guidance helps provide quality results quarter-after-quarter. Operating expenses totaled $125 million in the quarter, comprised of G&A expense of $27 million and other operating expense of $84 million and lease expense of $14 million. These results include operating costs for all 5 of our 2018 acquisitions. On a run rate basis, our Q1 number suggests full year operating expense below our $540 million guidance. While we expect quarter-to-quarter variances, we will deliver on our operating cost guidance on an annual basis.

Moving to capital. We invested $26 million in the first quarter, $22 million in growth capital and $4 million in maintenance capital. We gave 2019 capital guidance of $45 million for maintenance and $90 million for growth capital.

As mentioned in our earnings release today, we have signed a nonbinding letter of intent with Energy Transfer for an equity interest in a joint venture for the J.C. Nolan diesel pipeline that runs from Hebert, which is in the Beaumont-Port Arthur area, to Midland. We expect our cash spend on this project would be in the range of $50 million. As we finalize the terms, we will provide more details on the impact to the 2019 growth capital guidance.

We confirm our 2019 adjusted EBITDA guidance of $610 million to $650 million as well as our guidance for the other components that led to the adjusted EBITDA. Since our divestment of retail assets a year ago, our financial and operating results demonstrate our ability over the long term to remain within our target leverage of 4.5 to 4.75x and maintain a coverage ratio at or above 1.2. In short, we continue to deliver on financial -- on our financially disciplined strategy.

I will now turn the call over to Joe for closing thoughts. Joe?

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Joseph Kim, Sunoco LP - President, CEO & Director of Sunoco GP LLC [4]

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Thanks, Tom. Good morning, everyone. Our current first quarter performance, along with the fourth quarter of last year, demonstrates the resilience of our earnings power in different commodity environments. In the fourth quarter of last year, commodity prices dropped materially, providing fuel margin tailwinds. In the first quarter of this year, we saw the opposite.

WTI futures rose 32% from the beginning of the quarter to the end of the quarter while RBOB futures went up 43% which is the highest percentage increase in any quarter in over a decade. Even with this material increase in costs, our results were solid. Quarter-after-quarter, we continue to demonstrate the strength of our underlying business. Looking forward, we believe the rest of 2019 will remain strong.

As for growth, we will continue to prudently pursue opportunities. Last year, we demonstrated our ability to accretively grow in the fuel distribution sector. Our pipeline continues to remain strong, however, we will be very selective. In addition, we have shifted a portion of our growth resources towards more fee-based midstream assets.

The J.C. Nolan Pipeline is a prime example. This attractive opportunity capitalizes on the long-term demand for diesel in West Texas. The joint venture was a natural fit combining our fuel distribution ability with Energy Transfer's pipeline capabilities. Overall, we'll continue to pursue opportunities in both the traditional midstream sector as well as the fuel distribution sector.

Let me close by stating that we have established a track record of delivering on our targets. We remain confident that we'll continue to deliver in 2019 and beyond.

Operator, that concludes our prepared remarks. You may open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Theresa Chen from Barclays.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [2]

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Just a couple questions related to your announced diesel pipeline JV with your parent. For your cash spend of $50 million, what kind of EBITDA multiple are you expecting to generate?

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [3]

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Theresa, this is Karl. I think we're still finalizing the details with Energy Transfer. I'd say the return that we anticipate is a good one. It's a different earnings profile than some of our fuel distribution acquisitions that we've made. So I'd say probably the multiple is going to be a little higher than our fuel distribution acquisitions.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [4]

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Got it. And Karl, can you provide some more color about how this synergistically can create value with other parts of your business? I'm referring back to Joe's comments about your West Texas distribution footprint and how you can utilize this infrastructure to either save money or create more business opportunities versus the current option you have.

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [5]

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Sure. As Joe mentioned earlier, I mean our goal is to become a more diversified, ratable MLP, and this is definitely an opportunity to go in that direction. We have the ratable earnings from the pipeline and terminal.

But also as part of this JV, something that we bring, is we've committed to be an anchor shipper on the pipeline. And we already have a large customer base in West Texas and expertise in marketing diesel. We bring knowledge to the market, understanding of refined products and how they flow.

Obviously, the Permian is an area where there's a lot of demand growth. As drilling and crude production increases, diesel demand will increase. And so our ability to sell and market that diesel and expand into higher sales volumes and more customers is something that we bring to the table.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [6]

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Got it. And given that this will tie up some capital and other resources, how does this balance against your historical, I guess, M&A approach to growth?

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Joseph Kim, Sunoco LP - President, CEO & Director of Sunoco GP LLC [7]

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Theresa, it's Joe. Let me kind of give some perspective on the M&A side. If you look back at 2018, we focused heavily on fuel distribution acquisitions. I think a good way to look at 2019 is we'll shift more of our efforts towards on the fuel distribution side to organic growth as we've been filling up that organic growth pipeline.

And a lot of our efforts will also be shifted over to more traditional fee-based midstream. I think the J.C. Nolan project and the 2 terminals that we acquired late last year are good examples.

And Karl said it earlier, but our goal is to become a larger, more diversified, ever-increasing stability of income MLP. So we're going to show financial discipline and part of showing financial discipline is being very selective on opportunities that come our way. And I will say our pipeline for fuel distribution still remains very strong. But we're going to be highly, highly selective and make sure that we balance off our overall income portfolio.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [8]

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Got it. And lastly, related to the spending. So your portion, $50 million, 100 -- on 100% basis, do you have a breakdown of how much between the pipe and the newly built terminal, given that you'll be utilizing existing ET pipe?

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [9]

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Yes. We don't have that breakdown yet. As we've said, we're still finalizing the details with Energy Transfer. And I'd say it's -- our cash investment is in that $50 million range. Once we finalize, we'll probably be able to share a little more around that. And that also includes some working capital that we're going to have to take on, right, to be able to run that diesel business as well.

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Operator [10]

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Our next question is from Sharon Lui from Wells Fargo.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [11]

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Just following up on the pipeline JV. I'm just wondering what type of contracts are in place. I believe that the pipeline had an open season last year. And if you could maybe talk about financing that investment, whether you think you would need to draw on the ATM.

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [12]

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Yes. I'd say this fits within -- and Tom can add some flavor on the financing piece. But this fits within our leverage coverage guidance. We're not seeing any changes to that as we look this year. And then Tom can talk about financing.

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Thomas R. Miller, Sunoco LP - CFO & Treasurer of Sunoco GP LLC [13]

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Yes. At -- on a -- at this point, just to reiterate what we said last quarter and J.C. Nolan doesn't change it, we do not see the need for opening the ATM or issuing equity at this point based on our current plans.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [14]

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Okay. And the contracts in place, is it committed volumes already?

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [15]

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Yes. I'd say in the wholesale fuels business, you have different kind of profile of contracts. So I'd say we have -- we've made progress in that. And sometimes you have contracts that are maybe shorter duration. But you have experience where you might have the same customer for 10, 15 years but that's not necessarily under a 10-year contract. It might be under shorter contracts that renew. We're very comfortable with our ability to sell the diesel based on the demand in that market.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [16]

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Okay. Great. And then also for your non-motor fuel gross profit this quarter. Just wondering, I guess, what's the drivers for that segment and whether the $50 million is a good run rate going forward.

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Thomas R. Miller, Sunoco LP - CFO & Treasurer of Sunoco GP LLC [17]

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That includes our terminal business merchandise, would probably be the 2 largest items in the -- in that. If you look at -- and credit cards, I guess, is the other one that takes a fair amount of that. The -- if you were to look at the quarters over the last, say, 4 quarters, yes, $50 million is not far off. It's a good number. It'll move around.

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Operator [18]

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Our next question here is from Spiro Dounis from Crédit Suisse.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [19]

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Just a question on M&A in your core business. Joe, you mentioned the pipeline being pretty full again, which is good to hear. And I know it's hard to predict and we're early in the year here. But as you think about it relative to 2018, do you have a sense for 2019 M&A activity so far? Is it outpacing '18? And when you look at valuations, is there any pressure one way or the other yet?

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Joseph Kim, Sunoco LP - President, CEO & Director of Sunoco GP LLC [20]

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Spiro, as far as -- I'll kind of break down the 2 areas. As far as the fuel distribution side, we're seeing similar type of opportunities that we saw in '18. It's really the filter that we're putting it through. It's just a stronger filter.

Tom mentioned that our current plan is that we're not going to issue an equity. So we have to be very diligent in determining and picking from the -- pick-of-the-litter type of approach. And that's where I think the valuations that we're seeing is very similar to 2018. Our filter has just become tighter as we're starting to uncover more organic opportunities in the fuel distribution. It's really a buy or build, right?

And as we look to more traditional midstream, we just have more options than we did when we first -- right after the 7-Eleven transaction. So the market's still -- we're seeing similar values. The only difference is that we have more opportunities to choose from, and we're being far more selective.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [21]

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Got it. Appreciate that. Second one, just around the other opportunities like the one with Energy Transfer. Are those opportunities mainly with ET? Or are you actually actively talking to third parties about getting more involved in similar pipeline projects?

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Joseph Kim, Sunoco LP - President, CEO & Director of Sunoco GP LLC [22]

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I think the size and scope of ET, there's a lot for us to talk about on that side. But I think that is, by far, our best option and it's the most obvious option. But at the same time, if there's any other opportunities that ET wasn't involved in, we'd definitely look.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [23]

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Got it. Last clean-up one for me, just on maintenance CapEx. I think it's tracking well below the guidance right now. Just curious what's driving that and if we should maybe more or less expect that to rerate higher over the next 3 quarters.

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Thomas R. Miller, Sunoco LP - CFO & Treasurer of Sunoco GP LLC [24]

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Yes. We started off last year at $3 million for the first quarter, and we're $4 million this quarter. That's just the function of the weather to start the year, and we do expect to trend up over the year. And we gave the $45 million guidance, and we're sticking with that.

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Operator [25]

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(Operator Instructions) The next question here is from Vikram Bagri from Jefferies.

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Vikram Bagri, Jefferies LLC, Research Division - Equity Analyst [26]

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I wanted to follow up on the diesel fuel pipeline that you announced. The release mentioned initial capacity of 30,000 barrels a day. How much can this pipeline be expanded by? And is the pipeline -- scope of the project, I recognize, has not been finalized. But could you temper the size of the pipeline to enhance returns?

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [27]

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Yes. This is Karl. I mean I guess we're not going to give a lot of detail right now, but it has a little bit of upside capability as the project is -- as we said, we anticipate it to be in service by the end of the year, and so there's obviously still construction activity going on. And since this is a kind of a reuse of an idle pipeline, there's still some work being done to test how big that can be. So I'd say there's some moderate upside to that and if -- more to come in the future.

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Vikram Bagri, Jefferies LLC, Research Division - Equity Analyst [28]

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Great. And as a follow-up, you mentioned it's a reuse of the pipeline and it's a project you're doing with the parent. Are there any more projects that you can do of this -- kind of similar to this project? Given that these returns are slightly inferior to your base business even though you're using an old pipeline and infrastructure, are there more projects like that?

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [29]

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Yes. Vikram, I'll build on what Joe said earlier. As you think about -- one of the things we bring to the table and why we like this project is it's a midstream project, but it's really a platform for us to grow our fuel distribution business as well. So one of the things we bring to the table is we are in the refined products market across the country, and we're constantly looking for opportunities where additional logistics, whether it's pipes or terminals or docks or things of that nature, could help our business.

So we don't have anything to announce today, but I'd say that's a constant process of looking at and trying to identify opportunities. And as Joe mentioned, the most obvious would be with Energy Transfer. But if there are other opportunities, we'd look at those as well.

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Operator [30]

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Our next question here is from Dennis Coleman from Bank of America Merrill Lynch.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [31]

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Yes. Most of mine have been asked, but just to come back to the diesel line for -- it's a little bit of a detailed question. But the open season is nonbinding. I guess is there anything we should read into that versus binding? And given the short time frame that this thing is set to come online, I guess I'm just trying to understand why it would be nonbinding.

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [32]

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Yes. I'd say, Dennis, the open season for the pipeline is separate from our JV agreement with Energy Transfer. So the pipeline open season has already occurred, and like I said, we're an anchor ship around the pipe.

The nonbinding piece that we've announced is this joint venture agreement, and it's just -- that's the stage in which we're at right now. And we're comfortable enough with that, that we're announcing it, and we're planning in the short order to finalize that agreement and close on the JV.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [33]

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Okay. So the nonbinding bit is between you and Energy Transfer.

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [34]

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That's correct.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [35]

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I got it. Okay. And then -- so maybe you said this, but I just want to make sure. There's pipe there, capacity could maybe be expanded. But is the $50 million spend -- does Energy Transfer match that? Or is that the total spend? I guess they're donating or contributing the pipes so there must be some value attributed to that. And then is it incremental pipe? Is it racks? Is it -- what is the $50 million spend for?

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [36]

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Yes. I'd say we wanted to size our approximate investment in the pipeline in that $50 million range. I think some of the details of our arrangement with Energy Transfer, we're still finalizing. I'd say there's -- the spend is for both capital on the pipe renovations as well as the building of a new terminal in Midland and then some working capital on our end. And then there are additional commercial agreements that we have with Energy Transfer to equalize everything.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [37]

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Okay. Okay. That's helpful. And then just, again, a little bit more detail. But CapEx, $22 million for growth versus the $90 million target seems pretty ratable across the 4 quarters. Should we think about that cadence of spend for the rest of the year?

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Karl R. Fails, Sunoco LP - Senior VP & COO of Sunoco GP LLC [38]

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Yes. This is Karl. Yes. I think that's right. I mean quarter-to-quarter, we'll always have a little bit of variation. But we -- as Joe mentioned earlier, we've really ramped up our organic growth prospects, and we've also -- I think we've talked about our ability to improve some of our assets. And so that combination, that's in the range.

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Operator [39]

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This concludes the question-and-answer session. I'd like to turn the floor back over to Mr. Grischow for any closing comments.

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Scott D. Grischow, Sunoco LP - Senior Director -- IR & Treasury [40]

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Thanks for joining us on the call today, everyone. As always, if you have any follow-up questions, feel free to reach out to me. We'll talk to you soon. Have a great day.

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Operator [41]

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