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Greetings and welcome to Sunoco LP’s Third Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Scott Grischow, VP of IR 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; 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.
I will now turn the call over to Dylan to discuss the third quarter results.
Thanks, Scott. In the third quarter, Sunoco continued to demonstrate the strength of its business model with strong financial results in a period of continuing economic recovery. For the third quarter of 2021, the partnership recorded net income of $104 million. Adjusted EBITDA was $198 million compared to $189 million in the third quarter of 2020. Volumes were approximately 2 billion gallons, a sequential increase of 2% from the second quarter. Year-over-year volumes increased 6.4%. Fuel margin was $0.113 per gallon versus $0.121 per gallon in the third quarter of 2020.
Total operating expenses in the third quarter were up as expected compared to the second quarter at $113 million versus $102 million and were flat to the third quarter of 2020. Third quarter distributable cash flow as adjusted was $146 million, yielding a current quarter coverage ratio of 1.68x and a trailing 12-month coverage ratio of 1.43x, consistent with our long-term target of a minimum of 1.40x. On October 25, we declared an $0.8255 per unit distribution, consistent with last quarter. We continue to maintain a stable and secure distribution for our unitholders, which remains the number one pillar behind our capital allocation strategy. Leverage at the end of the quarter was 4.05x, which we expect to increase minimally with the closing of the NuStar acquisition. Leverage is expected to trend lower towards our 4.0x target as we move into next year.
Our 2021 full year EBITDA guidance remains $725 million to $765 million, excluding the NuStar and Cato acquisitions. As anticipated, second half expenses are trending higher than the first half. However, we expect the full year to come in below our previously guided range due to the extension of many of our 2020 cost-cutting initiatives throughout the first half of 2021. We are reducing full year 2021 operating expense guidance to $425 million to $435 million compared to our previous guidance of $440 million to $450 million. Finally, we continue to expect maintenance capital of $45 million and growth capital expenditures of approximately $150 million.
Next, with respect to the recently closed expansions to our midstream business, given the size and timing of the closing of these acquisitions, they will have only a modest impact to 2021 adjusted EBITDA and have been excluded from that guidance. In the fourth quarter, we took advantage of bond market conditions to de-risk our balance sheet and reduce our financing costs. In October, we issued $800 million of 4.5% senior notes due 2030, using the proceeds to redeem $800 million of our existing 5.5% senior notes due 2026. The transactions lower our interest rate on this debt by 100 basis points while extending the maturity date by approximately 4 years.
We will continue to take prudent and proactive measures to strengthen our financial position when opportunities like this arise. The third quarter’s strong results, the recently closed acquisitions, and our opportunistic refinancing demonstrate our commitment to maintaining Sunoco’s solid financial foundation and to increasing value to our stakeholders through a strategy of disciplined capital investment and balance sheet management.
With that, I will now turn the call over to Karl to walk through some additional thoughts on fuel gross profit, expenses and the operational outlook for the remainder of the year.
Thanks, Dylan. Good morning, everyone. Our strong third quarter results were driven by better volume performance, continued strength in margins and continued discipline on expenses. Volume for the quarter was up over 6% from last year, but the more relevant comparison continues to be performance relative to 2019. On that basis, we were off about 7% from the third quarter of 2019. So far, in the fourth quarter, our volumes continue to be in the same range relative to 2019 once you factor in the JC Nolan ramp-up in the fourth quarter of that year.
Turning to margins, the third quarter showed improvement versus the first half of the year. RBOB prices were generally flat from the beginning of the quarter to the end of the quarter, but the increased volatility coupled with our continual gross profit optimization strategies and elevated breakeven margins helped our margins remain solidly within our full year 2021 guidance range. The final piece of our strong financial performance was continued expense control and discipline. As Dylan mentioned earlier, we expect second half expenses to be higher than the first half. Some of the higher spending in the second half of the year is due to timing, and some of it is related to our decisions to defer bringing costs back into the business with a challenging start to the year. As the margin environment improved through this year, we are more comfortable returning some of our expenses to a more sustainable level going forward.
Before turning it over to Joe, I want to briefly touch on a few more topics. It seems that over the last few months, the topics of inflation, supply chain challenges and labor shortages have been increasingly visible and discussed. We have not been immune to any of these challenges. We have felt the impacts of inflation and incorporated the impact into our forward views on expenses. Over the last few years, we have demonstrated our ability to control expenses and increase efficiency. Going forward, we remain committed to delivering an efficient and lean expense structure. We have also put into place strategies to adequately deal with longer supply chains. We continue to be proactive in addressing our labor challenges and have been successful at maintaining a team to deliver for our customers. An important thing to remember is that every one of these issues continues to support higher-than-historic breakeven margins.
Finally, a brief update on our growth efforts, our Brownsville terminal remains on track for completion and commissioning by the end of the first quarter. The project team has done a great job keeping schedule and costs in line even in the face of some of the industry headwinds, I just discussed. And our integration efforts for the NuStar and Cato acquisitions are well underway. If anything, we have been excited by some of the additional commercial opportunities we have uncovered in the first month of ownership.
I will wrap up by stating that we will continue to focus on what we can control and what drove this quarter’s results, gross profit optimization, growth of our core business and solid and efficient operations. Joe?
Thanks, Karl. Good morning, everyone. We delivered a strong third quarter. Fuel volumes grew roughly 2% versus the second quarter of this year, while our fuel margins remained very healthy. And just as importantly, we continue to control costs and manage our balance sheet. Quarter after quarter, we have demonstrated the durability of our business. Looking towards the fourth quarter, RBOB prices increased rapidly through most of October with a moderate pullback during the last week of the month. Even if the challenging headwind environment continues, we expect to have a solid fourth quarter. Fuel margins should remain healthy given higher industry breakevens and fuel volume should remain steady with normal seasonality. As for full year 2021, we expect to deliver on our adjusted EBITDA guidance. As we look out further to 2022, you should expect us to have another good year. We will provide detailed guidance in December.
Moving on to growth, we continue to strengthen our business by growing our midstream assets. The NuStar and Cato acquisitions as well as the Brownsville project helped diversify and vertically integrate our business. It also provides us a more enhanced platform for fuel distribution growth. Financially, we executed these transactions at very attractive valuations, especially after adding synergies. On the fuel distribution side, we will continue to grow organically as well as capitalize on acquisition opportunities. As we continue to grow, we 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. [Operator Instructions] Our first question is from John Royall with JPMorgan. Please proceed.
Hey, good morning, guys. Thanks for taking my questions. I have a couple of questions on just the guidance. So the first one, you reduced your OpEx guide by, I think, $15 million, but there wasn’t a concurrent increase in the EBITDA guidance and all other pieces were unchanged. So I’m wondering if there is an offset you can point to there. It does seem like we’re tracking at the low end of the margin guide. So perhaps it’s just other pieces kind of moving around within the ranges, but any color there would be helpful. Thanks.
Yes. Good question. This is Dylan. Yes, really, I think you kind of hit on it there at the end. For all the other pieces, it’s within the ranges that we’ve put out, but as you noted, particularly at the beginning of the year, when we saw some pressures from the rising commodity price environment, we were a little low on fuel margin. And so we’re probably a little below the midpoint there, and that’s really the offset to that lower expense.
Okay. Thanks for clarifying. And then the second one is on the growth CapEx guide, I was a little surprised to not see that coming down, but if I’m doing the math correctly, I think you need about $80 million to hit guidance in the fourth quarter. I don’t think you’ve ever had that big a quarter in gross spend, so – or at least not in the past several years. So any color you can give there on kind of what’s hitting the quarter that will be really helpful. And maybe if there is any chance of some of that activity getting pushed into next year?
Yes. Hi, John, this is Karl. I agree with everything you said. And as we look at it, really, we have some concentrated spending for our Brownsville terminal, which is kind of weighted to the back half of the year. Some of our other growth efforts are weighted to the back half of the year. We’re trending towards that, but yes, if I had to guess, we might be on the lower side of that versus the higher side for all the reasons you mentioned.
Okay, that’s helpful. Thank you.
Thank you. Our next question is from Selman Akyol with Stifel. Please proceed.
Thank you. Good morning. Just a couple of quick ones. In your opening comments, you talked about integrating NuStar and Cato, and you’re uncovering some additional opportunities. Can you elaborate a little bit on that?
Sure. Good morning, Selman, this is Karl again. Really, as you look at due diligence on acquisitions, you make some assumptions, you’re looking at contracts, looking at commercial opportunities. And I think what we’ve done is once we’ve had ownership, we’ve actually been able to go out and talk to customers and work through their business and see some opportunities with the assets we acquired that we might be able to do better than what the assets were doing previously or what we’d even assumed. So I think that’s really behind my comments is we don’t have anything necessarily material that – to announce, but just the conversations among customers have been really good. The assets are good, and we think there is even upside to some of the – modest upside, I’d say, to some of the assumptions we made just based on those initial conversations with customers.
Is there any way to put, I don’t know, bookends around on maybe what you’re seeing there as – and what I’m thinking about is like is it proving out to be like 1% to 3%, 1% to 5% better than your expectations or should it be something we should be thinking larger than that?
No. I think single-digit percent better is probably reasonable.
Okay. And then also, you guys talked about – on fuel distribution. And I was just curious as to how the acquisition market does look?
Yes. Selman, it’s Joe. On the fuel distribution side, I don’t think the – as far as the set of opportunities that we saw 4 years ago to 3 years ago to today, has really changed. The valuations are still in line. They didn’t really dip during COVID. They didn’t really – didn’t go up during COVID. So valuations remain the same. What we’ve done is – over the last couple of years is really concentrated on organic growth. It’s been ratable. It’s been attractive, and you can kind of see from our numbers that we’ve been focusing on that. With all that said acquisitions on the fuel distribution side still remains part of our strategy. And if the right opportunity at the right price comes up, we’re in a good position to capitalize on it.
Alright. Thank you.
Thank you.
Thank you. [Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I would like to turn the call back to Scott Grischow for any closing remarks.
Thanks, everyone, for joining us on the call this morning. As always, if you have any questions, please feel free to reach out to me. Have a great day.
This concludes today’s conference. You may disconnect your lines at this time. Thank you very much for your participation, and have a great day.