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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, welcome to Sunoco LP Fourth Quarter Full-Year 2019 Earnings Call. [Operator Instructions] Please note this conference is being recorded.
I will now turn the conference over to Scott Grischow, Vice President of Investor Relations. Thank you. You may now 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; 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 review 2019 fourth quarter and full year financial and operating results. For the fourth quarter, the Partnership recorded net income of $83 million. Adjusted EBITDA was $168 million, compared to fourth quarter 2018 of $180 million. Fuel volumes of 2.1 billion gallons were up 3% from a year ago, and fuel margin was $0.099 per gallon.
Fourth quarter distributable cash flow as adjusted was $120 million, yielding a coverage ratio of 1.39 times. On January 27, we declared an $0.8255 per unit distribution the same as last quarter. For the full year of 2019, the Partnership recorded net income of $313 million and adjusted EBITDA of $665 million, compared to $638 million in 2018. Full year 2019 distributable cash flow as adjusted was $453 million compared to $455 million a year ago.
Looking at our operational performance, fuel volume for the full year 2019 totaled a record high of 8.2 billion gallon, up 4% from a year ago driven by the contribution from our 2018 acquisitions, organic growth and gross profit optimization efforts. Fuel margin was $0.101 per gallon, which was in the middle of our 9.5 to 10.5 guidance range.
Finally, total operating costs were down 13% or $75 million year-over-year. This reduction and continued focus on cost controls ensures that growth and our gross profits falls to the bottom line.
I will now turn the call over to Tom.
Thanks, Scott and good morning, everyone.
We delivered strong results again in 2019. Let me point out some of the highlights. Our 2019 adjusted EBITDA was up 4% from a year ago, and our distributable cash flow was essentially flat to a year ago. If we exclude one-time items in both 2019 and 2018, adjusted EBITDA would have increased by 10% and DCF as adjusted would have increased by 7% year-over-year.
We sold record volumes with margins in the middle of our annual guidance range anchored by our profit optimization efforts. Our focus on controlling expenses resulted in a 13% reduction in operating expense. Our J.C. Nolan pipeline and terminal venture, with Energy Transfer went into service in August, and we are pleased with the early results.
Our year end leverage of 4.6 times sits in the middle of our targeted range of 4.5 to 4.75 times. We have steadily improved our trailing 12-month coverage ratio over the last few years with 2019 coverage of greater than 1.3 times. And finally, we were successful in signing up new customers with long-term contracts that quickly deliver added EBITDA. We carry that momentum into 2020.
In December, we provided guidance for adjusted EBITDA between $670 million and $700 million. This guidance is made up of the following; fuel volumes of 8.4 billion gallons or better, annual margins between $0.095 and $0.105 per gallon, lease income of approximately $145 million, total operating expenses of approximately $515 million, maintenance capital of $45 million and growth capital totaling $130 million.
Let's take a moment to discuss our perspective on capital allocation. First, our capital program continues to be a critical component of our growth strategy. We will invest in attractive high quality growth projects. These growth projects take the shape of traditional fuel distribution investments, similar to those we've made over the last couple of years and midstream projects, similar to the J.C. Nolan joint venture.
Fuel distribution projects typically began to generate cash in less than six months. Our midstream projects take around 12 months to generate cash. Bottom line, our growth capital spend quickly generates returns for our unitholders. Evident in our strong 2019 results and our 2020 guidance it's better than the results we delivered this past year.
Next, managing our business to a coverage ratio of at least 1.2 times has allowed us to comfortably self fund a large portion of our capital with an excess cash flow. This self funding also allows us to remain within our target long-term leverage ratio target. All in, our primary focus regarding capital allocation is to build a business with stronger and more stable cash flows that over the long run will create meaningful value for our unitholders.
At the same time, we stay focused on capital discipline, targeting projects and opportunities with high returns that will allow us to live within our targeted financial metrics.
With that, Joe will provide his closing thoughts. Joe?
Thanks, Tom. Good morning, everyone.
We delivered very strong results in 2019. Over the last two years, we delivered record volume, combined with strong margins while reducing our expenses. And as a result, our EBITDA increased year-over-year. Our coverage ratio is now around 1.3 times, which is a significant improvement from two years ago.
At the same time, we remained at or below our targeted leverage range. We continue to deliver quality results quarter-after-quarter, regardless of a commodity environment. Our underlying business is strong. Looking forward, we expect 2020 to be better than 2019. The first quarter is off to a good start. Fuel gross profit is as expected while expense in capital management remains tight.
Moving on to growth, we have successfully transitioned from an acquisition strategy within fuel distribution to one focused on organic growth. We will continue to increase our fuel distribution footprint by steadily growing the number of customers fall into Sunoco brand. For our midstream segment, we’ll utilize both acquisitions and organic growth. With the right acquisition at the right prize presents itself we’ll act on it.
Concurrently, we are building an internal pipeline of organic growth opportunities. One example is a terminal project we're evaluating in South Texas. As we get further in the process, we’ll provide more detail.
These midstream investments are attracted to us for a couple of key reasons. First, that are natural synergies with our fuel distribution business and second, these assets provide ratable cash flow that further add stability and diversification to our portfolio. Let me close by stating that we expect 2020 to be another strong year.
Operator, that concludes our prepared remarks. You may open the line for questions.
[Operator Instructions] Our first question is from Sharon Lui with Wells Fargo Securities. Please proceed.
A question on your OpEx for this quarter, it was down quite a bit. Just wondering if this maybe a good run rate going forward? And if so, could your guidance for total expenses be a big conservative?
Well, quarter-to-quarter, month-to-month, there's a lot of variants in our OpEx. We gave you the number of 515. And I think that's the number you should work with. If you really want to dig into what other OpEx is, I would look at what our rent and our G&A is and sort of hold those flat and you'll back out to the other OpEx line.
And I guess, during the quarter, there were few announcements in the C-store space, particularly the spin off a Speedway, the GPM Empire merger and [indiscernible] of its MLP interest. Just wondering if any of these developments impact how you view, I guess, Sun’s competitive landscape?
Yes as a starting point, I don't comment on other deals that's happening because I don't know of the inside to them. From the competitive position, I think we're just as strong, or stronger than we were two years ago from a competitive position. We've added over the last two years over 300 locations that are flying the Sunoco brand.
If you look back, we were relatively flat or declining from a five to 10 year perspective. So we're growing the brand. We have a stronger balance sheet to continue to invest in the brand. So I think we're better positioned today than we have been in the past.
And just on my last question, your latest thoughts on Sun's costs of capital, one of your peers eliminated its IDRs, so just wondering if this is something that you would consider as well?
Yes, let me start off by saying there's no effort being spent by neither Sunoco, Energy Transfer on IDR elimination. I think what you got to keep in mind is, two years ago, when we completed the 711 transactions, we laid out a plan and a strategy to create value for all our shareholders, and we're delivering on that, quarter-after-quarter, we've delivered quality results. And I think what's more important is that, we feel very confident that we're going to continue to execute on this plan and continue to deliver value for all our stakeholders.
[Operator Instructions] Our next question is from Gab Moreen with Mizuho Securities. Please proceed.
This is Rob on for Gab. Looks like you were able to deliver pretty solid CPG in fourth quarter despite a relative lack of volatility and wholesale fuel prices. And given how the commodity backdrop is played out thus far in the first quarter, I guess how would you compare what you're seeing across your portfolio to what you saw at the end of 2018 in terms of foreign commodity prices. And would seasonality blunt any expected margin uplift given that the first quarter is traditionally your weakest quarter for margin?
Rob, this is Karl. A few thoughts for you. You pointed out that we've seen different commodity environments. So you compare Q4 of 2018 to Q4 of 2019. Obviously, the tailwind we had from steeply falling commodity prices in 2018 were beneficial to us. But you see our results in 2019 and we also had very strong results in a different commodity environment.
So one of the things we've said is, well quarter-to-quarter there will be some fluctuation that our base fuel distribution margins and gross profit are very stable. And there are two things that really underpin that, first is our 711 taker pay construct, right? So about 25% of our volume is sold under that, and even if we have some volume fluctuations that EBITDA is very steady.
And the second is our gross profit optimization efforts that we've put into place. And so we're able to respond to different commodity environments. And really maybe take more volume in one quarter, a little less volume in another quarter and continue to produce strong fairly stable results.
Okay, that's helpful. And just a quick second question. Could you guys frame up how you're thinking about distribution growth as your fundamentals begin to strengthen and particularly thoughts around, what it can mean to invest your perception given [indiscernible] overhang?
This is Joe. Let me answer your question about distribution growth. I think the market segment is pretty clear that even if we did increase distribution and we built our coverage now over one three that if we increase our distribution, I don't think it's going to lower our cost of capital. I think a better use of our excess cash flow is to use it for growth or for the balance sheet. And that's our direction going forward.
We have reached end our question-and-answer session. I would like to turn the conference back over to Scott for closing remarks.
Well, thanks, everyone for joining us this morning. As always, if you have any follow-up questions, feel free to reach out. I hope everyone has a good day. This concludes today's call.
Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.