Greetings, and welcome to Sunoco LP's Q1 2021 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Scott Grishaw, Vice President of Investor Relations and Treasurer. Thank you. You may 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 Carl Fails, Chief Operations Officer Dylan Bramhall, Chief Financial Officer and other members of the management team. A reminder that 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-nineteen 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 Q1 results.
Thanks, Scott. We delivered solid Q1 results in a challenging commodity environment. For the Q1 of 2021, the Partnership recorded net income of $154,000,000 Adjusted EBITDA was $157,000,000 compared to $209,000,000 in the Q1 of 2020. Volumes of approximately 1,800,000,000 gallons exhibited a normal seasonal pattern with a sequential decline of approximately 4% from the 4th quarter. Year over year volume declines were approximately 8%.
Fuel margin was $0.103 per gallon. The 7.11 makeup payment totaled $18,500,000 this year and contributed roughly a penny of the total 10.3 CPG this quarter. Carl will elaborate further on our fuel margin in his remarks. Moving on to expenses. Our total operating expenses were $100,000,000 in the first quarter, up slightly from the $96,000,000 in Q4 2020 or increase of approximately 4%.
These expenses are down approximately 30% from the $143,000,000 in the Q1 of 2020 and are largely a reflection of our cost reduction initiatives. As the year progresses and volumes improve, we expect some incremental expense related to this additional business. 1st quarter distributable cash flow as adjusted was $108,000,000 yielding a current quarter coverage ratio of 1.25 times and a trailing 12 months coverage ratio of 1.35 times. On April 22, we declared an $0.825 per unit distribution, the same as last quarter, as we continue to maintain a stable and secure distribution for our unitholders. Leverage at the end of the quarter was 4.4 times, which we expect to decline toward our 4.0 target as the year progresses.
Our 2021 full year EBITDA guidance is unchanged from what we originally provided in December 2020. For the full year 2021, we continue to expect adjusted EBITDA of between $725,000,000 $765,000,000 We expect annual fuel margins between $0.11 $0.12 per gallon. We also reiterate our annual guidance for fuel volumes in a range of $7,250,000,000 to 7,750,000,000 gallons, total operating expenses between $440,000,000 $450,000,000 and maintenance capital of $45,000,000 Next, I want to spend a few minutes on growth capital. Our original full year 2021 guidance was for at least $120,000,000 of growth capital. And today, we are providing a more precise full year guidance number of $150,000,000 with approximately $40,000,000 to be spent on the announced Brownsville terminal.
So let me take a step back here and go into a little more detail on the Brownsville project. Earlier today, we announced an exciting milestone for Sunoco with the construction of our 1st standalone organic terminal project in Brownsville, Texas. We have historically framed our capital allocation process from a build versus buy perspective. In this case, we're able to develop an organic project that meets all our criteria for capital investment in a very strategic area for our partnership. Carl will give you all some additional insight in the strategic importance of this project.
But first, let me wrap up with how we see this project fitting within our 3 pillar capital allocation framework. 1st, upon completion, this project is expected to be immediately accretive to distributable cash flow, supporting Pillar 1 of maintaining a stable and secure distribution and our target coverage ratio of 1.4 times. 2nd, the capital for this project is coming from retained cash flow, and we expect to end the year right around our target leverage ratio of 4.0 debt to EBITDA. At this leverage level, we have no need to direct additional capital to debt pay down, which when prudent is pillar number 2. And so 3rd, with the strong returns around this project, this fits the final pillar, which is to pursue disciplined investment in our growth opportunities.
Sunoco remains on solid financial footing with a strong base business and exciting growth opportunities. With that, I will now turn the call over to Carl to walk through some additional thoughts on the Brownsville terminal fuel gross profit and expenses.
Thanks, Dylan. Good morning, everyone. I want to start today by sharing some additional thoughts about our Brownsville project that we announced this morning. We're very excited about the opportunity and flexibility that this project gives us. The Rio Grande Valley is an important region of our business.
As Dylan already talked about, we have begun construction on a terminal that will have 560,000 barrels of storage and throughput capacity of over 50,000 barrels per day. This project highlights the synergies between our fuel distribution and terminals businesses. We currently have a large fuel distribution footprint in the Valley and our new terminal will provide supply flexibility that will strengthen our existing domestic business, enable us to grow our domestic sales and provide a platform for us to participate in the growing export fuels market into Mexico. As Dylan also mentioned, this project fits well into our capital allocation strategy. We expect our EBITDA build multiple on our $55,000,000 project cost to be in the mid to high single digits.
In addition, the project enhances the stability of our overall business and cash flows. Finally, we expect the terminal to be in operation less than 12 months from now. Next, I'll share some thoughts on our Q1 results. Dylan shared that our fuel volumes in the quarter were off about 7.5% from last year. With all the noise from COVID last year, comparing to 2020 volumes isn't as meaningful, so we plan on continuing to use 2019 as our benchmark as we go through the year.
On that basis, we were down a little more than 9% from 2019 volumes, which is a little better than last quarter. We've seen even better volume performance in the beginning of the second quarter as we're off around 7% relative to 2019 levels. As far as performance across our various geographies, we have seen general improvement throughout our entire network. A promising sign is that some of the areas linked to tourism and travel like Florida are doing even a bit better than our average. For the rest of the second quarter, we expect improved volume performance to continue and that the second half of the year will be better than the first.
Now turning to margins. The Q1 was challenging with the continuation of what we saw over the last 2 months of the 4th quarter, an incredibly consistent climb in RBOB prices with an increase of $0.75 per gallon from the beginning of the quarter to the peak in mid March. This followed a nearly $0.40 per gallon increase during the last 2 months of the 4th quarter. The last time that RBOB prices moved over $1 a gallon in a 4 to 5 month period was in early 2011. Last quarter, I shared that our floor margins in these types of environments will be higher in the post COVID world due to higher breakeven margins.
I cited a range of $0.095 to $0.10 per gallon being a reasonable floor excluding onetime items. So if we exclude the 711 catch up payment, our base margins were near the bottom end of that range, which reinforces the resilience of our portfolio and the continuation of higher breakeven margins. As we look forward, I still feel confident that $0.11 to $0.12 per gallon fuel margin is appropriate for the full year 2021 as we expect more traditional volatility to return to the commodity environment. We've seen that happen since mid March, and margins have recovered off the Q1 lows. Before I turn it over to Joe, I'll just wrap up by stating that we continue to focus on what we can control: gross profit optimization, growth of our core business and delivering on our expenses.
With that, I'll turn the call over to Joe.
Thanks, Carl. Good morning, everyone. We delivered a solid Q1. We saw our seasonally adjusted fuel volume trends continue to improve. While on the margin side, we continue to have attractive margins even within a challenging commodity environment.
The combination of higher industry breakevens with our ability to control costs and optimize fuel gross profit allows us to minimize the downside and also allows us to capture the upside when the commodity market supports it. Quarter after quarter, we have proven the durability of our business. Looking forward, the Q2 is off to a good start. RBOB prices continue to rise, however, with more normalized volatility as opposed to the Q1. On the volume side, we expect fuel volume to continue to increase based on seasonality along with an increase in economic activity.
With the Q1 in the books and early readings for the Q2, we expect to deliver on our full year 2021 adjusted EBITDA guidance. Moving on to growth, we see attractive growth opportunities in both fuel distribution and midstream. Starting with midstream, the Brownsville terminal project is both strategically and financially attractive. The terminal is within a geography where we have a material field distribution network, thus creating financial synergies. It also provides us the capability to export finished product into Mexico.
We expect Mexico to continue to be a major importer of finished products and the Brownsville terminal is in a great location to capitalize. And finally and importantly, it meets our financial criteria. On the fuel distribution side, we continue to organically grow our business. We have put ourselves in a position to self fund the vast majority of our organic growth. We'll continue to look for acquisition opportunities in both field distribution and midstream.
We will do this with financial discipline, protecting the security of our distribution, while also protecting our balance sheet. Operator, that concludes our prepared remarks. You may open the line for questions.
Our first question comes from the line of Theresa Chen with Barclays. Please proceed with your question.
Good morning. Thank you for taking my questions. In terms of the Brownsville project, can you talk about the just a little bit more about the history of its development? Why now? And as we think about the mid to high single digit EBITDA multiple, what are the parameters in terms of execution risk around that?
Will it be in any part underpinned by 3rd party commitments, for example?
Hi, Theresa. Good morning. This is Carl. We've been contemplating this project for a while and felt like now was the right time to do it. And the project is really kind of based on 3 pieces of our business.
So the first one that kind of underpins the foundation is our current fuel distribution footprint. We already sell a lot of fuel in that market, both direct to our customers and 711 has a lot of volume in that market. And adding in the additional supply flexibility of having our own terminal, where we can bring product in on the water, really kind of provides a base for that fuel distribution footprint and that is the base of the economics for the terminal. But we also as Dylan mentioned, we looked at this from a build versus buy. There are obviously other terminals in that market, and we looked at the options of maybe acquiring some of those assets versus building ourselves and the economics were just stronger for us to go this path.
And then you think about growth, I think Dylan and I both mentioned, we think there's opportunities for incremental domestic sales based on our added supply flexibility. And then clearly, we're excited about the opportunity to build a business going into Mexico. There are by our estimate, there about 1,000 trucks a day of product crossing the border from the Rio Grande Valley into Mexico today. And we're not really participating in much of that at all. So we think that's an opportunity to work with partners, as well as sell direct into that export market.
Got it. And in terms of that specific market, what is your view on Mexico's recently passed fuel permit reforms given their effort to curtail private foreign competitors in favor of strengthening their own state owned enterprises?
Yes, obviously, that's something we've been watching quite a bit. And for us, having a U. S. Asset on the border supported by a strong U. S.
Business is a good way for us to have that support underneath and then still go into the Mexican market. And we think there we've talked to a number of potential customers already, Mexican companies and as well as PMI or Pemex themselves to try to partner with them. And we think that's the best approach as we build out a business going into Mexico.
Therese, this is Joe. I think one other thing to add to that is anybody who's tracking kind of the evolving Mexican regulations about privatization versus kind of going to other direction. We took that into strong consideration. And the fact that we wanted a hard asset right on the border in Brownsville, I think gives us the opportunity whichever way the politics of Mexico goes, we're at the we're right on the border. So if we have the legislation goes in a direction where we can take our trucks or rail or whatever into Mexico, we can do that.
If the regulation goes in a direction where that becomes increasingly more difficult, then we can easily partner with Pemex or anybody else for them to pick it up on the border from us. So we like that optionality.
That makes a lot of sense. Thank you. And lastly, just in terms of the rising product prices for a portion of the Q1 and recently, clearly a lot of this likely has to do with the elevated RIN costs. And can you just remind us how RINs impact your business? Are you the blender of record for most of your volumes?
And in light of the Supreme Court currently reviewing the SRE case, what do you think is going to happen with the 2021 RVO?
Yes. I'll take the last part first in that. I don't know that I have any crystal ball that's better than other market watchers on exactly what the RVO is going to be for this year. But I will reiterate, we've said in the past that RINs prices are really baked into wholesale margins. And we've seen more volatility and movement in RINs over the last, call it, 6 months or so than we've seen for a number of years.
But as we look at our results, we still feel that way that whether RINs prices are $0.40 or whether they're over $1.50 like they are today, we see that not having a large impact on our overall all in margin.
Thank you.
Thanks, Theresa.
Our next question comes from the line of John Roark with JPMorgan. Please proceed with your question.
Hey, good morning guys. Thanks for taking my question. So on the 711 makeup payment, I know you won't get into specifics on the contracts, but just high level, if the payment were about $13,000,000 last year and really that only had COVID hitting volumes at the end of March 2020. So now we have a full year of COVID related volume losses translating into only $18,500,000 on the payment. So I guess I'm just trying to figure out why that number isn't at least double what it was last year, just given the magnitude of the loss in demand being so much larger this year.
Sure, John. The way that I would think about that is that clearly, 711 volumes were off. The 711 volumes that we supplied to them were off consistent with everybody's volumes were off. But I think I stayed in last few quarters that we didn't see the volume we supplied to them off as much as the rest of our customers. So I think if you're comparing the 18.5% to the little under 13% from last year, that's what I'd read into that is that the volume we supplied to them was not off as much as maybe the rest
of our business. Okay, understood. Thank you. And then I wanted to see how the trends are developing on the J. C.
Nolan pipe. As I assume you're starting to see those volumes come back with the rebound in prices, How much of an effect did that have on the overall volume declines in either direction?
Yes, you're right that as we've seen over the last couple of months, and you guys can track this as well, you see some of the rig counts coming up, that we've I'd call it some slow and steady increase in our diesel business out there. It's that combined with our other business out there is still off more than the average of our entire portfolio, but we have seen steady progress. And think with crude prices where they are and looking like they've been there for a while now, and I think most people view them staying at least kind of where they've been for a while longer, we'd expect that steady rise to continue.
Great. Thank you.
You bet.
And with that, there are no further questions left in the queue. And I would like to turn the call back over to Mr. Scott Grishow for any closing remarks.
Thanks again for joining us on the call this morning. As always, if you have any additional questions, please feel free to reach out to me. This concludes today's call. Have a great day.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.