ladies and gentlemen, and thank you for standing by. Welcome to Sunoco LP's 2023rd Quarter 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 will now turn the conference over to your host, Scott Grishow, Vice President of Investor Relations and Treasury for Sunoco. 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 Fales, 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 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'd like to begin today's call by reviewing the financial and operating results for the Q3 of 2020. For the Q3 of 2020, partnership recorded net income of $100,000,000 Adjusted EBITDA was $189,000,000 compared to $192,000,000 in the Q3 of 2019.
Volumes have recovered materially off their mid April lows with Q3 volumes of 1,900,000,000 gallons, up 22% from the 2nd quarter. Strength in our fuel margins continued into the 3rd quarter with fuel margin of $0.121 per gallon. Carl will elaborate on margins and volumes in more detail in his remarks. Lease income of $34,000,000 was flat to last quarter. Non motor fuel sales gross profit was $37,000,000 up from the $30,000,000 we reported in the 2nd quarter.
Higher merchandise sales and credit card fees contributed to the sequential increase. Total operating expenses for the Q3 increased to $112,000,000 from $97,000,000 in the 2nd quarter as a result of increased fuel volume. However, we continue to deliver on our cost reduction initiatives. In comparison to the Q3 of last year, we are down $22,000,000 which is a 16% decrease. Moving on to capital, we spent $14,000,000 on growth projects and $6,000,000 on maintenance capital in the Q3.
We expect to spend at least $75,000,000 in growth capital for the full year and approximately $30,000,000 in maintenance capital. 3rd quarter distributable cash flow as adjusted was $139,000,000 yielding a very strong coverage ratio of 1.6x for both the Q3 and the trailing 12 month period. On October 26, we declared an $0.825 per unit distribution. This is the 18th consecutive quarter of a distribution at this level. On the balance sheet, our long term debt decreased by $95,000,000 to just under $3,000,000,000 Our liquidity remains strong with $1,400,000,000 remaining under our revolving credit facility and no debt maturities prior to 2023.
We ended the quarter with a leverage reading of 3.9x. Finally, on October 31, we signed a definitive asset purchase agreement for the purchase of a waterborne terminal in Upstate New York for less than $20,000,000 The acquisition of the 350,000 barrel refined products terminal is consistent with our strategy of expanding our midstream portfolio to provide additional income, diversification and stability. We expect to close on the acquisition before the end of the year, and we'll fund the transaction with cash on hand and amounts available on our credit facility. The acquisition was done at a very attractive synergized multiple and we expect the acquisition to be accretive to our unitholders in the 1st year. I would like to conclude my remarks by stating that we laid out a plan in March of this year to address the COVID-nineteen pandemic, and we have executed on that plan.
Sunoco is on strong financial footing as we close out 2020 and enter 2021. I will now turn the call over to Carl.
Thanks, Scott, and good morning, everyone. Our 3rd quarter results continue to demonstrate the strength of our business model and provide insight into the coming quarters. As Scott mentioned, our 3rd quarter volumes were down 12% compared to the Q3 of last year. Our volume recovery showed continued improvement relative to what we saw in the Q2. To put our volumes in context, they were in line with the preliminary implied demand numbers published by the EIA and stronger than retail demand numbers published by OPUS.
While the pace of continued recovery in fuel demand has slowed, there are still encouraging signs that we see in our demand data. First, as I mentioned in last quarter's call, our normal seasonal pattern is for average daily volume to rise each month from the beginning of the year to a peak in August at the end of the summer. We saw this play out in our 3rd quarter volumes. The second promising trend is that our October volumes remain around 12% off of last year's volume numbers, even with a more difficult comparison last year. If you recall, the J.
C. Nolan pipeline started up in the Q3 of last year, and by Q4, volumes had ramped up considerably. The dramatic fall in crude prices in early 2020 resulted in a substantial reduction in drilling activity in the Permian Basin. While our diesel sales from volumes shipped on J. C.
Nolan have recovered since the lows in the Q2, they still remain below 50% of the levels at the end of last year. Taking out the J. C. Nolan impact on our total volumes, our October volume would be off around 10% from last year. Our geographic diversity helps us weather the larger impacts we have seen in West Texas and Hawaii.
When these areas recover, our business will be even stronger. We continued to deliver higher margins in the 3rd quarter, primarily attributable to higher breakevens for many operators across the industry. Even though RBOB price ended the quarter about the same level as it started, there was significant volatility during the quarter which provided added strength to the margin. The average retail price for gasoline during the Q3 remained below the 5 year average. As we entered the Q4, the margin strength continued in October, and we expect it to remain strong for the duration of the year.
As we think about the margin environment this year, it has been materially better than our historical average. The Q1 was boosted by the dramatic fall in gasoline prices and the second and third quarters have been supported by the higher industry breakevens driven by the associated reductions in fuel demand. We believe that as long as volumes remain below last year's levels and the breakevens remain higher, that margins will be supported above historical averages. This is even more relevant for companies like Sunoco with scale and the ability to control cost. If volume returns more rapidly and margins are not as high, we are good with this scenario, too.
While these market forces provide a favorable landscape for our gross profit optimization strategies, we have also delivered on optimizing our expenses. As expected, our expenses rose this quarter relative to the 2nd quarter with an increase in volumes. On a year over year basis, however, they were down 16% compared to the Q3 of 2019. We are well on our way to deliver on our commitment to reduce 2020 expenses to the range of $460,000,000 to $475,000,000 We acted swiftly and have delivered on expense and capital discipline. I will now turn it over to Joe to share some closing thoughts.
Joe?
Thanks, Karl, and good morning, everyone. Let me start off by welcoming Dylan to the Sunoco team as our new CFO. Some of you know Dylan and are very aware of his wealth of experience. Adding Dylan to our already strong foundation of Scott and the team will make us even stronger. Now talking about our financial results, we delivered another strong quarter.
Our 3rd quarter performance highlights the top line resiliency of our business model as well as the continued execution of our cost reduction initiative. Looking forward, the 4th quarter is off to a good start. Our base fuel volume, excluding the impact of J. C. Nolan, continues to steadily increase, while fuel margins remain very healthy.
As a result, we expect full year adjusted EBITDA to be $740,000,000 or above. As we look forward to 2021, we expect to have another strong year. We expect fuel volumes to improve year over year and we expect fuel margins to be above our previously guided range of $0.095 to $0.105 per gallon. As for expenses, a significant portion of our 2020 run rate reductions will carry over into 2021. When you combine our gross profit optimization and our cost management, we believe that we are well positioned in any volume margin scenario.
As for leverage, given the demonstrated strength of our business this year, which we would believe will continue, a long term target around 4 times is appropriate and achievable. In December, we'll provide a more detailed 2021 guidance. Moving on to growth, we will continue to grow our fuel distribution business. The opportunity set remains robust and we expect these organic opportunities to remain for the foreseeable future. On the midstream side, as Scott mentioned, we completed a small acquisition at a very attractive multiple.
We will continue to look for highly synergistic opportunities, while remaining financially disciplined. Let me close by thanking our employees and our fuel distribution partners for their continued dedication in keeping Sunoco strong. Over the last few years, we have built a very resilient business model. We will remain proactive throughout the current challenge as well as any future challenges to ensure a stable long term future. Operator, that concludes our prepared remarks.
You may open the line for questions.
Thank you. Our first question is from Spiro Dounis with Credit Suisse.
Hey, good morning guys. Joe, I'd like to maybe pick up on the last point around leverage. Down again and already below that target you just mentioned into what sounds to be a stronger year that you're heading into next year. So I guess just wondering short of any use for the balance sheet, is the plant just keep delevering with free cash flow at this point? Do you land at a certain spot and you consider alternatives?
You still have IDRs. Just wondering at one point does that become something you tackle next?
Hey, good morning, Spiro. So let me talk about more about kind of our capital allocation strategy. Our capital allocation strategy is really centered around 3 key areas. 1st is obviously maintaining a stable and secure distribution for our unitholders. 2nd is protecting our balance sheet.
And third is really investing in our long term growth of our business. The first one is obvious, right? We're committed to maintain a stable and secure distribution. We've been through some various economic impact like COVID this year and some commodity cycles. And I think we've shown that at the level that we're keeping our free cash flow that we can generate over the past and going forward, we feel very good about keeping this at very secure level.
If you look back at history a little bit, we were probably sitting somewhere around 1.0 3 years ago prior to the 711 acquisition. Now we're sitting around 1.5x and we think our business has continued to generate free cash flow. I think we're going to get a very good position. As far as the next area is really about protecting our balance sheet. Again, this goes back to the investments that we've made in the past and our cost reduction and in the free cash flow we're generating.
We're sitting already slightly below 4x. And like I said on the prepared remarks, I think 4x is definitely appropriate and achievable going forward. And the final kind of area that we'll continue to do is invest in our business. Next year, as an example, we believe that we can use our free cash flow to fund all of our 2021 growth CapEx. Got it.
Okay. That's helpful color. Thanks for that, Joe. Second question, just wanted to ask about the 711 contract and specifically about makeup payments. I remember in the Q1 of this year, you had a makeup payment from catch up volumes that hadn't moved.
And so I was just wondering if you're able to provide any color on how that's trending so far this year? And really what I'm trying
to get at is,
how much of the sort of 2020 EBITDA related to that contract actually shifts into the Q1 of next year just due to the way that contract works?
Hey, Spiro. This is Karl. Yes, I think in your question, you have kind of the components of our 711 deal correct in that, it's really an annual contract and the makeup payments come in the Q1. So we obviously, for to protect 711's business, we don't disclose or comment on the details of what their volumes are doing. But I'd say, if anything, they're probably a little better than the kind of volume numbers that we disclosed, for our overall business.
So you could use that as kind of a proxy for figuring out how much we might get in the Q1 next year.
Our next question is from John Royall with JPMorgan.
So looking at your full year guide on EBITDA, on the low end, I think it implies about and $60,000,000 of EBITDA for 4Q. And this will be a decline from last year's 4Q. So just trying to square the 4Q guide with the fact that volume
declines look pretty similar to 3Q,
margins are still strong. Look pretty similar to 3Q, margins are still strong. And then within the context of the cost you've also taken out, it seems a little conservative to me. Not sure if there's anything there that I'm missing.
Hey, John, it's Joe. Let me just kind of give you some more perspective on our 2020 numbers. Obviously, I mentioned we expect to have a very good year. We got 3 quarters in the book. All three quarters were very good.
And the guidance we gave for $740,000,000 is that typically historically the 4th quarter has been the lowest volume quarter and also on average the lowest margin quarter on average. Obviously, there's exceptions. And I think what you mentioned earlier, the Q4 of last year was definitely an exception. If you look back, I think commodity prices dropped very rapidly in the Q4 and then we rode the tailwind of increased margin. So not to say that won't happen this year or will happen this year.
I think what we're saying is that we expect Q4 to be very good. And it's a question of to how good is really going to be based on the commodity environment. If we see a rapid drop in commodity prices, we'll ride that tailwind and I think we have upside. If that doesn't happen, let's say the opposite happens and commodity prices goes up, I think we have plenty of quarters of demonstrated results where commodity prices goes up and we still have a very solid quarter. So that's why we felt comfortable saying that $7.40 as you said is really the lower side of that and depending upon macro variables, we have some upside.
Great. Thank you. That's very helpful. And then just another one on the balance sheet. Moving the target down to 4x, I mean, it sounds like that's an official move in the target.
Correct me if I'm wrong. But given that the business has been performing with a lot of stability, could you see it as another way of thinking that you were under levered and you could do some things to get that leverage back up, given you've had some stability in the business. So could you maybe talk through the decision there?
Yes. Let's get into 4x, there's obviously a bunch of ways math to get your leverage down. I think we did it the right way. We grew our top line and we're very consistent about keeping our expenses down and we didn't. And so the way that we look at it is that we think, 1st of all, our base business is solid and we're doing all the right things as far as cost management, gross profit optimization to keep our base business strong.
We're investing in the future on capital projects. We did a small acquisition. So we're growing the top line while keeping our debt flat. So that's the way that we're managing our leverage number.
Great. Thank you. Our next question is from Gabe Moreen with Mizuho.
Question on the M and A landscape. Finally got a deal under the belt, it sounds like. Just wondering where you're seeing the opportunity skew, whether it's on the midstream side or whether it's on the wholesale side? And if you could talk about, I guess, pricing in multiples in the current environment and where you see it. Have you seen those trending?
Hey, Gabe, this is Joe again. We're seeing it on both sides. We're seeing it on the field distribution side and we're seeing it on the midstream side. Our approach to growth hasn't changed. We want to grow both in field distribution and we want to grow in the midstream sector, specifically the product terminal side.
And we want to do it both organically and M and A. So compared to a half a year ago, we're definitely seeing some more activity, more conversations with different companies contemplating selling. So I think from our standpoint, we want to grow both, we want to do it organically, we want to look at M and A opportunities. We're just I think we've put ourselves in a very good position with the financial position we're in right now, where when the right opportunity comes up at the right price, we'll take advantage of it.
Thanks, Joe. And if I could follow-up with a little bit of
a different question. Clearly, you've seen a lot of refiners making more and more renewable diesel investments. I'm less familiar with how that distribution change works on the renewable diesel side. But is that something that you've looked at or Sunoco could get involved in?
Yes, Gabe, this is Karl. If you think about renewable diesel, it's a little bit different than biodiesel that's been around for a while. Renewable diesel is really a drop in fuel, where it really meets most of the same specifications as your regular ULSD. So from a some renewable diesel in it because it's in the system. And it's definitely something that we're going to be able to, as that market grows, take advantage of and participate in.
Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Scott Birchell for closing remarks.
Well, thanks again for joining us on the call today. As always, if you have any follow-up questions, please reach out to me to discuss. Have a great day and this concludes today's call.
Thank you for your participation. You may disconnect your lines at this time.