Greetings, welcome to the Sunoco LP's first quarter 2023 earnings call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Grischow, Senior Vice President, Finance and Treasurer. Please go ahead.
Thank you. 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. 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'd like to start the call by looking at some of our first quarter highlights. Sunoco delivered a record first quarter with adjusted EBITDA of $221 million, compared to $191 million a year ago, an increase of 16%. The partnership sold 1.9 billion gallons in the first quarter, up 9% from the first quarter of last year. Fuel margin for all gallons sold was $0.129 per gallon, compared to $0.124 per gallon a year ago. Fuel margin results include the benefit of the 7-Eleven makeup payment of $24 million. Total first quarter operating expenses were $127 million, an increase of $3 million from the same period last year.
We spent $29 million of growth capital in the first quarter and $8 million in maintenance capital. First quarter Distributable Cash Flow, as adjusted was $160 million compared to $142 million in the first quarter of 2022, yielding a current quart er last quarter. We plan to evaluate future distribution increases annually in the first quarter, balancing our financial metric targets and investment in growth opportunities. Turning to the balance sheet, at the end of the first quarter, we had $800 million outstanding on our revolving credit facility, leaving approximately $700 million of liquidity.
Leverage at the end of the quarter was 3.6x, down from 3.8x last quarter. Finally, yesterday, we completed the acquisition of 16 terminals from Zenith Energy. Located across the East Coast and Midwest, these terminals have connections with the Colonial, Buckeye, Laurel, and Energy Transfer pipelines. The partnership expects the acquisition to be accretive to unitholders in the first year of ownership. Strong results in cash flow generation over the past few years has allowed us to continue to execute on our capital allocation strategy. With leverage at or below our long-term target and strong distribution coverage, we're able to reinvest capital back into our business through organic growth and acquisitions. The result has been increased Distributable Cash Flow per unit that enables us to increase distribution to our unitholders.
Sunoco's financial stability, distribution yield, and growth prospects make our equity a compelling value proposition. With that, I will now turn the call over to Karl to walk through some additional thoughts on our first quarter performance and recent growth initiatives.
Thanks, Scott. Good morning, everyone. Our team delivered yet another strong quarter, supported by continued margin strength, consistent expense discipline, and solid operations across our business, including our recent investments. Starting with volumes, we were up about 9% in the first quarter versus the first quarter of last year. Even though industry volumes remain lower than last year, we have continued to see improved volume performance relative to prior years as we have realized volume contributions from our capital deployed, both organic and through acquisitions. With respect to margins, the strong margin performance over the last few years continued in the first quarter as we delivered margins of $0.129 per gallon. I will point out a few items that contributed to these margins. Some are consistent with prior discussions, namely higher industry breakeven margins, as well as continued volatility in the fuel markets.
Specifically for this quarter, we also received the 7-Eleven makeup payment that occurs annually in the first quarter, which contributed over $0.01 per gallon to our reported margin. Moving on to our growth. Yesterday, we closed on our second acquisition in the past six months with the addition of 16 terminals from Zenith Energy. We are excited about the combination of these assets with our fuel distribution portfolio and are looking forward to growing our presence in each of these markets. The majority of these terminals overlay our existing footprint, providing synergies with our fuel distribution portfolio. The remaining terminals provide us with new market opportunities to expand our fuel distribution reach. After synergies, we expect a mid-single digit EBITDA multiple on this investment. This acquisition is yet another example of our ability to deliver growth that fits into our strategic objectives and delivers solid returns.
Finally, a comment on expenses. You have heard me constantly talk about our ability to manage expenses. Controlling expenses remains one of our core strengths. First quarter expenses were in line with our 2023 guidance we provided in December. We announced today an update to that 2023 guidance. We put a lot of thought into our guidance last December, and we remain confident with those numbers. However, we want to include the impacts of adding the Zenith Energy acquisition to our portfolio.
The changes include increasing adjusted EBITDA by $15 million to a range of $865 million-$915 million, projecting operating expenses of between $540 million and $550 million, an increase of $15 million, and increasing our maintenance capital spend by $5 million to approximately $65 million. Before turning the time over to Joe, I will wrap up by stating that we are off to a strong start to the year and will continue to focus on delivering results for our stakeholders through our proven strategy of gross profit optimization, tight expense control, solid and efficient operations, and growing our business. Joe?
Thanks, Karl. Good morning, everyone. We delivered a strong first quarter. Scott and Karl have walked you through the key details. There are a few items that I would like to provide some additional commentary. We continue to have confidence in our business model, both short-term and long-term. Before this year started, we provided guidance, and we stated we expect to have another strong year. A third of the way into 2023, our expectation remains the same. Our base expectation has been enhanced by our most recent acquisition. As a result, we increased our guidance. These types of investments give us confidence that we'll continue to deliver strong results year after year. Thus, we announced a distribution increase. Over the last seven years, we have demonstrated our commitment to a secure distribution. We have never cut distributions even through unforeseen and challenging economic environments.
Given that this is one of our key pillars, we're very thoughtful as to any distribution increase. The decision to increase had to meet the following criteria: stay above our target coverage ratio, protect our balance sheet, remain a growth company, and finally, a clear path to increase distributions again over a multi-year timeframe. We're confident the answer is yes on all of these factors. Operator, that concludes our prepared remarks. You may open the line for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the questioning queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Gabe Moreen with Mizuho.
Hi. Good morning, guys. Maybe if I can start off on the Zenith acquisition, can you just talk about timing for getting to that mid-single digit multiple post synergies? Then also I'm just curious, as far as integrating the assets, how much you see being, I guess, Sunoco business versus third parties, and also whether you're particularly excited about, you know, doing anything with any of the specific terminals from a growth standpoint.
Yeah. Good morning, Gabe. This is Karl. I think on this acquisition, our synergy capture is probably a little faster. In the past, we've talked about our synergies being captured over the first two years of operation. I think by the end of the first year, we'll probably be at our synergy run rate. You know, by the time we get into next year, we should be in those mid-single digits. As far as the asset profile, I talked in my prepared remarks about kind of a nice combination between overlay, our existing fuel distribution portfolio and some new.
I'll just give one example of an area we're excited about, not that this is the only place we're excited about, but the Selma, North Carolina terminal in that asset mix is a good terminal. We have some business in North Carolina. It's just not quite as big as we'd like it to be. That's just one example of an area. I think the whole network and our combination of, as you mentioned, being able to put our own volumes in the terminals.
Again, I think we're a little different in companies that have fuel distribution businesses with our terminals in that we welcome and love third parties in our terminals, and I think have a good track record of purchasing terminals with a large third-party presence and keeping and growing that business with our third-party customers as well. I think it's gonna be a good mixture of both.
I can just follow up, in general thoughts on the M&A market right now, what you're seeing out there, should we expect additional deals through the rest of the year?
Hey, Gabe, this is Joe. you know, I think what I've said probably for the last two or three years is still highly appropriate today. We see opportunities, we see value plays. We believe it's still a buyer's market, especially for companies that bring synergies to the table, and I think our track record shows that, you know, we can buy stuff at attractive multiples on top of that, add synergies and finally deliver on those results. The market looks good for us. I think what we saw last year, I think we'll see again this year.
Great. Then maybe, Joe, you'd mentioned kind of the different boxes you need to check for that distribution increase. I'm just curious, as far as arriving at the 2%, it seems like you would have a lot more latitude to maybe be a little bit more aggressive than the 2%. How should we think about kind of staying at that level, what you'd need to see, I think, to maybe accelerate the 2% growth rate? I assume when you say mean stay a growth company, a lot of that refers to giving yourself flexibility in the M&A market. Maybe you can speak to that too.
Yeah. I think the way you characterize the very last term is very appropriate. You know, we want our pillars remain exactly the same: secure distribution, strong balance sheet, and growth. At the 2%, you know, it provides a lot of flexibility for us. You know, depending on evolving value creation opportunities that we see, you know, it gives us ability to continue to do 2%, grow 2%, put more into growth capital if there's a opportunity on the balance sheet. We like the flexibility. If you just look at I think I know where you're going with this. You just look at our coverage and look at our history of performance and our confidence in the future, I think it does bring up the question, is there possibilities for more?
At the 2% that we set right now, we're sitting in a really good position where it gives us the ability, as our business continue to perform, we can allocate that in different fashions.
Gotcha. Thanks, Joe.
Our next question comes from Spiro Dounis with Citi.
Hi, this is Chad on for Spiro. Just one question for me. Just curious, with the distribution growth commencing, does this change anything about the way the IDR feature is viewed at SUN?
Hey, Chad, this is Joe. No. I think like every company, we have multiple stakeholders, and ET is one of them. They've been an incredibly supportive GP and also very patient. you know, our obvious goal is to create value for all our stakeholders. I think our track record shows we've done that. more importantly, you know, on a going-forward path, we intend to create value on a going-forward basis for all our stakeholders.
Okay. That makes sense. That's it for me. Thank you.
Our next question comes from Ned Baramov with Wells Fargo.
Hey, good morning. Thanks for taking the question. You mentioned growth opportunities in and around the acquired Zenith assets. Could you maybe talk about the CapEx requirements around these opportunities and maybe the timeframe of the potential investments?
Yeah. Ned, in our updated guidance, you know, as I mentioned in my prepared remarks, really those changes all had to do with the Zenith acquisition. There is some maintenance capital that comes along with those assets, there's not any material growth capital necessarily associated with these assets, which is why we didn't update our growth capital guidance.
Got it. Then I guess on your, you updated OpEx, maintenance CapEx and EBITDA guidance ranges, that does reflect the Zenith acquisition, but any change on how you think about volumes and margins for 2023?
As we sit right here, I mean, we just finished four months of the year. We have, you know, eight months left, we still feel really good about the guidance that we put together back in December. If you look back at that, right, we modified how we gave guidance a little bit in that in the past, we gave volume and margin ranges, where this year we just gave a kinda singular volume target and a singular margin target. Not that we expected that that was exactly where we were gonna end up, but we thought that that was a good midpoint when you multiply those together for our fuel gross profit. As we sit here now, we're still comfortable with that and don't think there's anything that would materially change that.
As I've talked in the past, you know, there might be a slightly different path. If volumes are a little stronger than we assumed and margins are a little weaker or vice versa, we still expect to come in the same range of gross profit and EBITDA.
Thanks for that. That's all I had.
You bet.
Excuse me, ladies and gentlemen. If you would like to pose a question, please press star one. Our next question comes from John Royall with JP Morgan.
Hey, guys. Good morning. Thanks for taking my question. The Zenith Energy acquisition looks like it's spread across some different geographies and kind of begs the question on that front. Recognizing there is some interplay here with driving growth.
In the distribution business, do you have a focus, geographically at this point, on maybe where, you know, you think you have some holes that you'd like to fill on the acquisition side?
Hey, John, this is Joe. Yeah, I think as far as geographically, it still comes down to, I think, some pretty basic criterias that we look at when it comes to acquisitions. Stable income. All right, that's one. Growth opportunities. Synergies. If you look at those three, I think, layering on top of our existing geographies, that could, that would fit the criteria and also new geographies. When we did Puerto Rico, that was obviously outside our geography, but we thought it was stable income. We saw growth opportunities, and from more from kind of an administrative side, we saw synergies. I think those are the probably the more overriding criteria versus just being, you know, focused on one particular geography versus another.
That makes sense. Thanks, Joe. This may be a higher level question. You guys have had good insights in the past on kind of the structural trends around gasoline demand and miles traveled and how they're impacted by COVID and work from home dynamics. I was wondering if you have any thoughts on are we permanently impaired in gasoline demand from sticky work from home dynamics? Then, maybe if you stripped out acquisitions, where is your business today from a volume perspective on kind of a, you know, same store sales relative to 2019?
Yeah, John, it's a really good question. I think, you know, many of us in the industry have been thinking about that and looking at our own volumes over the last few years. I'd say, for the most part, our network is in line with the numbers you can see publicly where there's, you know, you're still off versus 2019 on the gasoline side and even off versus last year. So, you know, our strategy has been that one, with the higher breakeven margins, we think that more than compensates on the overall gross profit side.
We feel like it's an opportunity for us to pick up market share, whether it's through acquisitions like we did in the last 12 months with Gladieux and Peerless with criteria that Joe just talked about or whether through it's our organic growth capital or whether it's through just commercial activity. You know, as far as the drivers behind that fuel demand, you know, you look at by a lot of measures, vehicle miles traveled is pretty close to what it was in 2019. You know, if you look back on the history of the last 15 years, it's generally been an upward trend in overall fuel efficiency. We've seen that pick up slightly over the last couple years.
I don't know that our crystal ball is necessarily a lot clearer than anyone else's on exactly what's gonna happen. For us, it's really about the stability of our portfolio, where even with different scenarios, you know, we can put up predictable results.
John, I'll add a couple of things to that. I think what Karl said is that if you look at our base business, it's probably tracking similarly very close to the U.S. average. Obviously, as evident by the number we put up in the first quarter, our growth capital is working, so we're outpacing the U.S. average materially. As far as, I guess, you know, the heart of your question about kind of overall U.S. trends, I think there's probably one data point I think the street should probably consider as far as potential upside for overall U.S. volume. One of the data metrics that we track is from a company called Kastle with a K, and they're the office security and access company.
You know, everybody has kind of a key card that allows you into the office. They track the 10 biggest metro markets in the U.S., they track it from pre-COVID to on a monthly basis. Right now, we're still sitting 50% of pre-COVID level of people actually coming to the office. If you make an assumption that more people are going to start or that work for home is going to become less and people are going to come into the office more, I think that does give you the industry more upside when it comes to volume returning.
Very helpful. Thank you.
We are closing our question and answer session. Now, I would like to turn the floor back over to Scott Grischow for closing comments. Please go ahead.
Thanks everyone for joining us on the call this morning. As always, if you have any follow-up questions, feel free to reach out to me. Thanks.
This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation, and have a great day.