Morningstar | Favorable Weather Continues to Drive Year-Over-Year Benefit for Suburban. See Updated Analyst Note from 09 Aug 2018
We are maintaining our $25 fair value estimate and negative trend, no-moat rating for Suburban Propane Partners after the partnership reported its propane, refined fuels, and energy marketing businesses generated $30.5 million in adjusted EBITDA for the third quarter of fiscal 2018, up from $21.4 million in the year-ago period. We are maintaining our fiscal 2018 adjusted EBITDA expectation, which assumes normal weather. Management does not issue earnings guidance.A cooler-than-normal spring drove propane demand in the early part of the third quarter, lifting adjusted EBITDA. Adjusted EBITDA year to date was up roughly 17% year over year, highlighting how weather volatility materially affects Suburban's results. Average temperatures across Suburban's territories in the third quarter were 14% cooler than the prior year but 4% warmer than the long-term average.
In the third quarter, retail volumes were up 3.6% while management continued to manage operating expenses slightly below volume growth, with operating expenses up 2%. Suburban will pay a $0.60 per unit quarterly distribution, down 32% from the prior year's payout. We don't incorporate meaningful increases in the distribution in our five-year forecast, given Suburban's low distribution coverage. A reduction in debt and improved earnings helped the partnership move toward management's 4 times debt/EBITDA leverage target. We think it can reach that level even with normal weather.
Suburban Propane Partners is engaged in the distribution of propane, fuel oil and refined fuels, as well as the marketing of natural gas and electricity in deregulated markets. In support of its primary marketing and distribution operations, the company installs and services a variety of home comfort equipment, particularly in the areas of heating and ventilation. The company conducts its business principally through Suburban Propane, L.P., which operates its propane business and assets, and its direct and indirect subsidiaries. The company manages and evaluates its operations in four operating segments, three of which are reportable segments: Propane, Fuel Oil and Refined Fuels and Natural Gas and Electricity.
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