Ladies and gentlemen, thank you for standing by. Welcome to Suburban Propane's third quarter 2018 financial results conference call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. If you would like to ask a question, please press star one on your telephone keypad. As a reminder, today's conference call is being recorded. Before turning the conference over, I'd like to start out with the safe harbor statement. This conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, relating to the partnership's future business expectations and predictions and financial condition and results of operations. These forward-looking statements involve certain risks and uncertainties.
The partnership has listed some of the important factors that could cause actual results to differ materially from those discussed in such forward-looking statements, which are referred to as cautionary statements in its earnings press release, which can be viewed on the company's website. All subsequent written and oral forward-looking statements attributable to the partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements. I would now like to turn the conference over to the Vice President and Treasurer, Davin D'Ambrosio. Please go ahead, sir.
Thank you, Leah, and good morning, everyone. Thank you for joining us this morning for our fiscal 2018 third-quarter earnings conference call. Joining me this morning are Mike Stivala, President and Chief Executive Officer; Mike Kuglin, Chief Financial Officer and Chief Accounting Officer; and Steve Boyd, our Chief Operating Officer. This morning, we will review our third-quarter financial results, along with our current outlook for the business. As usual, once we've concluded our prepared remarks, we will open the session to questions. Before getting started, I would like to reemphasize what the operator has just explained about forward-looking statements. Additional information about factors that could cause actual results to differ materially from those discussed in forward-looking statements is contained in the partnership's SEC filings, including our Form 10-K for the fiscal year ended September 30th, 2017.
Our Form 10-Q for the period ended June 30th, 2018, will be filed by the end of business today. Copies of these filings may be obtained by contacting the partnership or the SEC. Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures, as well as a discussion of why we believe this information to be useful in our Form 8-K furnished to the SEC this morning. The Form 8-K can be accessed through a link on our website at suburbanpropane.com. At this time, I'll turn the call over to Mike Stivala for some opening remarks. Mike?
Great. Thanks, Davin, and thank you all for joining us this morning. On the heels of our solid performance through the first half of fiscal 2018, the fiscal third quarter got off to a great start due to an extended stretch of average temperatures across the majority of our service territories that were cooler than last year. Heat-related demand dominated deliveries in the early part of the third quarter, while our more traditional counter-seasonal deliveries that start in April provided support for the rest of the third quarter. As a result, adjusted EBITDA for the third quarter amounted to $30.5 million, our highest reported level of EBITDA for any third quarter, representing an increase of $9.1 million or 42.5% compared to the prior year.
The higher earnings resulted from a combination of 3.6% higher volume sold, strong margin management in a fairly volatile commodity price environment, and disciplined expense controls as we met the higher demand with just a modest 2% increase in operating and G&A expenses over the prior year. Through the first nine months of the fiscal year, adjusted EBITDA of nearly $286 million was more than $42 million or 17.3% higher than the comparable prior year period. As I stated during our last quarterly earnings call, we are very proud of the way we planned and prepared for this year's heating season, and our business has performed in line with our expectations. With the improvements in earnings and cash flows, our financial metrics continue to get stronger, with quarter-end leverage of 4.35 times, trending toward our target range of below four times.
Our distribution coverage is well above 1.3 times, based on a trailing 12-month distributable cash flow compared to our pro forma annualized cash distribution at the current annualized rate of $2.40 per common unit. In a moment, I will come back for some closing remarks. At this point, I'd like to turn the call over to Mike Kuglin to discuss our third quarter results in more detail. Mike?
Thanks, Mike, and good morning, everyone. Consistent with the seasonal nature of our propane and fuel oil businesses, we typically experience a net loss in the third quarter of our fiscal year. As Mike just indicated, we reported another solid improvement in earnings compared to the prior year. Our results benefited from a combination of higher volume sold, resulting from increased customer demand, higher unit margins, and continued tight control of our expenses. To be consistent with previous reporting, as I discuss our third quarter results, I'm excluding the impact of unrealized non-cash mark-to-market adjustments on derivative instruments used in risk management activities, which resulted in a $3.8 million unrealized gain in the third quarter of 2018 compared to a $700,000 unrealized loss in the prior year.
Excluding these items, net loss for the third quarter improved by $8.7 million, or $0.14 per common unit compared to the prior year. Adjusted EBITDA for the third quarter amounted to $30.5 million, an increase of $9.1 million, or 42.5% compared to the prior year. Retail propane gallons sold in the fiscal 2018 third quarter of 80.5 million gallons increased 2.8 million gallons or 3.6% compared to the prior year. Sales of fuel oil and other refined fuels of 5.1 million gallons were essentially flat compared to the prior year. Although weather during the third quarter typically has less of an impact on volume sold than it does during the heating season, we experienced a much cooler weather pattern in the month of April, which provided an extension to the heating season and drove increased customer demand.
Average temperatures across our service territories for the third quarter of fiscal 2018 were 14% cooler than the prior year third quarter, albeit 4% warmer than normal. In the commodity markets, the price of propane, basis Mont Belvieu, fluctuated within a $0.25 range during the third quarter, with prices settling at $0.94 per gallon at the end of June. Average propane prices for the third quarter increased 3.4% sequentially and 38.8% compared to the prior year third quarter. Total gross margins of $142.7 million for the third quarter of fiscal 2018 increased $11.3 million or 8.6% compared to the prior year, primarily due to higher volume sold and higher average unit margins. Our margins also benefited from a higher concentration of heat-related volume sold, as well as a higher level of realized gains on long derivative contracts used to hedge price risk associated with propane purchases.
With respect to expenses, combined operating and G&A expenses increased $2.2 million or 2% compared to the prior year. The modest increase in expenses reflects higher variable operating costs to support higher demand, higher vehicle fuel costs, and higher variable compensation associated with higher earnings, all of which were substantially offset by continued savings from operating efficiencies. Net interest expense of $19.5 million for the third quarter of fiscal 2018 increased $1 million or 5.5% compared to the prior year, primarily due to the impact of the rise in benchmark interest rates on borrowings under our revolving credit facility. Total capital spending for the third quarter amounted to $7.7 million, representing an increase of $2.9 million compared to the prior year. The increase reflects the purchase of properties to support our customer base growth initiatives, as well as tanks and cylinders in support of new customer installations.
During the third quarter, we also closed on the acquisition of a propane operation strategically located in our Florida market for a total purchase price of $11.9 million. The capital spending and the acquisition during the quarter were funded with internally generated cash. Looking at the year-to-date performance, as Mike mentioned, adjusted EBITDA for the first nine months of fiscal 2018 increased more than $42 million or 17% compared to the prior year. Earnings benefited from a 7% increase in propane volume sold, as well as higher average unit margins and continued operating efficiencies to help partially offset higher variable operating costs. Turning to our balance sheet. In continued support of our deleveraging efforts, during the third quarter, we paid down revolver borrowings by roughly $23 million from operating cash flows.
From a leverage perspective, the combination of the increase in earnings and debt repayment resulted in our consolidated leverage ratio improving to 4.35 times at the end of Q3. We are well within our debt covenant requirements and remain focused on restoring our balance sheet strength, which includes achieving a target leverage profile in the mid to upper three times. Back to you, Mike.
Great. Thanks, Mike. As announced in our July 26th press release, our board of supervisors declared our quarterly distribution of $0.60 per common unit in respect of the third quarter of fiscal 2018. The quarterly distribution will be paid on August 14th to our unit holders of record as of August the 7th. In closing, fiscal 2018 has shaped up to be a year in which our operations were challenged with a more seasonable weather pattern and the resulting increased customer demand. We were very well prepared to meet that higher demand and to deliver a significant improvement in earnings. We put the excess cash flow to work, investing in the growth of our propane operations in strategic markets and reducing debt.
As a result, we have made significant strides in restoring our balance sheet strength and are very well positioned, both operationally and financially, to continue to pursue our strategic growth initiatives. Finally, I'm extremely proud of the more than 3,200 employees of Suburban Propane, maintaining their focus on carrying out their commitment to outstanding service to the customers and communities they serve, and executing on our customer base growth and retention initiatives. Thank you for all that you do every day. As always, we appreciate your support and attention this morning and would now like to open the call up for questions. Leah, if you wouldn't mind helping us?
Great. Ladies and gentlemen, if you would like to ask a question, please press star then one on your telephone keypad. You will hear a tone indicating you have been placed in queue. You may remove yourself from this queue by depressing the pound key. Our first question is from the line of Ben Brownlow with Raymond James. Please go ahead.
Hi, good morning, congrats on the quarter.
Hey, great. Thanks, Ben.
Just one quick question from me. On the maintenance CapEx, that came down about $2 million sequentially and from the first half of the fiscal year, and it was about $1 million below what I had modeled. Any color call-out there, and you're still kind of looking for kind of a $15 million CapEx for the fiscal year?
Yeah, Ben, it's Mike Kuglin. Any movement sequentially really has to do with the timing of the expenditures on a full-year basis. The expectation of $15 million still remains best estimate.
Great. That's all I had, and you blew my Street High numbers out of the water. Congrats again.
Great. Thanks a lot, Ben. Appreciate it.
Next we go to the line of Mike Gaier with Janney Montgomery Scott. Please go ahead.
Hey, good morning, guys.
Hi, Mike.
Another great quarter, appreciate sort of the color you gave on sort of the initiative you guys are working on. Can you talk a little bit about, I guess, the acquisition opportunities out there? Obviously, you did the one in Florida. Can you maybe talk about kind of the markets you're focused on and what you're looking at there? Is it more sort of overlap of what you guys have or sort of new markets, kind of what you're looking at there, maybe?
Yeah, it's a good question, Mike. Generally it starts with, we have a list of good quality businesses that we keep our eye on. Our footprint is in 41 states, we break that up into 11 regions. Each of our 11 region management teams have a good pulse of what their market is and who the good quality businesses are in their markets. It starts from really knowing the marketplace and knowing who we would want to acquire based on the quality of the business. Generally, the majority of what we look for are businesses that are an exact tuck-in to our existing footprint.
I would say, we've actually been I think we've talked about this a little bit on prior calls, we've actually started to greenfield some new markets by just buying properties, adding some storage, and extending our delivery radius a little bit outside of where we are currently. As a result of those initiatives, we do have opportunities where businesses come up that fill a void in our delivery radius that we may have a small footprint, and it's a little bit too far outside of our current customer service center delivery radius. Instead of buying into that market by properties, we actually buy into it as a customer base. We have done that as well. It's a combination of both, it's primarily the main premise is it's got to be a good quality business.
Great. Maybe if you could touch on, I guess, your thinking of what to do with sort of the additional capital. Sounds like you're certainly focused on paying down leverage. Should we expect more spending in the growth capital next year, or is that, you think, still going to be used to be paying down debt?
I think it'll be a balance. It's going to be dependent on the opportunities. We've done a couple of deals this year. We've invested $15 million or so in acquisitions. Mike in his prepared remarks, had some color on the increase in growth CapEx, which was really supporting our customer base growth. We really have done a heck of a job driving our initiatives around customer base growth and retention, and that's coming through in the growth capital with buying new techs. It's going to be a balance of reinvesting in growth of the business, both for new customer installations and acquisitions. We also have a goal to get our leverage down below four, we'll look for opportunities to reduce debt as well.
Great. Thanks very much, and congratulations.
Great. Thanks, Mike.
There are no other questions. You may continue.
Well, okay. Great. Thanks, Leah, for your help. Thank you, everybody, for your time this morning, and enjoy the rest of your summer. The next time we talk will be in November following our fourth quarter earnings and full fiscal year results and getting prepared for 2019. Thank you.
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