Thank you for standing by. At this time, I would like to welcome everyone to the Suburban Propane second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. I would now like to turn the conference over to Davin D'Ambrosio, Vice President and Treasurer. The floor is yours.
Morgan, thank you. Good morning, everyone. Thank you for joining us this morning for our fiscal 2026 second quarter earnings conference call. Joining me this morning are Mike Stivala, our President and Chief Executive Officer, Mike Kuglin, Chief Financial Officer, and Alex Centeno, Senior Vice President of Operations. This morning, we will review our second quarter financial results along with our current outlook for the business. Once we've concluded our prepared remarks, we will open the session to questions. Our 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.
We have 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 our earnings press release, which can be viewed on our website at suburbanpropane.com. 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. Our annual report on Form 10-K for the fiscal year ended September 27, 2025, and our Form 10-Q for the period ending March 28, 2026, which will be filed by the end of business today, contain additional disclosure regarding forward-looking statements and risk factors. Copies may be obtained by contacting partnership or SEC. Certain non-GAAP measures will be discussed on this call.
We have provided a description of why these measures, as well as a discussion of why we believe this information to be useful in our Form 8-K, which was furnished to the SEC this morning. Form 8-K will be available through a link in an investor relations section of our website. At this point, I will turn the call over to Mike Stivala for some opening remarks. Mike?
Thanks, Davin. Good morning. Thank you all for joining us today. The fiscal 2026 second quarter was another solid quarter for Suburban Propane. Our core propane business performed extremely well in a very challenging heating season. We made great progress stabilizing production and advancing our expansion projects in our renewable natural gas business. With our excess cash flows from operations, we continued to reduce our total outstanding debt. With respect to our propane operations, this year's heating season was a tale of two halves. The Eastern half of our footprint experienced some of the most sustained colder temperatures in the heart of the heating season than we've experienced in decades, along with several harsh winter storms. Our Western half, on the other hand, reported near record warm temperatures throughout most of the winter.
Where we got weather, customer demand surged, and our teams worked tirelessly to safely and reliably meet the needs of our customers, many times in some very harsh weather with challenging road conditions. Volumes in our Eastern territories were approximately 3% higher than the prior year second quarter on average heating degree days that were 3% colder than the same period. In the West, volumes were approximately 10% lower on average heating degree days that were 17% warmer. As always, our operating personnel were well prepared to manage the surge in demand in our Eastern markets, supplemented by resources redeployed from certain locations in our Western territories to provide the additional support. I am so proud of how our teams responded to meet our customers' needs under these conditions, while also maintaining their focus on our customer base growth and retention initiatives.
In addition to solid volume performance, we effectively managed selling prices amid a volatile commodity price environment influenced in March by the conflict in the Middle East, while also maintaining disciplined expense control. In our renewable natural gas operations, average daily D3 RNG injections during the second quarter of fiscal 2026 increased 16% compared to the prior sequential quarter and more than 12% compared to the prior year second quarter. Driven by improved facility uptime and the benefits of our capital investments and process improvements that we have implemented since our acquisition of our anaerobic digester facility in Stanfield, Arizona.
Additionally, with our new anaerobic digester facility in Upstate N.Y. and our gas upgrading system at our facility in Columbus, Ohio, both of which remain on schedule for completion during the second half of fiscal 2026. We expect to add approximately 200,000 MMBTUs of annual production to our RNG platform. We are also pursuing opportunities to increase feedstock intake for both manure and food waste at the Stanfield facility in order to take advantage of additional production capacity at the plant. While environmental credit values, particularly California LCFS prices, have been depressed over the past couple of years. We are encouraged by the regulatory steps taken by the California Air Resources Board to create a better balance in the supply-demand equation for environmental credits, which is starting to favorably impact LCFS credit values.
We are also pleased to see the Treasury release draft regulations in February 2026 that favorably addressed ambiguities in previous guidance related to the eligibility to earn production tax credits or PTCs under Section 45Z of the Internal Revenue Code as promulgated in the Inflation Reduction Act. The One Big Beautiful Bill Act also extended the window for PTCs by two years until December 2029. During the second quarter of fiscal 2026, we recognized $3.5 million of PTCs earned on D3 RNG injections at our Stanfield facility for the period from January 2025 through March 2026, and we continue to earn PTCs on production going forward. As D3 production at our Upstate N.Y. facility comes online, we expect to be eligible to earn PTCs for RNG injected from that facility as well.
For the second quarter of fiscal 2026, Adjusted EBITDA of $175.3 million was essentially flat to the prior year. Combined with our fiscal first quarter results, Adjusted EBITDA totaled $258.7 million for the first half of the fiscal year. That's an increase of $8.4 million or 3.4% compared to the first two quarters of the prior year. With another quarter of strong operating performance and with capital expenditures for our RNG facilities that are nearing completion. We used excess cash flow generated during the second quarter to reduce our total outstanding debt by more than $64 million.
We remain disciplined in our capital allocation, balancing investments in the growth of our core propane business and renewable energy platform with preserving balance sheet strength and flexibility in support of our long-term strategic growth initiatives and for enhancing unitholder value. In a moment, I'll come back for some closing remarks. Let me turn the call over to Mike Kuglin to discuss the second quarter results in more detail. Mike?
Thanks, Mike, and good morning, everyone. To be consistent with previous reporting, as I discuss our second quarter results, I'm excluding the impact of unrealized mark-to-market adjustments on our commodity hedges, which resulted in an unrealized loss of $1.4 million for the second quarter, compared to an unrealized gain of $700,000 in the prior year second quarter. Excluding these and certain other non-cash items, Adjusted net income for the second quarter was $139.3 million or $2.09 per common unit, compared to Adjusted net income of $136.9 million or $2.11 per common unit in the prior year second quarter. Adjusted EBITDA for second quarter was $175.3 million, which was flat compared to the prior year second quarter.
Retail propane gallons sold in the second quarter were 161.6 million gal, essentially unchanged compared to the prior year as the impact of colder temperatures across much of the Eastern half of the country on heat-related demand, together with contributions from our recent acquisitions, were offset by considerably warmer temperatures in the Western half. With respect to the weather, average temperatures across our service territories during the second quarter were 6% warmer than normal and 1% warmer than the prior year. In the Eastern half of the U.S., average temperatures were slightly warmer than normal and 3% colder than the prior year second quarter. Whereas average temperatures in the West were 22% warmer than normal and 17% warmer than the prior year second quarter.
From a commodity perspective, propane inventory levels in the U.S. experienced a seasonal decline during the second quarter but remained well above historical averages for this time of year. At the end of the second quarter, U.S. propane inventories were at 77 million bbl, which were 75% higher than March 2025 levels and 47% higher than the five-year average for March. Given the increase in inventories and other factors, average wholesale propane prices for the quarter of $0.69 per gal basis month value decreased 23% compared to the prior year second quarter. Although average propane prices for the second quarter were lower than the prior year, prices have been volatile and have recently begun to rise due to the conflict in Iran and the resulting disruption of global energy markets.
At the end of February, just before the start of the conflict, spot propane prices were in the mid $0.60 per gal range, whereas most recently, spot prices have risen to the $0.90 per gal range. Excluding the impact of the non-cash mark-to-market adjustments on our commodity hedges that I mentioned earlier, total gross margins of $345.1 million for the second quarter increased $500,000 compared to the prior year second quarter, primarily due to the slight increase in propane unit margins of $0.03 per gal or 1.7%. As Mike mentioned, following the publication of proposed Treasury regulations in February 2026, which provided sufficient clarity for us to conclude that the production and sale of our RNG qualifies for production tax credits under Section 45Z.
We recognized $3.5 million of PTCs earned on D3 RNG injections at our Stanfield, Arizona facility for the period from January 2025 through March 2026. The benefit was reported as a reduction to operating expenses and included a catch-up adjustment of $2 million for credits related to fiscal 2025 and $800,000 related to the first quarter of fiscal 2026. With that said, combined operating and G&A expenses of $169.5 million for the quarter were flat compared to the prior year second quarter as higher payroll and benefit related expenses. Along with higher fuel and vehicle maintenance costs driven by elevated activity levels to meet stronger customer demand in the eastern territories and an increase in accruals for self-insurance matters were offset by the recognition of production tax credits. And a $2.9 million insurance recovery related to the partial settlement of certain claims associated with our RNG acquisition December 2022.
Net interest expense of $19.7 million for the quarter decreased 4.2% compared to the prior year second quarter, resulting from a lower level of average outstanding borrowings under our revolving credit facility and lower benchmark interest rates on revolving borrowings. Total capital spending for the quarter of $24.7 million was $5.4 million higher than the prior year second quarter, primarily due to the construction efforts at our Columbus, Ohio and Upstate New York RNG facilities. On a year-to-date basis, our total growth CapEx for our RNG facilities total $90 million and our full year capital spending estimate for the existing projects is $35 million-$40 million. Turning to our balance sheet. During the second quarter, we utilized excess cash flows from operating activities to repay $64.3 million borrowings under the revolver.
Our consolidated leverage ratio for the trailing 12-month period ended March 2026 improved to 4.34 x compared to 4.54 x for March 2025. We had an increase in Adjusted EBITDA of $6 million and total debt reduction of $32.3 million. We have now moved through our historically high period of seasonal working capital needs into the fiscal quarters we expect to generate excess cash flows. We will continue to remain focused on utilizing excess cash flows to strengthen the balance sheet as opportunities arise to fund strategic growth, including the remaining growth capital for our RNG platform. We have more than ample borrowing capacity under our revolver to support our capital expansion plans and ongoing strategic growth initiatives. With that, I turn it back to Mike.
Thanks, Mike. As announced on April 23rd, our Board of Supervisors declared our quarterly distribution of $0.325 per common unit in respect of our second quarter of fiscal 2026. That equates to an annualized rate of $1.30 per common unit. Our quarterly distribution will be paid on May 12th to our unit holders of record as of May 5th. Our distribution coverage continues to remain strong at 2.2 x for the trailing 12-month period ended March 2026. Just a few closing remarks. The management team here at Suburban Propane has been together for decades now. We've built our core propane business to be recognized as best in class with our hyperlocal operating model.
As evidenced by our performance in this year's heating season, our business and our outstanding personnel are very well situated to adapt and handle whatever weather conditions come our way. When others in our industry may struggle to keep up in high demand scenarios, our hardworking and dedicated teams across the country rise to the occasion. I'm super proud of their efforts in the face of some very challenging operating conditions this past winter. They've also done a great job executing on our customer base growth and retention initiatives, especially meeting growing demand for propane in certain unique applications such as EV charging stations, powering port equipment, power generation for a data center under construction, backup power generation, and multipurpose agricultural uses.
We're also proud of our expanded sponsorship with NASCAR and Speedway Motorsports as the official propane of NASCAR, which has given us the opportunity to showcase the power and versatility of propane in a very high performance setting at 28 races throughout virtually every weekend of the NASCAR Cup Series. In the meantime, we have taken a measured and disciplined approach toward the execution of our long-term strategic growth plans as we continue to build out our renewable energy platform to support the evolving clean energy needs of our customers. As I mentioned in my opening remarks, we've been focused on stabilizing production levels, building a team, and increasing the scale of our RNG platform, a process that we call suburbanizing the platform, to deliver the same operational discipline and excellence that we have been known for within the propane space.
We have made tremendous progress, we believe that the market for RNG is still in the early stages with tailwinds that will provide positive support for long-term growth potential given the ultra-low carbon qualities and its blending or drop-in replacement capabilities with traditional natural gas. As we are coming up on our 100-year anniversary in 2028, we view the build-out of our renewable energy platform as truly long-term strategic investments to help set Suburban Propane up for its next century of success. In closing, I wanna once again thank the more than 3,300 dedicated employees of Suburban Propane for their unwavering commitment to safety and outstanding customer service during a very challenging winter heating season and during a time when our customers needed us most. Thank you. As always, we appreciate your support and attention this morning and will now open the call for questions.
Morgan, if you could help us with that.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star then the number one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star then the number one again. One moment while we compile the Q&A roster. If you would like to ask a question at this time, simply press star then the number one on your telephone keypad. It appears there are no questions at this time. I would like to turn the conference back over to Mike Stivala for any further remarks.
Great. Morgan. Thank you all again for joining us. I hope you have a great summer. We look forward to talking to you again in August as we close out on our third quarter results. Thank you again, and please be safe.
This concludes today's call. Thank you for attending. You may now disconnect and have a wonderful rest of your day.