Executive Summary / Key Takeaways

• Suburban Propane Partners (SPH) is strategically evolving from a traditional propane and refined fuels distributor into a diversified energy solutions provider, balancing its resilient core business with significant investments in renewable energy alternatives like RNG, renewable propane, and hydrogen.
• The company demonstrated strong operational leverage in the second quarter of fiscal 2025, capitalizing on colder weather to drive a 15.5% increase in propane volumes and a 19.1% rise in Adjusted EBITDA, showcasing the strength of its operating model when demand is favorable.
• SPH is actively building out its renewable energy platform with key RNG projects in Columbus, Ohio, and Upstate New York expected online by late calendar 2025/early 2026, targeting approximately 850,000 MMBtus per year in RNG sales and leveraging potential tax credits under the Inflation Reduction Act, despite current regulatory ambiguity.
• The Partnership is pursuing growth in its core propane business through strategic acquisitions, including a significant $53 million deal in New Mexico and Arizona in November 2024, and expanding greenfield markets, aiming to offset weather sensitivity and grow its customer base.
• While recent investments and weather impacts have elevated leverage (4.54x TTM March 2025), SPH maintains ample liquidity, is focused on strengthening the balance sheet with expected future cash flows and proceeds from its ATM equity program, and continues to support a healthy quarterly distribution ($0.325/unit, 2.17x coverage TTM March 2025).

Setting the Scene: An Energy Distributor's Evolution

Suburban Propane Partners, L.P. (SPH) traces its operational roots back to March 1996, emerging as a publicly traded limited partnership focused primarily on the retail marketing and distribution of propane. Over the decades, the company expanded its footprint and service offerings, adding fuel oil, refined fuels, and the marketing of natural gas and electricity in deregulated markets. Complementing these energy distribution activities, SPH also developed a robust service business for home comfort equipment, particularly heating and ventilation systems. This evolution established SPH as a key regional energy provider, deeply embedded in the communities it serves across numerous states.

Today, SPH stands at a pivotal point, actively transforming its business model to align with the broader energy transition. This strategic shift is encapsulated in its "Go Green with Suburban Propane" pillar, which advocates for the clean-burning nature of propane while aggressively investing in innovative, lower-carbon energy alternatives. The formation of Suburban Renewable Energy, LLC in January 2022 formalized this commitment, serving as a dedicated platform for investments in areas like Renewable Natural Gas (RNG), renewable propane, and clean hydrogen.

Within the competitive landscape, SPH operates alongside larger, more integrated energy companies like UGI Corporation (UGI), major propane distributors such as AmeriGas Partners (APU), and other regional players including Superior Plus Corp. (SPB) in its U.S. operations. While UGI and APU benefit from greater scale and potentially lower procurement costs (UGI's integrated model and APU's market leadership contribute to estimated 10-15% lower operating costs per unit compared to SPH), SPH differentiates itself through its diversified energy offerings beyond just propane (including fuel oil, natural gas, and electricity), its strong regional presence across approximately 700 locations, and a focus on customer service and safety. SPH's operational agility is a key strength, enabling potentially faster response times for service calls compared to larger, less localized competitors. However, SPH's smaller scale relative to the largest players can result in higher operating costs per unit and potentially impact margins (SPH's TTM gross margin is 42.37% compared to UGI's 51% and SPB's 37% in their latest reported periods, though direct comparability across diverse businesses requires careful consideration). The company's strategic response to this competitive environment involves leveraging its customer relationships, expanding its service footprint through targeted acquisitions, and investing in new energy technologies to create future growth avenues.

Technological Edge and the Path to Lower Carbon

SPH's strategic evolution is fundamentally underpinned by its investments in and development of new energy technologies, particularly within the renewable fuels space. While not a technology developer in the traditional sense of creating novel materials or processes from scratch, SPH is actively deploying, integrating, and investing in technologies that enable the production and distribution of lower-carbon energy sources.

A core area of focus is Renewable Natural Gas (RNG). SPH's involvement centers on anaerobic digestion technology, which processes organic waste (such as food waste and dairy manure) to produce biogas, which is then upgraded to pipeline-quality RNG. The acquisition of RNG production assets from Equilibrium Capital Group in December 2022, including operating facilities in Stanfield, Arizona, and Columbus, Ohio, marked a significant step. The Stanfield facility, in particular, processes feedstocks to produce RNG with a deep negative carbon intensity (CI) score, making it highly valuable in environmental attribute markets like California's Low Carbon Fuel Standard (LCFS) program. Operational enhancements at Stanfield have already resulted in increased feedstock processing and higher daily RNG injection levels, reaching a peak of 1,535 MMBtus and averaging 1,049 MMBtus per day in fiscal 2024.

Further technological build-out is underway with the construction of a gas upgrade system at the Columbus facility and a new anaerobic digester facility at Adirondack Farms in Upstate New York. These projects, expected to be completed by late calendar 2025 or early 2026, are designed to significantly increase SPH's RNG production capacity. Once all three facilities reach run-rate capacity, SPH anticipates generating approximately 850,000 MMBtus per year in RNG sales.

The benefits of this technological focus are tangible and quantifiable for investors. RNG production diversifies SPH's revenue streams beyond traditional fuels, offering exposure to environmental attribute markets (LCFS, RINs) and potential Production Tax Credits (PTCs) under the Inflation Reduction Act (IRA). While there is current ambiguity in proposed IRA regulations regarding PTC eligibility for facilities like Stanfield, SPH is actively seeking clarification and is already earning PTCs from the Stanfield location effective January 1, 2025. The new Upstate New York facility is expected to qualify for a 30% Investment Tax Credit (ITC), equating to an estimated $6 million to $9 million in tax credits upon being placed in service. SPH plans to monetize these ITCs and PTCs in the tax credit transfer market, providing additional cash flow.

Beyond RNG, SPH is also involved in other emerging lower-carbon fuels. Through its minority equity stakes in Oberon Fuels (38%) and Independence Hydrogen (25%), SPH is gaining exposure to renewable dimethyl ether (rDME) and clean hydrogen technologies. Oberon's rDME, produced via a proprietary process, can be blended with propane to significantly reduce its carbon intensity. SPH is currently the only retailer delivering a low-carbon propane plus rDME blend (a 4% blend) to forklift customers in Southern California and is testing higher blend levels. Independence Hydrogen is developing a localized gaseous hydrogen ecosystem. While these are earlier-stage investments that faced challenges leading to impairment charges in Q1 fiscal 2025 ($10.2M for Oberon, $9.6M for IH), SPH views them as crucial for gaining knowledge and building relationships in the future low-carbon fuel supply chain.

For investors, SPH's technological strategy creates a competitive moat by positioning the company as a participant in the evolving energy landscape. While traditional competitors like APU and UGI are also exploring renewables, SPH's direct investments in RNG production assets and its unique rDME blending initiative demonstrate a proactive approach to developing diversified, lower-carbon energy solutions that leverage its core distribution expertise. This strategy aims to provide long-term growth potential and resilience against potential declines in demand for traditional fuels due to decarbonization trends.

Performance and Operational Strength

SPH's financial performance reflects the seasonal nature of its core business, heavily influenced by weather, coupled with the initial contributions and investments in its newer renewable energy ventures. The second quarter of fiscal 2025 (ended March 29, 2025) demonstrated the operational strength of the business when weather cooperates. Retail propane volumes surged by 15.5% compared to the prior year second quarter, driven by sustained cooler temperatures, particularly the 13% colder average temperatures experienced in January and February compared to the same period last year. This volume increase, combined with effective margin management that kept unit margins flat despite a 7.2% increase in average wholesale propane prices, fueled a significant improvement in profitability. Total gross margin for the quarter increased by $37.3 million, or 12.1% ($42.5 million or 14.1% excluding mark-to-market adjustments). Despite a 9.7% increase in combined operating and general and administrative expenses (driven by higher payroll, benefits, overtime, and variable costs to support the increased volume), operating income rose by $21.5 million, or 15.7%. Net income for the quarter was $137.1 million, or $2.11 per Common Unit, compared to $111.5 million, or $1.73 per Common Unit, in the prior year. Adjusted EBITDA saw a substantial increase of $28 million, or 19.1%, reaching $175 million.

Looking at the first half of fiscal 2025, total revenues increased by 11.2% to $961.0 million, and operating income grew by 17.2% to $217.5 million, reflecting the strong Q2 performance offsetting a warmer Q1. Net income for the six months was $156.5 million ($2.42 per unit), up from $136.0 million ($2.12 per unit) in the prior year period. Adjusted EBITDA for the first half was $250.3 million, up from $222.3 million.

Fiscal year 2024 (ended September 28, 2024) provided a contrasting picture, heavily impacted by unseasonably warm weather throughout much of the heating season. Retail propane volumes were down 4.6% (or 3% excluding the extra week in FY23). Despite this volume decline, SPH demonstrated resilience through effective selling price management, resulting in a 1.3% increase in propane unit margins, and tight cost control, limiting the increase in combined operating and G&A expenses to a nominal 0.2%. However, the volume shortfall ultimately led to lower overall earnings, with Adjusted EBITDA for fiscal 2024 at $250 million, down from $275 million in the prior year.

The "All Other" segment, which includes the RNG operations, showed revenue declines in the first half of fiscal 2025 (-7.0%) and Q2 fiscal 2025 (-1.0%), primarily due to planned downtime, cold weather impacts on anaerobic digestion, and headwinds from lower LCFS and RIN prices. However, operating income for this segment increased significantly in the first half (+24.1%) and Q2 (+19.5%), suggesting improved underlying operational efficiency despite revenue challenges.

For investors, these results highlight SPH's operational leverage and sensitivity to weather, but also its ability to manage margins and control costs in challenging environments. The strong Q2 FY25 performance underscores the potential upside when demand is favorable, while the FY24 results demonstrate the resilience built through customer growth, acquisitions, and expense discipline. The growing contribution (and volatility) from the "All Other" segment signals the increasing importance and potential impact of the renewable energy investments on future results.

Strategic Growth and Future Outlook

SPH's strategic initiatives are focused on a dual path: strengthening its core propane business and aggressively building out its renewable energy platform.

In the core business, SPH continues to pursue opportunistic acquisitions. The November 2024 acquisition of a propane retailer in New Mexico and Arizona for $53 million, adding over 14,000 customers, is the largest single propane acquisition since 2012 and is performing ahead of expectations. This follows three smaller acquisitions totaling approximately $14 million in fiscal 2024. These deals expand SPH's geographic footprint and customer base, providing a buffer against regional weather variations and contributing to overall volume stability. The company is also fostering organic growth through greenfield market expansions, increasing active initiatives from nine in fiscal 2023 to 18 in fiscal 2024. Securing additional contracts for renewable propane gallons coming online in 2025 further supports the core business's evolution towards lower-carbon offerings.

The build-out of the renewable energy platform remains a key strategic priority. The Columbus gas upgrade and Adirondack anaerobic digester projects are progressing, with expected completion by late calendar 2025 or early 2026. These facilities, combined with the existing Stanfield operation, are central to SPH's goal of reaching approximately 850,000 MMBtus per year in RNG sales. Management anticipates that as these projects come online and reach run-rate capacity, they will significantly contribute to earnings and help improve the company's leverage metric.

Financially, SPH is focused on maintaining a strong balance sheet to support these growth initiatives. As of March 29, 2025, total long-term borrowings stood at $1.29 billion. The company's Consolidated Leverage Ratio improved to 4.54x for the trailing twelve-month period ended March 29, 2025, down from 4.99x at the end of the first quarter. Management is committed to further strengthening the balance sheet, utilizing expected excess cash flows generated during the warmer months and proceeds from the recently launched At-the-Market (ATM) equity program.

The ATM program allows SPH to sell up to $100 million in Common Units, providing additional capital flexibility for debt reduction and funding strategic growth. As of March 29, 2025, $8.8 million had been raised through this program.

Capital expenditure plans reflect this dual focus, with fiscal 2025 guidance set at $40 million to $45 million for propane operations (consistent with historical levels) and $35 million to $45 million for RNG projects (excluding potential ITC benefits).

SPH maintains a commitment to returning capital to unitholders, declaring a quarterly distribution of $0.325 per Common Unit ($1.30 annualized) for Q2 fiscal 2025. The distribution coverage ratio remains healthy at 2.17 times for the trailing twelve-month period ended March 2025, providing confidence in the sustainability of the current payout.

The outlook is framed by the expected contributions from the new RNG facilities, continued growth in the core propane business through acquisitions and organic efforts, and the ability to leverage operational efficiencies. Management believes the broader energy conversation is shifting towards a more balanced view of energy resiliency, security, affordability, and sustainability, which benefits propane due to its existing attributes and on-demand nature.

Risks and Challenges

Despite a clear strategy and operational strengths, SPH faces several key risks. The most significant remains weather variability, which directly impacts demand for heating fuels. Periods of unseasonably warm weather, as experienced in fiscal 2024, can materially reduce volumes and profitability. Commodity price volatility also poses a risk; while SPH employs hedging strategies and aims to pass on cost increases, rapid price swings can impact margins and lead to customer conservation.

Execution risk exists in the renewable energy build-out. Delays in permitting, construction, or achieving expected operational performance at the new RNG facilities could impact timelines and projected returns. The commercial viability of renewable fuels also depends on customer adoption and the stability of environmental attribute markets (LCFS, RINs), which have experienced price volatility. Regulatory uncertainty, particularly regarding the final rules for IRA production tax credits for RNG, could affect the expected financial benefits from these projects.

Competition remains a factor, both from traditional energy distributors and increasingly from alternative energy sources like electricity and solar, which could erode market share over the long term. While SPH's diversification helps, the pace of energy transition and government mandates favoring electrification could present headwinds.

Financial risks include maintaining compliance with debt covenants, although management has demonstrated the ability to manage these, as seen with the Green Bonds covenant issue and its resolution. Inflationary pressures on operating costs and capital expenditures could also impact profitability and investment returns.

Conclusion

Suburban Propane Partners is navigating a dynamic energy landscape by leveraging the stability and cash-generating capacity of its core propane and refined fuels distribution business to fund a strategic expansion into renewable energy. The company's operational model proved its resilience and ability to capitalize on favorable weather in Q2 fiscal 2025, driving strong performance. Simultaneously, SPH is actively building out its renewable energy platform with significant RNG production assets expected online soon, positioning itself for future growth in lower-carbon fuels and aiming to benefit from environmental attribute markets and tax credits.

While challenges such as weather dependency, commodity volatility, and execution risks in new ventures persist, SPH's management is focused on strategic acquisitions, organic growth, operational efficiency, and maintaining a strong balance sheet. The recent acquisitions and the ATM program underscore the commitment to funding growth and financial flexibility. For investors, SPH represents an opportunity to invest in a seasoned energy distributor that is proactively evolving, balancing a reliable core business with calculated investments in the future of energy, supported by a healthy distribution yield. Key factors to watch will be the successful commissioning and performance of the new RNG facilities, the clarity and impact of renewable energy regulations and incentives, and the continued execution of the company's growth and cost management strategies in its core business.