Suburban Propane Partners, L.P. — Q1 FY2024 Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended December 30, 2023, compared with the 13 weeks ended December 24, 2022. Suburban Propane markets and distributes propane, renewable propane, fuel oil and refined fuels, natural gas and electricity, and provides home-comfort equipment services. It also invests in renewable-energy businesses, including renewable natural gas (RNG), hydrogen and renewable dimethyl ether.
Operations are highly seasonal, with approximately two-thirds of annual retail propane volume sold during the October–March heating season. Results for the quarter are therefore not necessarily indicative of full-year performance.
Financial performance and key metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $365.8 million | $397.5 million | Down 8.0% |
| Operating income | $48.7 million | $62.3 million | Down 21.8% |
| Net income | $24.5 million | $45.4 million | Down 46.1% |
| Net income per common unit | $0.38 | $0.71 | Down $0.33 |
| Adjusted EBITDA | $75.2 million | $90.0 million | Down 16.4% |
| Net cash from operating activities | $(12.8) million | $6.3 million | Declined $19.0 million |
| Gross margin | $212.8 million | $214.8 million | Down 0.9% |
Revenue decreased primarily because of lower selling prices and volumes across propane, fuel oil and refined fuels, and natural gas and electricity. All other revenue increased 35.6% to $22.1 million, principally reflecting the RNG platform acquired in December 2022.
Reported operating margin was approximately 13.3%, compared with 15.7% in the prior-year quarter. Net margin was approximately 6.7%, compared with 11.4%. Gross margin as a percentage of revenue increased to approximately 58.2% from 54.1%, largely because product costs declined faster than revenue; the comparison was affected by derivative mark-to-market losses.
- Retail propane volume declined 2.0% to 106.5 million gallons.
- Fuel oil and refined fuels volume declined 5.5% to 5.3 million gallons.
- Average propane prices declined 16.7% at Mont Belvieu, while average fuel oil prices declined 25.0%.
- Operating expenses increased 5.5% to $122.1 million, and general and administrative expenses increased 11.1% to $25.6 million.
- Depreciation and amortization increased 19.0% to $16.4 million, principally because of the RNG acquisition.
- Net interest expense increased 13.7% to $18.2 million because of higher revolving borrowings, higher benchmark rates and the assumed Green Bonds.
Cash flow, debt and liquidity
- Operating cash flow was negative $12.8 million, primarily reflecting lower earnings and seasonal working-capital investment, including a $51.1 million increase in accounts receivable.
- Investing cash outflow was $13.9 million, including $11.2 million of capital expenditures and $3.3 million of investments in businesses.
- Financing cash inflow was $30.6 million, including $54.8 million of net revolver borrowings, partly offset by $20.6 million of partnership distributions.
- Cash and cash equivalents were $6.3 million at December 30, 2023. Including restricted cash, total cash was $18.0 million.
- Long-term borrowings were $1.244 billion on the balance sheet, including $350.0 million of 2027 Senior Notes, $650.0 million of 2031 Senior Notes, $67.1 million of Green Bonds and $186.8 million outstanding under the revolving facility.
- Total debt, based on principal amounts and including the Green Bonds, was approximately $1.267 billion, up $54.8 million from September 30, 2023. The revolving facility had a $500.0 million commitment and an interest rate of approximately 7.90% at quarter-end.
- The trailing-twelve-month Consolidated Leverage Ratio was 4.72x, compared with 4.28x at September 30, 2023. Management stated that all debt covenants were satisfied.
- Debt maturities include $186.8 million in fiscal 2025, $350.0 million in fiscal 2027 and $730.6 million thereafter.
Material changes versus the prior comparable period
- Warmer weather reduced heating demand: service-territory temperatures were 9% warmer than normal and 6% warmer than the prior-year quarter; December temperatures were 10% warmer than both normal and the prior year.
- Lower commodity prices reduced revenue and product costs, while propane volumes and unit margins also declined. Propane unit margin decreased approximately $0.05 per gallon, or 2.8%.
- Adjusted EBITDA declined $14.8 million, primarily from lower volumes and margins and higher operating and corporate costs.
- Combined operating and general and administrative expenses rose 6.4%, driven by payroll, benefits, inflation and RNG facility costs.
- Unrealized derivative losses were $10.8 million, compared with $13.7 million in the prior year. These non-cash losses were excluded from Adjusted EBITDA.
- Equity in losses of unconsolidated affiliates increased to $5.2 million from $0.3 million and was added back in the Adjusted EBITDA reconciliation.
- The unit count increased to 64.0 million from 63.5 million at September 30, 2023, primarily from restricted-unit activity.
Guidance, outlook, commentary and risks
Management expects to have sufficient funds to meet current and future obligations based on cash on hand, revolver availability and expected operating cash flow. For the remainder of fiscal 2024, management anticipates approximately $14.9 million of maintenance capital expenditures, $42.0 million of growth capital expenditures, $55.2 million of interest and income-tax payments, and $62.4 million of cash distributions, assuming a quarterly distribution rate of $0.325 per common unit.
The Partnership declared a $0.325 per-unit quarterly distribution for the first quarter of fiscal 2024, equivalent to $1.30 per unit on an annualized basis, payable February 13, 2024.
- Weather remains a major earnings and cash-flow variable, particularly during the heating season.
- Commodity-price volatility, supply availability, transportation costs and customer conservation can affect margins and volumes.
- Variable-rate debt exposes the Partnership to higher interest expense; no interest-rate swaps were outstanding at quarter-end.
- RNG and other renewable-energy investments face development, permitting, operating, financing, regulatory, environmental-attribute pricing and customer-demand risks.
- Inflation continues to affect labor, transportation, equipment and other operating costs.
- The Partnership is self-insured for certain liabilities and had $61.0 million of accrued insurance liabilities, partly offset by a $15.4 million insurance receivable.
- Residual-value guarantees on operating leases had a maximum potential exposure of $39.4 million, although their fair value was de minimis.
- A previously disclosed class-action matter involving the natural gas and electricity business was affirmed in the Partnership’s favor by the Second Circuit in December 2023; the plaintiff could petition the U.S. Supreme Court within the applicable period.
- A hypothetical 10% adverse movement in commodity prices for open derivatives was estimated to increase potential future net losses by $3.4 million; management cautioned that actual results could differ materially.
Most important facts for investors to verify
- Whether colder or warmer weather in the remainder of the heating season changes propane volumes, margins and operating cash flow.
- Revolver availability, interest-rate resets, leverage covenant headroom and the March 2025 revolver maturity.
- Whether the planned $42.0 million of growth capital expenditures and RNG investments generate expected returns.
- The sustainability of the $0.325 quarterly distribution given negative first-quarter operating cash flow, seasonal working capital and debt levels.
- The effect of derivative settlements and mark-to-market changes on reported product costs and future earnings.
- Progress, funding requirements and operating performance of the RNG, hydrogen and rDME investments.