Suburban Propane Partners, L.P. — Fiscal 2023 Q3 Form 10-Q
Reporting period: Quarter and nine months ended June 24, 2023, compared with June 25, 2022. Results are seasonal, with most propane and fuel-oil activity occurring during the October–March heating season; third-quarter results typically include lower operating profit and may include a net loss.
Business context
The Partnership markets and distributes propane, renewable propane, fuel oil and refined fuels, natural gas and electricity, and provides home-comfort services. It is also investing in renewable natural gas (RNG), hydrogen and renewable dimethyl ether projects. The December 2022 acquisition of an RNG platform added operating facilities in Arizona and Ohio and related development opportunities.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Revenue | $278.6 million | $300.3 million | Down 7.2% |
| Gross margin | $168.2 million | $159.4 million | Up $8.8 million |
| Operating income | $14.9 million | $14.8 million | Up $0.1 million |
| Net income (loss) | $(5.3) million | $(2.5) million | Loss increased |
| Net loss per unit | $(0.08) | $(0.04) | Lower |
| Adjusted EBITDA | $33.0 million | $29.2 million | Up 13.2% |
- Revenue declined primarily because lower propane, fuel-oil and natural-gas prices more than offset higher propane volumes and RNG-related revenue.
- Retail propane gallons sold increased 3.9% to 78.5 million gallons in the quarter, while fuel-oil and refined-fuel gallons declined 7.6% to 3.4 million gallons.
- Gross margin benefited from higher propane volumes and lower product costs. A $3.0 million unrealized derivative loss was recorded in cost of products sold, compared with a $0.9 million loss in the prior-year quarter.
- Operating expenses increased 6.9% to $116.6 million, reflecting higher volume-related costs, inflation in payroll, vehicle lease and repair costs, and costs of the RNG facilities.
- Net interest expense increased 24.9% to $18.7 million due to higher borrowings, higher variable interest rates and assumed Green Bonds debt.
Nine-month performance
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|---|---|---|
| Revenue | $1.203 billion | $1.264 billion | Down 4.8% |
| Operating income | $202.9 million | $244.0 million | Down 16.9% |
| Net income | $144.6 million | $193.9 million | Down 25.4% |
| Diluted earnings per unit | $2.25 | $3.04 | Down 26.0% |
| Adjusted EBITDA | $272.0 million | $288.2 million | Down 5.6% |
| Net cash from operations | $167.4 million | $171.1 million | Down $3.7 million |
Nine-month results were adversely affected by warmer-than-normal winter weather, particularly in January and February. Propane gallons sold declined 2.5% to 331.4 million gallons. Operating and general and administrative expenses increased because of inflation, higher payroll and insurance costs, RNG operating costs and $4.7 million of RNG acquisition-related professional fees. Unrealized derivative losses increased to $21.2 million from $1.4 million, although these losses were excluded from Adjusted EBITDA.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $10.0 million at June 24, 2023; total cash, cash equivalents and restricted cash were $18.7 million.
- Total long-term borrowings were $1.215 billion on the balance sheet, including $350.0 million of 2027 Senior Notes, $650.0 million of 2031 Senior Notes, $66.4 million carrying value of Green Bonds and $160.0 million drawn on the $500.0 million revolving credit facility.
- Aggregate principal debt maturities are $160.0 million in fiscal 2025, $350.0 million in fiscal 2027 and $730.6 million thereafter.
- Borrowings under the revolving facility carried an interest rate of approximately 7.52% at June 24, 2023. Reported borrowing capacity was $297.3 million, and standby letters of credit totaled $42.7 million.
- The Partnership was in compliance with its debt covenants. The trailing twelve-month Consolidated Leverage Ratio improved to 4.36x from 4.43x at March 25, 2023.
- Nine-month investing cash outflows were $157.1 million, including $108.3 million net for the RNG acquisition, $33.4 million of capital expenditures and additional investments. Maintenance capital expenditures were approximately $16.1 million and growth capital expenditures approximately $17.3 million.
- Cash distributions were $61.7 million during the first nine months. A quarterly distribution of $0.325 per common unit, or $1.30 annualized, was declared for the third quarter and paid August 8, 2023.
Material changes, outlook and risks
- Management expects approximately $3.9 million of maintenance capital expenditures, $13.3 million of growth capital expenditures, $17.8 million of interest and tax payments, and $20.6 million of distributions during the remainder of fiscal 2023.
- Management expects available cash, revolver capacity and operating cash flow to be sufficient for current and future obligations.
- The RNG platform is expected to support long-term growth, but it introduces development, permitting, operating, financing, partner-dependence, environmental-credit and customer-demand risks. The Partnership is also constructing an RNG facility in New York, expected to be completed within 18–24 months from the start of construction.
- Commodity prices, weather and customer conservation remain significant drivers of demand and margins. June 2023 U.S. propane inventories were 47.2% above the prior year and 18.2% above the five-year average; average Mont Belvieu propane prices were 45.9% lower year over year in the quarter.
- A hypothetical 10% adverse change in market prices for open derivative positions indicated potential future net losses of approximately $4.3 million. The Partnership does not use derivatives for speculative trading.
- Inflation continues to affect labor, transportation, equipment, insurance and other operating costs. Variable-rate debt creates additional interest-rate exposure.
- The Partnership reported no material pending legal proceedings requiring a loss reserve and stated that currently pending or threatened matters are not expected to have a material adverse effect.
- Disclosure controls were effective as of June 24, 2023. Management excluded the recently acquired RNG assets and facilities from its interim internal-control evaluation under applicable SEC guidance.
Important facts for investors to verify
- Whether warmer-than-normal weather and lower commodity prices continue to affect propane volumes, pricing and margins.
- The sustainability of the improved quarterly Adjusted EBITDA despite lower nine-month earnings and higher operating costs.
- RNG facility operating performance, environmental-credit pricing, development spending and the potential earnout of up to $45.0 million associated with the acquisition.
- Revolver utilization, variable interest rates, covenant headroom and the $160.0 million fiscal 2025 maturity.
- Whether operating cash flow remains sufficient to fund capital expenditures, distributions and debt obligations while supporting renewable-energy investments.
- The effect of the $21.2 million year-to-date unrealized derivative loss and future commodity-price movements on reported earnings and cash requirements.