Business Context and Reporting Period
Suburban Propane Partners, L.P. filed its Annual Report on Form 10-K for the 52-week fiscal year ended September 25, 2021. The Partnership markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and home-comfort services through approximately 700 locations in 41 states serving approximately 1.0 million customers.
Propane remains the core business, representing approximately 88% of revenue from reportable segments. Fiscal 2021 operating conditions reflected warmer-than-normal annual temperatures, cooler weather during the critical December 2020-February 2021 heating period, easing COVID-19 restrictions, higher commodity prices, and supply-chain pressure.
Financial Performance and Liquidity
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Total revenue | $1,288.8 million | $1,107.9 million | +16.3% |
| Net income | $122.8 million | $60.8 million | +102.1% |
| Basic earnings per common unit | $1.96 | $0.98 | +100.0% |
| Adjusted EBITDA | $275.7 million | $253.7 million | +8.7% |
| Net cash provided by operating activities | $226.6 million | $209.4 million | +8.2% |
| Capital expenditures | $29.9 million | $32.5 million | -8.1% |
| Cash and cash equivalents | $5.8 million | $3.1 million | Increase |
- Total gross margin was $803.3 million, implying an approximate 62.3% gross margin, compared with approximately 65.4% in fiscal 2020.
- Operating income was $213.2 million, implying an approximate 16.5% operating margin.
- Net income margin was approximately 9.5%; Adjusted EBITDA margin was approximately 21.4%.
- Retail propane volume increased 4.2% to 419.8 million gallons. Fuel oil and refined fuels volume decreased 7.7% to 24.0 million gallons.
- Propane revenue increased 19.4% to $1,140.5 million, while fuel oil and refined fuels revenue decreased 10.6% to $67.1 million. Natural gas and electricity revenue declined 2.4% to $30.4 million.
- Fiscal 2021 included a $43.1 million unrealized non-cash derivative gain, compared with a $0.4 million unrealized loss in fiscal 2020. Adjusted EBITDA excludes this mark-to-market effect.
- Long-term debt consisted of $350.0 million of 5.875% senior notes due 2027, $650.0 million of 5.0% senior notes due 2031, and $132.0 million drawn under a $500.0 million revolving credit facility. Carrying value of long-term borrowings was $1,118.0 million.
- The Partnership refinanced the $525.0 million 2024 notes and $250.0 million 2025 notes with the 2031 notes and revolver borrowings, recording a $16.0 million loss on debt extinguishment. Management stated that the refinancing extended weighted-average maturities by 3.5 years and reduced annual interest expense by approximately $7.0 million.
- Net interest expense decreased 8.8% to $68.1 million. Consolidated leverage was 3.96x, and the Partnership reported compliance with all debt covenants at year-end.
- Fiscal 2022 anticipated cash requirements include approximately $35.0 million of capital expenditures, $61.3 million of interest and income-tax payments, and $81.9 million of distributions based on the $1.30 annualized distribution rate.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher propane selling prices and volumes. Average Mont Belvieu propane prices increased 97.5%, while average propane selling prices increased 11.6%.
- Propane demand benefited from cooler temperatures during the most important heating months, recovery in commercial and industrial activity, and customer growth and retention initiatives.
- U.S. propane inventories at September 2021 were 28.5% below the prior-year level and 19% below the five-year average, increasing supply and margin risk.
- Operating expenses rose 2.3% to $411.4 million, while general and administrative expenses increased 12.4% to $74.1 million. Depreciation and amortization declined 10.5% to $104.6 million, primarily because certain acquired intangible assets completed amortization.
- The Partnership repaid approximately $87.6 million of debt using operating cash flow and increased the quarterly distribution from $0.30 to $0.325 per common unit, an 8.3% increase.
- Fiscal 2021 included a $4.3 million charge related to voluntary withdrawal from a multi-employer pension plan and a $1.0 million pension settlement charge.
- Fourth-quarter results remained seasonal and weak: revenue was $208.2 million, operating income was $0.4 million, and net loss was $16.4 million, or $0.26 per basic common unit.
Outlook, Commentary, Risks and Unusual Items
- Management expects sufficient liquidity for fiscal 2022 obligations based on operating cash flow and availability under the revolving credit facility, but distributions remain dependent on cash generation, debt restrictions, reserves and operating performance.
- The Partnership expects to secure adequate propane and fuel oil supplies during fiscal 2022, but two suppliers accounted for approximately 29% and 16% of total propane purchases, respectively. An interruption could increase procurement and transportation costs.
- Key earnings risks include warm winters, weather volatility, customer conservation, commodity-price increases, transportation and supply-chain disruptions, competition from natural gas and electricity, and energy-efficiency improvements.
- COVID-19 continued to create uncertainty around customer demand, employee availability, supplier operations, recruiting costs and government restrictions. Management stated that the supply chain had not been materially disrupted as of the filing.
- The natural gas and electricity business faces regulatory and litigation risks in New York and Pennsylvania. Telemarketing sales in New York remained suspended, and a consumer class action remained pending with no reserve recorded because the potential loss could not be reasonably estimated.
- The Partnership is investing in renewable propane and holds a 39% interest in Oberon Fuels, a development-stage producer of renewable dimethyl ether. Oberon began U.S. production of rDME in June 2021, but the investment remains development-stage and its future commercial contribution is uncertain.
- Environmental liabilities were accrued at $1.9 million. Accrued insurance liabilities totaled $66.1 million, partially offset by $16.1 million of expected insurance recoveries. The Partnership also disclosed estimated multi-employer pension withdrawal obligations of $23.6 million.
- Commodity derivatives generated significant mark-to-market volatility. A hypothetical 10% adverse change in relevant market prices would have reduced potential future net gains by approximately $18.5 million as of September 25, 2021.
Most Important Facts for Investors to Verify
- Whether higher propane prices and the fiscal 2021 volume recovery are sustainable without materially increasing customer conservation or compressing margins.
- The extent to which the $43.1 million derivative mark-to-market gain affected reported gross margin and how normalized earnings compare with GAAP results.
- Availability, pricing and concentration of propane supplies, especially reliance on Crestwood and Targa.
- Debt covenant headroom, revolver availability, refinancing needs and the ability to sustain the $0.325 quarterly distribution.
- The duration and financial impact of COVID-19, labor shortages, transportation costs and broader supply-chain disruptions.
- The outcome and potential exposure from the pending AES consumer class action and any additional environmental or pension liabilities.
- Commercial progress, funding requirements and potential returns from renewable propane and Oberon’s rDME initiatives.
- Weather-normalized operating performance, given that the business is highly seasonal and fiscal 2021 heating-degree days were 10% warmer than normal overall.