Suburban Propane Partners, L.P. — Q3 Fiscal 2020 Form 10-Q Summary
Business context and reporting period
Suburban Propane Partners, L.P. distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides home-comfort equipment services. The filing covers the three and nine months ended June 27, 2020, compared with June 29, 2019. Results are highly seasonal, with most heating-related volumes and profits generated during the first and second fiscal quarters.
Key financial metrics
| Metric | Three months ended June 27, 2020 | Three months ended June 29, 2019 | Nine months ended June 27, 2020 | Nine months ended June 29, 2019 |
|---|---|---|---|---|
| Revenue | $206.9 million | $214.2 million | $941.8 million | $1,095.7 million |
| Operating income | $4.9 million | $(8.8) million | $162.4 million | $181.8 million |
| Net income (loss) | $(15.6) million | $(29.0) million | $101.9 million | $119.7 million |
| Net income (loss) per common unit | $(0.25) | $(0.47) | $1.64 | $1.93 |
| Operating margin | 2.4% | (4.1)% | 17.2% | 16.6% |
| Net margin | (7.5)% | (13.6)% | 10.8% | 10.9% |
| Adjusted EBITDA | $32.2 million | $20.1 million | $248.2 million | $276.4 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $169.0 million | $166.1 million |
Third-quarter revenue declined 3.4%, primarily because lower wholesale costs reduced selling prices, partially offset by higher volumes. Propane gallons sold increased 2.2% to 75.4 million, while fuel oil and refined fuels gallons increased 10.8%. Lower product costs reduced cost of products sold by 24.1% and improved the product-cost ratio to 28.8% from 36.7%.
As of June 27, 2020, cash and cash equivalents were $4.2 million. Long-term borrowings, net of debt issuance costs, were $1.225 billion, consisting principally of $1.125 billion of senior notes and $109.7 million outstanding under the revolving credit facility. The facility had a $500 million commitment, $63.1 million of standby letters of credit, and reported borrowing capacity of $234.9 million. The revolving facility carried an interest rate of approximately 3.3% at quarter-end.
The Partnership reported a consolidated leverage ratio of 4.83x and stated that it complied with all debt covenants. Total assets were $2.075 billion and total partners’ capital was $422.2 million. Operating lease right-of-use assets and liabilities totaled $115.9 million and $115.5 million, respectively, following adoption of the new lease standard.
Material changes versus the prior comparable period
- Third-quarter net loss improved by $13.5 million, and operating results moved from an $8.8 million loss to $4.9 million of income.
- Third-quarter Adjusted EBITDA increased 60.5% to $32.2 million, excluding unrealized derivative gains and the $0.9 million pension settlement charge.
- Nine-month revenue decreased 14.0% and net income decreased 14.8%, primarily reflecting unusually warm heating-season weather, lower selling prices and lower volumes.
- Nine-month propane gallons sold decreased 5.9%; first-nine-month temperatures were 10% warmer than normal and 6% warmer than the prior-year period.
- Operating cash flow increased modestly by $2.9 million to $169.0 million despite lower earnings, primarily because of more favorable working-capital changes.
- The Partnership entered into a new $500 million revolving credit facility on March 5, 2020, extending maturity, lowering borrowing costs and increasing the maximum permitted total consolidated leverage ratio from 5.50x to 5.75x.
- Quarterly distributions were reduced from $0.60 to $0.30 per common unit, or $1.20 annualized, expected to reduce annual cash requirements by approximately $75 million and support debt reduction.
- The Partnership acquired two propane businesses for aggregate consideration of approximately $23.4 million plus working capital, with $21.5 million paid by June 27, 2020.
Guidance, outlook, commentary and risks
Management did not provide formal earnings guidance. For the remainder of fiscal 2020, anticipated cash requirements included approximately $8.9 million of maintenance and growth capital expenditures, $19.0 million of interest and income-tax payments, and $18.6 million of cash distributions. Management expected available cash, operating cash flow and revolver availability to be sufficient for current obligations.
COVID-19 reduced demand from certain commercial and industrial customers, slowed collections and increased bad-debt exposure. Residential demand benefited from cooler April and May weather and stay-at-home measures. Management stated that supply chains had not been materially disrupted and that sufficient product supply and liquidity remained available, but it could not estimate the pandemic’s full financial impact.
- Key operating risks include weather variability, commodity-price volatility, customer conservation, supply and transportation disruptions, competition and regulatory changes.
- COVID-19 risks include prolonged economic weakness, customer defaults, reduced demand, workforce or facility disruptions, additional safety costs and potential supply-chain constraints.
- Self-insurance liabilities were $72.7 million, partially offset by a $17.3 million insurance receivable.
- The Partnership recorded a $5.0 million charge in the first quarter for settlement of product-liability and other legal matters; the claims were paid in the second quarter.
- Two putative class actions involving the natural gas and electricity business remained pending. No loss reserve was recorded, and the potential loss could not be reasonably estimated.
- A $0.9 million non-cash pension settlement charge was recognized in the third quarter.
- Future debt maturities were $634.7 million in fiscal 2024 and $600.0 million thereafter.
Important facts for investors to verify
- Whether the reduced $0.30 quarterly distribution is sustainable through the next heating season and how quickly debt reduction progresses.
- Actual commercial and industrial demand, customer collections and bad-debt expense as COVID-19 effects continue.
- Weather conditions and their effect on propane and fuel-oil volumes during fiscal 2021’s heating season.
- Compliance with the 5.75x total leverage, 2.5x interest-coverage and 3.25x senior-secured leverage covenants.
- Liquidity available under the revolving facility after letters of credit and other borrowing-base limitations.
- Refinancing plans for the $634.7 million of fiscal 2024 debt maturities.
- Potential exposure from pending litigation, self-insurance reserves and the $24.0 million maximum residual-value guarantee on operating leases.
- The filing’s non-GAAP Adjusted EBITDA calculation and reconciliation before comparing it with other companies.