Business Context and Reporting Period
Suburban Propane Partners, L.P. markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and home-comfort services. This unaudited Form 10-Q covers the three and six months ended March 28, 2020, compared with March 30, 2019. The second quarter is seasonally significant because most heating-related volumes and operating profits occur from October through March.
Key Financial Metrics
| Metric | Q2 FY2020 | Q2 FY2019 | Change |
|---|---|---|---|
| Revenue | $401.1 million | $504.4 million | Down 20.5% |
| Operating income | $97.6 million | $142.1 million | Down 31.3% |
| Net income | $77.4 million | $121.0 million | Down 36.1% |
| Basic earnings per common unit | $1.24 | $1.96 | Down 36.7% |
| Adjusted EBITDA | $130.6 million | $163.0 million | Down 19.9% |
| Operating margin | 24.3% | 28.2% | Down 3.9 percentage points |
| Net margin | 19.3% | 24.0% | Down 4.7 percentage points |
For the six months ended March 28, 2020, revenue was $734.9 million versus $881.5 million, operating income was $157.5 million versus $190.6 million, net income was $117.5 million versus $148.7 million, and Adjusted EBITDA was $216.0 million versus $256.4 million.
- Q2 retail propane volume declined 12.2% to 145.1 million gallons; fuel oil and refined fuels volume declined 23.6% to 10.1 million gallons.
- Average service-territory temperatures were 16% warmer than normal and 13% warmer than the prior-year quarter. Average posted propane prices were 44.3% lower.
- Q2 cost of products sold declined 25.5% to $150.1 million and represented 37.4% of revenue versus 40.0% in the prior year. Operating expenses increased 2.3% to $110.6 million, while general and administrative expense declined 38.9% to $13.4 million.
- Net cash provided by operating activities for the first six months was $91.3 million versus $101.2 million. Investing cash use was $40.1 million, including $20.5 million of capital expenditures and $21.5 million for acquisitions. Financing cash use was $48.5 million, including $74.3 million of distributions.
- Cash and cash equivalents were $5.2 million at March 28, 2020, compared with $2.4 million at September 28, 2019. Accounts receivable increased to $113.6 million from $59.3 million, and the allowance for doubtful accounts increased to $4.8 million from $2.6 million.
- Long-term borrowings were $1.260 billion, including $1.125 billion of senior notes and $145.1 million outstanding under the revolving facility. The facility provides $500.0 million of commitments, with reported borrowing capacity of $129.8 million after borrowings and letters of credit.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability fell principally because of exceptionally warm weather, lower volumes, lower commodity prices and, late in the quarter, reduced commercial and industrial demand associated with COVID-19.
- Propane revenue decreased 19.7% in Q2; fuel oil and refined fuels revenue decreased 24.3%; and natural gas and electricity revenue decreased 42.0%. The latter also reflected New York regulatory actions limiting service to certain customers.
- Lower wholesale costs reduced product costs faster than selling prices, but the benefit was partly offset by a $4.7 million unrealized derivative loss, compared with an $8.5 million unrealized gain in the prior-year quarter.
- The Partnership completed two propane acquisitions, in Georgia and California, for aggregate purchase prices of approximately $23.4 million plus working capital. The acquisitions generated $5.7 million of goodwill and were not material to consolidated results.
- On March 5, 2020, the Partnership entered into a new $500.0 million revolving credit agreement that extended maturity, lowered borrowing costs and increased the maximum permitted Total Consolidated Leverage Ratio from 5.50x to 5.75x. The reported ratio at quarter-end was 5.22x.
- Adoption of lease accounting resulted in approximately $103.1 million of operating lease right-of-use assets and liabilities at September 29, 2019, without affecting other financial statements or debt-covenant metrics.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings guidance. It expects the business to remain affected by COVID-19-related restrictions and economic weakness, including lower commercial and industrial demand, slower collections, higher bad-debt risk, limits on collection actions in certain states, potential supply-chain disruption and higher costs for protective measures. Management is developing alternative operating plans and evaluating liquidity and cash-flow scenarios for the remainder of fiscal 2020 and the next heating season.
- The Partnership stated that supply arrangements had not been materially disrupted and that it continued to have access to sufficient product and liquidity. It expected available cash, operating cash flow and revolving-credit availability to cover obligations at the filing date.
- Expected cash requirements for the remainder of fiscal 2020 included approximately $14.5 million of capital expenditures, $36.1 million of interest and income-tax payments, and $74.6 million of distributions based on the $0.60-per-unit quarterly rate.
- The Board declared a $0.60-per-unit distribution for the second quarter, payable May 12, 2020. Management noted that it could reevaluate the distribution level if additional balance-sheet flexibility or liquidity became necessary.
- The first six months included a $5.0 million charge for settlement of product-liability and other legal matters, a $0.1 million non-cash debt-extinguishment charge, and a $496,000 discrete deferred-tax benefit from certain net operating losses.
- Two putative class actions concerning electricity pricing remained pending in New York and Pennsylvania. No loss reserve was recorded, and the Partnership could not reasonably estimate any potential loss. The Pennsylvania case had been dismissed and was under appeal; claims remained proceeding in the New York case.
- Other exposures include commodity-price and interest-rate volatility, weather sensitivity, customer credit and collections, covenant compliance, supply availability, self-insured claims, pension and multi-employer pension obligations, residual-value lease guarantees, regulatory changes and cybersecurity risks.
Most Important Facts to Verify
- Whether COVID-19 caused sustained declines in commercial and industrial demand, collections or customer credit quality after March 28, 2020.
- Revolving-credit availability, covenant headroom and the 5.22x leverage ratio as operating results and seasonal working-capital needs change.
- The ability to fund the $0.60-per-unit distribution, planned capital expenditures, debt service and the $525.0 million senior-note maturity in fiscal 2024.
- Actual weather, propane volumes, commodity prices and derivative mark-to-market results in subsequent quarters.
- Whether the pending electricity-pricing litigation, self-insurance claims or other contingencies require reserves or produce material cash payments.
- The effect of New York regulatory restrictions and COVID-19-related customer losses on the natural gas and electricity segment.