Suburban Propane Partners, L.P. — Fiscal 2018 First-Quarter 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended December 30, 2017, compared with the 13 weeks ended December 24, 2016. Suburban Propane markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and provides home-comfort equipment and related services. Results are highly seasonal, with demand and earnings concentrated in the October–March heating season.
Key financial metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $373.3 million | $317.3 million | Up 17.6% |
| Operating income | $55.7 million | $53.5 million | Up 4.2% |
| Net income | $37.2 million | $34.5 million | Up 7.8% |
| Basic earnings per common unit | $0.61 | $0.57 | Up $0.04 |
| Diluted earnings per common unit | $0.60 | $0.56 | Up $0.04 |
| Adjusted EBITDA | $93.2 million | $84.3 million | Up 10.6% |
| Net cash provided by operating activities | $1.7 million | $23.2 million | Down $21.5 million |
Revenue growth reflected higher selling prices and volumes. Propane revenue increased 19.5% to $322.1 million; fuel oil and refined fuels revenue increased 14.6% to $25.3 million. Propane gallons sold rose 5.4% to 125.0 million, while fuel oil and refined-fuel gallons rose 1.2% to 9.1 million.
- Cost of products sold increased 39.8% to $165.2 million and represented 44.3% of revenue, compared with 37.2% in the prior-year quarter.
- Operating expenses were $99.6 million, essentially flat year over year; general and administrative expense increased 11.5% to $16.8 million.
- Operating margin was approximately 14.9%, compared with 16.9% in the prior-year quarter. Net margin was approximately 10.0%, compared with 10.9%.
- Net interest expense increased 3.6% to $19.5 million.
- Cash and cash equivalents were $5.9 million at December 30, 2017, versus $2.8 million at September 30, 2017.
Material changes versus the prior comparable period
- Average posted propane prices were 63.7% higher and fuel oil prices were 20.7% higher than in the prior-year quarter. Average propane selling prices increased 15.0%, while propane unit margins excluding derivative mark-to-market effects were flat.
- Temperatures across the service territories were 8% warmer than normal but 6% cooler than the prior-year quarter, supporting higher heating demand and volumes.
- Adjusted EBITDA increased $8.9 million to $93.2 million, despite a $4.8 million loss on the sale of certain non-strategic propane assets and a $1.5 million unrealized derivative loss.
- Operating cash flow declined because higher wholesale costs and volumes produced a larger increase in accounts receivable and other working capital requirements.
- The Partnership acquired a California propane business for $4.9 million, including $0.8 million of non-compete consideration, and sold assets in a non-strategic propane market for $2.8 million plus working capital consideration. The sale generated a $4.8 million loss, principally from allocated goodwill and intangible assets.
- The Partnership adopted ASU 2016-09 on stock-based compensation. The filing states that $847,000 of employee tax-withholding payments were classified as financing cash flows in the quarter.
Debt, liquidity and cash deployment
- Long-term borrowings were $1.320 billion net of debt issuance costs at December 30, 2017, compared with $1.272 billion at September 30, 2017.
- Debt consisted of $525.0 million of 5.5% senior notes due 2024, $250.0 million of 5.75% senior notes due 2025, $350.0 million of 5.875% senior notes due 2027, and $209.9 million outstanding under the $500 million revolving credit facility.
- Net borrowings under the revolving facility increased $47.3 million during the quarter, primarily funding seasonal working-capital needs. The facility borrowing rate was approximately 3.8% at December 30, 2017.
- The Consolidated Leverage Ratio was 5.15x, compared with 5.15x at fiscal year-end. The Partnership was in compliance with all debt covenants.
- Net cash used in investing activities was $8.4 million, including $8.5 million of capital expenditures and $4.1 million for the acquisition, partly offset by asset-sale proceeds.
- Net cash provided by financing activities was $9.8 million, including $36.7 million of partnership distributions.
- The Partnership declared a quarterly distribution of $0.60 per common unit, or $2.40 annualized.
Guidance, outlook, risks and unusual items
Management expects sufficient liquidity to meet current and future obligations using cash on hand, revolving-credit availability and expected operating cash flow. For the remainder of fiscal 2018, anticipated cash requirements include approximately $26.5 million of maintenance and growth capital expenditures, $57.7 million of interest and income-tax payments, and $110.5 million of cash distributions based on the $0.60 quarterly distribution rate.
- Management expects lower operating profits and potentially lower net income during the April–September off-season.
- Key risks include weather variability, commodity-price and transportation-cost volatility, customer conservation, supply availability, competition, interest-rate exposure, regulatory and tax changes, operating hazards, litigation, insurance coverage, and access to capital markets.
- Commodity derivatives are used for hedging and supply management rather than speculation. A hypothetical 10% adverse change in market prices for open derivative positions could reduce potential future net gains by approximately $3.6 million; management cautions that actual results could differ materially.
- The first-quarter results include a $4.8 million loss on the business disposition, a $1.5 million unrealized derivative loss, and a $1.1 million discrete deferred-tax benefit from releasing a valuation allowance on alternative minimum tax credits following the 2017 Tax Cuts and Jobs Act.
- Accrued self-insurance liabilities were $70.5 million, with an $18.6 million related insurance-recovery asset. The filing states that pending or threatened litigation is not expected to have a material adverse effect, based on currently available information.
Most important facts for investors to verify
- Whether colder or warmer weather, wholesale commodity prices and customer conservation materially alter future volumes and margins.
- The sustainability of the $0.60 quarterly distribution relative to seasonal cash generation, distribution coverage and leverage covenants.
- Revolving-credit usage, interest-rate exposure and the ability to refinance or repay the $209.9 million facility balance due in fiscal 2021.
- Whether working-capital requirements normalize after the heating season and restore operating cash flow.
- The effect of the California acquisition and non-strategic market disposition on future operating performance.
- The eventual accounting impact of pending revenue-recognition, lease, pension-cost and cash-flow-classification standards.