Suburban Propane Partners, L.P. — Form 10-Q Summary
Business context and reporting period
The Partnership markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and provides home-comfort equipment services. This unaudited report covers the three and nine months ended June 24, 2017, compared with June 25, 2016. Results are highly seasonal, with most propane and fuel-oil demand occurring during the October–March heating season; third-quarter results typically include a net loss.
Key financial metrics
| Metric | Three months ended June 24, 2017 | Year-over-year change | Nine months ended June 24, 2017 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $222.9 million | Up 8.7% | $990.8 million | Up 11.9% |
| Operating income/(loss) | $(11.1) million | Compared with $(10.8) million | $145.3 million | Up from $131.8 million |
| Net income/(loss) | $(29.7) million | Compared with $(29.6) million | $88.6 million | Up from $74.7 million |
| Net income/(loss) per common unit | $(0.48) | Compared with $(0.49) | $1.45 basic; $1.44 diluted | Up from $1.23 basic; $1.22 diluted |
| Adjusted EBITDA | $21.4 million | Up from $18.4 million | $243.7 million | Up from $230.7 million |
| Cash flow from operations | Not separately provided for the quarter | — | $123.2 million | Down from $128.7 million |
Third-quarter operating loss was $11.1 million on a 4.9% operating margin, compared with a 5.3% operating loss margin in the prior-year quarter. Nine-month operating margin improved to 14.7% from 14.9% on reported operating income, while net margin improved to 8.9% from 8.4%.
- Third-quarter propane revenue rose 9.3% to $188.4 million, while propane gallons sold declined 3.1% to 77.7 million.
- Third-quarter fuel-oil and refined-fuels gallons sold declined 9.1%; natural gas and electricity revenue increased 12.5%.
- Cost of products sold increased 22.0% in the quarter and 32.0% year to date. As a percentage of revenue, it increased to 41.3% from 36.8% in the quarter and to 40.6% from 34.5% year to date.
- Combined operating and general and administrative expenses decreased 6.6% in the quarter, primarily due to lower payroll and benefit costs, reduced headcount and operating efficiencies.
- Cash and cash equivalents were $3.2 million at June 24, 2017, down from $37.3 million at September 24, 2016.
- Total assets were $2.19 billion and total liabilities were $1.55 billion at June 24, 2017.
- Long-term borrowings were $1.25 billion, including $1.125 billion of senior notes and $141.1 million drawn under the revolving credit facility, net of debt issuance costs.
- Capital expenditures were $22.0 million year to date, including approximately $13.6 million for growth and $8.4 million for maintenance.
- Partnership distributions were $162.3 million year to date, compared with $161.6 million in the prior-year period.
Material changes versus the prior comparable period
- Higher commodity prices increased selling prices and revenue but also increased product costs. Average propane and fuel-oil prices in the third quarter were 27.9% and 8.6% higher, respectively, than the prior-year quarter.
- Weather was materially warmer: third-quarter temperatures across service territories were 18% warmer than normal and 9% warmer than the prior year. This reduced demand and volumes sold.
- Operating results benefited from expense reductions. The prior-year quarter included a $9.8 million gain on the sale of a non-strategic business and a $6.6 million multi-employer pension withdrawal charge, which management excluded from Adjusted EBITDA.
- The Partnership issued $350.0 million of 5.875% senior notes due 2027 and used the proceeds, together with revolving borrowings, to retire all remaining 7.375% senior notes due 2021. The refinancing generated a $1.6 million loss on debt extinguishment and reduced interest expense, partially offset by higher revolver borrowings.
- On May 1, 2017, the revolving credit agreement was amended to temporarily increase the maximum consolidated leverage ratio to 5.95 through June 2018, stepping down thereafter. Actual leverage at quarter-end was 5.19, and the Partnership reported compliance with all debt covenants.
Guidance, outlook, commentary and risks
Management did not provide formal earnings guidance. It expects the seasonal business to produce lower operating profits and potentially net losses during the April–September period. Management stated that the Partnership was assessing customer demand under various weather scenarios after two unusually warm winters and was focused on restoring balance-sheet strength and improving long-term financial metrics.
The Board declared a third-quarter distribution of $0.8875 per common unit, or $3.55 annualized. On August 1, 2017, the Board discussed reducing the distribution by up to 33% beginning with the distribution payable in November 2017; no final decision had been made as of the filing.
Management expected sufficient liquidity for the remainder of fiscal 2017 based on cash on hand, anticipated operating cash flow and revolver availability. Estimated remaining fiscal 2017 cash requirements included approximately $8.0 million of capital expenditures, $21.9 million of interest and income-tax payments, and $54.3 million of distributions at the then-current rate.
- Key risks include weather variability, commodity-price and transportation-cost volatility, customer conservation, supply availability, competition, interest-rate exposure and access to capital.
- Derivative instruments are used for hedging, not speculation. A hypothetical 10% adverse commodity-price change was estimated to increase potential future net losses by $2.3 million.
- The Partnership had $43.3 million of defined-benefit pension liabilities, $15.5 million of postretirement benefit liabilities and $66.2 million of accrued self-insurance liabilities at June 24, 2017.
- Potential residual-value guarantee payments under operating leases were $14.7 million, assuming leased equipment had no value at lease expiration.
- Management did not believe pending litigation would have a material adverse effect, although litigation and operating hazards involving combustible fuels remain ongoing risks.
Investor verification checklist
- Verify the final distribution decision and whether the contemplated reduction of up to 33% was implemented.
- Review subsequent weather, propane demand, customer-volume and commodity-price trends.
- Monitor leverage, revolver utilization, covenant headroom and the $141.1 million revolver maturity in fiscal 2021.
- Reconcile Adjusted EBITDA with GAAP net income and assess the effect of excluding derivative losses and other unusual items.
- Evaluate whether operating-cost reductions are sustainable and whether higher bad-debt expense persists.
- Review pension, self-insurance, multi-employer plan and legal contingencies for changes after the reporting date.