Suburban Propane Partners, L.P. — Fiscal 2021 First-Quarter 10-Q
Business context and reporting period
The filing covers the 13 weeks ended December 26, 2020, compared with the 13 weeks ended December 28, 2019. The Partnership distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides home-comfort equipment services. Results are highly seasonal, with most heating-related volumes generated from October through March.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $305.2 million | $333.9 million | Down 8.6% |
| Operating income | $57.7 million | $59.9 million | Down 3.6% |
| Net income | $38.0 million | $40.2 million | Down 5.4% |
| Basic net income per unit | $0.61 | $0.65 | Down $0.04 |
| Adjusted EBITDA | $80.0 million | $85.4 million | Down 6.3% |
| Net cash from operations | $4.2 million | $15.6 million | Down $11.4 million |
- Operating margin was approximately 18.9%, compared with 17.9% in the prior-year quarter. Net margin was approximately 12.4%, compared with 12.0%.
- Adjusted EBITDA margin was approximately 26.2%, compared with 25.6%. Adjusted EBITDA excludes unrealized derivative gains and equity-method earnings.
- Propane revenue declined 5.9% to $268.6 million, and propane gallons sold declined 7.8% to 111.7 million gallons. Fuel oil and refined-fuels revenue declined 39.2% to $15.8 million.
- Heating degree days were 13% warmer than normal and 9% warmer than the prior-year quarter, reducing heating demand. COVID-19 also reduced certain commercial and industrial demand, partly offset by higher residential usage.
- Cost of products sold declined 12.8% to $103.4 million, equal to 33.9% of revenue versus 35.5% in the prior-year quarter. The quarter included a $4.9 million unrealized non-cash derivative gain, compared with $2.8 million previously.
- Operating expenses declined 8.3% to $98.0 million, partly because the prior-year quarter included approximately $5.0 million of product-liability and other legal settlement costs.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $5.3 million at December 26, 2020, compared with $3.1 million at September 26, 2020.
- Total assets were $2.11 billion and total liabilities were $1.73 billion. Partners’ capital was $383.2 million.
- Long-term borrowings were $1.241 billion, comprising $1.125 billion of senior notes and $124.8 million drawn under the revolving credit facility. The facility had a $500 million commitment and approximately $230.0 million of borrowing capacity based on the Partnership’s leverage calculations.
- The Partnership had $53.6 million of standby letters of credit outstanding. It reported compliance with all debt covenants at quarter-end; trailing-twelve-month consolidated leverage was 4.86x.
- Debt maturities are $649.8 million in fiscal 2024, $250.0 million in fiscal 2025 and $350.0 million thereafter. No principal maturities were scheduled for fiscal 2021 through 2023.
- Operating cash flow was constrained by seasonal working-capital investment, including higher accounts receivable and inventory. Investing cash outflows were $11.2 million, including $5.8 million of capital expenditures and $6.1 million for acquisitions and investments. Financing cash inflow was $9.2 million, including $30.2 million of net revolver borrowings and $18.6 million of distributions.
Material changes and unusual items
- On November 12, 2020, the Partnership acquired a North Carolina propane retailer for approximately $7.7 million, excluding working capital; the acquisition was not material to consolidated results.
- The Partnership made an additional investment in Oberon Fuels, a developer of renewable dimethyl ether transportation fuel, after reaching specified development milestones.
- Fiscal 2021 began with adoption of updated goodwill-impairment and expected-credit-loss accounting guidance; neither adoption materially affected the financial statements.
- The Partnership issued 748,159 restricted units during the quarter and withheld 90,284 units for employee tax obligations upon vesting.
- The Board declared a $0.30-per-unit quarterly distribution, or $1.20 annualized, payable February 9, 2021.
Guidance, outlook, commentary and risks
- Management expects approximately $29.2 million of maintenance and growth capital expenditures, $53.4 million of interest and income-tax payments, and $56.4 million of cash distributions during the remainder of fiscal 2021, based on the $0.30 quarterly distribution rate.
- Management expects available cash, revolving-credit capacity and operating cash flow to be sufficient for current and anticipated obligations, while acknowledging continued uncertainty from COVID-19.
- Propane prices were 14.9% higher year over year, reflecting lower U.S. inventories and higher exports. Management adjusted customer pricing as market conditions allowed but noted that rapid cost increases may not be fully or immediately passed through.
- Principal risks include warmer weather, commodity-price volatility, customer conservation, supply and transportation availability, COVID-19-related demand and collection pressure, interest-rate exposure, leverage and refinancing needs, regulation, litigation, operating hazards and cybersecurity.
- A hypothetical 10% adverse change in commodity prices for open derivative positions indicated a potential $2.7 million decrease in future net gains; management does not use derivatives for speculative trading.
- A putative class action involving electricity pricing remains pending in federal court. No loss reserve was recorded, and the Partnership cannot reasonably estimate any potential loss.
- The Partnership is self-insured for certain claims and had accrued insurance liabilities of $69.1 million. Residual-value guarantees on operating leases had a maximum potential future payment of $27.5 million, although their recorded fair value was de minimis.
Investor verification checklist
- Verify the sustainability of the $0.30-per-unit distribution against seasonal operating cash flow, working-capital needs and debt covenant capacity.
- Monitor weather-normalized propane and fuel-oil volumes, customer collections, bad-debt expense and commercial and industrial demand as COVID-19 effects continue.
- Review refinancing plans for the $649.8 million of fiscal 2024 debt maturities and the Partnership’s leverage trajectory.
- Assess exposure to propane prices, inventory levels, transportation availability and derivative valuation gains or losses.
- Track integration and returns from the North Carolina acquisition and the Oberon Fuels investment.
- Review developments in the electricity-pricing litigation, self-insurance claims and lease residual-value guarantees.