Suburban Propane Partners, L.P. — Fiscal Q1 2019 Form 10-Q
Business context and reporting period
The filing covers the unaudited 13-week quarter ended December 29, 2018, compared with the quarter ended December 30, 2017. The Partnership 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 approximately two-thirds of retail propane volume sold during the October–March heating season.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $377.1 million | $373.3 million | Up 1.0% |
| Operating income | $48.5 million | $56.9 million | Down 14.7% |
| Net income | $27.7 million | $37.2 million | Down 25.4% |
| Basic earnings per common unit | $0.45 | $0.61 | Down $0.16 |
| EBITDA | $77.4 million | $86.9 million | Down $9.5 million |
| Adjusted EBITDA | $93.3 million | $93.2 million | Essentially flat |
| Net cash from operating activities | $7.3 million | $2.7 million | Up $4.6 million |
Cost of products sold increased 10.5% to $182.6 million, representing 48.4% of revenue versus 44.3% in the prior-year quarter. Operating expenses were $99.4 million, or 26.4% of revenue, while general and administrative expense declined to $16.5 million, or 4.4% of revenue. Operating margin was approximately 12.9%, compared with 15.3% in the prior-year quarter; net margin was approximately 7.4%, compared with 10.0%.
Retail propane gallons sold declined 0.7% to 124.1 million gallons. Propane revenue decreased 0.2% to $321.4 million, while fuel oil and refined fuels revenue rose 14.2% to $28.9 million. Natural gas and electricity revenue increased 2.0% to $13.4 million.
At December 29, 2018, cash and cash equivalents were $6.6 million and total assets were $2.15 billion. Long-term borrowings were $1.295 billion, consisting of $1.125 billion of senior notes and $182.8 million drawn under the $500 million revolving credit facility. The revolver had approximately $62.4 million of standby letters of credit outstanding. The Partnership was in compliance with its debt covenants.
Investing cash use was $5.8 million, including $7.7 million of capital expenditures. Financing cash use was $0.1 million after $36.8 million of partnership distributions and $39.2 million of net revolver borrowings. Management expected approximately $27.3 million of remaining fiscal 2019 capital expenditures, $57.8 million of interest and income tax payments, and $111.1 million of distributions based on the then-current distribution rate.
Material changes versus the prior comparable period
- Revenue increased modestly because higher average selling prices more than offset lower propane volumes.
- Unrealized, non-cash derivative losses increased to $15.9 million from $1.5 million, adding approximately $14.4 million to year-over-year cost of products sold and materially reducing reported operating income and net income.
- Adjusted EBITDA was essentially unchanged because management excludes the derivative mark-to-market effects and the prior-year business-sale loss from that measure.
- Q1 FY2018 included a $4.8 million loss on the sale of assets and operations in a non-strategic propane market; no comparable loss occurred in Q1 FY2019.
- Average temperatures across service territories were 3% warmer than normal and 5% cooler than the prior year. December was 8% warmer than normal and 4% warmer than December 2017, contributing to weaker demand late in the quarter.
- The Partnership adopted revenue-recognition guidance using the full retrospective method; management reported no material impact on the financial statements.
- On February 6, 2019, after quarter-end, the Operating Partnership acquired west-coast propane assets and operations for $12.0 million, including $0.8 million of non-compete consideration, plus working capital.
Guidance, outlook, risks and unusual items
Management stated that available cash, revolver availability and expected operating cash flow should be sufficient to meet current and future obligations. The filing does not provide formal earnings or volume guidance.
Key risks include weather-driven demand variability, commodity-cost and transportation-price volatility, customer conservation, competition, supply availability, interest-rate exposure, regulatory and environmental requirements, operating hazards, litigation, insurance exposures, tax-law changes, access to capital and the ability to execute acquisitions. A hypothetical 10% adverse change in commodity prices for open derivative positions indicated a potential $1.9 million increase in future net losses; management cautioned that this is not a worst-case scenario.
The Partnership self-insures certain general, product, workers’ compensation and automobile liabilities, with accrued insurance liabilities of $70.5 million and an expected insurance recovery of $20.8 million. Two putative class actions concerning electricity pricing remained pending; no loss reserve was recorded, and a possible loss could not be reasonably estimated. The Partnership stated that it did not expect currently pending or threatened litigation to have a material adverse effect.
The Board declared a quarterly distribution of $0.60 per common unit, or $2.40 annualized, payable February 12, 2019. Distribution capacity remains subject to available cash, reserves, debt covenants and operating results.
Important facts for investors to verify
- Whether future commodity prices and derivative mark-to-market movements normalize, and how effectively hedging offsets physical product exposure.
- Winter weather, propane and fuel-oil volumes, pricing spreads and working-capital requirements through the remainder of the heating season.
- Revolver utilization, interest-rate exposure, covenant compliance and the $182.8 million revolver maturity in fiscal 2021.
- Coverage of the $0.60 quarterly distribution under seasonal operating cash flow and planned fiscal 2019 capital spending.
- Integration and returns from the February 2019 west-coast propane acquisition.
- Developments in the pending New York and Pennsylvania electricity-pricing litigation and the adequacy of self-insurance reserves.