Business context and reporting period
Suburban Propane Partners, L.P. is a publicly traded Delaware limited partnership engaged primarily in retail propane distribution, fuel oil and refined fuels, natural gas and electricity marketing, home-comfort services, and renewable energy investments, including RNG. This Form 10-Q covers the three and six months ended March 30, 2024, compared with March 25, 2023. Results are highly seasonal, with most heating-related demand and operating profit generated during the October–March heating season.
Financial performance and position
| Metric | Q2 FY2024 | Q2 FY2023 | Change |
|---|---|---|---|
| Revenue | $498.1 million | $526.5 million | Down 5.4% |
| Gross margin | $308.0 million | $294.9 million | Up 4.4% |
| Operating income | $136.9 million | $125.7 million | Up 8.9% |
| Net income | $111.5 million | $104.5 million | Up 6.7% |
| Basic earnings per unit | $1.73 | $1.63 | Up 6.1% |
| Adjusted EBITDA | $147.0 million | $149.0 million | Down 1.3% |
Q2 gross margin was approximately 61.8% of revenue versus 56.0% in the prior-year quarter. Operating margin was approximately 27.5% versus 23.9%, and net margin was approximately 22.4% versus 19.8%. Gross margin benefited from higher unit margins and a $5.9 million unrealized derivative gain, compared with a $4.5 million unrealized loss in the prior-year period.
| Metric | Six months FY2024 | Six months FY2023 | Change |
|---|---|---|---|
| Revenue | $863.9 million | $924.0 million | Down 6.5% |
| Operating income | $185.6 million | $188.0 million | Down 1.3% |
| Net income | $136.0 million | $149.9 million | Down 9.3% |
| Basic earnings per unit | $2.12 | $2.35 | Down 9.8% |
| Adjusted EBITDA | $222.3 million | $239.0 million | Down 7.0% |
| Operating cash flow | $62.4 million | $105.4 million | Down 40.8% |
Six-month gross margin was $520.7 million, or approximately 60.3% of revenue, compared with 55.2% in the prior-year period. Operating margin was approximately 21.5% versus 20.3%, while net margin was approximately 15.7% versus 16.2%.
Revenue and operating drivers
- Q2 propane revenue declined 4.3% to $437.6 million; retail propane volume fell 2.7% to 140.2 million gallons.
- Fuel oil and refined fuels revenue declined 17.1% to $31.6 million, with volume down 9.7%.
- Natural gas and electricity revenue declined 26.5% to $8.7 million.
- All other revenue increased 4.3% to $20.2 million, supported by higher RNG volumes and environmental-attribute pricing.
- Operating expenses increased 0.7% in Q2 and 3.0% for the six-month period, primarily due to payroll, benefits, RNG facility costs, and inflation.
- Net interest expense was $19.9 million in Q2 and $38.1 million for six months, up 6.3% for the six-month period due primarily to higher rates and higher average revolving borrowings.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $4.4 million at March 30, 2024; cash, cash equivalents and restricted cash totaled $19.2 million.
- Long-term borrowings were $1.212 billion on the balance sheet, comprising $350.0 million of 2027 Senior Notes, $650.0 million of 2031 Senior Notes, $67.5 million of Green Bonds net of fair-value adjustments, and $154.5 million outstanding under the revolving facility.
- The new Fourth Amended and Restated Credit Agreement provides a $500 million revolving facility maturing March 15, 2029, subject to an earlier maturity trigger tied to the 2027 Senior Notes. The revolving facility rate was approximately 7.74% at March 30, 2024.
- Debt maturities are $504.5 million in fiscal 2027 and $730.6 million thereafter; no maturities are scheduled for fiscal 2024–2026.
- The Total Consolidated Leverage Ratio was 4.61x at March 30, 2024, compared with 4.28x at September 30, 2023. The Partnership reported compliance with all debt covenants.
- Management expects approximately $9.3 million of maintenance capital expenditures, $27.5 million of growth capital expenditures, $35.0 million of interest and tax payments, and $41.6 million of cash distributions during the remainder of fiscal 2024.
- The quarterly distribution was maintained at $0.325 per common unit, or $1.30 annualized, payable May 14, 2024.
Material changes, outlook and risks
- Unusually warm weather reduced heating demand. Service-territory temperatures were 8% warmer than normal in Q2 and 9% warmer than normal for the first six months.
- Management expects lower operating profits and potentially lower net income during the April–September off-season.
- Management expects sufficient liquidity from cash on hand, operating cash flow, and revolver availability to meet current obligations and planned expenditures.
- The Partnership refinanced its revolving credit facility and recorded a $0.2 million non-cash debt-extinguishment charge.
- Two subsequent propane acquisitions were completed: a Florida retailer for $4.25 million on April 11, 2024, and a Nevada retailer for $9.0 million plus working capital on May 2, 2024.
- The Partnership is reviewing strategic alternatives for its Agway Energy Services natural gas and electricity business following New York regulatory changes and proposed customer-notice requirements. Management stated that the amended law had not yet had a material negative impact, but future customer-retention effects remain uncertain.
- Key risks include weather variability, commodity-price and supply volatility, customer conservation, inflation, interest rates, competition, renewable-project execution and environmental-attribute pricing, regulation and climate-related requirements, cybersecurity, operating hazards, legal claims, and the ability to integrate acquisitions.
- A hypothetical 10% adverse change in commodity prices for open derivative positions could reduce potential future net gains by approximately $6.5 million; actual effects could differ materially.
Most important facts to verify
- Whether warmer weather and lower volumes persist into the next heating season and affect customer retention and margins.
- The sustainability of unit margins after excluding derivative mark-to-market gains and losses.
- Revolver utilization, interest-rate exposure, leverage covenant headroom, and the $504.5 million fiscal 2027 maturity.
- Whether operating cash flow recovers from the six-month decline to $62.4 million and supports distributions and planned capital spending.
- The financial contribution, funding needs, and execution risks of RNG, Oberon, hydrogen, and other renewable investments.
- The outcome of the AES strategic review and the effect of New York regulatory changes on customer retention and profitability.
- The integration and expected returns of the Florida and Nevada propane acquisitions.