Business Context and Reporting Period
Suburban Propane Partners, L.P. filed a Form 10-K for the fiscal year ended September 30, 2023. Fiscal 2023 included 53 weeks, with a 14-week fourth quarter; the prior fiscal year included 52 weeks. The Partnership markets propane, renewable propane, fuel oil and refined fuels, natural gas and electricity, home-comfort services, and renewable-energy products. It served approximately 1.0 million customers through approximately 700 locations in 42 states.
The filing’s fourth-quarter results were: revenue of $226.6 million, operating income of $4.0 million, net loss of $20.9 million, operating cash flow of $57.8 million, and Adjusted EBITDA of $3.0 million. Results are highly seasonal, with demand and profitability concentrated in the first and second fiscal quarters.
Key Financial Metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Revenue | $1,429.2 million | $1,501.5 million | (4.8%) |
| Gross margin | $839.0 million | $789.3 million | 6.3% |
| Gross margin percentage | 58.7% | 52.6% | Up 610 bps |
| Operating income | $206.8 million | $206.3 million | 0.3% |
| Operating margin | 14.5% | 13.7% | Up 70 bps |
| Net income | $123.8 million | $139.7 million | (11.4%) |
| Basic net income per Common Unit | $1.94 | $2.21 | (12.2%) |
| Adjusted EBITDA | $275.0 million | $291.0 million | (5.5%) |
| Net cash from operations | $225.2 million | $220.5 million | 2.1% |
Revenue declines reflected lower average selling prices and lower volumes. Propane revenue declined 6.2% to $1,232.1 million, fuel oil and refined fuels revenue declined 3.2% to $92.1 million, and natural gas and electricity revenue declined 21.1% to $31.2 million. All other revenue increased 38.6% to $73.8 million, primarily due to the RNG acquisition.
- Retail propane volume declined 1.2% to 396.4 million gallons.
- Fuel oil and refined fuels volume declined 16.1% to 19.1 million gallons.
- Operating expenses increased 8.1% to $478.1 million, and general and administrative expenses increased 12.0% to $91.6 million.
- Net interest expense increased 21.0% to $73.4 million because of higher interest rates and additional borrowings used to fund the RNG acquisition.
- Reported gross margin benefited from higher propane unit margins and a $24.2 million reduction in unrealized derivative losses year over year. Fiscal 2023 included a $3.7 million unrealized derivative loss versus $27.9 million in fiscal 2022.
Liquidity, Debt and Capital Allocation
At September 30, 2023, the Partnership had $3.5 million of unrestricted cash and $14.1 million of cash, cash equivalents and restricted cash, including $10.6 million of restricted cash. Total liabilities were $1.724 billion and partners’ capital was $546.4 million.
- Debt consisted of $350.0 million of 5.875% senior notes due 2027, $650.0 million of 5.0% senior notes due 2031, $80.6 million of 5.5% Green Bonds due 2028–2033, and $132.0 million outstanding under a $500.0 million revolving credit facility.
- Long-term borrowings were $1.189 billion on the balance sheet; gross borrowings used for the leverage calculation were $1.213 billion.
- The Total Consolidated Leverage Ratio was 4.28x versus 3.60x in the prior year.
- The revolving facility had approximately $368.0 million of stated capacity before consideration of outstanding letters of credit and other limitations. Standby letters of credit totaled $42.7 million.
- The Partnership was in compliance with its debt covenants at September 30, 2023.
- Fiscal 2023 investing cash outflows were $170.6 million, including $108.3 million for the RNG acquisition, $44.9 million of capital expenditures, and $7.5 million for a propane-business acquisition.
- Quarterly distributions remained $0.325 per Common Unit, or $1.30 annualized. Fiscal 2023 distributions totaled $82.4 million.
Material Changes Versus the Prior Comparable Period
- Unusually warm weather reduced heating demand. Temperatures across service territories were 8% warmer than normal, while January and February were 16% warmer than normal.
- Wholesale propane prices declined substantially, with average Mont Belvieu prices down 38.9%, reducing revenue but supporting higher unit margins.
- The Partnership acquired operating RNG assets in Arizona and Ohio in December 2022 and formed a broader development platform with Equilibrium Capital Group. The acquisition added revenue and assets but also increased operating, depreciation, acquisition and interest costs.
- Adjusted EBITDA declined despite higher gross margin because inflationary payroll, vehicle, operating and acquisition-related costs increased.
- Debt increased materially to fund renewable-energy investments, raising leverage and interest expense.
- Construction began on an RNG facility at Adirondack Farms in New York, expected to be completed by the end of calendar 2024 or to begin production in fiscal 2025, according to the filing.
Guidance, Outlook, Risks and Unusual Items
Management expects fiscal 2024 cash requirements of approximately $40.0 million for propane capital expenditures, $28.2 million for renewable-energy capital expenditures, $71.7 million for interest and income-tax payments, and $83.1 million for distributions based on the then-current annualized distribution rate. Management expects available liquidity and operating cash flow to be sufficient to meet current and anticipated obligations.
- Key risks include warmer weather, natural disasters, customer conservation, commodity-price volatility, inflation, supply-chain disruption, competition from natural gas and electricity, and geopolitical instability.
- Renewable-energy projects depend on feedstock availability, construction and operating performance, third-party partners, pipeline access, environmental attributes, tax credits and evolving federal and state regulations.
- The RNG acquisition includes potential contingent consideration of up to $45.0 million, primarily based on future EBITDA performance, potentially payable in fiscal 2026.
- The Partnership had $61.2 million of accrued insurance liabilities, including general and product liability, workers’ compensation and automobile claims. The auditor identified accrued insurance as a critical audit matter because of the actuarial judgments involved.
- Environmental liabilities were accrued at $1.7 million, although future remediation obligations could differ from current estimates.
- A New York class-action appeal involving the natural gas and electricity business remained pending. Management believes the appeal is without merit and had not accrued a loss reserve.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of September 30, 2023; however, the recently acquired RNG assets were excluded from management’s annual controls evaluation under applicable SEC guidance.
Most Important Facts for Investors to Verify
- Whether warmer-than-normal weather and declining legacy-fuel demand continue to pressure volumes and cash flow.
- Whether higher propane unit margins can offset inflation, labor, transportation, operating and interest costs.
- The pace, capital requirements and operating performance of the Arizona, Ohio and Adirondack Farms RNG projects.
- The effect of environmental-credit prices, tax incentives and regulatory changes on renewable-energy returns.
- Debt refinancing and distribution capacity before the $132.0 million revolving-facility maturity in 2025 and the $350.0 million senior-notes maturity in 2027.
- Progress in reducing the 4.28x leverage ratio and maintaining compliance with all financial covenants.
- The outcome of the pending AES litigation appeal and any changes in regulatory restrictions on retail energy customers.
- The assumptions supporting accrued insurance, pension obligations, environmental reserves, goodwill and acquisition-related contingent consideration.