SUBURBAN PROPANE PARTNERS LP quarterly report, Q2 FY2019

Suburban Propane Partners, L.P. — Form 10-Q Summary

Business context and reporting period

The filing covers the quarter and six months ended March 30, 2019, compared with the periods ended March 31, 2018. Suburban Propane markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and provides home-comfort equipment services. Results are highly seasonal, with approximately two-thirds of retail propane volume sold during the October–March heating season.

Financial performance and key metrics

Metric	Three months ended Mar. 30, 2019	Prior comparable period	Six months ended Mar. 30, 2019	Prior comparable period
Revenue	$504.4 million	$536.3 million	$881.5 million	$909.6 million
Operating income	$142.1 million	$127.4 million	$190.6 million	$184.3 million
Net income	$121.0 million	$106.8 million	$148.7 million	$144.0 million
Net income per basic unit	$1.96	$1.74	$2.41	$2.34
Adjusted EBITDA	$163.0 million	$162.1 million	$256.4 million	$255.4 million
Net cash from operating activities	Not separately provided	Not separately provided	$101.2 million	$83.6 million

Calculated operating margin was approximately 28.2% for the quarter and 21.6% for the six-month period. Calculated net margin was approximately 24.0% and 16.9%, respectively.
Quarterly cost of products sold declined 18.3% to $201.5 million, and represented 40.0% of revenue versus 46.0% in the prior year. The six-month ratio declined to 43.6% from 45.3%.
Retail propane volume declined 2.6% in the quarter to 165.2 million gallons and 1.8% for the six-month period to 289.3 million gallons.
Quarterly Adjusted EBITDA was broadly stable despite lower revenue; the period included an $8.5 million unrealized, non-cash derivative gain versus a $3.7 million loss in the prior year.
Cash used in investing activities was $24.0 million, including $16.6 million of capital expenditures and $10.6 million for an acquisition. Cash used in financing activities was $76.4 million, including $73.8 million of distributions.

Balance sheet, debt and liquidity

Cash and cash equivalents were $5.9 million at March 30, 2019, compared with $5.2 million at September 29, 2018. Current assets were $232.6 million and current liabilities were $179.2 million.
Long-term borrowings were $1.256 billion, consisting principally of $1.125 billion of senior notes and $143.5 million outstanding under the $500 million revolving credit facility. Debt principal maturities are $143.5 million in fiscal 2021 and $1.125 billion thereafter.
The revolving facility had $62.4 million of outstanding letters of credit and an approximate borrowing rate of 5.0% at quarter-end. The Partnership reported compliance with all debt covenants.
Total Consolidated Leverage Ratio improved to 4.32x. The credit agreement limits this ratio to 5.5x and requires interest coverage of at least 2.5x.
Management expected sufficient liquidity from cash on hand, revolving-credit availability and operating cash flow to fund anticipated fiscal 2019 requirements, including approximately $18.4 million of capital expenditures, $36.5 million of interest and income-tax payments, and $74.0 million of distributions.

Material changes versus the prior comparable period

Revenue decreased 5.9% for the quarter and 3.1% for the six-month period, primarily from lower volumes and lower selling prices associated with lower wholesale propane costs.
Operating income increased 11.5% for the quarter and 3.4% for the six-month period. Net income increased 13.3% for the quarter and 3.3% for the six-month period.
Propane revenue declined 6.4% in the quarter and 3.9% for the six-month period. Fuel oil and refined fuels revenue was nearly flat quarterly but increased 5.2% year-to-date.
General and administrative expense increased 20.8% in the quarter and 10.0% for the six-month period, primarily due to higher variable compensation and professional-services costs for marketing and advertising.
Operating expenses decreased 3.3% in the quarter and 1.3% year-to-date, reflecting lower insurance and bad-debt costs, partly offset by higher payroll, benefits, and vehicle-maintenance costs.
The prior-year six-month period included a $4.8 million loss on the sale of a non-strategic business; no comparable loss occurred in 2019.
On February 6, 2019, the Partnership acquired a West Coast propane retailer for $12.0 million plus working capital; $10.6 million had been paid by quarter-end. The acquisition was not material to reported results.
The Partnership adopted the new revenue-recognition standard using full retrospective application; management reported no impact on the financial statements.

Guidance, outlook, commentary and risks

Management emphasized that weather, commodity costs, transportation costs, customer conservation, supply availability and competition materially affect demand and margins. Average temperatures in the quarter were 3% warmer than normal and 3% cooler than the prior year; January was particularly warm, while February and March were near or above normal in heating-degree days.

The Partnership maintained a quarterly distribution of $0.60 per Common Unit, or $2.40 annualized. No broader earnings guidance was provided. Management expects lower operating profits and potentially lower net income during the April–September period because of seasonality.

Commodity derivatives are used for hedging and supply management, not speculative trading. A hypothetical 10% adverse market-price change indicated potential future net losses of $6.8 million on open derivative positions; the filing cautions that actual results could differ materially.
Variable-rate debt creates interest-rate exposure. The Partnership was not party to an interest-rate swap at March 30, 2019.
The Partnership is self-insured for specified liabilities and had accrued insurance liabilities of $67.7 million, partially offset by a $19.1 million insurance receivable.
Two putative class actions involving electricity pricing remained pending in New York and Pennsylvania. The Partnership recorded no loss reserve and could not estimate a possible loss range; management stated that it believed the claims were without merit.
Aggregate potential payments under residual-value guarantees for operating leases were $17.7 million, assuming leased equipment had no value at lease end.
Management stated that there were no material changes to the risk factors in the fiscal 2018 Form 10-K and that disclosure controls were effective.

Important facts for investors to verify

Whether unusually warm or cold weather changes propane and fuel-oil volumes materially in subsequent quarters.
The sustainability of improved operating margins given lower commodity prices, derivative mark-to-market effects and declining propane volumes.
Available borrowing capacity after the $62.4 million of letters of credit and compliance with leverage and interest-coverage covenants.
Refinancing plans for the $143.5 million revolving-facility maturity in fiscal 2021 and the $1.125 billion of senior notes due thereafter.
The effect of higher general and administrative costs, variable compensation and marketing expenditures on future cash distributions.
Developments in the New York and Pennsylvania electricity-pricing litigation and the adequacy of self-insurance reserves.
The impact of the West Coast propane acquisition and any additional acquisitions on leverage, cash flow and operating performance.