Suburban Propane Partners, L.P. — Form 10-Q Summary
Business context and reporting period
The Partnership markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and home-comfort equipment and services. This filing covers the 13 weeks ended December 24, 2016, the first quarter of fiscal 2017, compared with the 13 weeks ended December 26, 2015. Results are highly seasonal, with demand and profits concentrated in the October–March heating season.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $317.3 million | $275.9 million | +15.0% |
| Operating income | $53.5 million | $31.3 million | +70.7% |
| Net income | $34.5 million | $12.3 million | +181.3% |
| Basic earnings per unit | $0.57 | $0.20 | +$0.37 |
| Net cash from operations | $22.5 million | $10.4 million | +$12.2 million |
| Adjusted EBITDA | $84.3 million | $67.2 million | +25.0% |
Operating margin increased to approximately 16.9% from 11.4%, while net margin increased to approximately 10.9% from 4.4%. Product cost was $118.2 million, or 37.2% of revenue, versus 33.5% in the prior-year quarter. Operating expenses fell 5.3% to $99.3 million and general and administrative expense fell 2.9% to $15.0 million.
Propane revenue rose 16.4% to $269.5 million, supported by an 8.1% increase in retail gallons sold to 118.6 million gallons and higher selling prices. Fuel oil and refined-fuel gallons increased 5.2% to 9.0 million gallons. Average posted propane prices were 38.8% higher year over year.
Cash and cash equivalents were $4.6 million at December 24, 2016, compared with $37.3 million at September 24, 2016. Total long-term borrowings were $1.228 billion, including $103.4 million drawn under the $500 million revolving credit facility. The Partnership paid $54.0 million in distributions and used $6.8 million for capital expenditures during the quarter.
Material changes versus the prior comparable period
- Net income and operating income improved substantially, driven by higher volumes, higher selling prices, lower operating costs and the absence of a $3.0 million product-liability settlement recorded in Q1 FY2016.
- Adjusted EBITDA increased $17.1 million to $84.3 million. Q1 FY2017 included a $0.5 million unrealized derivative gain, compared with a $1.2 million unrealized loss in the prior-year quarter.
- Operating cash flow more than doubled, although higher receivables and inventory required additional working capital.
- Investing cash use declined to $4.7 million from $52.5 million because the prior-year period included a $41.3 million business acquisition.
- Revolving-credit borrowings increased by $3.4 million on a net basis to support working capital.
Guidance, outlook, risks and unusual items
Management expects approximately $31.2 million of maintenance and growth capital expenditures, $59.3 million of interest and income-tax payments, and $162.7 million of cash distributions during the remainder of fiscal 2017. Based on available cash, expected operating cash flow and revolving-credit availability, management expects sufficient liquidity to meet current obligations.
The Board declared a quarterly distribution of $0.8875 per common unit, or $3.55 annualized, payable February 7, 2017.
Management reported that fiscal Q1 temperatures were 14% warmer than normal but 11% cooler than the prior-year quarter; October and November were particularly warm, while December was cooler. Weather, commodity prices, customer conservation, supply and transportation availability, competition, interest rates, regulation, tax treatment, litigation and operating hazards remain material risks.
The Partnership was in compliance with all debt covenants at December 24, 2016. Debt maturities are concentrated in fiscal 2021 and thereafter: $449.6 million in fiscal 2021 and $775.0 million thereafter. A hypothetical 10% adverse change in commodity prices was estimated to reduce potential future net gains on open derivatives by $1.3 million.
Self-insurance liabilities were $59.7 million, with a related insurance recovery asset of $15.5 million. Management stated that pending or threatened litigation was not expected to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors; final Treasury and IRS regulations did not affect the Partnership’s qualifying-income status.
Important facts for investors to verify
- Whether the improved earnings and 25% Adjusted EBITDA growth persist after the peak heating season and under less favorable weather conditions.
- Liquidity after the planned distributions, capital expenditures and seasonal working-capital needs, given only $4.6 million of quarter-end cash.
- Leverage, covenant headroom and refinancing plans for the $449.6 million of fiscal 2021 maturities.
- The sustainability of the $0.8875 quarterly distribution relative to available cash and distribution coverage.
- Exposure to propane and other commodity-price volatility, including the effectiveness and valuation of derivatives.
- Potential changes in self-insurance, pension, multi-employer pension and other contingent liabilities.