Suburban Propane Partners, L.P. — Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended March 31, 2018, compared with March 25, 2017. Suburban Propane primarily distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides home-comfort equipment services. Results are highly seasonal, with approximately two-thirds of propane volume sold during the October–March heating season.
Financial performance and key metrics
| Metric | Three months ended Mar. 31, 2018 | Prior comparable period | Change |
|---|---|---|---|
| Revenue | $536.3 million | $450.6 million | +19.0% |
| Operating income | $126.2 million | $102.9 million | +22.7% |
| Net income | $106.8 million | $83.8 million | +27.4% |
| Basic earnings per common unit | $1.74 | $1.37 | +27.0% |
| Adjusted EBITDA | $162.1 million | $138.0 million | +17.5% |
| Net cash provided by operations | Six months: $82.4 million, versus $79.5 million |
For the six months ended March 31, 2018, revenue was $909.6 million, up 18.4%; operating income was $182.0 million, up 16.4%; and net income was $144.0 million, up 21.7%. Six-month basic earnings per common unit increased to $2.34 from $1.94. EBITDA was $245.3 million and Adjusted EBITDA was $255.4 million, compared with $218.7 million and $222.3 million, respectively.
Second-quarter retail propane volume increased 10.3% to 169.7 million gallons, while fuel oil and refined-fuels volume increased 5.0% to 13.6 million gallons. Revenue growth reflected higher volumes, higher selling prices and colder conditions than the prior year, although temperatures were 6% warmer than normal. Average posted propane and fuel-oil prices were 18.0% and 23.4% higher, respectively.
Second-quarter cost of products sold increased 28.1% to $246.6 million and rose to 46.0% of revenue from 42.7%. Management attributed the margin pressure primarily to wholesale propane costs increasing faster than selling prices; propane unit margins nevertheless increased 3.1%. Operating expenses were $113.0 million, or 21.1% of revenue, versus 24.5% previously. General and administrative expense increased 49.7% to $18.2 million, primarily because of higher variable compensation.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $5.7 million at March 31, 2018, compared with $2.8 million at September 30, 2017.
- Total assets were $2.23 billion and total partners’ capital was $629.3 million.
- Long-term borrowings were $1.285 billion, including $1.125 billion of senior notes and $174.0 million outstanding under the $500 million revolving credit facility. The revolver carried an interest rate of approximately 4.2% at quarter-end.
- Debt maturities were $174.0 million in fiscal 2021 and $1.125 billion thereafter; no maturities were scheduled for fiscal 2018–2020 or fiscal 2022.
- The Partnership reported compliance with all debt covenants. Management stated that the consolidated leverage ratio improved to 4.58x at March 31, 2018.
- Standby letters of credit outstanding under the revolver totaled $45.6 million. The Partnership had no cash-collateral requirements for commodity derivatives.
- Cash used in investing activities was $16.5 million for the first six months, including $18.2 million of capital expenditures and $4.2 million for an acquisition. Cash used in financing activities was $62.9 million, including $73.5 million of distributions.
Material changes versus the prior comparable period
- Revenue, operating income, net income and Adjusted EBITDA all increased, driven primarily by higher product prices, increased volumes and more favorable weather compared with the prior year.
- Higher wholesale costs increased the cost-of-products-sold ratio despite improved propane unit margins.
- Interest expense increased 11.0% in the quarter and 7.2% for the six months, principally because of higher revolver borrowings, partly offset by savings from prior-year refinancing.
- The prior-year period included a $1.6 million loss on debt extinguishment; the current six-month period included a $4.8 million loss on the sale of a non-strategic propane business.
- The Partnership acquired a California propane retailer for approximately $4.9 million, including $0.75 million of non-compete consideration, and subsequently acquired a Florida propane retailer for approximately $11.9 million on April 5, 2018.
- The Partnership adopted ASU 2016-09, changing the cash-flow classification of employee tax-withholding payments. The filing also disclosed a $1.1 million discrete deferred tax benefit from releasing an AMT-credit valuation allowance following the 2017 Tax Cuts and Jobs Act.
Guidance, outlook, commentary and risks
Management expected approximately $16.8 million of maintenance and growth capital expenditures, $35.0 million of interest and income-tax payments, and approximately $73.7 million of distributions during the remainder of fiscal 2018. Based on cash on hand, revolver availability and expected operating cash flow, management expected sufficient liquidity to meet current and future obligations.
The Board declared a quarterly distribution of $0.60 per common unit, equivalent to $2.40 annualized, payable May 15, 2018. The Partnership generally distributes available cash after reserving for business needs, debt service and future distributions.
Key risks include weather variability, commodity-price and transportation-cost volatility, customer conservation, supply availability, competition, interest-rate exposure on variable-rate debt, leverage and covenant compliance, legal and operating hazards, self-insurance claims, environmental and regulatory changes, tax-law changes, acquisition integration, capital-market conditions and counterparty risk. A hypothetical 10% adverse commodity-price change in open derivative positions was estimated to reduce potential future net gains by $1.1 million; management cautioned that actual results could differ materially.
The Partnership does not use derivatives for speculative trading. At March 31, 2018, it was not party to an interest-rate swap. Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether seasonal cash generation and weather conditions support the stated liquidity outlook and $0.60-per-unit quarterly distribution.
- The sustainability of propane unit margins as wholesale commodity costs and customer selling prices change.
- Revolver utilization, variable interest expense, the 4.58x leverage ratio and compliance with applicable debt covenants.
- The timing and funding of the $174.0 million revolver maturity in fiscal 2021 and $1.125 billion of senior-note maturities thereafter.
- The impact and integration of the California and subsequent Florida acquisitions, including the related purchase-price allocations.
- Exposure to self-insurance, pension and multi-employer pension obligations, legal proceedings and residual-value guarantees.
- The potential effects of pending accounting standards for revenue recognition, leases, cash-flow classification and pension-cost presentation.