Suburban Propane Partners, L.P. — Fiscal 2017 Form 10-K Summary
Business context and reporting period
The filing reports the 52/53-week fiscal year ended September 30, 2017, including 53 weeks versus 52 weeks in fiscal 2016. The fourth quarter included 14 weeks. Suburban is a nationwide marketer and distributor of propane, fuel oil and refined fuels, natural gas and electricity, and related heating and ventilation services. It served approximately 1.0 million customers through 668 locations in 41 states.
- Retail propane gallons sold: 420.8 million, up 1.4%.
- Fuel oil and refined fuels gallons sold: 30.9 million, essentially flat.
- Fiscal 2017 weather was challenging: temperatures across service territories were 15% warmer than normal, and the winter was the second warmest on record in the contiguous United States.
Financial results and key metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Revenue | $1,187.9 million | $1,046.1 million | +13.6% |
| Operating income | $115.3 million | $90.4 million | +27.5% |
| Net income | $38.0 million | $14.4 million | +163.1% |
| Basic earnings per common unit | $0.62 | $0.24 | +158.3% |
| EBITDA | $241.7 million | $219.7 million | +10.0% |
| Adjusted EBITDA | $243.0 million | $223.0 million | +9.0% |
| Cash flow from operating activities | $160.4 million | $157.1 million | +$3.3 million |
| Capital expenditures | $28.2 million | $38.4 million | -26.6% |
| Cash distributions declared per unit | $3.26 | $3.55 | -8.2% |
- Approximate margins were 9.7% for operating income, 3.2% for net income, 20.3% for EBITDA and 20.5% for Adjusted EBITDA.
- Revenue growth primarily reflected higher selling prices associated with higher wholesale costs and modestly higher propane volumes. Propane revenue increased 14.4% to $1.011 billion; fuel oil and refined fuels revenue increased 13.6% to $78.1 million; and natural gas and electricity revenue increased 8.5% to $55.1 million.
- Cost of products sold increased 31.7% to $476.7 million and rose to 40.1% of revenue from 34.6%, as wholesale costs increased faster than selling prices. Average propane and fuel oil prices increased 51.8% and 20.7%, respectively.
- Operating expenses declined 0.5% to $410.7 million, and general and administrative expenses declined 6.2% to $57.3 million, reflecting cost-control and efficiency initiatives.
- Cash and cash equivalents declined to $2.8 million from $37.3 million. Total debt increased to $1.272 billion from $1.225 billion, while total liabilities increased to $1.618 billion from $1.574 billion.
- Fiscal 2017 investing cash use was $23.0 million. Financing cash use was $171.9 million, principally reflecting distributions, debt refinancing activity and net revolving-credit borrowings.
Material changes versus the prior comparable period
- Results improved despite warmer-than-normal weather. Adjusted EBITDA increased $20.0 million, or 9.0%, after excluding specified unusual items and unrealized derivative gains and losses.
- The company refinanced approximately $350.0 million of 7.375% senior notes due 2021 with 5.875% senior notes due 2027 and revolving-credit borrowings. Management expects the refinancing to reduce annual interest requirements by approximately $5.0 million and extend maturities.
- The company amended its $500.0 million revolving credit facility, temporarily increasing permitted leverage thresholds through fiscal 2018 and adding pricing provisions if leverage exceeds specified levels.
- The company declared a fourth-quarter distribution of $0.60 per unit, reducing the annualized distribution rate from $3.55 to $2.40 per unit beginning with the distribution relating to the quarter ended September 30, 2017.
- Fiscal 2017 included a $6.1 million non-cash pension settlement charge and a $1.6 million loss on debt extinguishment. Fiscal 2016 included a $9.8 million gain on sale of a business, a $6.6 million multi-employer pension withdrawal charge and a $3.0 million product liability settlement.
Guidance, outlook, commentary, risks and unusual items
- Management expects fiscal 2018 maintenance and growth capital expenditures of approximately $35.0 million, interest and income tax payments of approximately $70.6 million, and distributions of approximately $147.3 million based on the $2.40 annualized distribution rate.
- Management expects adequate propane and fuel oil supplies during fiscal 2018, but supply interruptions could increase procurement and transportation costs and pressure margins.
- Management stated that available cash, revolver capacity and expected operating cash flow should be sufficient for current and anticipated obligations; however, cash on hand at year-end was only $2.8 million.
- Key operating risks include warm winters, commodity-price volatility, customer conservation, competition from natural gas and electricity, supply and transportation constraints, interest-rate exposure, leverage, regulatory and environmental requirements, litigation, operating hazards, cyber-security disruptions and dependence on acquisitions for growth.
- The company was in compliance with the senior-note and revolving-credit covenants at September 30, 2017. The facility requires, among other provisions, minimum interest coverage of 2.5-to-1.0 and limits on total and senior-secured leverage.
- Environmental liabilities accrued at year-end were $0.7 million. Self-insurance liabilities were $68.6 million, and estimated multi-employer pension withdrawal obligations were $23.7 million; the timing and amount of additional withdrawal liability remain uncertain.
- The defined benefit pension plan was underfunded by $37.0 million at year-end, and management expected to contribute approximately $10.3 million during fiscal 2018.
- A hypothetical 10% adverse change in commodity prices for open derivative positions would have reduced potential future net gains by approximately $2.6 million; management does not use derivatives for speculative trading.
Most important facts for investors to verify
- Whether the reduced $2.40 annualized distribution is sustainable under varying weather and commodity-price scenarios.
- Progress in reducing leverage and the company’s compliance with the amended revolving-credit-facility thresholds.
- Operating cash flow after distributions, capital expenditures, pension funding and required interest payments.
- Underlying propane and fuel-oil margins after separating selling-price effects, wholesale costs, weather, derivative mark-to-market gains and unusual items.
- The effect of continued warm weather, natural-gas substitution, customer conservation and energy-efficiency trends on volumes.
- Potential changes in environmental, New York energy-marketing, climate, tax and safety regulations.
- Future cash requirements for self-insurance, multi-employer pension obligations, litigation, leases and other contingencies.