Suburban Propane Partners, L.P. — Form 10-Q Summary
Business context and reporting period
Suburban Propane Partners, L.P. distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides home-comfort equipment and related services. The unaudited filing covers the 13-week quarter and nine months ended June 29, 2019, compared with June 30, 2018. 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 June 29, 2019 | Prior comparable period | Change |
|---|---|---|---|
| Revenue | $214.2 million | $241.9 million | Down 11.5% |
| Operating income | $(8.8) million | $4.2 million | Declined $13.0 million |
| Net income/(loss) | $(29.0) million | $(16.6) million | Loss increased $12.4 million |
| Net loss per common unit | $(0.47) | $(0.27) | Lower |
| Adjusted EBITDA | $20.1 million | $30.5 million | Down $10.5 million |
| Metric | Nine months ended June 29, 2019 | Prior comparable period | Change |
|---|---|---|---|
| Revenue | $1.096 billion | $1.151 billion | Down 4.8% |
| Operating income | $181.8 million | $188.6 million | Down 3.6% |
| Net income | $119.7 million | $127.4 million | Down 6.0% |
| Diluted earnings per common unit | $1.92 | $2.06 | Lower |
| Adjusted EBITDA | $276.4 million | $285.9 million | Down $9.5 million |
Third-quarter revenue weakness was concentrated in propane, which declined 10.9% to $183.1 million. Retail propane volume fell 8.3% to 73.8 million gallons; fuel oil and refined fuels volume fell 15.7%. Cost of products sold declined 17.6% to $78.6 million, and represented 36.7% of revenue versus 39.4% in the prior-year quarter. Operating expenses and general and administrative expenses increased 1.5% and 11.8%, respectively, contributing to the quarterly operating loss.
For the first nine months, propane revenue declined 5.3% and propane gallons sold declined 3.2%. Cost of products sold as a percentage of revenue improved to 42.2% from 44.0%, but higher general and administrative expense and lower revenue reduced profitability.
Cash flow, liquidity and capital structure
- Net cash provided by operating activities was $166.1 million for the first nine months, compared with $157.3 million in the prior-year period.
- Investing cash outflows were $38.5 million, including $24.3 million of capital expenditures and $18.9 million for three propane-business acquisitions.
- Financing cash outflows were $130.2 million, including $110.8 million of partnership distributions and $16.4 million of net revolver repayments.
- Cash and cash equivalents were $2.5 million at June 29, 2019, down from $5.2 million at September 29, 2018.
- Total debt principal was $1.252 billion, consisting of $1.125 billion of senior notes and $127.2 million outstanding under the revolving credit facility. Long-term borrowings, net of issuance costs, were $1.240 billion.
- The $500 million revolving credit facility matures March 3, 2021; $65.8 million of standby letters of credit reduced available capacity.
- The revolver interest rate was approximately 4.8% at June 29, 2019. The Partnership reported a consolidated leverage ratio of 4.41x and stated that it complied with all debt covenants.
- Management expected sufficient liquidity from cash on hand, revolver availability and operating cash flow to meet obligations.
Material changes versus the prior comparable period
- Warmer weather was the principal operating pressure. Third-quarter temperatures were 12% warmer than normal and 8% warmer than the prior year; April was 17% warmer than normal and 33% warmer than April 2018.
- Average Mont Belvieu propane prices were 36.4% lower in the third quarter and 24.6% lower for the nine-month period. Lower wholesale costs reduced revenue and cost of products sold.
- Third-quarter adjusted EBITDA declined 34.3%, primarily due to lower volumes and higher operating and administrative expenses.
- Third-quarter cost of products sold included a $0.1 million unrealized derivative gain versus a $3.8 million gain in the prior year. For nine months, unrealized derivative losses were $7.3 million versus $1.4 million in the prior year.
- The Partnership completed three propane acquisitions for approximately $23.0 million during the first nine months, including $1.6 million of common units issued in one transaction.
- Total assets declined to $2.035 billion from $2.101 billion, while total partners’ capital increased to $513.4 million from $493.8 million.
Guidance, outlook, risks and unusual items
The Partnership declared a third-quarter distribution of $0.60 per common unit, or $2.40 annualized, payable August 13, 2019. Management projected approximately $10.7 million of remaining fiscal 2019 maintenance and growth capital expenditures, $19.7 million of interest and income-tax payments, and $37.0 million of cash distributions at the then-current rate.
Management expects lower operating profits and possible net losses during the April–September period because of seasonality. Key risks include weather variability, propane and refined-fuel price volatility, supply and transportation availability, customer conservation, competition, interest rates, regulation, environmental and climate-related requirements, litigation, operating hazards, acquisition integration and access to capital.
Derivative instruments are used for hedging rather than speculation. A hypothetical 10% adverse change in commodity prices was estimated to increase potential future net losses by $4.4 million, although actual results could differ materially. The filing also discloses two putative class actions concerning electricity pricing; one was dismissed in full and appealed, while claims in the other remain pending. No loss reserve was recorded, and the potential loss could not be reasonably estimated.
Other notable items include $69.8 million of accrued self-insurance liabilities, a $17.975 million maximum potential exposure under operating-lease residual-value guarantees, and an estimated $21.7 million obligation related to withdrawn multi-employer pension plans. The filing states that no material changes occurred in previously disclosed risk factors or internal controls.
Investor verification priorities
- Verify weather-normalized propane volumes, margins and demand trends entering the next heating season.
- Monitor revolver availability, covenant headroom, the 2021 revolver maturity and the ability to sustain $0.60 quarterly distributions.
- Assess whether acquisitions improve volume, cash flow and leverage without increasing integration or goodwill-impairment risk.
- Reconcile adjusted EBITDA to GAAP cash flow and track the effect of derivative mark-to-market volatility.
- Follow the electricity-pricing litigation, self-insurance claims and pension-related obligations for changes in exposure.
- Evaluate the impact of variable-rate debt and changing commodity prices on future earnings and liquidity.