Business Context and Reporting Period
Suburban Propane Partners, L.P. filed its Form 10-K for the 52-week fiscal year ended September 28, 2019. The partnership markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and related heating and ventilation services. It served approximately 1.0 million customers through approximately 700 locations in 41 states. Propane represented approximately 85% of consolidated revenue.
Operations are highly seasonal: approximately two-thirds of propane volume and three-fourths of fuel-oil volume are sold during the October–March heating season. Fiscal 2019 temperatures were approximately 6% warmer than normal, which reduced demand.
Key Financial Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue | $1,267.7 million | $1,344.4 million | Down 5.7% |
| Operating income | $150.9 million | $158.0 million | Down 4.5% |
| Net income | $68.6 million | $76.5 million | Down 10.3% |
| Basic earnings per unit | $1.11 | $1.24 | Down $0.13 |
| EBITDA | $267.0 million | $278.5 million | Down 4.1% |
| Adjusted EBITDA | $275.0 million | $283.0 million | Down 2.8% |
| Cash flow from operations | $226.8 million | $210.4 million | Up 7.8% |
| Capital expenditures | $35.0 million | $32.9 million | Up 6.3% |
| Cash distributions per unit | $2.40 | $2.40 | Unchanged |
Cost of products sold declined to $522.0 million from $592.6 million, and declined to 41.2% of revenue from 44.1%. Operating expenses rose to $403.0 million from $397.5 million, while general and administrative expenses increased to $71.0 million from $66.2 million. Operating margin was approximately 11.9%, compared with 11.8% in fiscal 2018; net margin was approximately 5.4%, compared with 5.7%.
- Propane revenue declined 6.1% to $1,083.4 million; retail propane volume declined 3.0% to 426.7 million gallons.
- Fuel oil and refined fuels revenue increased 0.6% to $92.1 million, despite a 4.0% volume decline to 29.8 million gallons.
- Natural gas and electricity revenue declined 16.8% to $45.2 million, primarily because of customer losses associated with New York regulatory changes and lower electricity usage.
- Fiscal 2019 included an $8.0 million unrealized, non-cash derivative loss, compared with a $0.3 million gain in fiscal 2018.
Liquidity, Debt and Capital Allocation
Cash and cash equivalents were $2.4 million at September 28, 2019, compared with $5.2 million a year earlier. Total debt was $1,227.1 million, including $1,125.0 million of senior notes and $113.5 million drawn under the $500.0 million revolving credit facility, net of debt issuance costs. The partnership repaid $30.1 million under the revolving facility during fiscal 2019.
Debt maturities include $113.5 million in fiscal 2021, $525.0 million in fiscal 2024 and $600.0 million thereafter. The reported consolidated leverage ratio was 4.34x at fiscal year-end. The partnership reported compliance with all debt covenants, including a minimum interest coverage ratio of 2.5x, a maximum total consolidated leverage ratio of 5.5x and a maximum senior secured leverage ratio of 3.0x.
Fiscal 2019 investing cash outflows included $35.0 million of capital expenditures and $19.3 million for three propane acquisitions. Financing cash outflows included $147.9 million of partnership distributions. Management expects fiscal 2020 cash requirements of approximately $35.0 million for capital expenditures, $72.1 million for interest and income taxes, and $148.9 million for distributions based on the annualized $2.40 per-unit rate.
Material Changes Versus the Prior Comparable Period
- Revenue, net income, EBITDA and adjusted EBITDA declined, primarily because of warmer and inconsistent weather, lower volumes and lower selling prices resulting from reduced wholesale commodity costs.
- Propane gross economics benefited from lower wholesale costs, although the derivative mark-to-market loss reduced reported product margins.
- Cash flow from operations increased despite lower earnings, primarily because working capital required less cash as wholesale propane costs declined.
- Operating and general and administrative expenses increased, reflecting higher payroll, benefits, vehicle maintenance, incentive compensation and professional services costs.
- The partnership acquired three propane businesses for aggregate consideration of approximately $22.9 million, including cash, units and amounts payable under acquisition agreements.
- The New York Public Service Commission’s low-income customer order resulted in the return of approximately 6,100 natural gas and electricity customers to local utility service.
- The quarterly distribution remained $0.60 per Common Unit. A $0.60 distribution for the fourth quarter was declared after year-end and paid on November 12, 2019.
Guidance, Outlook, Risks and Unusual Items
Management expected adequate propane and fuel-oil supplies during fiscal 2020 and stated that available liquidity and expected operating cash flow should be sufficient to meet anticipated obligations. The filing does not provide formal revenue or earnings guidance.
- Results remain highly sensitive to winter weather, natural disasters and regional heating demand.
- Commodity price volatility, supply interruptions, transportation constraints, customer conservation and hedging results can materially affect margins and cash flow.
- Propane and fuel oil face competition from natural gas, electricity, other fuels and local distributors; natural gas pipeline expansion may displace propane and fuel oil demand.
- New York regulatory rulemaking could restrict AES’s access to utility distribution systems or affect customer acquisition and retention. Two related consumer class actions remained pending; no loss reserve was recorded and the possible loss could not be estimated.
- Environmental, health and safety compliance remains material. Environmental liabilities accrued at year-end were $1.2 million, while accrued self-insurance liabilities were $67.3 million.
- The partnership had an unfunded pension obligation of $34.6 million and estimated fiscal 2020 pension contributions of approximately $6.6 million.
- A hypothetical 10% adverse change in commodity prices for open derivatives would have increased potential future net losses by approximately $5.3 million.
- Adoption of the new lease standard in fiscal 2020 was expected to add approximately $100 million to $110 million of right-of-use assets and lease liabilities, without an expected impact on debt covenant compliance.
- Fiscal 2019 included no debt-extinguishment loss or business-sale loss. Fiscal 2018 included a $4.8 million loss on the sale of a non-strategic propane operation.
Important Facts for Investors to Verify
- Whether warmer-than-normal weather, customer conservation and natural gas substitution continue to pressure propane and fuel-oil volumes.
- The partnership’s ability to refinance or repay the $113.5 million revolving-facility maturity in fiscal 2021 and the $525.0 million senior-note maturity in fiscal 2024.
- Compliance with leverage, interest coverage and distribution restrictions under the credit facility and senior-note indentures.
- The sustainability of the $2.40 annualized distribution relative to distributable cash flow and debt-reduction needs.
- The outcome of New York ESCO rulemaking and the pending New York and Pennsylvania customer litigation.
- Actual fiscal 2020 operating cash flow, adjusted EBITDA, acquisition spending and the impact of derivative mark-to-market volatility.
- Potential changes in environmental liabilities, self-insurance reserves, pension funding requirements and multi-employer pension withdrawal obligations.