Suburban Propane Partners, L.P. — Fiscal 2022 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended June 25, 2022, compared with June 26, 2021. Results are seasonal, with most propane and fuel-oil demand occurring during the October–March heating season. Interim results are not necessarily indicative of full-year performance.
Business Context
The Partnership markets and distributes propane, renewable propane, fuel oil and refined fuels; markets natural gas and electricity; provides home-comfort equipment and related services; and is developing renewable-energy investments, including renewable natural gas, renewable dimethyl ether and hydrogen.
Key Financial Metrics
| Metric | Q3 FY2022 | Q3 FY2021 | 9M FY2022 | 9M FY2021 |
|---|---|---|---|---|
| Revenue | $300.3 million | $238.1 million | $1,263.8 million | $1,080.5 million |
| Operating income | $14.8 million | $8.0 million | $244.0 million | $212.8 million |
| Net income (loss) | $(2.5) million | $(26.0) million | $193.9 million | $139.2 million |
| Net income (loss) per unit | $(0.04) | $(0.41) | $3.07 | $2.22 |
| Adjusted EBITDA | $29.2 million | $23.3 million | $288.2 million | $275.4 million |
| Net cash from operations | Not separately disclosed | Not separately disclosed | $171.1 million | $180.8 million |
Margins: Q3 operating margin was approximately 4.9% versus 3.4% in the prior-year quarter; net margin was approximately (0.8)% versus (10.9)%. For the first nine months, operating margin was approximately 19.3% versus 19.7%, and net margin was approximately 15.3% versus 12.9%. Q3 gross margin was $159.4 million, or approximately 53.1% of revenue, versus $155.0 million, or 65.1%, in the prior-year quarter. The lower gross-margin percentage primarily reflects substantially higher commodity costs and unfavorable derivative mark-to-market movements.
Balance sheet and liquidity: Cash was $7.1 million at June 25, 2022. Total assets were $2.115 billion and total liabilities were $1.550 billion. Long-term borrowings, net of issuance costs, were $1.079 billion, consisting principally of $350.0 million of 5.875% senior notes due 2027, $650.0 million of 5.0% senior notes due 2031 and $91.4 million drawn under the revolving credit facility. The $500.0 million revolving facility had stated borrowing capacity of $359.7 million based on applicable covenant limitations, and $48.9 million of standby letters of credit were outstanding. The Partnership reported compliance with all debt covenants.
Distributions: The Partnership declared a quarterly distribution of $0.325 per common unit, or $1.30 annualized, payable August 9, 2022.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 26.1%, primarily from higher selling prices reflecting elevated commodity costs. Propane revenue rose 24.9%, fuel oil and refined fuels revenue rose 70.4%, and natural gas and electricity revenue rose 29.3%.
- Retail propane volume declined 1.6% in Q3 and 4.9% for the first nine months; fuel-oil and refined-fuel volume declined 5.8% in Q3 and 3.9% for the first nine months. Customer conservation, warmer weather and reduced pandemic-related outdoor demand contributed to lower volumes.
- Q3 net loss improved substantially because the prior-year period included a $16.0 million loss on debt extinguishment, while current-year interest expense declined 10.4% following debt refinancing and lower average debt.
- Q3 Adjusted EBITDA increased 25.3% to $29.2 million. Excluding non-cash derivative mark-to-market effects, gross margin increased $16.4 million, or 11.4%.
- Operating and general and administrative expenses increased because of higher payroll, benefits, variable compensation, vehicle, fuel, doubtful-account and other inflation-related costs.
- Operating cash flow declined $9.6 million for the first nine months despite higher earnings, reflecting higher working-capital requirements, compensation payments and repayment of deferred payroll taxes.
- Investing cash outflows increased to $64.3 million from $27.8 million, including $33.3 million of capital expenditures, a $30.0 million investment in Independence Hydrogen and additional acquisitions and investments.
- The Partnership formed Suburban Renewable Energy, invested in hydrogen and renewable-fuel businesses, launched commercial Propane+rDME sales, and agreed to construct a renewable natural gas biodigester.
Outlook, Risks and Unusual Items
- Management expected approximately $11.7 million of maintenance and growth capital expenditures, $12.0 million of interest and income-tax payments, and $20.5 million of cash distributions during the remainder of fiscal 2022. Management stated that available liquidity and expected operating cash flow should be sufficient for current obligations.
- Management did not provide formal revenue, earnings or volume guidance in the filing. It emphasized seasonal demand, commodity-price volatility, customer conservation, weather variability and inflation.
- Average Mont Belvieu propane prices were 43.8% higher in Q3 and 62.2% higher for the first nine months than in the comparable prior periods. June 2022 U.S. propane inventories were 14% below the five-year average.
- Derivative instruments generated a $0.9 million unrealized loss in Q3 2022 versus an $11.1 million unrealized gain in Q3 2021. A hypothetical 10% adverse commodity-price movement would have reduced potential future net gains by approximately $14.7 million, although management stated this is not a worst-case scenario.
- Key risks include weather, commodity and transportation costs, customer conservation, inflation, interest-rate exposure, supply availability, competition, COVID-19 effects, geopolitical conditions including the Russia-Ukraine conflict, regulation, litigation, cybersecurity and the ability to execute renewable-energy investments.
- Pending litigation was not expected by management to have a material adverse effect. A consumer action involving the natural gas and electricity business was dismissed on summary judgment, but the plaintiff appealed.
- Self-insurance liabilities were $65.4 million, with a $15.7 million receivable for amounts expected to be covered by insurance. Potential residual-value guarantee payments under operating leases were $39.5 million, assuming leased equipment had no value at lease end.
- After quarter-end, the Partnership acquired propane assets and operations of a New Mexico retailer for $19.4 million plus working capital.
Investor Verification Priorities
- Verify the sustainability of margins and cash flow if propane, fuel oil and other commodity prices remain elevated or decline rapidly.
- Review distribution coverage, leverage and covenant headroom, particularly ahead of the $91.4 million revolving-facility maturity in fiscal 2025 and $1.0 billion of senior-note maturities thereafter.
- Reconcile Adjusted EBITDA and gross margin to GAAP results and assess the recurring versus nonrecurring impact of derivative mark-to-market adjustments.
- Monitor retail volumes, customer conservation, weather trends and the impact of post-pandemic demand normalization.
- Assess execution risk and capital requirements for the hydrogen, rDME and renewable natural gas initiatives, including the post-quarter-end acquisition.
- Review exposure to inflation, interest-rate increases, supply disruptions, self-insurance claims, pension obligations and the appeal of the consumer litigation matter.