Suburban Propane Partners, L.P. — Fiscal 2022 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended September 24, 2022, with comparisons to the fiscal year ended September 25, 2021. Suburban is a nationwide distributor and marketer of propane, renewable propane, fuel oil and refined fuels, natural gas and electricity, and home-comfort services. It served approximately 1.0 million customers through approximately 700 locations in 42 states. Propane represented the dominant business, with 401.3 million retail gallons sold during fiscal 2022.
The business is highly seasonal: approximately two-thirds of retail propane volume and three-fourths of fuel-oil volume are typically sold from October through March. The filing’s fourth-quarter results were a loss-making seasonal period, not a standalone quarterly filing.
Key financial metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Total revenue | $1,501.5 million | $1,288.8 million | +16.5% |
| Gross margin | $789.3 million | $803.2 million | -1.7% |
| Operating income | $206.3 million | $213.2 million | -3.2% |
| Net income | $139.7 million | $122.8 million | +13.8% |
| Basic net income per Common Unit | $2.21 | $1.96 | +12.8% |
| Adjusted EBITDA | $291.0 million | $275.7 million | +5.6% |
| Cash flow from operations | $220.5 million | $226.6 million | -2.7% |
| Capital expenditures | $44.4 million | $29.9 million | +48.6% |
| Net cash used in investing | $94.4 million | $34.1 million | Higher investment activity |
| Net cash used in financing | $127.8 million | $189.8 million | Lower outflow |
Reported gross margin included a $27.9 million unrealized derivative loss in fiscal 2022 versus a $43.1 million unrealized gain in fiscal 2021. Excluding these non-cash mark-to-market effects, gross margin increased $57.1 million, or 7.5%.
Fiscal 2022 revenue growth primarily reflected higher selling prices. Average propane selling prices increased 21.9%, while propane gallons sold declined 4.4% to 401.3 million. Fuel-oil and refined-fuel gallons declined 5.3% to 22.8 million. Operating expenses increased 7.5% and general and administrative expenses increased 10.3%, reflecting higher labor, benefits, vehicle, transportation, doubtful-account and other inflation-related costs. Depreciation and amortization declined 43.7% because certain acquired intangible assets reached the end of their amortization periods. Net interest expense declined 11.0% to $60.7 million.
Fourth-quarter fiscal 2022 revenue was $237.6 million, operating loss was $37.7 million and net loss was $54.2 million, compared with fourth-quarter fiscal 2021 revenue of $208.2 million, operating income of $0.4 million and net loss of $16.4 million.
Liquidity, debt and distributions
- Cash and cash equivalents were $4.1 million at September 24, 2022, compared with $5.8 million at the prior year-end.
- Gross borrowings were $1,089.6 million, consisting of $350.0 million of 5.875% senior notes due 2027, $650.0 million of 5.0% senior notes due 2031 and $89.6 million drawn under a $500.0 million revolving credit facility due 2025.
- Debt was reduced by $42.4 million during fiscal 2022 using operating cash flow. The reported total consolidated leverage ratio improved to 3.60x from 3.96x.
- The Partnership was in compliance with all debt covenants at September 24, 2022. The revolving credit facility requires interest coverage of at least 2.5x, total leverage no greater than 5.75x and senior secured leverage no greater than 3.25x.
- Quarterly distributions were $0.325 per Common Unit throughout fiscal 2022. A $0.325 distribution for the fourth quarter was declared after year-end, equivalent to an annualized rate of $1.30 per unit.
- Management expected fiscal 2023 cash requirements of approximately $45.0 million for maintenance and growth capital, $33.0 million for renewable-energy development, $63.8 million for interest and income taxes and $82.4 million for distributions.
- Standby letters of credit totaled $48.9 million, and maximum potential payments under residual-value guarantees for certain leases were approximately $34.0 million.
Material changes versus the prior comparable period
- Revenue increased sharply because of higher commodity-driven selling prices, despite lower volumes caused by warm weather and customer conservation.
- Adjusted EBITDA improved, but reported gross margin and operating income declined because of unfavorable derivative mark-to-market movements and higher operating costs.
- Fiscal 2022 benefited from the absence of the $16.0 million debt-extinguishment loss and $4.3 million multi-employer pension withdrawal charge recorded in fiscal 2021.
- Investing activity increased substantially, including a $30.0 million investment for a 25% interest in Independence Hydrogen, approximately $26.7 million of propane acquisitions and additional investment in Oberon Fuels.
- The Partnership entered into an agreement with Adirondack Farms to construct and operate a biodigester for renewable natural gas production and built a commercial Propane+rDME blending facility.
- Fiscal 2022 temperatures were approximately 10% warmer than normal across service territories and comparable to fiscal 2021, while December 2021 through February 2022 was approximately 2% warmer than the prior-year period.
- Average posted propane prices increased 39.1%, while average fuel-oil prices increased 81.6%. U.S. propane inventories improved by year-end but remained below the five-year average.
Guidance, outlook, risks and unusual items
Management did not provide formal revenue or earnings guidance. It stated that expected liquidity, revolving-credit availability and operating cash flow should be sufficient to meet current obligations and planned fiscal 2023 expenditures. Management emphasized flexibility, cost control, balance-sheet improvement and continued investment in renewable energy.
- Key operating risks include warmer winters, weather volatility, customer conservation, competition from natural gas and electricity, commodity-price volatility and supply-chain disruption.
- Inflation increased commodity, transportation, labor, vehicle, tank and equipment costs and could continue to pressure margins and demand.
- Russia’s military action in Ukraine created additional volatility in oil, natural-gas, propane and refined-fuel prices and supply.
- Renewable-energy investments depend on customer adoption, project execution, third-party partners, financing, permitting and the continued availability and value of federal and state incentives, RINs and LCFS credits.
- Environmental, climate-change, health-and-safety and transportation regulations could increase costs or restrict fossil-fuel demand. Environmental liabilities accrued at year-end were $1.5 million.
- The Partnership had approximately $64.1 million of accrued self-insurance liabilities, partially offset by an insurance recovery asset of approximately $15.7 million. The auditor identified accrued insurance as a critical audit matter because of the judgment involved in estimating claims.
- A putative class action involving the natural-gas and electricity business was dismissed on summary judgment, but the plaintiff appealed. Management believed the appeal was without merit and did not expect pending litigation to have a material adverse effect.
- The pension plan was underfunded by approximately $20.8 million at year-end, and the Partnership estimated a $22.5 million obligation for established multi-employer pension-plan withdrawals, with timing and additional liability uncertain.
- Internal control over financial reporting and disclosure controls were assessed as effective, and PwC issued an unqualified audit opinion.
Most important facts for investors to verify
- Whether future winters, commodity prices and customer conservation cause propane and fuel-oil volumes and margins to recover or deteriorate.
- The sustainability of the $1.30 annualized distribution relative to distributable cash flow, debt service, capital expenditures and seasonal working-capital needs.
- Debt refinancing and covenant headroom ahead of the $89.6 million revolving-facility maturity in 2025 and the $350.0 million senior-note maturity in 2027.
- Actual returns, funding needs and commercial progress from the Oberon, Independence Hydrogen and Adirondack Farms renewable-energy initiatives.
- The effect of inflation, higher interest rates, supply constraints and geopolitical conditions on operating costs and liquidity.
- The outcome of the AES class-action appeal and changes in state regulation of deregulated natural-gas and electricity marketers.
- Potential changes in climate legislation, renewable-fuel incentives, RIN and LCFS-credit markets and environmental liabilities.
- The reliability of non-GAAP Adjusted EBITDA, particularly the treatment and timing of derivative mark-to-market gains and losses.