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 service activities. The filing covers the 13 weeks ended December 25, 2021, the first quarter of fiscal 2022, compared with the quarter ended December 26, 2020. Operations are highly seasonal, with demand and profitability concentrated in the October–March heating season.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $375.4 million | $305.2 million | +23.0% |
| Operating income | $37.3 million | $57.7 million | -35.4% |
| Net income | $21.3 million | $38.0 million | -43.9% |
| Basic earnings per unit | $0.34 | $0.61 | -$0.27 |
| Adjusted EBITDA | $86.5 million | $80.0 million | +8.1% |
| Cash used in operating activities | $13.3 million | Cash provided of $4.2 million | -$17.6 million |
- Revenue mix: Propane revenue was $331.1 million, fuel oil and refined fuels revenue was $21.0 million, natural gas and electricity revenue was $9.2 million, and all other revenue was $14.1 million.
- Volumes: Retail propane gallons sold declined 5.7% to 105.3 million; fuel oil and refined fuels gallons declined 4.2% to 6.1 million.
- Margins: Reported gross margin was $179.1 million, or approximately 47.7% of revenue, versus $201.8 million, or approximately 66.1%, in the prior-year quarter. Excluding unrealized derivative mark-to-market effects, gross margin was $212.6 million, or approximately 56.6%. Operating margin was approximately 9.9%, compared with 18.9%.
- Derivative impact: Cost of products sold included a $33.5 million unrealized, non-cash derivative loss, compared with a $4.9 million unrealized gain in the prior-year quarter.
- Cash and liquidity: Cash was $3.5 million at December 25, 2021, down from $5.8 million at fiscal year-end. The revolving credit facility had $176.4 million outstanding, with reported borrowing capacity of $274.7 million after considering leverage and letters of credit.
- Debt: Total principal debt was $1.176 billion, consisting of $350.0 million of 5.875% senior notes due 2027, $650.0 million of 5.0% senior notes due 2031, and $176.4 million under the revolving facility. The reported Consolidated Leverage Ratio was 4.02x.
- Capital allocation: Capital expenditures were $10.7 million, including $6.3 million for growth and $4.4 million for maintenance. The Partnership paid $20.3 million in distributions and declared a $0.325 per-unit quarterly distribution, or $1.30 annualized.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially because higher selling prices more than offset lower volumes. Average propane selling prices increased 30.9%, while average propane prices at Mont Belvieu increased 118.5%.
- Unseasonably warm weather reduced heating demand. Service-territory heating degree days were 16% warmer than normal and 3% warmer than the prior year; December temperatures were particularly unfavorable.
- Net income and operating income declined primarily because of the $33.5 million unrealized derivative loss, lower volumes, and higher operating and administrative costs.
- Adjusted EBITDA increased because of margin management and favorable realized results from commodity hedges, despite inflationary increases in payroll, benefits, vehicle costs and other operating expenses.
- Interest expense declined 15.6% to $15.3 million, reflecting refinancing at lower interest rates and lower average debt.
- Operating cash flow shifted from a $4.2 million inflow to a $13.3 million outflow, driven by working-capital investment related to higher commodity costs, timing of interest and compensation payments, and repayment of deferred payroll taxes.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $24.3 million of maintenance and growth capital expenditures, $41.8 million of interest and income tax payments, and $61.5 million of cash distributions during the remainder of fiscal 2022. Management expects available cash, revolver capacity and operating cash flow to be sufficient for current obligations.
- The business remains exposed to weather variability, commodity-price volatility, customer conservation, supply and transportation availability, inflation, labor constraints, competition, interest-rate changes and seasonal working-capital needs.
- COVID-19 continues to create uncertainty regarding customer demand, operations, supply chains, employee costs and liquidity, although the Partnership reported no material supply-chain disruption and continued access to adequate liquidity.
- The Partnership uses derivatives for hedging and supply management, not speculative trading. A hypothetical 10% adverse commodity-price change was estimated to reduce potential future net gains by $7.8 million; actual results may differ materially.
- The Partnership had an unresolved putative class action involving electricity pricing in New York and Pennsylvania. No loss reserve was recorded, and the possible loss could not be reasonably estimated.
- The Partnership invested further in Oberon Fuels, a minority-owned developer of renewable dimethyl ether, and announced a collaboration to test propane and rDME blended products.
- Residual-value guarantees on operating leases had a maximum potential future payment of $34.0 million, although their fair value was de minimis at the reporting date.
- The Partnership reported compliance with the covenants governing its senior notes and revolving credit facility, and its disclosure controls were effective as of December 25, 2021.
Important Facts for Investors to Verify
- Whether warmer-than-normal weather and lower volumes persist through the remaining heating season.
- The realized versus unrealized effects of commodity hedges and the potential volatility of reported earnings from mark-to-market adjustments.
- Revolver availability, leverage covenant headroom, variable-rate exposure and the $176.4 million facility maturity in fiscal 2025.
- The sustainability of the $0.325 per-unit quarterly distribution relative to seasonal cash flow, capital spending and debt requirements.
- The ability to recover higher product, transportation, labor and vehicle costs through customer pricing without further demand erosion.
- Progress and required funding for the Oberon rDME initiative, including commercialization and execution risks.
- Developments in the electricity-pricing litigation, self-insurance claims and other contingent liabilities.