Business Context and Reporting Period
Suburban Propane Partners, L.P. is a publicly traded limited partnership distributing propane, fuel oil and refined fuels, marketing natural gas and electricity, and providing home-comfort equipment and services. This unaudited Form 10-Q covers the 13 weeks and 39 weeks ended June 26, 2021, compared with June 27, 2020. Results are seasonal, with substantially greater demand and profitability generally occurring during the October–March heating season.
Key Financial Metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Revenue | $238.1 million | $206.9 million | $1,080.5 million | $941.8 million |
| Operating income | $8.0 million | $4.9 million | $212.8 million | $162.4 million |
| Net income (loss) | $(26.0) million | $(15.6) million | $139.2 million | $101.9 million |
| Net income (loss) per unit | $(0.41) | $(0.25) | $2.22 basic; $2.20 diluted | $1.64 basic; $1.63 diluted |
| Adjusted EBITDA | $23.3 million | $32.2 million | $275.4 million | $248.2 million |
| Net cash from operations | Not separately provided | Not separately provided | $180.8 million | $169.0 million |
Q3 operating margin was approximately 3.4%, compared with 2.4% in the prior-year quarter. The nine-month operating margin was approximately 19.7%, compared with 17.2%. Revenue growth was driven primarily by propane pricing and volumes, while reported Q3 net loss included a $16.0 million loss on debt extinguishment.
- Q3 propane revenue increased 16.6% to $208.7 million; propane gallons sold increased 1.7% to 76.7 million gallons.
- Q3 total gross margin was $155.0 million, up 5.3%; it included an $11.1 million unrealized, non-cash derivative gain.
- Q3 cost of products sold increased 39.1% to $83.1 million, or 34.9% of revenue versus 28.8% in the prior-year quarter.
- Q3 operating expenses increased 6.2% to $102.0 million, while general and administrative expense increased 3.8% to $17.8 million.
- For the first nine months, propane revenue increased 18.0% and propane gallons sold increased 4.6%; fuel oil and refined fuels revenue declined 14.5%.
- Nine-month operating cash flow increased $11.8 million year over year despite higher working-capital needs associated with higher propane costs.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $6.0 million at June 26, 2021, compared with $3.1 million at September 26, 2020.
- Long-term borrowings, net of issuance costs, were $1.137 billion, compared with $1.210 billion at September 26, 2020. Principal debt consisted of $350.0 million of 5.875% senior notes due 2027, $650.0 million of 5.0% senior notes due 2031, and $151.4 million drawn under the revolving credit facility.
- The $500.0 million revolving credit facility had $151.4 million outstanding, $56.9 million of standby letters of credit, and reported borrowing capacity of $291.8 million at quarter-end. The facility interest rate was approximately 2.15%.
- The Partnership refinanced its $525.0 million 2024 notes and $250.0 million 2025 notes with the 2031 notes and revolving-credit borrowings. Management expects approximately $7.0 million of annual net interest savings and an extension of average debt maturities by more than 3.5 years.
- The trailing-twelve-month Consolidated Leverage Ratio was 3.96x. The Partnership reported compliance with all debt covenants at June 26, 2021.
- Nine-month capital expenditures were $21.8 million, including approximately $11.3 million for growth and $10.5 million for maintenance. Investing cash outflow was $27.8 million.
- Nine-month distributions were $56.2 million. A quarterly distribution of $0.325 per common unit, or $1.30 annualized, was declared for Q3, an 8.3% increase from $0.30 per unit.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 15.1%, but Adjusted EBITDA declined 27.7% to $23.3 million, principally reflecting lower blended unit margins, warmer weather and higher operating costs.
- Q3 net loss widened by $10.4 million, primarily because of the $16.0 million debt-extinguishment loss; interest expense nevertheless declined 9.4%.
- Nine-month net income increased 36.5% and Adjusted EBITDA increased 10.9%, benefiting from higher propane volumes and pricing, cooler weather during key heating-season months, and lower operating and depreciation expenses.
- Average posted propane prices were 111.5% higher year over year in Q3 and 83.1% higher for the nine-month period. The company adjusted customer pricing as market conditions allowed.
- Average temperatures were 9% warmer than normal and the prior year in Q3, reducing heating-related demand. Commercial and industrial demand improved as COVID-19 restrictions eased.
- The natural gas and electricity customer base and revenue were reduced by New York regulatory actions that limited energy service companies from serving certain customers.
- The Partnership acquired a North Carolina propane retailer for approximately $7.7 million, plus working capital, and continued investments in Oberon Fuels, including milestones toward commercialization of renewable dimethyl ether.
Outlook, Commentary, Risks and Unusual Items
Management did not provide formal earnings guidance. It expects sufficient funds to meet current and future obligations based on cash on hand, expected operating cash flow and revolver availability. Remaining FY2021 cash requirements were estimated at approximately $13.2 million for capital expenditures, $11.7 million for interest and income taxes, and $20.3 million for common-unit distributions.
- COVID-19 effects were continuing to evolve. Commercial and industrial demand had begun to normalize, but management could not estimate the pandemic’s full financial impact and noted risks from renewed restrictions, demand destruction, supply-chain disruption and higher safety costs.
- Weather remains a major earnings and volume risk because heating demand is concentrated in the first two fiscal quarters.
- Commodity-price volatility, product availability, transportation costs, customer conservation and the ability to pass cost increases through to customers may materially affect margins.
- The Partnership uses derivatives for hedging rather than speculation. A hypothetical 10% adverse change in market prices for open derivative positions indicated a potential $8.8 million decrease in future net gains; actual results could differ materially.
- A putative class action involving pricing practices in the natural gas and electricity business remained pending. The Partnership recorded no reserve and could not reasonably estimate any potential loss.
- Self-insurance liabilities were $67.8 million, partially offset by a $16.3 million insurance receivable. Maximum potential payments under residual-value guarantees for operating leases were $28.8 million, although historical equipment values exceeded guaranteed amounts.
Investor Verification Points
- Verify the sustainability of propane margins and volumes after the unusually high commodity-price environment and warmer Q3 weather.
- Reconcile Adjusted EBITDA with GAAP results and assess the impact of derivative mark-to-market gains and the debt-extinguishment charge.
- Review refinancing terms, variable-rate exposure, revolver availability, covenant headroom and the $151.4 million maturity in fiscal 2025.
- Assess whether the increased $0.325-per-unit distribution is supported by recurring distributable cash flow through the lower-demand quarters.
- Monitor COVID-19 developments, New York energy-market regulation, pending litigation, self-insurance claims and other contingencies.
- Confirm the performance and funding requirements of the North Carolina acquisition and Oberon Fuels investment.