Suburban Propane Partners, L.P. — Fiscal 2020 First-Quarter Form 10-Q
Reporting period: Three months ended December 28, 2019, compared with the three months ended December 29, 2018. The filing describes a seasonal retail energy business serving residential, commercial, industrial, agricultural and government customers through propane, fuel oil and refined fuels, natural gas and electricity, and home-comfort services.
Financial performance and position
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $333.9 million | $377.1 million | Down 11.5% |
| Operating income | $59.9 million | $48.5 million | Up 23.3% |
| Net income | $40.2 million | $27.7 million | Up 44.9% |
| Basic earnings per unit | $0.65 | $0.45 | Up $0.20 |
| Adjusted EBITDA | $85.4 million | $93.3 million | Down 8.5% |
| Cash flow from operations | $15.6 million | $7.3 million | Up $8.3 million |
Revenue declined primarily because of lower selling prices caused by lower wholesale commodity costs and lower propane volumes. Retail propane gallons sold decreased 2.3% to 121.2 million gallons, while fuel oil and refined-fuel gallons decreased 7.7%. Cost of products sold fell 35.0% to $118.6 million, and declined to 35.5% of revenue from 48.4%. The improvement included a $2.8 million unrealized derivative gain versus a $15.9 million unrealized loss in the prior-year quarter.
Operating margin was approximately 17.9%, compared with 12.9% in the prior-year quarter. Net margin was approximately 12.0%, compared with 7.4%. Adjusted EBITDA margin was approximately 25.6%, compared with 24.7%.
Cash flow, debt and liquidity
- Capital expenditures were $13.0 million, including approximately $8.6 million for growth and $4.4 million for maintenance.
- The Partnership used $21.0 million for two propane acquisitions and received $0.9 million from property, plant and equipment sales.
- Net borrowings under the revolving credit facility were $61.0 million during the quarter. Cash increased to $5.9 million from $2.4 million at September 28, 2019.
- Total debt principal was $1.2995 billion at December 28, 2019, consisting of $1.125 billion of senior notes and $174.5 million under the revolving facility. The carrying value of long-term borrowings was $1.289 billion.
- The $500 million revolving facility matures March 3, 2021; approximately $65.8 million of standby letters of credit were outstanding. The facility rate was approximately 4.2% at period end.
- Debt maturities after December 28, 2019 include $174.5 million in fiscal 2021, $525.0 million in fiscal 2024 and $600.0 million thereafter. The Partnership reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Warmer weather reduced demand: temperatures across service territories were 4% warmer than normal and 1% warmer than the prior year; December was 10% warmer than normal.
- Propane revenue declined 11.2%, fuel oil and refined-fuels revenue declined 10.4%, and natural gas and electricity revenue declined 34.9%. The latter also reflected New York regulatory actions limiting service to certain customers.
- Operating and general and administrative expenses increased, including a $5.0 million charge for settlement of product-liability and other legal matters, higher payroll and benefits, vehicle costs, professional fees, and marketing expenditures.
- Two propane businesses were acquired for total consideration of approximately $23.4 million, excluding working capital: one in Georgia and one in California. The acquisitions were not material individually or in aggregate to reported results.
- Operating lease right-of-use assets and liabilities of approximately $103.1 million were recognized upon adoption of the new lease standard. The adoption did not affect other financial statements or debt-covenant metrics.
- The Partnership adopted a $0.60 per-unit quarterly distribution for the first quarter, payable February 11, 2020, or $2.40 per unit on an annualized basis.
Outlook, risks and unusual items
Management expected approximately $22.0 million of maintenance and growth capital expenditures, $57.1 million of interest and income-tax payments, and $111.9 million of cash distributions for the remainder of fiscal 2020. Based on cash on hand, revolver availability and expected operating cash flow, management expected sufficient liquidity to meet obligations.
Results remain highly seasonal, with approximately two-thirds of retail propane volume sold during the October–March heating season. Management expects lower operating profits and potentially lower net income or losses during the April–September period. Key risks include weather, commodity-price and supply volatility, customer conservation, competition, transportation and supply availability, variable interest rates, leverage and refinancing, regulation, litigation, self-insurance claims, pension obligations, cybersecurity and integration of acquisitions.
- Two putative class actions concerning natural-gas and electricity pricing remained pending. One Pennsylvania action had been dismissed in full and was under appeal; portions of the New York action remained active. No loss reserve was recorded, and a possible loss could not be reasonably estimated.
- Self-insurance liabilities were $71.1 million, partially offset by an $18.9 million insurance receivable. Residual-value guarantees on operating leases had a maximum potential exposure of $19.7 million, although their fair value was de minimis.
- The filing reports a $496,000 discrete deferred-tax benefit from releasing a valuation allowance on certain post-2017 net operating losses.
- A hypothetical 10% adverse movement in commodity prices would have reduced potential future net gains on open derivative positions by approximately $3.3 million. Derivatives were used for hedging and not speculative trading.
Important facts for investors to verify
- Whether warmer weather and regulatory customer restrictions continue to pressure volumes, particularly in propane and natural gas and electricity.
- The sustainability of reported earnings given the significant year-over-year benefit from lower product costs and derivative mark-to-market movements, while Adjusted EBITDA declined.
- Liquidity and refinancing capacity ahead of the $174.5 million fiscal 2021 revolver maturity and the $525.0 million fiscal 2024 senior-note maturity.
- Future distribution coverage and whether anticipated cash flow supports the stated $0.60 quarterly distribution.
- Progress and integration economics of the Georgia and California acquisitions.
- Developments in the pending pricing litigation, product-liability matters, self-insurance reserves and pension obligations.