Suburban Propane Partners, L.P. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended June 30, 2018, compared with June 24, 2017. Suburban Propane distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides heating and ventilation equipment, installation and service. Results are highly seasonal, with most heating-related volumes and operating profits generated from October through March. The interim financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Prior comparable period | Nine months ended June 30, 2018 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $241.9 million | $222.9 million | $1,151.5 million | $990.8 million |
| Operating income | $3.1 million | $(11.1) million | $185.0 million | $145.3 million |
| Net income (loss) | $(16.6) million | $(29.7) million | $127.4 million | $88.6 million |
| Net income (loss) per common unit | $(0.27) | $(0.48) | $2.07 basic; $2.06 diluted | $1.45 basic; $1.44 diluted |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $156.1 million | $124.0 million |
| Adjusted EBITDA | $30.5 million | $21.4 million | $285.9 million | $243.7 million |
Third-quarter operating margin was approximately 1.3%, compared with negative 5.0% in the prior-year quarter. Nine-month operating margin was approximately 16.1%, compared with 14.7%. Third-quarter cost of products sold declined to 39.4% of revenue from 41.3%, while the nine-month ratio increased to 44.0% from 40.6%.
- Third-quarter propane revenue increased 9.0% to $205.4 million; propane gallons sold increased 3.6% to 80.5 million gallons.
- Nine-month propane revenue increased 17.4% to $990.3 million; propane gallons sold increased 7.1% to 375.2 million gallons.
- Third-quarter interest expense increased 5.5% to $19.5 million. Nine-month interest expense increased 6.6% to $58.4 million.
- Capital expenditures were $25.8 million for the first nine months, including approximately $15.7 million for growth and $10.1 million for maintenance.
- Cash and cash equivalents were $3.4 million at June 30, 2018, compared with $2.8 million at September 30, 2017.
- Total liabilities were $1.55 billion and partners’ capital was $578.3 million at June 30, 2018.
Debt, liquidity and distributions
- Long-term borrowings totaled $1.262 billion net of issuance costs, including $1.125 billion of senior notes and $151.1 million outstanding under the $500 million revolving credit facility.
- The revolving facility matures March 3, 2021; senior notes mature in 2024, 2025 and 2027. There were no scheduled maturities in fiscal 2018 through 2020, with $151.1 million due in fiscal 2021 and $1.125 billion thereafter.
- The revolving facility interest rate was approximately 4.8% at June 30, 2018. The Partnership had $45.2 million of standby letters of credit outstanding.
- Management reported compliance with all debt covenants. Consolidated leverage improved to 4.35x from 5.14x at September 30, 2017.
- The Partnership declared a quarterly distribution of $0.60 per common unit, or $2.40 annualized, payable August 14, 2018.
- Expected cash requirements for the remainder of fiscal 2018 were approximately $9.2 million for capital expenditures, $20.3 million for interest and income taxes, and $36.8 million for common-unit distributions. Management expected available cash, borrowing capacity and operating cash flow to be sufficient for current obligations.
Material changes versus the prior comparable period
- Revenue increased 8.5% in the third quarter and 16.2% for the first nine months, primarily from higher propane prices and volumes and higher fuel-oil pricing.
- Third-quarter net loss narrowed by $13.1 million, while nine-month net income increased by $38.8 million.
- Third-quarter Adjusted EBITDA rose 42.5% to $30.5 million; nine-month Adjusted EBITDA increased 17.3% to $285.9 million.
- Cooler weather supported demand: service-territory heating degree days were 14% cooler year over year in the third quarter and 9% cooler for the first nine months, although temperatures remained warmer than normal.
- Average third-quarter Mont Belvieu propane and fuel-oil prices were 38.8% and 42.0% higher, respectively. Higher costs were partly offset by higher selling prices, volumes and risk-management results.
- Third-quarter cost of products sold included a $3.8 million unrealized derivative gain, compared with a $0.7 million unrealized loss in the prior-year quarter. These non-cash items were excluded from Adjusted EBITDA.
- The Partnership acquired propane operations in California and Florida for aggregate purchase consideration of approximately $16.8 million, including non-compete consideration. It also sold a non-strategic propane business for $2.8 million and recorded a $4.8 million loss.
- The Partnership adopted stock-based compensation guidance during fiscal 2018. The Tax Cuts and Jobs Act produced a $1.1 million discrete deferred tax benefit in the first quarter.
Outlook, management commentary, risks and unusual items
Management expects seasonal losses or lower earnings during the April–September period and relies on cash generated during peak heating quarters to support distributions and subsequent obligations. Management did not provide formal full-year revenue or earnings guidance in the filing.
- Primary operating risks include weather variability, commodity-price volatility, customer conservation, supply and transportation availability, competition, interest-rate exposure and the ability to retain or acquire customers.
- The Partnership uses futures, options, swaps and forward contracts to manage commodity-price and supply risk and does not use derivatives for speculative trading. A hypothetical 10% adverse change in commodity prices for open derivative positions could reduce potential future net gains by approximately $6.4 million.
- Variable-rate borrowings expose the Partnership to higher benchmark interest rates; no interest-rate swap was outstanding at June 30, 2018.
- Two putative class-action suits concerning electricity pricing were pending in New York and Pennsylvania. Management considered the claims without merit and stated that no loss contingency was required at the reporting date.
- The Partnership is self-insured for certain casualty and workers’ compensation risks. Accrued insurance liabilities were $71.3 million, partially offset by a $19.9 million insurance receivable.
- Aggregate potential payments under operating-lease residual-value guarantees were $16.4 million, although historical equipment values exceeded guaranteed amounts and the guarantees’ fair value was de minimis.
Investor verification checklist
- Verify the sustainability of the $0.60 quarterly distribution against distributable cash flow, seasonal cash generation and debt covenant requirements.
- Assess leverage, revolving-credit utilization and the refinancing profile for the $151.1 million facility balance due in fiscal 2021 and $1.125 billion of senior notes due thereafter.
- Separate recurring operating performance from derivative mark-to-market gains and losses and the $4.8 million business-disposition loss.
- Monitor weather-normalized propane volumes, wholesale commodity prices and the ability to pass cost increases through to customers.
- Review the valuation and impairment sensitivity of the approximately $1.09 billion goodwill balance and $189.4 million of net intangible assets.
- Track pending litigation, self-insurance reserves, pension and postretirement obligations, and the potential effects of new accounting standards beginning in fiscal 2019 and later.