Business Context and Reporting Period
Suburban Propane Partners, L.P. is a publicly traded Delaware limited partnership engaged primarily in the retail marketing and distribution of propane, fuel oil and refined fuels, natural gas and electricity, home-comfort services, and renewable-energy investments. This Form 10-Q covers the 13 weeks ended December 24, 2022, the first quarter of fiscal 2023; the comparable period ended December 25, 2021. Operations are highly seasonal, with most propane and fuel-oil sales occurring during the October–March heating season.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $397.5 million | $375.4 million | 5.9% increase |
| Gross margin | $214.8 million | $179.1 million | 20.0% increase |
| Operating income | $62.3 million | $37.3 million | 67.3% increase |
| Net income | $45.4 million | $21.3 million | 113.2% increase |
| Net income per common unit | $0.71 | $0.34 | Increase |
| Adjusted EBITDA | $90.0 million | $86.5 million | 4.1% increase |
| Net cash provided by operating activities | $6.3 million | $(13.3) million | $19.6 million improvement |
Revenue increased primarily from higher propane volumes and higher fuel-oil selling prices. Propane revenue was $342.4 million, fuel-oil and refined-fuels revenue was $30.1 million, natural-gas and electricity revenue was $8.7 million, and other revenue was $16.3 million.
Operating margin improved to approximately 15.7% from 9.9%, while net margin improved to approximately 11.4% from 5.7%. Gross margin benefited from a smaller unrealized derivative loss: $13.7 million in Q1 FY2023 versus $33.5 million in the prior-year quarter. Excluding these mark-to-market effects, gross margin increased 7.5%.
Retail propane gallons sold increased 3.3% to 108.8 million gallons. Fuel-oil and refined-fuels gallons declined 9.3% to 5.6 million gallons. Average propane prices declined 35.9%, while average fuel-oil and refined-fuels selling prices increased 58.0%.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $6.1 million at December 24, 2022, compared with $4.1 million at September 24, 2022.
- Total long-term borrowings were $1.124 billion before debt issuance costs, consisting of $350.0 million of 5.875% senior notes due 2027, $650.0 million of 5.0% senior notes due 2031, and $123.5 million drawn under the $500.0 million revolving credit facility.
- Borrowing capacity under the revolving facility was reported at $325.6 million, after considering borrowings and letters of credit. Letters of credit outstanding were $50.9 million.
- The consolidated leverage ratio for the trailing twelve months was 3.68x. The Partnership was in compliance with its debt covenants at quarter-end.
- Capital expenditures were $10.8 million, including approximately $5.7 million of maintenance spending and $5.1 million supporting growth. Investing cash outflows also included approximately $3.0 million for an investment in a privately held start-up and an additional investment in Oberon.
- Financing activities generated $10.1 million, including $33.9 million of net revolving-credit borrowings, partly offset by $20.5 million of distributions.
- The Partnership declared a quarterly distribution of $0.325 per common unit, or $1.30 annualized, payable February 7, 2023.
Material Changes Versus the Prior Comparable Period
- Net income more than doubled, driven primarily by improved propane margins, higher propane volumes, and a substantially smaller derivative mark-to-market loss.
- Operating and general and administrative expenses increased 9.4% and 16.2%, respectively, reflecting higher payroll, benefits, vehicle, fuel, professional and other inflation-related costs.
- Interest expense increased 4.5% to $16.0 million because of higher benchmark rates on variable-rate borrowings, partly offset by lower average debt.
- Operating cash flow shifted from an outflow of $13.3 million to an inflow of $6.3 million, primarily due to higher earnings and lower working-capital requirements associated with declining commodity prices.
- Propane segment operating income increased to $94.4 million from $66.6 million. Natural gas and electricity operating income declined to $1.1 million from $1.7 million.
- On December 28, 2022, subsequent to quarter-end, the Partnership acquired two operating renewable natural gas facilities for $190.0 million, funded with approximately $112.0 million of revolving-facility borrowings and the assumption of approximately $80.0 million of green bonds. It also formed a joint venture with Equilibrium Capital Group for future RNG projects.
- The credit agreement was amended on December 28, 2022 to replace LIBOR with a SOFR-based rate, modify covenants, permit the RNG-related debt assumption, and provide additional renewable-energy investment capacity.
Guidance, Outlook, Commentary and Risks
Management expects the seasonal business to produce lower operating profits and potentially lower net income or net losses during the April–September period. Management expects sufficient liquidity to meet current and future obligations based on cash on hand, revolving-facility availability, and expected operating cash flow.
For the remainder of fiscal 2023, management identified approximately $14.3 million of maintenance capital expenditures, $42.6 million of growth capital expenditures, $55.1 million of interest and income-tax payments, and approximately $61.9 million of common-unit distributions based on the $0.325 quarterly distribution rate.
Management reported that propane inventories at the end of December 2022 were 22.7% above the prior year and 7% above the five-year average. The filing states that COVID-19 and the Russia-Ukraine conflict had not materially adversely affected supply agreements or hedging strategies as of the filing date.
- Results remain highly sensitive to weather, particularly warmer-than-normal temperatures during the heating season.
- Commodity-price volatility, supply availability, transportation costs, customer conservation and the effectiveness of hedging can materially affect margins and cash flow.
- Inflation is increasing labor, transportation, equipment and other operating costs.
- Variable-rate debt exposes the Partnership to higher interest expense. A hypothetical 10% adverse change in commodity prices for open derivatives would have reduced potential future net gains by approximately $5.1 million; management cautioned that actual results may differ materially.
- The RNG acquisition and development strategy introduces execution, integration, regulatory, financing and project-development risks.
- The Partnership has self-insurance exposure, residual-value guarantees on operating leases, pension and multi-employer pension obligations, and ongoing litigation risks. Management did not expect currently pending or threatened litigation to have a material adverse effect.
Investor Verification Checklist
- Verify the sustainability of the improved propane unit margins and the extent to which earnings benefited from lower derivative mark-to-market losses.
- Monitor winter weather, propane and fuel-oil prices, customer conservation, and volumes sold through the remainder of the heating season.
- Assess post-acquisition leverage, debt service and covenant capacity after the $190.0 million RNG transaction and assumed green bonds.
- Review the operating performance, valuation and funding requirements of the acquired RNG facilities and the Equilibrium joint venture.
- Evaluate whether inflation-driven operating-cost increases continue to outpace pricing and volume benefits.
- Confirm the quarterly distribution, distribution coverage and available cash after capital expenditures, interest payments and RNG investments.