Suburban Propane Partners, L.P. — Fiscal 2022 Second-Quarter Form 10-Q
Business Context and Reporting Period
Suburban Propane Partners, L.P. markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and provides home-comfort equipment and services. The filing covers the 13 weeks and 26 weeks ended March 26, 2022, compared with March 27, 2021. Results are highly seasonal, with approximately two-thirds of retail propane volume sold during the October–March heating season.
Key Financial Metrics
| Metric | Three months ended Mar. 26, 2022 | Prior-year period | Change |
|---|---|---|---|
| Revenue | $588.1 million | $537.2 million | +9.5% |
| Operating income | $192.0 million | $147.2 million | +30.4% |
| Net income | $175.1 million | $127.2 million | +37.6% |
| Basic earnings per unit | $2.77 | $2.03 | +$0.74 |
| Operating margin | 32.6% | 27.4% | +5.2 percentage points |
| Net margin | 29.8% | 23.7% | +6.1 percentage points |
| Adjusted EBITDA | $172.5 million | $172.0 million | +0.3% |
| Metric | Six months ended Mar. 26, 2022 | Prior-year period | Change |
|---|---|---|---|
| Revenue | $963.5 million | $842.4 million | +14.4% |
| Operating income | $229.2 million | $204.8 million | +11.9% |
| Net income | $196.4 million | $165.2 million | +18.9% |
| Basic earnings per unit | $3.11 | $2.64 | +$0.47 |
| Net cash from operations | $95.5 million | $101.8 million | -6.2% |
| Adjusted EBITDA | $259.0 million | $252.1 million | +2.8% |
Second-quarter gross margin was $349.1 million, including a $33.0 million unrealized derivative gain, versus $305.7 million and a $1.6 million gain in the prior year. Excluding these non-cash mark-to-market effects, gross margin increased 4.0% to $316.1 million. Six-month cost of products sold increased 30.0% and represented 45.2% of revenue, compared with 39.8% previously.
At March 26, 2022, cash and cash equivalents were $6.8 million, total assets were $2.20 billion, and total partners’ capital was $585.1 million. Long-term borrowings were $1.12 billion, comprising $350.0 million of 2027 senior notes, $650.0 million of 2031 senior notes and $134.5 million outstanding under the revolving credit facility, net of issuance costs. Revolving-facility borrowing capacity was $316.6 million, including the effect of outstanding letters of credit.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected higher selling prices: average propane prices increased 44.5% in the second quarter and 43.8% for the first half, while fuel oil prices increased 74.5% and 50.3%, respectively.
- Retail propane gallons sold declined 5.8% in both the quarter and first half; fuel oil and refined-fuels volumes declined 3.0% in the quarter and 3.4% for the first half.
- Warm and inconsistent weather, elevated customer tank levels, customer conservation and customers returning to work reduced heating demand. Service-territory temperatures were 7% warmer than normal in the quarter and 10% warmer than normal for the first half.
- Second-quarter operating expenses increased 9.4% and general and administrative expenses increased 7.5%, driven by payroll, benefits, vehicle, fuel, doubtful-account and other inflationary costs.
- Depreciation and amortization decreased 48.6% in the quarter and 45.2% for the first half because certain acquisition-related intangible assets had reached the end of their amortization periods.
- Interest expense declined 15.7% in both periods, reflecting prior-year refinancing at lower rates and lower average debt.
- The Partnership invested $30.0 million, plus costs, for a 25% interest in Independence Hydrogen and made additional investments in Oberon Fuels, supporting its renewable-energy strategy.
- Debt was $46.7 million lower than at the end of the prior-year second quarter, and trailing-twelve-month consolidated leverage was 3.87x.
Cash Flow, Distributions, Outlook and Risks
Six-month operating cash flow was $95.5 million. Investing cash flow used $53.1 million, including $22.3 million of capital expenditures and the Independence Hydrogen investment. Financing cash flow used $41.5 million, including $40.8 million of distributions and $2.5 million of net revolving-facility borrowings. The Partnership declared a quarterly distribution of $0.325 per common unit, or $1.30 annualized, payable May 10, 2022.
Management expected approximately $17.7 million of maintenance and growth capital expenditures, $29.6 million of interest and income-tax payments, and $41.0 million of cash distributions for the remainder of fiscal 2022. Management stated that cash on hand, expected operating cash flow and revolving-credit availability should provide sufficient liquidity for current obligations.
Key risks include weather-driven demand volatility, commodity-price and transportation-cost inflation, customer conservation, supply availability, interest-rate exposure, COVID-19 and related economic effects, Russia-Ukraine-related market volatility, competition, labor and cybersecurity risks, regulation and climate-related requirements, legal claims and the ability to execute renewable-energy investments. A hypothetical 10% adverse change in commodity prices would have reduced potential future net gains on open derivatives by approximately $11.8 million.
The Partnership was in compliance with all debt covenants at March 26, 2022. A New York consumer-pricing lawsuit was dismissed in full on April 12, 2022, although the plaintiff had 30 days to appeal. The filing states that pending or threatened litigation is not expected to have a material adverse effect. The maximum potential payments under residual-value guarantees on operating leases were $37.9 million, although historical equipment values have exceeded guaranteed amounts.
Investor Verification Items
- Verify the sustainability of earnings excluding the $33.0 million second-quarter unrealized derivative gain and the effects of unusually high commodity prices.
- Monitor propane and fuel-oil volumes, weather normalization and customer conservation during the lower-demand April–September period.
- Assess cash available for distributions after capital expenditures, working-capital requirements, debt service and renewable-energy investments.
- Review refinancing and interest-rate risk associated with the $134.5 million revolving facility maturity in fiscal 2025 and $1.0 billion of senior notes due thereafter.
- Evaluate execution risk and future funding requirements for Independence Hydrogen and Oberon Fuels.
- Confirm continued compliance with leverage, interest-coverage and distribution covenants.