Business Context and Reporting Period
Suburban Propane Partners, L.P. filed its Form 10-K for the 52-week fiscal year ended September 29, 2018. The filing is not a standalone quarterly report, although fourth-quarter results are included. The Partnership markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and related home-comfort services through approximately 700 locations in 41 states, serving approximately 1.0 million customers.
Fiscal 2018 included 52 weeks versus 53 weeks in fiscal 2017. Approximately two-thirds of retail propane volume and three-fourths of fuel-oil volume historically occur during the October–March heating season.
Financial Performance and Key Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $1,344.4 million | $1,187.9 million | +13.2% |
| Operating income | $153.3 million | $115.3 million | +33.0% |
| Net income | $76.5 million | $38.0 million | +101.4% |
| Basic net income per unit | $1.24 | $0.62 | +100.0% |
| EBITDA | $278.5 million | $241.7 million | +15.3% |
| Adjusted EBITDA | $283.0 million | $243.0 million | +16.5% |
| Cash flow from operations | $208.5 million | $161.3 million | +29.3% |
| Capital expenditures | $32.9 million | $28.2 million | +16.8% |
| Cash distributions declared per unit | $2.40 | $3.26 | Lower |
Cost of products sold increased 24.3% to $592.6 million and rose to 44.1% of revenue from 40.1%, reflecting higher commodity costs. Operating expenses declined 2.1% to $402.2 million, while general and administrative expenses increased 15.5% to $66.2 million. Operating margin was approximately 11.4%, compared with 9.7% in fiscal 2017; net margin was approximately 5.7%, compared with 3.2%.
- Retail propane volume increased 4.6% to 440.0 million gallons.
- Fuel oil and refined fuels volume was essentially flat at 31.0 million gallons.
- Average temperatures were 7% warmer than normal but 8% cooler than the prior year, supporting higher heating demand.
- Cash and cash equivalents were $5.2 million at year-end, compared with $2.8 million in the prior year.
- Total assets were $2.10 billion and total partners’ capital was $493.8 million.
Liquidity, Debt and Cash Flow
Fiscal 2018 operating cash flow of $208.5 million funded $32.9 million of capital expenditures, $14.9 million of acquisitions, distributions and debt repayment. Investing cash flow was negative $39.1 million and financing cash flow was negative $167.1 million.
Total debt was $1.255 billion at September 29, 2018, including $1.125 billion of senior notes and $143.6 million outstanding under a $500 million revolving credit facility, net of debt issuance costs. The Partnership repaid $19.0 million of revolver borrowings during fiscal 2018. Debt maturities include $143.6 million in fiscal 2021 and $1.125 billion thereafter. The reported consolidated leverage ratio improved to 4.36x from 5.14x.
The Partnership was in compliance with all debt covenants at year-end, including minimum interest coverage of 2.5x, a September 2018 total leverage limit of 5.75x, and a senior secured leverage limit of 3.0x. Available liquidity consists of cash, revolver availability and expected operating cash flow; the filing states management expects sufficient funds for current and future obligations.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, net income and Adjusted EBITDA improved substantially, primarily from higher selling prices, higher propane volume and cooler weather than in fiscal 2017.
- Wholesale propane and fuel-oil prices increased approximately 36.0% and 29.5%, respectively, raising both revenue and product costs.
- Adjusted EBITDA increased $40.0 million, despite higher commodity costs, due to volume growth and operating efficiencies.
- Fiscal 2018 had no pension settlement charge or debt-extinguishment loss; fiscal 2017 included charges of $6.1 million and $1.6 million, respectively.
- The Partnership recorded a $4.8 million loss on the sale of certain non-strategic propane assets in December 2017.
- Two propane businesses were acquired in Florida and California for aggregate stated purchase prices of approximately $16.8 million, plus working capital.
- Quarterly distributions were reduced to $0.60 per unit from $0.8875 per unit for the first three quarters of fiscal 2017.
Guidance, Outlook, Risks and Unusual Items
For fiscal 2019, management anticipated approximately $35.0 million of maintenance and growth capital expenditures, $73.1 million of interest and income-tax payments, and $147.9 million of distributions based on an annualized $2.40 per-unit rate. No formal revenue or earnings guidance was provided.
- Results are highly sensitive to winter weather, particularly in the Northeast. Fiscal 2018 temperatures were still warmer than normal.
- Commodity-price volatility, supply constraints, transportation costs and customer conservation can compress margins or reduce volumes.
- Propane and fuel oil face competition from natural gas, electricity and other energy sources, while industry demand is expected to be flat to moderately declining.
- New York regulatory changes and litigation may restrict the ability of the natural gas and electricity business to acquire or retain customers. Two putative class actions remained pending; potential losses were not reasonably estimable and no loss reserve beyond defense costs was recorded.
- Environmental, health and safety obligations remain material considerations. Accrued environmental liabilities were $1.9 million, while accrued self-insurance liabilities were $70.6 million.
- The Partnership had an estimated $22.5 million obligation related to multi-employer pension plan withdrawals, with uncertain payment timing and potential for additional liability.
- Derivative activities are intended to hedge commodity exposure, not to speculate. The year-end fair value of open derivative positions was an unrealized gain of approximately $7.0 million; a hypothetical 10% adverse price change indicated an unrealized loss of approximately $2.0 million.
- The Partnership adopted ASU 2016-09, changing the classification of certain employee-tax withholding cash payments to financing activities. It expected no material impact from other newly issued accounting standards discussed in the filing.
Most Important Facts to Verify
- Whether the $0.60 quarterly distribution rate remains sustainable given debt service, seasonal cash flow and covenant restrictions.
- The timing and refinancing capacity for the $143.6 million revolver maturity in fiscal 2021 and $1.125 billion of senior notes maturing thereafter.
- The sensitivity of fiscal 2019 volumes and margins to winter temperatures, commodity prices and customer conservation.
- The status and potential exposure from the New York and Pennsylvania AES class actions and related regulatory proceedings.
- Whether integration of the Florida and California acquisitions produces the expected customer and cost benefits.
- The ultimate cost of environmental remediation, self-insurance claims and multi-employer pension obligations.
- The filing’s non-GAAP Adjusted EBITDA reconciliation and the effect of excluding derivative mark-to-market gains and unusual items.