8-K: Suburban Propane Reports Lower First Quarter Earnings Due to Warm Weather

Suburban Propane Partners reported a decrease in net income and adjusted EBITDA for the first quarter of fiscal 2024, primarily due to unseasonably warm weather impacting demand.

Summary

• Suburban Propane Partners, L.P. announced its first quarter fiscal 2024 results, showing a decrease in net income to $24.5 million, or $0.38 per Common Unit, compared to $45.4 million, or $0.71 per Common Unit, in the same quarter of the previous year.
• Adjusted EBITDA for the quarter was $75.2 million, down from $90.0 million in the prior year's first quarter.
• The primary reason for the decline was unseasonably warm weather, which reduced demand for heating purposes, particularly in the last six weeks of the quarter.
• Propane volumes decreased by 2.0% year-over-year, but this was partially offset by strong agricultural demand and positive customer base trends.
• Average temperatures were 9% warmer than normal and 6% warmer than the prior year's first quarter, with December being 10% warmer than both normal and December 2022.
• Average propane prices decreased by 16.7% compared to the prior year's first quarter.
• Total gross margin decreased by 0.9% to $212.8 million, with a $10.8 million unrealized loss from mark-to-market adjustments for derivative instruments.
• Excluding these adjustments, gross margin decreased by 2.2% due to lower propane volumes and unit margins.
• Operating and general and administrative expenses increased by 6.4% to $147.6 million, driven by higher payroll, benefits, and RNG facility operating costs.
• Total debt increased by $54.8 million due to seasonal borrowings under the revolving credit facility.
• The Consolidated Leverage Ratio was 4.72x for the twelve-month period ending December 30, 2023.
• A quarterly distribution of $0.325 per Common Unit was declared, payable on February 13, 2024.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the lower earnings and impact of warm weather, but there are some positives in the company's renewable energy investments and positioning for future demand.

Positives

• Propane volume decline was limited to 2.0% despite the warm weather, due to strong agricultural demand and customer base growth.
• The company is well-positioned to meet increased demand as more seasonable weather arrived in the early part of the second quarter.
• Capital is being deployed to enhance the efficiency of the RNG production facility in Stanfield, Arizona.
• The company is progressing with capital improvement plans at the Columbus, Ohio facility, including RNG upgrade equipment.
• Engineering and construction of the anaerobic digester facility at Adirondack Farms in New York is advancing.
• The company is developing relationships with local feedstock providers to increase tipping fee revenue and production capacity for all of its facilities.
• The company is developing RNG offtake arrangements for Columbus and New York once those facilities begin producing RNG.

Negatives

• Unseasonably warm weather significantly impacted customer demand for heating purposes.
• Net income and Adjusted EBITDA decreased compared to the prior year's first quarter.
• Propane unit margins decreased by $0.05 per gallon, or 2.8%, due to a greater mix from commercial and industrial customers.
• Total gross margin decreased by 0.9% compared to the prior year's first quarter.
• Operating and general and administrative expenses increased by 6.4% compared to the prior year's first quarter.
• Total debt increased by $54.8 million due to seasonal borrowings.

Risks

• The company is exposed to the impact of weather conditions on the demand for propane and other fuels.
• Climate change and potential climate change legislation could impact the company and demand for its products.
• Volatility in the unit cost of propane and other fuels can affect profitability.
• The company faces competition from other suppliers of propane and other energy sources.
• Political, military, or economic instability in oil-producing nations can impact the price and supply of propane.
• The company's ability to attract and retain employees is a risk.
• Customer conservation, energy efficiency, and technology advances can impact demand.
• The company faces risks related to its renewable fuel projects and investments.
• Changes in applicable statutes and government regulations could impose costs and liabilities.
• Legal risks and proceedings could impact the company's business.
• Operating hazards could adversely affect the company's reputation and operating results.
• The company faces risks related to cybersecurity threats.
• Current conditions in the global capital, credit, and environmental attribute markets pose risks.

Future Outlook

The company is well-positioned to meet increased demand as more seasonable weather arrived in the early part of the second quarter and there is still plenty of heating season ahead. The company continues to execute on its capital improvement plans for its renewable natural gas operations.

Management Comments

• The fiscal 2024 first quarter was dominated by unseasonably warm weather that persisted across the country, especially during the critical last six weeks of the quarter, which negatively impacted customer demand for heating purposes.
• Our operations personnel are continuing to do an excellent job managing our selling prices and expenses and, as more seasonable weather arrived in the early part of the second quarter, our business is very well positioned to meet increased demand.
• In our renewable natural gas (RNG) operations, we have deployed capital to enhance the efficiency and operating performance of our RNG production facility in Stanfield, Arizona.

Industry Context

The results reflect the challenges faced by propane distributors during periods of warmer-than-usual weather, which directly impacts heating demand. The company's focus on renewable natural gas (RNG) aligns with the broader industry trend towards cleaner energy sources.

Comparison to Industry Standards

• Suburban Propane's performance is directly comparable to other propane distributors such as AmeriGas and Ferrellgas, which also experience fluctuations in demand based on weather patterns.
• The decrease in propane volumes and margins is consistent with what would be expected in a warmer-than-average quarter for the industry.
• The company's investment in RNG projects is similar to other energy companies diversifying into renewable energy sources, such as Clean Energy Fuels Corp.
• The leverage ratio of 4.72x is within the range of what is typical for companies in the midstream energy sector, but it is important to monitor this ratio in the context of the company's debt obligations and future capital expenditures.

Stakeholder Impact

• Shareholders will see a decrease in earnings per unit and a lower distribution compared to the prior year.
• Employees may be impacted by the company's efforts to manage expenses.
• Customers may experience fluctuations in propane prices based on market conditions.
• Suppliers may be affected by changes in the company's demand for propane and other fuels.
• Creditors will be monitoring the company's debt levels and leverage ratio.

Next Steps

• The company will continue to execute on its capital improvement plans for its renewable natural gas operations.
• The company will continue to develop relationships with local feedstock providers to increase tipping fee revenue and production capacity for all of its facilities.
• The company will continue to develop RNG offtake arrangements for Columbus and New York once those facilities begin producing RNG.
• The company will file its Quarterly Report on Form 10-Q with the SEC.

Key Dates

Keywords

propane, renewable natural gas, RNG, EBITDA, adjusted EBITDA, gross margin, weather, heating, energy, fuel, distribution