Please ensure Javascript is enabled for purposes of website accessibility

Suburban Propane Partners Closes Out a Tough Year. Can It Survive Another One?

By Tyler Crowe – Nov 11, 2016 at 8:48AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A mild winter meant Suburban Propane Partners wasn't selling much home heating fuel. If this winter is as warm as the last, then investors might want to question the sustainability of the dividend.

After such a mild winter and seeing its largest competitor throw the market a curveball during its most recent earnings report, the bar was set pretty low for Suburban Propane Partners (SPH 0.66%) when it reported earnings for the fourth quarter and fiscal year. While the fourth quarter was a loss as expected for the propane distributor, the company showed why it was such a good idea to stay conservative this past year versus FerrellGas Partners' (FGP) more aggressive actions. Let's take a quick look at Suburban Propane's most recent quarterly and annual results and what investors can expect for the coming year. 

Image source: Getty Images.

By the numbers

MetricQ4 2016Q4 2016Growth (YOY)
Revenue $161.0 million $174.3 million (7.6%)
Operational profit ($41.3 million) ($47.9 million) N/A
Earnings per share ($0.99) ($1.11) N/A
Distributable cash flow ($29.3 million) ($17.3 million) N/A

Data source: Suburban Propane Partners earnings release. YOY = year over year.

In the propane distribution business, this past quarter is typically always the worst quarter of the year as customers have not yet started demanding propane or fuel oil for heating yet. What is also impacting this year in particular is that this past spring was a little cooler than usual. As a result, there were more spring refills and higher levels of customer inventory going into this final quarter before winter propane orders start to come in. So don't be too shocked to see that the company lost money in this quarter because that is a pretty common thread for this business. 

When comparing this year compared to last year, things don't look much better.

MetricFY 2016FY 2015Growth (YOY)
Revenue $1,046 million $1,416 million (26.1% million)
Operational profit $90.4 million $177.8 million (49.1% million)
Earnings per share $0.24 $1.38 (82.6%)
Distributable cash flow $130.8 million $236.3 million (44.6% million)

Data source: Suburban Propane Partners earnings release. YOY = year over year.

What a difference the weather can make. Winter of 2015/2016 was the warmest on record in the regions Suburban supplies propane. According to the National Oceanic and Atmospheric Administration. Average winter temperatures were 17% warmer than historical averages and 15% higher than the winter of 2014/2015. What makes this so difficult for Suburban is that it is a relatively higher fixed-cost business because the one variable cost -- the price of propane -- is passed onto the customer. If volumes decline like they did last year, though, it's harder to adjust to the fixed costs of its distribution terminals and fleet vehicles. 

The big concern is that, for the year, Suburban didn't generate enough cash to cover its $3.55 per share annual distribution. Fortunately, the company had enough cash on hand from the prior year to make up for the shortfall. 

The one highlight

This year wasn't about what Suburban did, it's what the company didn't do: Try to diversify. FerrellGas Partners, on the other hand, did the exact opposite and it came back to haunt it. The company decided to acquire some oil and gas midstream and logistics assets the same year as one of the most brutal winters for a propane distributor. When that business didn't exactly pan out as planned, there wasn't support from the legacy business. 

By sticking to its knitting, Suburban was able to make some smaller acquisitions of other propane distributors and kept plenty of cash lying around to cover up the weakness from last year's business and not have to significantly tap the debt markets. This gave the company the flexibility to refinance its credit facility, which extended the maturity date and lowered the coupon rate. 

What management had to say

CEO Michael A. Stivala commented:

Notwithstanding the challenges resulting from the record warm temperatures, fiscal 2016 had some notable achievements that will provide further support for our long-term strategic growth initiatives.  Specifically, during the first quarter we acquired the assets of Propane USA Distribution, LLC ("Propane USA"), which expanded our presence in an already strong market for Suburban and provided an opportunity to apply our operating model to enhance overall returns.  During the second quarter, we took steps to further improve our liquidity position with the opportunistic refinancing of our revolving credit facility which was scheduled to mature in January 2017.  The new facility improved our cost of capital, extended this facility's maturity until 2021, and increased our available borrowing capacity.  Throughout the year, we made further refinements to our operating footprint and business model to enhance our position in several markets, and we extended our reach in certain strategic markets.

We funded all working capital needs, including the Propane USA acquisition, from cash on hand without the need to borrow under our revolving credit facility, and ended the year with more than $37.0 million of cash. The fundamentals of our business haven't changed and we are well positioned to continue to focus on our next phase of growth. 

What a Fool believes

Suburban Propane Partners was able to make a little bit of lemonade from the lemons that this past year's winter gave to the company. Unlike FerrellGas Partners that took on the wrong acquisition at the worst possible time, Suburban stayed in its lane. 

Though the company had enough financial strength to last one lousy winter without compromising its payout to shareholders, it probably can't last another one. If we have another unusually warm winter, don't be surprised if Suburban is forced to cut its payout like FerrellGas expects to in the coming quarter. 

Tyler Crowe has no position in any stocks mentioned. You can follow him at or on Twitter @TylerCroweFool.

The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.