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

By Tyler

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 (NYSE: SPH) 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' (NYSE: 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.

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By the numbers

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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.

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

CEOMichael A. Stivala commented:

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.

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Tyler Crowe has no position in any stocks mentioned.You can follow himat Fool.comor on Twitter@TylerCroweFool.

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