Business Context and Reporting Period
Suburban Propane Partners, L.P. filed its Form 10-K for the fiscal year ended September 25, 2010. The filing is annual rather than a standalone “2010 Q4” filing, although fourth-quarter results are separately disclosed. The Partnership marketed and distributed propane, fuel oil and refined fuels, natural gas and electricity, and related home-comfort services through approximately 300 locations in 30 states serving approximately 800,000 active customers.
Fiscal 2010 was materially affected by warmer-than-normal weather, weak economic conditions, customer conservation, and higher commodity costs. The business is highly seasonal, with most volumes and operating profits generated during the October–March heating season.
Financial Performance and Key Metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Revenue | $1,136.7 million | $1,143.2 million | Down 0.6% |
| Income from continuing operations | $115.3 million | $165.2 million | Down 30.2% |
| Net income per basic unit | $3.26 | $4.99 | Down 34.7% |
| Adjusted EBITDA | $192.4 million | $239.2 million | Down 19.6% |
| Cash flow from operations | $155.8 million | $246.6 million | Down 36.8% |
| Capital expenditures | $19.1 million | $21.8 million | Down 12.4% |
| Cash and cash equivalents | $156.9 million | $163.2 million | Down $6.3 million |
| Total debt | $348.0 million | $349.4 million | Down $1.5 million |
| Cash distributions declared per unit | $3.35 | $3.26 | Up 2.8% |
- Net margin was approximately 10.1%, compared with 14.5% in fiscal 2009. Income before interest, debt-extinguishment losses and taxes represented approximately 13.5% of revenue, compared with 18.4% in the prior year.
- Cost of products sold increased 10.7% to $598.5 million and rose to 52.6% of revenue from 47.3%, reflecting higher commodity prices and unfavorable derivative mark-to-market results.
- Propane revenue increased 2.5% to $885.5 million despite a 7.6% decline in retail gallons sold to 317.9 million. Fuel oil and refined-fuel revenue declined 15.4% to $135.1 million as volumes fell 24.7% to 43.2 million gallons.
- Natural gas and electricity revenue increased 1.0% to $77.6 million. “All other” revenue declined 9.7% to $38.6 million.
- Fiscal 2010 included a $5.4 million non-cash derivative loss, a $9.5 million debt-extinguishment loss, a $2.8 million non-cash pension settlement charge, and a $1.8 million accelerated depreciation charge.
Liquidity, Debt and Distributions
- Outstanding borrowings at year-end were approximately $350.0 million, consisting of $250.0 million of 7.375% senior notes due March 2020 and $100.0 million drawn under a $250.0 million revolving credit facility due June 2013.
- The Partnership refinanced the former 6.875% senior notes due 2013 with the 7.375% notes due 2020. The transaction extended maturities but generated a $9.5 million loss on debt extinguishment.
- Available borrowing capacity under the revolving facility was $91.5 million after $58.5 million of standby letters of credit. The Partnership reported compliance with all debt covenants at September 25, 2010.
- Fiscal 2010 operating cash flow funded working capital, capital expenditures, acquisitions and distributions without drawing additional working-capital borrowings. Financing cash outflows included $118.3 million of unit distributions.
- The fourth-quarter distribution was $0.85 per unit, establishing an annualized distribution rate of $3.40 per unit. Management expected approximately $120.4 million of fiscal 2011 distributions if that annualized rate continued.
Material Changes and Management Outlook
- Four mid-sized propane acquisitions were completed in fiscal 2010 for approximately $14.5 million of cash consideration, expanding the customer base in existing strategic markets. No acquisitions were completed in fiscal 2009 or 2008.
- Management cited operating-efficiency initiatives, lower variable compensation, payroll and vehicle savings, and lower insurance costs as partially offsetting weaker volumes and margins.
- For fiscal 2011, management anticipated approximately $25.0 million of maintenance and growth capital expenditures and approximately $29.5 million of interest and income-tax payments. Based on cash, expected operating cash flow and available credit, management expected sufficient liquidity and did not expect to borrow for working capital under its current forecast.
- Management expected fiscal 2011 supply to be adequate for propane and fuel oil, while acknowledging that supplier interruptions could increase costs and pressure margins.
Risks, Contingencies and Unusual Items
- Results are highly sensitive to weather, particularly warmer winters in the Northeast, where the Partnership has significant residential propane, fuel oil and natural-gas operations.
- Commodity-price volatility may compress margins if retail prices cannot be increased as quickly as wholesale costs. Higher prices may also increase customer conservation and reduce volumes.
- Competition from natural gas, electricity, fuel oil and other propane distributors, together with energy-efficiency improvements and weak economic conditions, may limit volume growth.
- Environmental, health and safety regulation could require additional compliance or remediation spending. Accrued environmental liabilities were $0.7 million at year-end, but the Partnership could not determine the amount of any additional exposure.
- Self-insurance liabilities were approximately $55.4 million, partially offset by an insurance recovery asset of approximately $18.0 million. Management did not expect pending litigation to have a material adverse effect after considering reserves and insurance.
- The defined-benefit pension plan was underfunded by approximately $17.7 million, and the Partnership recognized a $2.8 million pension settlement charge in fiscal 2010.
- Derivative contracts are used for hedging rather than speculation. A hypothetical 10% adverse commodity-price change was estimated to reduce potential future net gains by approximately $3.5 million as of year-end; actual results could differ materially.
- The Dodd-Frank Act and potential climate-change legislation could increase derivative, operating or product costs and could affect demand, although the ultimate effects were uncertain.
Investor Verification Checklist
- Verify the audited fiscal-year results and reconcile the filing’s non-GAAP Adjusted EBITDA to GAAP net income and operating cash flow.
- Assess whether the fiscal 2010 volume decline was primarily weather-related and whether customer conservation and economic weakness persisted into fiscal 2011.
- Review propane and fuel-oil gross-margin trends, including the effect of commodity prices and derivative mark-to-market accounting.
- Confirm debt maturities, revolving-facility availability, covenant headroom and the sustainability of the $3.40 annualized distribution rate.
- Evaluate acquisition performance and integration benefits from the four fiscal 2010 propane acquisitions.
- Review environmental, self-insurance, litigation, pension and derivative exposures for changes after September 25, 2010.