Business Context and Reporting Period
Company: Suburban Propane Partners, L.P.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended March 29, 2008
Business Overview: The Partnership is engaged in the retail marketing and distribution of propane, fuel oil, refined fuels, natural gas, and electricity, along with home comfort equipment services. Operations are highly seasonal, with approximately two-thirds of propane volume sold during the October-March heating season.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 29, 2008 |
Three Months Ended Mar 31, 2007 |
Six Months Ended Mar 29, 2008 |
Six Months Ended Mar 31, 2007 |
|---|---|---|---|---|
| Total Revenues | $587,097 | $555,111 | $1,012,206 | $953,019 |
| Net Income | $94,523 | $105,860 | $179,952 | $160,514 |
| Diluted EPS | $2.87 | $3.22 | $5.47 | $4.93 |
| EBITDA | $111,482 | $123,130 | $214,037 | $194,898 |
| Operating Cash Flow | $50,340 (3mo) | $87,120 (3mo) | $8,387 (6mo) | $81,227 (6mo) |
| Cash and Equivalents | $100,803 (as of Mar 29, 2008) | |||
| Long-Term Debt | $548,655 (as of Mar 29, 2008) |
Margins: Cost of products sold as a percentage of total revenues increased to 64.9% for the quarter (from 59.0% prior year) and 65.1% for the six months (from 58.6% prior year), driven by higher commodity costs.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 5.8% for the quarter and 6.2% for the six months. This growth was driven by significantly higher average selling prices (propane prices up ~51.6% and fuel oil up ~65.0% year-over-year) which offset lower sales volumes.
- Volume Decline: Retail propane gallons sold decreased 12.3% for the quarter and 10.5% for the six months. Fuel oil volumes decreased 28.6% for the quarter and 24.1% for the six months. Declines were attributed to customer conservation due to high energy prices and warmer-than-normal weather (95% of normal heating degree days).
- Profitability: Net income for the quarter decreased 10.8% ($11.4 million) compared to the prior year, primarily due to the loss of favorable market conditions and incremental margin opportunities (~$8.3 million) present in the prior year that were absent in 2008. However, net income for the six months increased 12.1% ($19.5 million), boosted by a $43.7 million gain on the disposal of discontinued operations.
- Operating Expenses: Combined operating and general/administrative expenses decreased 9.0% for the quarter and 10.5% for the six months, reflecting successful cost reduction initiatives and lower variable compensation.
- Cash Flow: Net cash provided by operating activities for the six months dropped significantly to $8.4 million from $81.2 million in the prior year. This was due to a larger investment in working capital required to fund inventory at higher commodity prices.
Guidance, Outlook, and Risks
- Outlook: Management expects the high commodity price environment to continue presenting challenges, potentially negatively impacting sales volumes. However, the company cites its flexible cost structure and financial strength as mitigating factors.
- Liquidity: The company ended the quarter with $100.8 million in cash and does not anticipate needing to borrow under its $175 million working capital facility for the remainder of fiscal 2008. Available borrowing capacity is approximately $119.2 million after letters of credit.
- Distributions: The Board declared a quarterly distribution of $0.775 per Common Unit (up from $0.7625), representing a 10.7% increase over the prior year quarter. This is the 17th increase since 1999.
- Risks:
- Commodity Prices: Profitability is highly sensitive to the spread between retail sales prices and product costs. Rapid cost increases may not be fully or immediately passed to customers.
- Weather: Demand is directly correlated with heating degree days; warmer weather reduces volume.
- Customer Conservation: Sustained high prices lead to reduced consumption.
- Derivatives: The company uses futures and options to hedge price risk. A hypothetical 10% adverse price change could result in a $5.3 million reduction in future earnings.
- Unusual Items: The six-month net income includes a $43.7 million gain from the sale of the Tirzah, South Carolina propane storage cavern and pipeline (discontinued operations).
Investor Verification Checklist
- Working Capital Impact: Verify the sustainability of cash flows given the $103.6 million increase in accounts receivable and the significant drop in operating cash flow for the six-month period.
- Volume Trends: Monitor propane and fuel oil sales volumes to assess the long-term impact of customer conservation and weather patterns on core revenue drivers.
- Margin Compression: Track the cost of products sold as a percentage of revenue to determine if the company can maintain margins amidst volatile commodity pricing.
- Debt Covenants: Confirm continued compliance with the Revolving Credit Agreement leverage ratio (debt/EBITDA < 4.0) and interest coverage ratio (EBITDA/interest > 2.5).
- Discontinued Operations: Note that the six-month net income is significantly bolstered by a one-time gain; analyze continuing operations performance separately for trend analysis.