Business Context and Reporting Period
Suburban Propane Partners, L.P. is a seasonal energy distributor and service provider focused on retail propane, fuel oil and refined fuels, natural gas and electricity, and home-comfort equipment and services. This unaudited Form 10-Q covers the three and six months ended March 26, 2016, compared with the periods ended March 28, 2015. Results are significantly affected by winter weather, with approximately two-thirds of retail propane volume sold during the October–March heating season.
Key Financial Metrics
| Metric | Three months ended March 26, 2016 | Prior comparable period |
|---|
| Revenue | $404.1 million | $599.4 million |
| Operating income | $111.2 million | $171.6 million |
| Net income | $92.0 million | $136.6 million |
| Basic net income per unit | $1.51 | $2.26 |
| EBITDA | $144.1 million | $189.7 million |
| Adjusted EBITDA | $145.1 million | $214.3 million |
| Operating margin | 27.5% | 28.6% |
| Net margin | 22.8% | 22.8% |
| Metric | Six months ended March 26, 2016 | Prior comparable period |
|---|
| Revenue | $680.0 million | $1.022 billion |
| Operating income | $142.6 million | $247.6 million |
| Net income | $104.3 million | $192.4 million |
| Basic net income per unit | $1.72 | $3.18 |
| EBITDA | $207.1 million | $298.3 million |
| Adjusted EBITDA | $212.3 million | $315.3 million |
| Operating margin | 21.0% | 24.2% |
| Net margin | 15.3% | 18.8% |
- Six-month net cash provided by operating activities was $80.5 million, down from $159.9 million.
- Capital expenditures were $24.7 million, including approximately $14.2 million for growth and $10.5 million for maintenance.
- The Partnership used $42.2 million for the acquisition of Propane USA and $107.6 million for partnership distributions.
- Cash and cash equivalents were $58.7 million at March 26, 2016, versus $152.3 million at September 26, 2015.
- Long-term borrowings were $1.240 billion, including $100.0 million outstanding under the revolving credit facility.
- The amended $500.0 million revolving facility had $353.8 million of available borrowing capacity after outstanding letters of credit.
- Total partners’ capital was $903.3 million, compared with $898.3 million at fiscal year-end.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 32.6% and six-month revenue declined 33.5%, primarily because of lower volumes and lower average selling prices.
- Record warm temperatures materially reduced demand. Second-quarter heating degree days were 20% warmer than the prior year and 13% warmer than normal; the six-month period was 19% warmer than the prior year and 18% warmer than normal.
- Second-quarter propane volume declined 19.1% to 161.6 million gallons, while fuel oil and refined fuels volume declined 33.2% to 13.3 million gallons. Six-month propane volume declined 18.8% and fuel oil and refined fuels volume declined 29.8%.
- Average posted propane and fuel oil prices were 27.0% and 40.2% lower, respectively, in the second quarter. Lower product costs reduced revenue but also lowered cost of products sold.
- Second-quarter cost of products sold fell 46.0%, causing the ratio to revenue to improve to 33.9% from 42.3%. However, lower volumes and a less favorable mix reduced overall margins and earnings.
- Operating and general and administrative expenses declined due to lower headcount, compensation, vehicle and variable costs, and operating efficiencies.
- Interest expense declined 4.4% in the second quarter and 4.9% for the six-month period, primarily following refinancing of senior notes in fiscal 2015.
- The prior-year period included a $15.1 million loss on debt extinguishment and $4.0 million of integration-related costs. The current period included a $0.3 million non-cash debt-cost write-off and a $3.0 million product-liability settlement.
- On December 15, 2015, the Partnership acquired Propane USA for $45.0 million plus working capital, funded from cash on hand. The acquisition was not material to consolidated results.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- No formal earnings or volume guidance is provided. Management expects sufficient funds to meet current and future obligations based on cash on hand, expected operating cash flow, and revolving-credit availability.
- Management expected approximately $10.3 million of capital expenditures, $36.8 million of interest and income-tax payments, and approximately $107.8 million of distributions during the remainder of fiscal 2016.
- The Board declared a quarterly distribution of $0.8875 per common unit, or $3.55 annualized, payable May 10, 2016.
- Management identifies weather, commodity-price volatility, customer conservation, supply and transportation availability, competition, regulation, environmental and climate-related requirements, interest rates, capital-market conditions, operating hazards, litigation, acquisitions and tax-law changes as principal risks.
- The Partnership uses futures, options, swaps and other derivatives for hedging and supply-management purposes and not for speculative trading. A hypothetical 10% adverse commodity-price movement indicated potential additional future net losses of approximately $2.0 million on open derivative positions.
- The Partnership was in compliance with all covenants at March 26, 2016. Debt maturities after that date are reported as $1.221 billion in fiscal 2021 and thereafter, with no scheduled maturities through fiscal 2020.
- Self-insurance liabilities were $57.3 million, partially offset by a $15.0 million insurance recovery asset. A product-liability matter was settled for $3.0 million during the first quarter.
- Residual-value guarantees on operating leases had a maximum potential future payment of $13.0 million, although their fair value was de minimis.
- On April 22, 2016, the Partnership sold assets in a non-strategic propane market for $26.0 million, including $5.0 million payable over five years. The gain was expected to be recognized in the third quarter and the divestiture was not material.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing states that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether normalized weather and heating demand improve propane and fuel-oil volumes and earnings in subsequent periods.
- The Partnership’s ability to sustain the $0.8875 per-unit quarterly distribution while operating cash flow remains below the prior year.
- Compliance with the revolving-credit facility’s minimum 2.5-to-1 interest-coverage covenant and maximum 5.5-to-1 leverage covenant.
- Actual cash generation after distributions, acquisition spending, capital expenditures and seasonal working-capital changes.
- Exposure to commodity prices, derivative valuation changes and variable-rate borrowing costs.
- Integration and performance of the Propane USA acquisition and the financial effect of the subsequent asset divestiture.
- Potential changes in self-insurance, litigation, pension, multi-employer pension and other contingent liabilities.
