Suburban Propane Partners, L.P. — Fiscal 2012 First Quarter 10-Q
Business context and reporting period
The filing covers the 13 weeks ended December 24, 2011, compared with the three months ended December 25, 2010. The Partnership markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and provides home-comfort equipment services. Results are highly seasonal, with the majority of heating-fuel volume and operating profit generated during the October–March peak season.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $299.9 million | $328.3 million | Down 8.7% |
| Operating income | $30.3 million | $50.3 million | Down 39.8% |
| Net income | $23.2 million | $43.1 million | Down 46.1% |
| Basic income per common unit | $0.65 | $1.22 | Down $0.57 |
| EBITDA | $38.1 million | $58.5 million | Down 35.0% |
| Adjusted EBITDA | $39.1 million | $60.1 million | Down 34.9% |
| Net cash used in operating activities | $25.3 million | $4.9 million | Higher use of $20.5 million |
Operating margin was approximately 10.1%, compared with 15.3% in the prior-year quarter. Net margin was approximately 7.7%, compared with 13.1%. Cost of products sold was $183.6 million, or 61.2% of revenue, versus 56.8% in the prior-year quarter. Operating expenses declined 4.5% to $65.9 million and general and administrative expenses declined 13.4% to $12.3 million.
Cash and cash equivalents were $89.3 million at December 24, 2011, down from $149.6 million at September 24, 2011. Total assets were $952.1 million. Long-term borrowings were $348.2 million, consisting principally of $250.0 million of 7.375% senior notes due 2020 and $100.0 million outstanding under the revolving credit facility. Available revolving capacity was $100.7 million after $49.3 million of letters of credit.
Capital expenditures were $5.4 million, including $1.9 million of maintenance spending and $3.5 million supporting growth. Partnership distributions paid during the quarter were $30.2 million. A quarterly distribution of $0.8525 per common unit was declared for the quarter, equivalent to $3.41 annualized.
Material changes versus the prior comparable period
- Warmer weather was the principal adverse factor: temperatures across service territories were 9% warmer than the prior year and 11% warmer than normal; Northeast and Southeast temperatures were 19% and 30% warmer, respectively, than the prior year.
- Retail propane volume declined 13.9% to 74.3 million gallons from 86.3 million gallons. Fuel oil and refined-fuels volume declined 32.5% to 7.7 million gallons from 11.4 million gallons.
- Average propane and fuel-oil selling prices increased 9.2% and 19.5%, respectively, but higher prices did not offset lower volumes and customer conservation.
- Wholesale product costs increased faster than selling prices, reducing margins. Average posted propane and fuel-oil prices were 14.4% and 26.1% higher, respectively, than in the prior-year quarter.
- Corporate operating income improved by approximately $1.4 million, but propane operating income fell to $43.5 million from $65.1 million. Fuel oil and refined fuels operating income increased to $2.5 million from $1.7 million, while natural gas and electricity operating income declined to $2.7 million from $3.2 million.
- Operating cash flow was pressured by lower earnings and seasonal working-capital investment, including $40.6 million of additional accounts receivable and $21.6 million of additional inventory.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings guidance. It expects weak economic conditions, high commodity prices, customer conservation and potentially continued unfavorable weather to pressure volumes and margins for the remainder of fiscal 2012. Management cited its flexible cost structure, operating-efficiency initiatives and financial strength as mitigating factors.
Expected remaining fiscal 2012 cash requirements were approximately $16.6 million of capital expenditures, $23.4 million of interest payments and $90.8 million of distributions, based on the then-current distribution rate. Management did not anticipate borrowing for working-capital needs based on projected operating cash flow and available cash.
- Commodity-price volatility can affect product costs, margins, inventory values and derivative results. A hypothetical 10% adverse commodity-price movement indicated potential future losses of approximately $3.3 million on open derivative positions.
- Derivative instruments generated $1.0 million of unrealized non-cash losses in cost of products sold, compared with $1.6 million in the prior-year quarter. The Partnership states that derivatives are used for hedging, not speculation.
- On January 5, 2012, the revolving credit agreement was amended to extend maturity from June 25, 2013 to January 5, 2017, reduce borrowing rates and commitment fees, and amend covenants. A $0.5 million non-cash debt-cost write-off was recorded.
- The Partnership was in compliance with its debt covenants at December 24, 2011. It carried $52.4 million of accrued self-insurance liabilities and disclosed maximum potential residual-value guarantee payments of approximately $9.9 million.
- Pending commercial lawsuits include allegations involving pricing, fee disclosure and tank ownership. Management believes the claims are without merit and reported that no loss-contingency accrual was required beyond legal defense costs.
Facts investors should verify
- Actual heating-degree days, weather normalization and volume trends in the second fiscal quarter.
- Whether commodity costs continue to rise faster than customer pricing and whether margins recover.
- Operating cash flow, inventory and receivables as the heating season progresses.
- Compliance with amended revolving-credit covenants and the availability of borrowing capacity.
- Sustainability of the $0.8525 quarterly distribution given seasonal cash generation and projected fiscal 2012 cash requirements.
- Future derivative fair-value changes, hedge effectiveness and exposure to commodity and interest-rate movements.