Business Context and Reporting Period
Suburban Propane Partners, L.P. markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and provides home-comfort equipment services. This unaudited Form 10-Q covers the 13 weeks ended December 27, 2014, compared with the 13 weeks ended December 28, 2013. Results are highly seasonal, with approximately two-thirds of retail propane volume sold during the October–March heating season.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $422.9 million | $526.1 million | Down 19.6% |
| Operating income | $76.0 million | $80.1 million | Down 5.1% |
| Net income | $55.8 million | $58.7 million | Down 4.9% |
| Basic net income per unit | $0.92 | $0.97 | Down $0.05 |
| EBITDA | $108.6 million | $114.9 million | Down 5.5% |
| Adjusted EBITDA | $101.0 million | $117.7 million | Down 14.2% |
| Net cash provided by operating activities | $33.6 million | $4.2 million | Improved $29.4 million |
| Capital expenditures | $7.9 million | $9.3 million | Down $1.4 million |
Net margin was approximately 13.2%, compared with 11.2% in the prior-year quarter. Operating margin was approximately 18.0%, compared with 15.2%. Cost of products sold declined to 44.4% of revenue from 53.3%, primarily because wholesale propane costs declined faster than average selling prices. The reported cost of products sold included a $9.5 million non-cash derivative mark-to-market gain, compared with a $0.3 million loss in the prior-year quarter.
Cash and cash equivalents were $62.0 million at December 27, 2014, compared with $92.6 million at September 27, 2014. Total assets were $2.62 billion and total liabilities were $1.59 billion. Long-term borrowings were $1.242 billion, including $100.0 million outstanding under the revolving credit facility. Available revolver capacity was $246.8 million after borrowings and $53.2 million of standby letters of credit.
Material Changes Versus the Prior Comparable Period
- Revenue declined $103.2 million, driven by lower propane and fuel-oil volumes and lower selling prices.
- Retail propane volume fell 14.8% to 134.5 million gallons; fuel oil and refined fuels volume fell 19.5% to 11.3 million gallons.
- Average temperatures were 8% warmer than normal and the prior-year quarter, with December temperatures 15% warmer than normal and 21% warmer than the prior year. West Coast temperatures were particularly warm.
- Average posted propane and fuel-oil prices declined 36.0% and 22.5%, respectively.
- Operating expenses decreased 5.5% to $107.1 million due to integration efficiencies, lower headcount and vehicle costs, and lower bad-debt expense. General and administrative expenses increased 11.4% to $19.3 million, primarily due to payroll, benefits and professional services.
- Interest expense declined 5.7% to $20.0 million, primarily reflecting the refinancing of the former 7.5% 2018 Senior Notes with 5.5% 2024 Senior Notes in fiscal 2014.
- Operating cash flow increased substantially because lower wholesale prices reduced working-capital requirements.
- The Partnership completed a $6.0 million business acquisition during the quarter, its first acquisition since the Inergy Propane Acquisition.
Outlook, Risks, Contingencies and Unusual Items
Management stated that fiscal 2015 is the final year of the three-year Inergy integration plan and that it remains focused on operating-model and cost-structure improvements. First-quarter results included $1.9 million of Inergy integration expenses, compared with $2.5 million in the prior-year quarter.
The Partnership announced a quarterly distribution of $0.8750 per Common Unit, or $3.50 annualized, payable February 10, 2015. Anticipated fiscal 2015 cash requirements include approximately $26.1 million of maintenance and growth capital expenditures, $62.2 million of interest payments and $158.7 million of distributions at the current quarterly rate.
- Key operating risks include warmer-than-normal weather, commodity-price volatility, customer conservation, supply and transportation availability, competition and the ability to retain customers.
- Derivative instruments are used for hedging rather than speculation. A hypothetical 10% adverse change in commodity prices was estimated to reduce potential future net gains by $1.8 million; actual results may differ materially.
- The Partnership was in compliance with its debt covenants at December 27, 2014. Debt maturities include $100.0 million in fiscal 2017 and $1.121 billion thereafter.
- Self-insurance liabilities were $62.5 million, partially offset by an $18.4 million insurance recovery asset. Residual-value lease guarantees had a maximum potential exposure of approximately $13.7 million.
- The Partnership had accrued $6.85 million for estimated obligations associated with certain multi-employer pension plans; future withdrawal liability cannot be determined clearly.
- Management does not believe pending or threatened litigation will materially affect results, financial condition or cash flow, although litigation remains inherently uncertain.
- The filing identifies no material changes to previously disclosed risk factors. Disclosure controls were considered effective.
Investor Verification Points
- Verify the sustainability of margins and cash flow after excluding the $9.5 million non-cash derivative gain and considering weather normalization.
- Assess whether warmer weather, lower volumes and customer conservation persist through the remainder of the heating season.
- Review distribution coverage, projected fiscal 2015 cash requirements and the capacity to fund distributions, capital expenditures and acquisitions.
- Monitor leverage and covenant compliance ahead of the $100.0 million revolver maturity in fiscal 2017 and larger debt maturities thereafter.
- Evaluate whether the Inergy integration savings and operating efficiencies are fully realized after the integration plan ends.
- Review exposure to commodity prices, derivative valuation changes, supply disruptions, self-insurance claims and multi-employer pension withdrawal liabilities.