Suburban Propane Partners, L.P. — Fiscal 2015 Form 10-K Summary
Business Context and Reporting Period
The filing covers the 52-week fiscal year ended September 26, 2015, not a standalone fourth quarter. Suburban Propane is a nationwide marketer and distributor of propane, fuel oil and refined fuels, natural gas and electricity, and related home-comfort services. It served approximately 1.1 million customers through 700 locations in 41 states, including approximately 973,000 propane customers.
Fiscal 2015 volumes included approximately 480.4 million retail propane gallons and 41.9 million fuel oil and refined-fuel gallons. The business is highly seasonal, with most propane and fuel-oil volumes and operating profits generated during the October-to-March heating season.
Key Financial Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $1,417.0 million | $1,938.3 million | Down 26.9% |
| Operating income | $177.8 million | $190.1 million | Down 6.5% |
| Net income | $84.4 million | $94.5 million | Down 10.8% |
| Basic net income per unit | $1.39 | $1.56 | Down $0.17 |
| EBITDA | $296.0 million | $314.9 million | Down 6.0% |
| Adjusted EBITDA | $334.0 million | $338.5 million | Down 1.3% |
| Cash flow from operations | $324.2 million | $225.6 million | Up 43.7% |
| Capital expenditures | $41.2 million | $30.1 million | Up 37.2% |
| Cash and cash equivalents | $152.3 million | $92.6 million | Up $59.7 million |
| Total debt | $1,241.1 million | $1,242.7 million | Essentially flat |
Cost of products sold declined to $593.4 million from $1,080.8 million, and represented 41.9% of revenue versus 55.8% in the prior year. Operating expenses were $444.3 million, or 31.4% of revenue, compared with 24.1% in fiscal 2014. Net interest expense declined 6.8% to $77.6 million.
Propane revenue was $1,177.0 million, fuel oil and refined-fuels revenue was $127.5 million, natural gas and electricity revenue was $66.9 million, and all other revenue was $45.6 million. Propane gallons sold fell 9.5% to 480.4 million, while fuel-oil and refined-fuel gallons fell 14.7% to 41.9 million.
Fiscal 2015 quarterly distributions totaled $3.54 per common unit, up from $3.50 in fiscal 2014. The fourth-quarter distribution was $0.8875 per unit, equivalent to an annualized rate of $3.55.
Material Changes Versus the Prior Comparable Period
- Revenue and volumes were pressured by warmer weather, particularly an unusually warm December and persistently warm western service territories. Average temperatures across service territories were 2% warmer than normal and 5% warmer than the prior year.
- Lower commodity prices materially reduced reported revenue. Average posted propane prices declined 52.7%, while fuel-oil prices declined 35.5%.
- Despite lower revenue and volumes, gross product margin improved because wholesale-cost reductions exceeded selling-price reductions.
- Adjusted EBITDA declined modestly, reflecting adverse weather and lower volumes, partly offset by operating efficiencies, lower headcount and vehicle costs, and lower insurance and bad-debt expense.
- Fiscal 2015 included $15.1 million of debt-extinguishment loss, $11.5 million of Inergy integration costs, an $11.3 million multi-employer pension withdrawal charge, and a $2.0 million non-cash pension settlement charge.
- The Partnership refinanced $250.0 million of 7.375% senior notes due 2020 with 5.75% senior notes due 2025. Management stated that the transaction extended maturities by five years and reduced annual cash interest requirements by more than $4 million.
- Cash flow from operations increased substantially, primarily because lower wholesale prices reduced working-capital needs for inventory, receivables and payables.
Debt, Liquidity and Financial Position
At September 26, 2015, debt consisted of $346.2 million principal amount of 7.375% senior notes due 2021, $525.0 million of 5.5% senior notes due 2024, $250.0 million of 5.75% senior notes due 2025, and $100.0 million outstanding under a $400.0 million senior secured revolving credit facility.
After $46.2 million of standby letters of credit, available borrowing capacity was approximately $253.8 million. The revolving facility had an interest rate of approximately 2.5% at year-end and was scheduled to mature January 5, 2017. The Partnership and Operating Partnership were in compliance with all debt covenants at year-end, including interest-coverage and leverage requirements.
Fiscal 2016 expected cash requirements were approximately $35.0 million for maintenance and growth capital expenditures, $74.9 million for interest and income-tax payments, and $215.7 million for distributions assuming the $3.55 annualized distribution rate. Management expected available cash, operating cash flow and revolver capacity to be sufficient for current obligations.
Outlook, Commentary, Risks and Unusual Items
- Management expected adequate propane and fuel-oil supplies during fiscal 2016, although availability and transportation costs remain dependent on weather, competing demand, infrastructure and supplier performance.
- Management described the propane and fuel-oil industries as mature, with demand expected to remain flat to moderately declining. Natural-gas pipeline expansion, energy efficiency, conservation and technology may reduce demand.
- Weather remains the principal operating risk. Warmer winters can materially reduce volumes, revenue, margins and cash generation, while severe winters can create supply, logistics and cost pressures.
- Commodity-price volatility may affect margins, customer conservation and working capital. The Partnership uses futures, options, swaps and forward contracts for hedging and does not use derivatives for speculative trading. A hypothetical 10% adverse commodity-price movement in open derivative positions indicated potential future losses of $1.4 million.
- Environmental, health and safety regulation, remediation obligations, operating hazards, litigation, insurance limits, cyber risks and dependence on management information systems could adversely affect results. Accrued environmental liabilities were $0.7 million at year-end.
- The defined-benefit pension plan was underfunded by $42.6 million, compared with $32.1 million in the prior year. The Partnership expected to contribute approximately $0.7 million in fiscal 2016.
- Estimated multi-employer pension withdrawal liability increased to $18.0 million from $6.9 million. The timing and amount of future payments, including any additional liability, were not determinable.
- The filing states that currently pending or threatened litigation was not expected to have a material adverse effect, but legal outcomes remain inherently uncertain.
- Cash distributions are not guaranteed and are subject to cash generation, reserves, debt covenants, capital needs and other factors.
Most Important Facts for Investors to Verify
- Whether fiscal 2016 weather and heating-degree days support recovery from the fiscal 2015 volume decline.
- Actual distribution coverage and distributable cash flow relative to the $3.55 annualized distribution rate.
- Refinancing or repayment plans for the $100.0 million revolver maturity in fiscal 2017 and longer-term senior-note maturities.
- Progress in maintaining operating efficiencies after completion of the Inergy Propane integration.
- Changes in propane supply, transportation costs, supplier concentration and commodity-hedging positions.
- Developments in multi-employer pension withdrawal liability, the underfunded defined-benefit plan and environmental obligations.
- The effect of natural-gas expansion, conservation, energy efficiency and customer retention on long-term volumes.
- Adjusted EBITDA trends alongside GAAP net income and operating cash flow; Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly titled measures used by other companies.