Suburban Propane Partners, L.P. — Fiscal 2014 Form 10-K
Reporting period: Fiscal year ended September 27, 2014, comprising 52 weeks. The filing includes fourth-quarter results for the three months ended September 27, 2014. The business distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides heating and ventilation equipment services. It served approximately 1.2 million customers through approximately 710 locations in 41 states.
Financial performance and key metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Revenue | $1,938.3 million | $1,703.6 million | +13.8% |
| Operating income | $190.1 million | $177.0 million | +7.4% |
| Net income | $94.5 million | $78.8 million | +20.0% |
| Basic earnings per common unit | $1.56 | $1.35 | +15.6% |
| EBITDA | $314.9 million | $305.2 million | +3.2% |
| Adjusted EBITDA | $338.5 million | $329.3 million | +2.8% |
| Net cash from operating activities | $225.6 million | $214.3 million | +5.2% |
| Capital expenditures | $30.1 million | $27.8 million | +8.0% |
- Margins: Cost of products sold increased to 55.8% of revenue from 50.6%, primarily because wholesale propane costs increased faster than selling prices. Operating expenses declined to 24.1% of revenue from 27.6%, reflecting integration synergies.
- Volumes: Retail propane gallons declined 0.7% to 530.7 million. Fuel oil and refined fuels volumes declined 8.6% to 49.1 million gallons. Natural gas and electricity revenue increased 9.6% to $87.1 million.
- Cash flow: Operating cash flow was $225.6 million. Investing activities used $16.5 million, including $30.1 million of capital expenditures, partly offset by $13.5 million of proceeds from asset sales. Financing activities used $223.6 million, principally for distributions and debt refinancing.
- Liquidity: Cash and cash equivalents were $92.6 million at year-end, compared with $107.2 million a year earlier. The revolving credit facility had $255.1 million of available borrowing capacity after $100.0 million of borrowings and $44.9 million of standby letters of credit.
- Debt: Total debt was $1.243 billion. Debt comprised $250.0 million of 7.375% senior notes due 2020, $346.2 million of 7.375% senior notes due 2021, $525.0 million of 5.5% senior notes due 2024, and $100.0 million outstanding under the revolving credit facility.
- Distributions: Quarterly distributions were $0.8750 per common unit, or $3.50 annualized. The board declared the fourth-quarter distribution of $0.8750 per unit, paid November 10, 2014.
Fourth-quarter fiscal 2014 results
| Metric | Q4 fiscal 2014 | Q4 fiscal 2013 |
|---|---|---|
| Revenue | $241.3 million | $243.7 million |
| Operating income (loss) | $(34.4) million | $(38.7) million |
| Net income (loss) | $(54.7) million | $(63.1) million |
| Basic earnings (loss) per unit | $(0.90) | $(1.05) |
| Net cash from operating activities | $80.6 million | $13.8 million |
| Adjusted EBITDA | $4.5 million | $1.9 million |
The fourth quarter is seasonally weak; the partnership states that sales and operating profits are concentrated in the first and second fiscal quarters, with lower profits or losses generally occurring from April through September.
Material changes and unusual items
- Revenue growth was driven primarily by a 20.0% increase in average propane selling prices, reflecting higher wholesale costs, rather than volume growth.
- Fiscal 2014 propane volumes were constrained by industry-wide supply shortages, transportation and logistics issues, warmer conditions in western territories, and customer conservation resulting from higher prices.
- The partnership completed the refinancing of its 7.5% senior notes due 2018 with $525.0 million of 5.5% senior notes due 2024. Management stated that the refinancing extended maturities by six years and reduced annual cash interest requirements by more than $8 million.
- The refinancing generated an $11.6 million loss on debt extinguishment, including redemption premiums, fees and write-offs of debt costs.
- Inergy Propane integration expenses were $12.3 million in fiscal 2014, compared with $10.6 million in fiscal 2013. Management reported completion of system conversions, substantial physical blending, and migration to one common brand.
- Adjusted EBITDA increased $9.2 million despite lower volumes, supported by integration-related operating efficiencies and expense control.
- Fiscal 2014 included a management succession: Michael A. Stivala became president in April 2014 and chief executive officer at the beginning of fiscal 2015; Michael J. Dunn retired at the end of fiscal 2014.
Outlook, risks and contingencies
- For fiscal 2015, management anticipated approximately $34.0 million of maintenance and growth capital expenditures, $79.4 million of interest and income tax payments, and $211.6 million of distributions assuming the $3.50 annualized rate continued.
- Management expected available cash, operating cash flow and credit capacity to be sufficient for stated fiscal 2015 requirements, but distributions are not guaranteed and are subject to cash generation, reserves, debt covenants and operating conditions.
- The principal operating risks are weather variability, commodity-price and transportation-cost volatility, supply availability, customer conservation, competition from natural gas and other energy sources, and the ability to retain or acquire customers.
- Propane supply was challenging in fiscal 2014. Crestwood, Targa and Enterprise represented approximately 19%, 13% and 13% of total propane purchases, respectively. Management expected adequate fiscal 2015 supply but noted that replacement supply could be more expensive.
- The revolving credit facility required a minimum interest coverage ratio of 2.5 to 1.0 and limited leverage ratios. The partnership and operating partnership were in compliance with all debt covenants at September 27, 2014.
- Environmental liabilities accrued at year-end were $0.6 million. The partnership disclosed acquired properties with known or probable environmental exposure and stated that ultimate remediation costs could differ from estimates.
- The pension plan was underfunded by $32.1 million at year-end. A multiemployer pension withdrawal-liability accrual of $6.9 million remained, and the ultimate amount and timing of additional liability could not be determined.
- Self-insurance liabilities were $62.5 million, and the maximum potential payments under residual-value guarantees on leased equipment were approximately $14.1 million, assuming the equipment had no value at lease termination.
- The filing states that pending or threatened litigation was not expected to have a material adverse effect, but operating hazards, product liability, environmental regulation, derivative-counterparty risk and cybersecurity remain material risk areas.
Important facts for investors to verify
- Whether operating cash flow and distribution coverage remain adequate after seasonal working-capital needs, capital expenditures, interest and distributions.
- Whether the partnership can maintain the $3.50 annualized distribution while meeting debt covenant requirements and the 2017 revolving-facility maturity.
- Progress in realizing remaining Inergy integration savings and the level of continuing integration costs.
- Fiscal 2015 propane supply availability, transportation costs, commodity prices and resulting gross margins.
- Volume trends, particularly propane and fuel oil volumes, after adjusting for weather and customer conservation.
- Potential changes in environmental, climate-change, derivatives and tax regulations, including any additional remediation or multiemployer pension liabilities.
- The effect of the 2024 refinancing on interest expense, leverage and future refinancing requirements.