Suburban Propane Partners, L.P. — Form 10-Q Summary
Reporting period: Three and six months ended March 29, 2014, compared with the comparable periods ended March 30, 2013. The filing was signed May 8, 2014. The partnership distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides home-comfort equipment and services. Results are highly seasonal, with most heating-fuel volumes and operating profits generated from October through March.
Key Financial Metrics
| Metric | Three months ended March 29, 2014 | Three months ended March 30, 2013 | Six months ended March 29, 2014 | Six months ended March 30, 2013 |
|---|---|---|---|---|
| Revenue | $873.8 million | $678.4 million | $1,399.8 million | $1,169.1 million |
| Operating income | $171.0 million | $154.0 million | $251.1 million | $236.3 million |
| Net income | $149.5 million | $129.5 million | $208.2 million | $187.1 million |
| Basic income per common unit | $2.47 | $2.26 | $3.45 | $3.27 |
| EBITDA | $204.3 million | $185.3 million | $319.2 million | $298.1 million |
| Adjusted EBITDA | $206.3 million | $190.7 million | $324.0 million | $308.1 million |
| Net cash from operating activities | Not separately provided in the financial statements | Not separately provided in the financial statements | $20.4 million | $134.0 million |
- Three-month revenue increased 28.8%, net income increased 15.5%, EBITDA increased 10.3%, and Adjusted EBITDA increased 8.2% year over year.
- Six-month revenue increased 19.7%, net income increased 11.3%, EBITDA increased 7.1%, and Adjusted EBITDA increased 5.1%.
- Approximate operating margin declined to 19.6% from 22.7% in the second quarter and to 17.9% from 20.2% for the six-month period. Approximate net margin declined to 17.1% from 19.1% in the second quarter and to 14.9% from 16.0% for six months.
- Propane revenue increased 34.8% in the second quarter and 25.0% for six months, driven primarily by higher selling prices and, to a lesser extent, higher volumes.
- Retail propane volume increased 1.6% in the quarter to 213.7 million gallons and 2.0% for six months to 371.5 million gallons. Fuel oil and refined-fuels volume declined 2.6% in the quarter and 6.4% for six months.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $68.8 million at March 29, 2014, versus $107.2 million at September 28, 2013.
- Total assets were $2.85 billion and total partners’ capital was $1.24 billion at March 29, 2014.
- Long-term borrowings were $1.30 billion, including $155.0 million outstanding under the $400.0 million revolving credit facility. The facility carried an interest rate of approximately 2.5% at quarter-end and matures January 5, 2017.
- Outstanding senior-note principal consisted of $496.6 million due 2018, $250.0 million due 2020, and $346.2 million due 2021. The filing reports no scheduled principal maturities through fiscal 2016, followed by $155.0 million in fiscal 2017, $496.6 million in fiscal 2018, and $596.2 million thereafter.
- Available revolver capacity was $195.8 million at March 29, 2014 after considering borrowings and $49.2 million of letters of credit. The $55.0 million borrowed during the quarter was repaid in April 2014, increasing unused capacity to $250.8 million.
- The partnership paid $105.5 million of distributions during the first six months. It declared a quarterly distribution of $0.8750 per common unit, or $3.50 annualized, payable May 13, 2014.
- Capital expenditures were $14.4 million for six months, including approximately $7.8 million of maintenance spending and $6.6 million supporting growth.
Material Changes Versus the Prior Comparable Period
- Wholesale propane costs rose sharply; average posted propane prices increased 51.1% in the second quarter and 43.0% for six months at Mont Belvieu. Product costs grew faster than selling prices, increasing cost of products sold as a percentage of revenue to 59.2% from 51.1% in the quarter and to 57.0% from 50.6% for six months.
- Higher product costs and receivables substantially increased working-capital needs. Six-month operating cash flow fell to $20.4 million from $134.0 million, primarily because accounts receivable increased $200.5 million and inventories increased $18.9 million.
- Weather was 9% colder than normal and 11% colder than the prior-year quarter across service territories, although western territories were materially warmer than normal. Industry-wide supply and logistics constraints and customer conservation limited volumes.
- Operating expenses increased 4.2% in the quarter and 1.5% for six months, while general and administrative expenses were broadly stable. Integration synergies from the Inergy Propane acquisition partly offset higher overtime, vehicle, bad-debt and variable-compensation costs.
- Net interest expense declined 12.8% in the quarter and 13.2% for six months, primarily due to the reduction of $157.3 million of long-term borrowings in fiscal 2013.
- Inergy Propane integration remained ongoing. Integration-related costs were $2.2 million in the quarter and $4.8 million for six months, compared with $2.7 million and $3.8 million, respectively, in the prior-year periods.
Outlook, Risks and Unusual Items
- Management expected to be substantially complete with systems conversion and physical blending activities by the end of fiscal 2014, while continuing to refine operations and pursue acquisition synergies into fiscal 2015.
- Management expected approximately $15.6 million of capital expenditures, $44.2 million of interest payments and $105.5 million of cash distributions for the remainder of fiscal 2014.
- Management did not provide formal earnings or revenue guidance in the filing. It cautioned that results are seasonal and that April through September generally produces lower operating profits and may produce net losses or lower net income.
- Key risks include weather variability, propane and fuel-price volatility, supply and transportation disruptions, customer conservation, competition, interest-rate exposure, acquisition integration, regulatory and environmental requirements, litigation, operating hazards and access to capital.
- The partnership uses derivatives for hedging rather than speculation. A hypothetical 10% adverse change in commodity prices for open derivative positions at March 29, 2014 indicated potential future net losses of $3.7 million.
- Self-insurance liabilities were $58.2 million, partially offset by a $16.3 million insurance recovery asset. Residual-value guarantees on operating leases had a maximum potential future payment of approximately $16.1 million.
- A previously reported putative class action was voluntarily dismissed with prejudice on February 4, 2014. Management did not believe pending or threatened litigation would materially affect results, financial condition or cash flow.
- The partnership reported compliance with its debt covenants at March 29, 2014, including a minimum interest-coverage ratio of 2.5 to 1.0 and maximum leverage ratio of 4.75 to 1.0.
Investor Verification Items
- Verify whether elevated propane prices, supply constraints and customer conservation continue to pressure volumes and gross margins.
- Reconcile the sharp decline in operating cash flow with earnings growth, particularly accounts receivable, inventory and customer-deposit changes.
- Monitor revolver utilization, debt maturities, covenant headroom and the effect of variable interest rates.
- Assess progress, remaining costs and realized synergies from the Inergy Propane integration.
- Evaluate the sustainability of the $0.8750 quarterly distribution against seasonal cash generation, capital spending and debt-service requirements.
- Review exposure to weather, commodity prices, hedging results, self-insurance claims and potential multi-employer pension withdrawal liabilities.