Suburban Propane Partners, L.P. — Form 10-Q Summary
Business context and reporting period
The Partnership distributes propane, fuel oil and refined fuels, markets natural gas and electricity in deregulated markets, and provides home-comfort equipment and related services. This unaudited filing covers the three and nine months ended June 25, 2011, compared with June 26, 2010. Operations are highly seasonal, with most heating-fuel volumes and operating profits generated during the first and second fiscal quarters.
Key financial metrics
| Metric | Three months ended June 25, 2011 | Prior comparable period | Nine months ended June 25, 2011 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $216.6 million | $198.1 million | $1,009.0 million | $968.7 million |
| Operating income | $0.4 million | $0.6 million | $157.9 million | $171.1 million |
| Net income/(loss) | $(6.8) million | $(6.6) million | $136.7 million | $140.1 million |
| Income/(loss) per common unit | $(0.19) | $(0.19) | $3.85 | $3.96 |
| Net cash provided by operating activities | Not separately provided in the filing for the quarter | Not separately provided | $109.8 million | $129.7 million |
| EBITDA | $10.0 million | $9.4 million | $184.2 million | $184.7 million |
| Adjusted EBITDA | $10.3 million | $9.1 million | $182.0 million | $199.1 million |
Third-quarter cost of products sold rose 17.4% to $125.2 million, representing 57.8% of revenue versus 53.8% in the prior year. Nine-month cost of products sold rose 13.1% to $571.5 million, or 56.6% of revenue versus 52.2%. Operating expenses were $68.7 million for the quarter and $213.8 million for nine months; general and administrative expenses were $12.6 million and $37.4 million, respectively.
At June 25, 2011, cash and cash equivalents were $161.4 million, total assets were $976.1 million, and total partners’ capital was $418.6 million. Long-term borrowings were $348.1 million, consisting of $248.1 million of 7.375% senior notes due 2020 and $100.0 million outstanding under the revolving credit facility. The facility had $95.1 million of available capacity after $54.9 million of standby letters of credit.
Material changes versus the prior comparable period
- Third-quarter revenue increased 9.3%, driven primarily by higher selling prices reflecting higher commodity costs; volumes declined.
- Retail propane volume declined 2.5% in the quarter to 54.6 million gallons and 5.7% for the nine-month period to 254.9 million gallons. Fuel oil and refined-fuels volume declined 15.2% in the quarter and 12.6% for nine months.
- Average third-quarter propane and fuel-oil posted prices increased 38.1% and 44.6%, respectively. Product costs rose faster than selling prices, compressing margins.
- Third-quarter operating income decreased modestly despite higher revenue. Nine-month operating income declined 7.7%, while net income declined 2.5%.
- Operating cash flow decreased $19.9 million year over year, primarily because higher commodity prices increased working-capital requirements and earnings declined.
- Operating and general and administrative expenses improved through payroll, benefits and efficiency savings, partly offset by higher fleet fuel and bad-debt costs.
- The Partnership recorded a $2.0 million severance charge in the second quarter for a regional operating-footprint realignment. The prior-year nine-month period included a $9.5 million loss on debt extinguishment, while 2011 included no comparable charge.
- Capital expenditures were $17.2 million and business acquisitions were $3.2 million during the first nine months, compared with $13.0 million and $10.8 million, respectively, in the prior year.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings guidance. It expects weak economic conditions and high commodity prices to continue affecting customer buying patterns, sales volumes and margins. Management cited a flexible cost structure, operating efficiencies and financial strength as mitigating factors.
For the remainder of fiscal 2011, expected cash requirements included approximately $5.6 million of capital expenditures, $10.9 million of interest payments and $30.2 million of cash distributions at the then-current distribution rate. Management did not expect to borrow under the credit facility for the remainder of the fiscal year based on projected operating cash flow and available cash.
The Partnership announced a quarterly distribution of $0.8525 per common unit, or $3.41 annualized, payable August 9, 2011. The annualized rate was 0.9% higher than the comparable prior-year quarter.
- Weather materially affects demand; warmer heating seasons can reduce volumes.
- Commodity-price volatility can pressure margins, particularly when selling prices cannot be adjusted quickly enough. Customer conservation may further reduce demand.
- Derivative instruments are used for hedging rather than speculation, but realized losses may precede the offsetting benefit from product sales. A hypothetical 10% adverse commodity-price movement was not expected to have a material impact on outstanding derivatives at quarter-end.
- Variable-rate debt creates interest-rate exposure. A $100.0 million interest-rate swap effectively fixed the LIBOR component at 3.12% through June 25, 2013.
- The Partnership was in compliance with its debt covenants at June 25, 2011, including minimum interest coverage and maximum leverage requirements.
- Self-insurance liabilities were $52.5 million, with a related insurance recovery asset of $16.7 million. Management did not believe existing legal proceedings would materially affect financial position, results or cash flows.
- Lease residual-value guarantees had a maximum potential future payment of approximately $10.4 million, although their fair value was de minimis.
Investor verification items
- Verify whether higher commodity costs continue to outpace pricing and further compress propane and refined-fuels margins.
- Monitor propane and fuel-oil volumes, customer conservation, weather trends and the effect of economic conditions on non-residential demand.
- Reconcile reported EBITDA and Adjusted EBITDA to GAAP operating cash flow and review the effect of derivative settlements and mark-to-market adjustments.
- Assess distribution coverage using seasonal operating cash flow, cash reserves, capital expenditures and scheduled debt obligations.
- Confirm compliance with the revolving-credit and senior-note covenants and the availability of the credit facility after letters of credit.
- Review exposure to self-insurance claims, litigation, pension and postretirement obligations, and lease guarantees.