Business Context and Reporting Period
Suburban Propane Partners, L.P. distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides home-comfort equipment and services. This unaudited Form 10-Q covers the quarter and six months ended March 28, 2015, compared with the periods ended March 29, 2014. Results are highly seasonal, with approximately two-thirds of retail propane volume sold during the October–March heating season.
Financial Performance and Position
| Metric | Q2 FY2015 | Q2 FY2014 | Six Months FY2015 | Six Months FY2014 |
|---|---|---|---|---|
| Revenue | $599.4 million | $873.8 million | $1,022.3 million | $1,399.8 million |
| Operating income | $171.6 million | $171.0 million | $247.6 million | $251.1 million |
| Net income | $136.6 million | $149.5 million | $192.4 million | $208.2 million |
| Basic earnings per unit | $2.26 | $2.47 | $3.18 | $3.45 |
| EBITDA | $189.7 million | $204.3 million | $298.3 million | $319.2 million |
| Adjusted EBITDA | $214.3 million | $206.3 million | $315.3 million | $324.0 million |
| Operating cash flow | Not separately provided | Not separately provided | $159.9 million | $20.4 million |
Q2 operating margin was approximately 28.6%, versus 19.6% in the prior-year quarter; net margin was approximately 22.8%, versus 17.1%. The improvement in reported margins primarily reflected sharply lower product costs, although reported net income was reduced by a $15.1 million loss on debt extinguishment and a $7.4 million unrealized derivative loss. Six-month operating margin was approximately 24.2%, versus 17.9%.
- Retail propane volume declined 6.6% in Q2 and 10.0% for the six-month period. Fuel oil and refined fuels volume declined 12.0% and 14.9%, respectively.
- Average posted propane prices were 59.4% lower in Q2 and 48.2% lower for the six-month period; fuel oil prices were 40.2% and 31.4% lower, respectively.
- Combined operating and general and administrative expenses declined 7.5% in Q2, aided by Inergy integration synergies, lower headcount and vehicle costs, and lower fuel, insurance and bad-debt expense.
- Cash and cash equivalents were $110.1 million at March 28, 2015, compared with $92.6 million at September 27, 2014. Total current assets were $380.2 million versus current liabilities of $171.3 million.
- Long-term borrowings were $1.243 billion. The debt comprised $346.2 million of 7.375% senior notes due 2021, $525.0 million of 5.5% notes due 2024, $250.0 million of 5.75% notes due 2025, and $100.0 million drawn on the revolving facility.
- The $400.0 million revolving facility had $246.8 million of available capacity after outstanding borrowings and $53.2 million of letters of credit. The Partnership was in compliance with all debt covenants.
- Net cash used in financing activities was $121.0 million for the first six months, including $105.7 million of distributions. Capital expenditures were $19.9 million and a business acquisition used $6.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue fell 31.4% in Q2 and 27.0% for the first six months, driven mainly by lower commodity prices and reduced volumes.
- Despite lower revenue, Q2 operating income was essentially flat because product costs fell faster than selling prices and integration-related efficiencies reduced operating expenses.
- Q2 net income declined 8.6%, and six-month net income declined 7.6%, primarily because the current period included the $15.1 million debt-extinguishment loss.
- Adjusted EBITDA increased 3.9% in Q2 to $214.3 million but declined 2.7% for the six-month period to $315.3 million.
- On February 25, 2015, the Partnership issued $250.0 million of 5.75% notes due 2025 and used the proceeds plus cash to retire the 7.375% notes due 2020. Net interest expense declined 7.1% in Q2 and 6.4% for the six-month period.
- Operating cash flow increased substantially because lower wholesale propane costs reduced working-capital requirements, particularly inventory and receivables.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal full-year earnings guidance in the filing. For the remainder of fiscal 2015, management anticipated approximately $14.1 million of maintenance and growth capital expenditures, $37.1 million of interest payments and $107.4 million of cash distributions based on the then-current distribution rate.
- The Board declared a quarterly distribution of $0.8875 per common unit, or $3.55 annualized, payable May 12, 2015. This represented a 1.4% increase and the 30th increase since the 1999 recapitalization.
- Management stated that the Inergy Propane integration had made significant progress and expected continued focus on operating-model, cost-structure and customer-service efficiencies. Q2 integration costs were $2.1 million; six-month costs were $4.0 million.
- Weather remains a major demand risk. Q2 temperatures were 2% warmer than the prior year overall, with western territories 5% warmer than the prior year and 21% warmer than normal. Warm weather reduced heating demand and volumes.
- Commodity-price volatility, supply and transportation availability, customer conservation, competition, interest rates, regulatory changes, environmental matters, acquisition integration and capital-market conditions may materially affect results.
- Unrealized derivative losses of $7.4 million reduced Q2 cost-of-products-sold results; six-month derivative activity produced a $2.1 million unrealized gain. A hypothetical 10% adverse change in commodity prices for open derivative positions was estimated to reduce potential future net gains by $2.5 million.
- The Partnership carried $62.4 million of self-insurance liabilities and had accrued $6.8 million for estimated multi-employer pension-plan withdrawal obligations. Pending litigation was not expected by management to have a material adverse effect, although litigation outcomes are inherently uncertain.
- Residual-value guarantees on operating leases had a maximum potential future payment of approximately $12.1 million, assuming the related equipment became worthless.
Investor Verification Checklist
- Verify the sustainability of margin expansion after the temporary benefit of lower commodity costs and the effect of colder or warmer weather.
- Reconcile GAAP net income and EBITDA with Adjusted EBITDA, including the debt-extinguishment charge, derivative mark-to-market losses and Inergy integration costs.
- Monitor propane and fuel-oil volumes, regional heating-degree days, commodity prices and customer conservation trends.
- Assess liquidity relative to the planned distributions, capital expenditures, interest payments and the $100.0 million revolving-facility maturity in fiscal 2017.
- Review distribution coverage, debt covenants and the Partnership’s ability to maintain distributions through the lower-demand April–September period.
- Evaluate remaining Inergy integration execution risk, self-insurance and multi-employer pension obligations, legal contingencies and derivative exposures.