Suburban Propane Partners, L.P. — Fiscal 2016 Form 10-K Summary
Reporting period: Fiscal year ended September 24, 2016, comprising 52 weeks. The filing was signed November 23, 2016. The company markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and related home-comfort services. It served approximately 1.1 million customers through 675 locations in 41 states.
Business Context and Operating Environment
- Propane remained the core business, with 414.8 million retail gallons sold and $884.2 million of revenue.
- Fuel oil and refined fuels generated $68.8 million of revenue on 30.9 million gallons sold.
- Natural gas and electricity generated $50.8 million of revenue; the segment served approximately 80,000 customers.
- Fiscal 2016 was materially affected by exceptionally warm weather: average temperatures across service territories were 17% warmer than normal and 15% warmer than the prior year. The contiguous United States experienced its warmest winter on record.
Financial Performance and Key Metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Revenue | $1,046.1 million | $1,417.0 million | Down 26.2% |
| Operating income | $90.4 million | $177.8 million | Down 49.1% |
| Net income | $14.4 million | $84.4 million | Down 82.9% |
| Basic net income per unit | $0.24 | $1.39 | Down $1.15 |
| EBITDA | $219.7 million | $296.0 million | Down 25.8% |
| Adjusted EBITDA | $223.0 million | $334.0 million | Down 33.2% |
| Cash flow from operations | $157.1 million | $324.2 million | Down 51.5% |
| Capital expenditures | $38.4 million | $41.2 million | Down 6.9% |
| Cash and cash equivalents | $37.3 million | $152.3 million | Down $115.0 million |
| Total debt | $1,238.2 million | $1,241.1 million | Down $2.9 million |
| Cash distributions per unit | $3.55 | $3.54 | Up $0.01 |
Revenue decline reflected both lower volumes and lower selling prices. Propane volumes fell 13.7%, while fuel oil and refined-fuels volumes fell 26.3%. Cost of products sold declined 39.0% to $362.0 million, causing the product-cost ratio to improve to 34.6% from 41.9%; however, operating expenses, depreciation and interest remained substantial. Operating income margin was approximately 8.6%, compared with 12.5% in fiscal 2015, and net income margin was approximately 1.4%, compared with 6.0%.
Cash Flow, Liquidity and Debt
- Operating cash flow of $157.1 million funded $38.4 million of capital expenditures and supported $215.5 million of partnership distributions, but cash declined to $37.3 million at year-end.
- Investing cash flow included $42.9 million for the acquisition of Propane USA, $21.5 million of proceeds from a business sale, and $6.0 million of proceeds from property, plant and equipment sales.
- Financing cash outflow was $218.2 million, primarily reflecting distributions.
- Debt consisted principally of $346.2 million 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 drawn under a $500.0 million revolving credit facility.
- The revolving credit facility was amended in March 2016, extending maturity to March 2021, reducing borrowing costs and increasing commitments from $400.0 million to $500.0 million. The reported interest rate at year-end was approximately 3.1%.
- No long-term debt maturities were scheduled before fiscal 2021; scheduled maturities were $446.2 million in fiscal 2021 and $775.0 million thereafter.
- The Partnership and Operating Partnership were in compliance with all debt covenants at September 24, 2016. The company reported sufficient liquidity based on cash on hand, expected operating cash flow and revolver availability.
Material Changes Versus Fiscal 2015
- Revenue decreased $370.9 million, driven by record warm weather, lower customer demand and lower commodity-linked selling prices.
- Adjusted EBITDA declined $111.0 million, despite lower payroll, vehicle, fuel and other operating costs from continued cost reductions.
- Operating cash flow declined $167.1 million, reflecting lower earnings and less favorable working-capital effects.
- The company acquired Propane USA Distribution for approximately $45.0 million, funded from cash on hand, expanding its South Florida presence.
- The company sold assets and operations in a non-strategic propane market for $26.0 million, recognizing a $9.8 million gain; $5.0 million of consideration is payable over five years.
- Fiscal 2016 included a $6.6 million multi-employer pension plan withdrawal charge, a $3.0 million product-liability settlement charge, a $2.0 million pension settlement charge, and a $0.3 million debt-extinguishment loss.
- Fiscal 2015 included larger nonrecurring charges, including a $15.1 million debt-extinguishment loss, $11.5 million of integration costs and an $11.3 million multi-employer pension withdrawal charge.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2017 capital expenditures of approximately $38.0 million, interest and income-tax payments of approximately $74.8 million, and distributions of approximately $216.6 million assuming the annualized $3.55 per-unit distribution rate continued.
- Management stated that it expected adequate propane and fuel-oil supplies during fiscal 2017, but availability and transportation costs remain dependent on weather, competing demand, infrastructure and commodity markets.
- The business is highly seasonal: approximately two-thirds of propane volume and three-fourths of fuel-oil volume are sold from October through March. Warmer-than-normal winters can materially reduce revenue, margins and cash flow.
- Competition from natural gas, electricity, other fuels and local distributors, along with customer conservation and energy-efficiency improvements, may pressure volumes and margins.
- Commodity derivatives are used for hedging rather than speculation. A hypothetical 10% adverse market-price change in open derivative positions at year-end indicated potential additional future losses of approximately $1.0 million.
- Environmental, health and safety regulation, climate-change regulation, litigation, self-insurance claims, cybersecurity and information-system failures could increase costs or disrupt operations.
- Environmental liabilities accrued at year-end were $0.6 million, but management could not determine the potential extent of additional liabilities. Multi-employer pension withdrawal obligations were estimated at $24.2 million, with timing and additional exposure uncertain.
- The defined-benefit pension plan was underfunded by $49.3 million at year-end, and the company expected to contribute approximately $10.7 million in fiscal 2017.
- Quarterly distributions are not guaranteed and are subject to cash generation, reserves, debt covenants and other liquidity requirements.
- Management reported effective disclosure controls and internal control over financial reporting; PricewaterhouseCoopers LLP provided an unqualified audit opinion.
Most Important Facts for Investors to Verify
- Whether subsequent heating-season weather normalizes and restores propane, fuel-oil and natural-gas volumes.
- Whether the $3.55 annualized distribution can be sustained given low year-end cash, high debt service and expected distributions exceeding fiscal 2016 operating cash flow.
- Adjusted EBITDA, operating cash flow and distribution coverage excluding unusual items and under normalized weather conditions.
- Compliance with the revolving-credit financial covenants, particularly the minimum 2.5-to-1 interest-coverage ratio and maximum leverage tests.
- Refinancing or repayment plans for the $446.2 million of debt scheduled to mature in fiscal 2021.
- The ultimate cost and timing of multi-employer pension withdrawals, environmental remediation, self-insurance claims and other contingencies.
- The effect of natural-gas expansion, customer conservation, commodity-price volatility and regulatory changes on long-term demand and margins.