Business Context and Reporting Period
Suburban Propane Partners, L.P. is a publicly traded Delaware limited partnership that markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and home-comfort services. This unaudited Form 10-Q covers the three and six months ended March 26, 2011, compared with the respective periods ended March 27, 2010. Operations are highly seasonal, with the primary heating season concentrated in the first two fiscal quarters.
Key Financial Metrics
| Metric | Three Months Ended Mar. 26, 2011 | Prior Year | Six Months Ended Mar. 26, 2011 | Prior Year |
|---|---|---|---|---|
| Revenue | $464.1 million | $469.2 million | $792.4 million | $770.6 million |
| Operating income | $107.2 million | $114.8 million | $157.6 million | $170.6 million |
| Net income | $100.3 million | $98.4 million | $143.4 million | $146.8 million |
| Basic income per common unit | $2.82 | $2.78 | $4.04 | $4.15 |
| EBITDA | $115.7 million | $112.5 million | $174.2 million | $175.3 million |
| Adjusted EBITDA | $111.6 million | $123.7 million | $171.7 million | $189.9 million |
| Net cash from operating activities | Not separately presented in the financial statements | Not separately presented in the financial statements | $49.8 million | $57.3 million |
The second-quarter operating margin was approximately 23.1%, versus 24.5% in the prior-year quarter. Net margin was approximately 21.6%, versus 21.0%. Cost of products sold rose to 56.0% of revenue from 53.0%; for the six-month period, it rose to 56.3% from 51.8%.
- Second-quarter retail propane volume declined 8.4% to 114.0 million gallons; fuel oil and refined fuels volume declined 12.0% to 16.2 million gallons.
- Six-month retail propane volume declined 6.6% to 200.3 million gallons; fuel oil and refined fuels volume declined 12.1% to 27.6 million gallons.
- Cash and cash equivalents were $136.9 million at March 26, 2011, compared with $156.9 million at September 25, 2010.
- Total assets were $1.02 billion and total partners’ capital was $454.2 million at March 26, 2011.
- Long-term borrowings were $348.1 million, consisting of $248.1 million of 7.375% senior notes due 2020 and $100.0 million drawn under the revolving credit facility.
- The revolving credit facility had $95.1 million of available borrowing capacity after $54.9 million of outstanding letters of credit.
- Capital expenditures were $11.4 million and an acquisition used $3.2 million during the first six months. Partnership distributions totaled $60.2 million.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue declined 1.1% because lower volumes offset higher selling prices. Six-month revenue increased 2.8%, primarily from higher prices and higher natural gas and electricity volumes.
- Operating income declined 6.6% in the second quarter and 7.6% for the first six months. Net income increased 2.0% in the second quarter but declined 2.3% for the first six months.
- Adjusted EBITDA declined 9.8% in the second quarter and 9.6% for the first six months, reflecting weaker underlying margins despite reported net income benefiting from the absence of the prior-year debt-extinguishment loss.
- Commodity costs increased faster than selling prices, pressuring gross margins. Average posted propane and fuel oil prices increased 11.8% and 37.3%, respectively, in the second quarter.
- Operating expenses declined 3.2% in the second quarter and 5.2% for the first six months. General and administrative expense declined 47.8% and 27.1%, respectively, aided by lower variable compensation, operating efficiencies, lower professional fees and a $2.5 million gain on asset sales.
- The 2011 second quarter included a $2.0 million severance charge related to a regional operating-footprint realignment. The 2010 second quarter included a $9.5 million loss on debt extinguishment related to refinancing.
- Operating cash flow declined by $7.5 million for the first six months, primarily because higher commodity prices required greater working-capital investment.
Guidance, Outlook, Risks and Unusual Items
Management expected weak economic conditions and high commodity prices to continue affecting customer buying behavior and sales volumes during the remainder of fiscal 2011. Management cited a flexible cost structure, operating efficiencies and financial strength as mitigants, but did not provide formal earnings guidance.
- Expected remaining fiscal 2011 cash requirements included approximately $13.6 million of maintenance and growth capital expenditures, $12.5 million of interest payments and $60.4 million of cash distributions.
- Management did not anticipate borrowing under the credit facility for the remainder of fiscal 2011 based on projected operating cash flow and cash on hand.
- The Partnership declared a quarterly distribution of $0.8525 per common unit, or $3.41 annualized, representing 1.5% growth from the comparable prior-year rate.
- Weather, commodity-price volatility, customer conservation, competition, supply and transportation availability, economic conditions, regulation, environmental matters, litigation and operating hazards could materially affect results.
- Derivatives are used for hedging rather than speculation. The filing reported a $4.1 million non-cash derivative gain in the second quarter and a $2.6 million non-cash gain for the first six months.
- The Partnership was in compliance with its debt covenants at March 26, 2011. The filing reported $51.8 million of accrued self-insurance liabilities and a $16.7 million insurance-recovery asset. Management did not expect existing legal actions to have a material adverse effect.
- A hypothetical 10% adverse change in relevant commodity prices indicated potential future losses of approximately $0.4 million on open derivative positions; management cautioned that actual results could differ materially.
Investor Verification Points
- Verify whether high commodity prices continue to reduce propane and fuel-oil volumes and compress unit margins.
- Reconcile reported net income and EBITDA with Adjusted EBITDA, including the effects of derivative mark-to-market gains, severance and the prior-year debt-refinancing loss.
- Monitor working-capital needs, seasonal cash generation and the ability to fund distributions without additional revolver borrowings.
- Review $348.1 million of debt, the $100.0 million revolver balance, covenant headroom and the 2013 and 2020 maturity profile.
- Assess the sustainability of the $0.8525 per-unit quarterly distribution against operating cash flow and capital requirements.
- Evaluate exposure to weather, customer conservation, commodity prices, hedging outcomes, self-insurance claims and potential litigation.