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 related services. This unaudited Form 10-Q covers the three months ended December 25, 2010, compared with December 26, 2009. Operations are highly seasonal, with heating demand concentrated in the first two fiscal quarters.
Key Financial Metrics
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $328.3 million | $301.4 million | Up 8.9% |
| Income before interest and taxes | $50.3 million | $55.8 million | Down 9.7% |
| Net income | $43.1 million | $48.4 million | Down 10.8% |
| Basic income per common unit | $1.22 | $1.37 | Down $0.15 |
| EBITDA | $58.5 million | $62.8 million | Down 6.9% |
| Adjusted EBITDA | $60.1 million | $66.2 million | Down 9.3% |
| Net cash used in operating activities | $4.9 million | $14.7 million | Use decreased $9.8 million |
Revenue increased primarily because of higher selling prices, while volumes declined. Cost of products sold rose 24.0% to $186.5 million and increased to 56.8% of revenue from 49.9%, reducing profitability. Operating income margin was approximately 15.3%, versus 18.5% in the prior-year quarter; net income margin was approximately 13.1%, versus 16.0%.
- Propane revenue increased 11.1% to $259.4 million, while retail propane volume declined 4.1% to 86.3 million gallons.
- Fuel oil and refined fuels revenue decreased 2.2% to $38.4 million, with volume down 13.0% to 11.4 million gallons.
- Natural gas and electricity revenue increased 12.5% to $19.0 million.
- Operating expenses declined 7.3% to $69.1 million; general and administrative expense increased 3.4% to $14.2 million.
- Cash and cash equivalents were $115.6 million at December 25, 2010, compared with $156.9 million at September 25, 2010.
- Total assets were $997.1 million and total partners’ capital was $381.6 million at quarter-end.
Debt, Liquidity and Capital Allocation
- Long-term borrowings totaled $348.0 million, consisting of $248.0 million of 7.375% senior notes due 2020 and $100.0 million drawn under the revolving credit facility due 2013.
- The revolving facility had $91.6 million of available capacity after $58.4 million of outstanding letters of credit. Its reported interest rate was approximately 3.3% at quarter-end.
- The Partnership was in compliance with the debt covenants, including minimum interest coverage and maximum leverage requirements.
- Investing cash outflows were $6.4 million, including $5.8 million of capital expenditures and $2.5 million for a propane-business acquisition, partly offset by $1.8 million of asset-sale proceeds.
- Financing cash outflows were $30.1 million for partnership distributions.
- Management expected approximately $19.2 million of remaining fiscal 2011 capital expenditures, $23.4 million of interest payments and $90.5 million of distributions. Management did not expect to borrow for working-capital needs based on then-current estimates.
Material Changes Versus the Prior Comparable Period
- Unseasonably warm weather during the first six weeks of the quarter was 13% warmer than normal and 18% warmer than the comparable prior-year period, reducing heating-fuel demand.
- Higher commodity prices lifted average posted propane and fuel-oil prices by 15.5% and 18.6%, respectively, but product costs increased faster than selling prices.
- Rising commodity prices generated realized derivative losses that were not fully offset by physical-product sales. Cost of products sold also included a $1.6 million unrealized non-cash derivative loss, compared with $3.4 million in the prior-year quarter.
- Lower variable compensation, payroll and field-related expenses, bad-debt expense and insurance costs reduced operating expenses.
- Depreciation and amortization increased 15.5% to $8.2 million, primarily reflecting assets acquired in prior business combinations.
- The Partnership acquired the net assets of a propane business for $2.5 million; management stated the impact was immaterial for separate disclosure.
Guidance, Outlook, Risks and Unusual Items
Management expected continued challenges from economic weakness, volatile commodity prices and customer conservation, which could negatively affect sales volumes. Management cited its flexible cost structure, operating efficiencies and financial strength as mitigating factors but did not provide formal earnings guidance.
- Key risks include weather variability, commodity-price volatility, inability to pass through cost increases, customer conservation, competition, supply and transportation constraints, interest-rate exposure, regulatory and tax changes, litigation, operating hazards and capital-market conditions.
- The Partnership uses futures, options and other derivatives for hedging and supply management, not speculation. A hypothetical 10% adverse commodity-price change was estimated to produce potential future earnings losses of $0.2 million on open positions, although actual results could differ materially.
- Interest-rate swaps with a $100.0 million notional amount effectively fixed the LIBOR component of a portion of revolving-facility borrowings at 3.12%. The swaps had a $5.0 million unrealized loss at quarter-end.
- Self-insurance liabilities were $56.0 million, with a $17.9 million insurance recovery asset. Management did not believe existing litigation would materially adversely affect the Partnership.
- Residual-value guarantees on operating leases had a maximum potential future payment of approximately $9.1 million, assuming the related equipment became worthless.
- The quarterly distribution was increased to $0.8525 per common unit, or $3.41 annualized, payable February 8, 2011. This represented a 2.1% increase from the comparable prior-year rate.
Important Facts for Investors to Verify
- Whether colder weather in subsequent heating periods improved propane and fuel-oil volumes after the unusually warm start to the quarter.
- Whether commodity-price movements and derivative settlements continued to pressure gross margins.
- Actual cash flow generation versus planned capital expenditures, interest payments and approximately $90.5 million of remaining fiscal 2011 distributions.
- Compliance with revolving-credit and senior-note covenants, including leverage and interest-coverage thresholds.
- Renewal or expiration of the $58.4 million of standby letters of credit and the resulting borrowing capacity.
- Evolution of self-insurance, pension and postretirement liabilities and any material litigation developments.
- The sustainability of the increased $0.8525 per-unit distribution given seasonal cash flows and lower first-quarter earnings.