Business Context and Reporting Period
Suburban Propane Partners, L.P. filed its Form 10-K for the fiscal year ended September 24, 2011. The partnership markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and related home-comfort services. It served approximately 750,000 customers through approximately 300 locations in 30 states. The filing includes fourth-quarter results, but the primary reporting period is the full fiscal year.
Fiscal 2011 was affected by warmer-than-normal weather, high commodity prices, customer conservation and weak economic conditions. The partnership completed one mid-sized propane acquisition during the year.
Financial Performance and Key Metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $1,190.6 million | $1,136.7 million | +4.7% |
| Operating income | $143.2 million | $153.4 million | -6.6% |
| Net income | $115.0 million | $115.3 million | -0.3% |
| Basic earnings per unit | $3.24 | $3.26 | Down $0.02 |
| EBITDA | $178.9 million | $174.7 million | +2.4% |
| Adjusted EBITDA | $179.4 million | $192.4 million | -6.8% |
| Cash flow from operations | $132.8 million | $155.8 million | -14.8% |
| Capital expenditures | $22.3 million | $19.1 million | +16.5% |
| Cash and cash equivalents | $149.6 million | $156.9 million | Down $7.4 million |
| Total debt | $348.2 million | $348.0 million | Essentially flat |
| Cash distributions per unit | $3.41 | $3.35 | +1.8% |
Reported operating margin was approximately 12.0%, compared with 13.5% in fiscal 2010. Net margin was approximately 9.7%, compared with 10.1%. Adjusted EBITDA margin was approximately 15.1%, compared with 16.9%.
- Propane revenue increased 5.0% to $929.5 million, while propane gallons sold declined 6.0% to 298.9 million gallons.
- Fuel oil and refined fuels revenue increased 3.3% to $139.6 million, despite a 13.8% decline in gallons sold to 37.2 million.
- Natural gas and electricity revenue increased 9.2% to $84.7 million.
- Total cost of products sold rose 13.4% to $678.7 million, and increased to 57.0% of revenue from 52.6%, reflecting commodity costs rising faster than selling prices.
- Operating expenses declined 3.5% to $279.3 million and general and administrative expenses declined 16.2% to $51.6 million, reflecting expense controls and lower variable compensation.
- The fourth quarter was seasonally weak: revenue was $181.6 million, operating loss was $14.7 million and net loss was $21.7 million, or $0.61 per basic unit.
Liquidity, Debt and Distributions
Debt consisted of $250.0 million of 7.375% senior notes due March 2020 and $100.0 million drawn under a $250.0 million revolving credit facility due June 2013. The partnership had approximately $95.1 million of unused revolver capacity after considering $54.9 million of standby letters of credit. The revolver interest rate was approximately 3.25% at year-end.
Management stated that working capital requirements were funded from cash on hand without borrowing under the facility for the fifth consecutive year. The partnership was in compliance with all debt covenants at September 24, 2011. The principal covenant thresholds included minimum interest coverage of 2.5 to 1.0, maximum total leverage of 4.5 to 1.0 and maximum senior secured leverage of 3.0 to 1.0.
Cash distributions were $0.8525 per unit for each fiscal 2011 quarter. A fourth-quarter distribution of $0.8525 per unit was announced after year-end, implying an annualized rate of $3.41 per unit. Distributions are based on available cash and are not guaranteed.
Material Changes Versus the Prior Comparable Period
- Revenue increased because higher selling prices more than offset lower volumes.
- Propane and fuel oil volumes fell as customers conserved energy amid higher commodity prices and weak economic conditions.
- Commodity prices increased materially; average posted propane and fuel oil prices rose 26.7% and 36.6%, respectively.
- Product costs increased faster than revenue, compressing product margins.
- Operating and administrative cost reductions partly offset lower volumes and margin pressure.
- Fiscal 2011 included a $2.0 million severance charge and $2.9 million of accelerated depreciation on assets taken out of service. Fiscal 2010 instead included a $9.5 million debt-extinguishment loss and a $2.8 million pension settlement charge.
- Operating cash flow declined because of lower earnings and a $12.4 million increase in working-capital investment associated primarily with higher product costs.
- Fiscal 2011 capital spending included $10.2 million of maintenance expenditures and $12.1 million supporting growth, plus $3.2 million for acquisitions.
Guidance, Outlook, Risks and Unusual Items
For fiscal 2012, management anticipated approximately $22.0 million of maintenance and growth capital expenditures, $26.2 million of interest and income tax payments, and approximately $121.2 million of distributions assuming the annualized $3.41 per-unit distribution remained unchanged. Management expected available cash, operating cash flow and revolver capacity to fund obligations and did not expect to borrow under the facility for working capital based on its forecast.
- Results are highly seasonal and sensitive to winter weather; approximately two-thirds of retail propane and three-fourths of fuel oil volumes are sold from October through March.
- Commodity price volatility can reduce margins, increase working-capital needs and encourage customer conservation. Hedging reduces but does not eliminate this exposure.
- Demand faces competition from natural gas, electricity and other fuels, as well as energy-efficiency improvements and technological change.
- Supply disruptions, transportation constraints and concentration among major propane suppliers could increase costs or affect availability.
- Environmental, health and safety regulation, climate-related regulation and derivative-market regulation could increase operating or compliance costs.
- The partnership had $0.6 million of accrued environmental liabilities, $52.8 million of self-insurance liabilities and approximately $17.5 million of insurance recoveries recorded as an asset.
- Putative lawsuits in several states allege issues involving pricing, fee disclosure, tank ownership and related consumer and antitrust matters. Management believes the claims are without merit and did not accrue a loss contingency beyond legal defense costs.
- The defined benefit pension plan was underfunded by $26.2 million at year-end, up from $17.7 million a year earlier, primarily because lower discount rates increased the benefit obligation.
- The partnership remains exposed to tax-law changes that could affect its treatment as a publicly traded partnership and the amount of cash available for distribution.
Most Important Facts for Investors to Verify
- Whether propane and fuel oil volumes stabilize or continue declining under high commodity prices and conservation trends.
- Whether selling prices and hedging activities can offset future wholesale cost increases without further margin compression.
- Cash flow coverage of the $3.41 annualized distribution after capital spending, interest, taxes and working-capital requirements.
- Compliance with leverage, interest-coverage and distribution covenants, particularly ahead of the $100.0 million revolver maturity in 2013.
- Progress and ultimate exposure relating to consumer litigation, self-insurance claims and environmental remediation.
- The effect of warmer or colder-than-normal weather on fiscal 2012 earnings and cash flow.
- The sustainability of the partnership’s tax classification and the associated tax treatment of unitholder income and distributions.