Business Context and Reporting Period
Suburban Propane Partners, L.P. is a publicly traded Delaware limited partnership engaged in the retail distribution of propane, fuel oil and refined fuels; marketing of natural gas and electricity; and home-comfort equipment and service activities. This unaudited Form 10-Q covers the three and nine months ended June 26, 2010, compared with June 27, 2009. Results are highly seasonal, with heating demand concentrated in the first and second fiscal quarters.
Financial Performance and Liquidity
| Metric | Three months ended June 26, 2010 | Comparable period | Nine months ended June 26, 2010 | Comparable period |
|---|---|---|---|---|
| Revenue | $198.1 million | $184.4 million | $968.7 million | $992.9 million |
| Operating income before interest and taxes | $0.6 million | $3.8 million | $171.1 million | $219.2 million |
| Net income (loss) | $(6.6) million | $(7.4) million | $140.1 million | $188.1 million |
| Income (loss) per common unit | $(0.19) | $(0.23) | $3.96 | $5.73 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $129.7 million | $223.5 million |
| EBITDA | $9.4 million | $11.5 million | $184.7 million | $241.1 million |
| Adjusted EBITDA | $9.1 million | $17.7 million | $199.1 million | $241.9 million |
Third-quarter revenue rose 7.4% because higher selling prices offset lower volumes. Nine-month revenue declined 2.4%, reflecting weaker volumes in propane, fuel oil, natural gas and electricity, partly offset by higher selling prices.
For the nine months, cost of products sold increased 7.6% to $505.5 million, and represented 52.2% of revenue versus 47.3% in the prior year. Third-quarter cost of products sold represented 53.8% of revenue versus 47.4%. Rising commodity costs outpaced selling-price increases, although derivative mark-to-market results were favorable in the third quarter.
Operating cash flow declined primarily because higher commodity prices increased working-capital requirements and earnings were lower. Investing cash outflows were $20.8 million, including $13.0 million of capital expenditures and $10.8 million for acquisitions, partly offset by $3.0 million of asset-sale proceeds. Financing cash outflows were $102.1 million, including $88.4 million of distributions.
Cash and cash equivalents were $170.0 million at June 26, 2010, compared with $163.2 million at September 26, 2009. Long-term borrowings were $347.9 million, consisting of $247.9 million of 7.375% senior notes due 2020 and $100.0 million drawn under the revolving credit facility. The facility had $91.5 million of available capacity after $58.5 million of outstanding letters of credit. The Partnership reported compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Third-quarter retail propane volume fell 8.5% to 56.0 million gallons; fuel oil and refined-fuels volume fell 32.0% to 6.6 million gallons.
- For the first nine months, propane volume declined 8.2% to 270.5 million gallons and fuel-oil and refined-fuels volume declined 24.6% to 38.1 million gallons.
- Average third-quarter propane and fuel-oil posted prices increased 49.2% and 35.5%, respectively; higher prices drove revenue but pressured margins.
- Third-quarter operating expenses decreased 5.1% to $68.6 million, while general and administrative expenses increased 2.1% to $13.4 million.
- Net interest expense decreased 32.4% in the third quarter and 28.8% for the nine months, primarily because of debt reductions in fiscal 2009.
- On March 23, 2010, the Partnership issued $250.0 million of 7.375% senior notes due 2020 and repurchased its 6.875% senior notes due 2013. The refinancing produced a $9.5 million loss on debt extinguishment.
- The Partnership acquired three propane businesses during the nine-month period; management stated that the acquisitions were not material individually or in aggregate for disclosure purposes.
- A $1.8 million non-cash depreciation charge was recorded in the third quarter for assets taken out of service. A $1.4 million liability for an unfavorable uninsured legal judgment was established in the second quarter and paid during the third quarter.
Guidance, Outlook, Risks and Unusual Items
Management expects economic weakness and volatile commodity prices to continue affecting customer buying patterns and sales volumes. Management expects its flexible cost structure, operating efficiencies and financial position to help manage these conditions, but no formal earnings guidance was provided.
Expected cash requirements for the remainder of fiscal 2010 were approximately $12.0 million for maintenance and growth capital expenditures, $11.0 million for interest payments and $29.8 million for common-unit distributions. Management did not expect to borrow under the credit facility for the remainder of fiscal 2010 based on estimated operating cash flow and cash on hand.
The Board declared a third-quarter distribution of $0.845 per common unit, or $3.38 annualized, payable August 10, 2010. This represented a $0.02 increase from the prior distribution and a 2.4% increase from the third quarter of fiscal 2009.
- Principal operating risks include weather variability, customer conservation, economic conditions, commodity-price volatility, supply and transportation availability, competition and the ability to pass cost increases to customers.
- Derivative instruments are used for hedging rather than speculation. At June 26, 2010, derivative assets were $3.3 million and derivative liabilities were $3.0 million; a hypothetical 10% adverse commodity-price change indicated potential future losses of $2.6 million.
- The Partnership is self-insured for specified risks and carried accrued insurance liabilities of $55.5 million, partially offset by an $18.2 million insurance recovery asset.
- Residual-value guarantees on operating leases had a maximum potential future payment of approximately $9.4 million, assuming leased equipment had no value at lease termination.
- Management stated that existing legal proceedings were not expected to have a material adverse effect after considering reserves and insurance.
Important Facts for Investors to Verify
- Whether warmer weather and weaker commercial and industrial demand continue to reduce propane and fuel-oil volumes.
- Whether selling prices and hedging activities can offset future commodity-cost increases without further margin compression.
- Compliance with the revolving-credit and senior-note covenants, including interest-coverage and leverage requirements.
- Cash generation relative to distributions, capital expenditures, acquisitions and the approximately $100 million debt maturity in 2013.
- The sustainability of the $0.845-per-unit quarterly distribution given seasonal losses in the third and fourth quarters.
- Future effects of self-insurance claims, legal matters, pension and postretirement obligations, and derivative fair-value changes.