Suburban Propane Partners, L.P. — Fiscal 2016 First-Quarter Form 10-Q
Business context and reporting period
The filing covers the 13 weeks ended December 26, 2015, compared with the three months ended December 27, 2014. Suburban Propane markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and home-comfort equipment and services. Results are highly seasonal and weather-sensitive, with the first and second fiscal quarters representing the peak heating season.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $275.9 million | $422.9 million | Down 34.8% |
| Operating income | $31.3 million | $76.0 million | Down 58.7% |
| Net income | $12.3 million | $55.8 million | Down 78.0% |
| Basic earnings per unit | $0.20 | $0.92 | Down $0.72 |
| EBITDA | $63.0 million | $108.6 million | Down 42.0% |
| Adjusted EBITDA | $67.2 million | $101.0 million | Down 33.5% |
| Cash flow from operations | $10.4 million | $33.6 million | Down $23.3 million |
Cost of products sold fell to $92.5 million from $187.9 million, and represented 33.5% of revenue versus 44.4% in the prior-year quarter. Implied gross margin was approximately 66.5%, compared with 55.6% previously. Operating margin was approximately 11.4%, compared with 18.0%, and net margin was approximately 4.4%, compared with 13.2%.
Retail propane volume declined 18.4% to 109.8 million gallons, while fuel oil and refined-fuels volume declined 23.9% to 8.6 million gallons. Average posted propane and fuel-oil prices were 44.8% and 41.0% lower, respectively. The quarter included a $1.2 million unrealized derivative loss, compared with a $9.5 million unrealized gain in the prior-year quarter.
Cash and cash equivalents were $56.5 million at December 26, 2015, compared with $152.3 million at September 26, 2015. Cash used for the Propane USA acquisition and distributions was the primary driver of the decrease. Capital expenditures were $13.0 million, and cash used for investing activities was $52.5 million.
Long-term borrowings were $1.240 billion, including $100.0 million outstanding under the revolving credit facility. The facility had $253.8 million of available borrowing capacity after $46.2 million of letters of credit. The Partnership was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Record warm weather reduced heating demand: first-quarter temperatures were 25% warmer than normal and 17% warmer than the prior year; December and the quarter were described as the warmest on record across the service territories.
- Revenue decreased primarily because of lower volumes and lower selling prices. Propane revenue fell 34.7%, fuel-oil and refined-fuels revenue fell 46.9%, and natural-gas and electricity revenue fell 26.9%.
- Operating expenses decreased 2.1% and general and administrative expenses decreased 19.7%, reflecting lower payroll, benefits, variable compensation, vehicle costs and professional fees. These savings were insufficient to offset the decline in gross profit.
- Interest expense decreased 5.5% to $18.9 million, primarily because of refinancing completed in fiscal 2015.
- On December 15, 2015, the Partnership acquired Propane USA for $45.0 million, including $41.25 million paid during the quarter. The acquisition expanded the Partnership’s presence in southern Florida and was funded from cash on hand.
- A $3.0 million product-liability settlement reduced current-quarter results. The prior-year quarter included $1.9 million of Inergy Propane integration costs.
Guidance, outlook, commentary and risks
Management did not provide formal earnings guidance. It expects approximately $22.0 million of maintenance and growth capital expenditures, $58.9 million of interest and income-tax payments, and $161.8 million of cash distributions during the remainder of fiscal 2016, based on the then-current distribution rate. Management expected available cash, operating cash flow and revolving-credit capacity to fund these requirements.
The Board declared a quarterly distribution of $0.8875 per Common Unit, or $3.55 annualized, a 1.4% increase from the comparable prior-year rate. The distribution was payable February 9, 2016.
Key risks include unusually warm weather, commodity-price and transportation-cost volatility, customer conservation, supply availability, competition, interest-rate exposure, derivative and counterparty risk, regulatory and environmental requirements, operating hazards, litigation, insurance claims, capital-market conditions and the ability to integrate acquisitions. The Partnership uses derivatives for hedging and not speculative trading; a hypothetical 10% adverse commodity-price move would have reduced potential future net gains by approximately $1.1 million based on open positions at quarter-end.
The Partnership settled a product-liability matter for $3.0 million during the quarter and reported accrued insurance liabilities of $60.8 million, partially offset by a $15.8 million insurance recovery asset. Management stated that pending or threatened litigation was not expected to have a material adverse effect. The maximum potential residual-value guarantee under operating leases was $14.8 million.
Most important facts for investors to verify
- Whether heating demand normalizes after the record-warm first quarter and how volumes develop during the balance of the heating season.
- The sustainability of the $0.8875 per-unit quarterly distribution given low first-quarter operating cash flow, planned distributions and debt obligations.
- Progress and returns from the Propane USA acquisition, including integration performance and any additional purchase-price payments.
- Liquidity before the revolving credit facility maturity in January 2017, including covenant compliance and the $100.0 million facility balance.
- The effect of commodity prices, derivative mark-to-market results and customer conservation on margins and adjusted EBITDA.
- Future legal, self-insurance, pension and multi-employer pension obligations, including the estimated $18.0 million multi-employer plan obligation.