Business Context and Reporting Period
Suburban Propane Partners, L.P. is a publicly traded limited partnership engaged primarily in retail propane distribution, fuel oil and refined fuels, natural gas and electricity marketing, and home-comfort equipment services. This unaudited Form 10-Q covers the three and nine months ended June 27, 2015, compared with June 28, 2014. Results are highly seasonal, with most heating-related volume and profit generated during the first and second fiscal quarters.
Financial Performance and Position
| Metric | Three Months Ended June 27, 2015 | Year-over-Year Change | Nine Months Ended June 27, 2015 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $220.3 million | Down 25.9% | $1,242.6 million | Down 26.8% |
| Operating income | $(21.8) million | Improved from $(26.6) million | $225.7 million | Up 0.5% |
| Net income (loss) | $(41.0) million | Improved from $(59.0) million | $151.5 million | Up 1.5% |
| Net income (loss) per common unit | $(0.67) | Improved from $(0.98) | $2.50 basic | Up from $2.47 |
| EBITDA | $10.9 million | Improved from $(5.2) million | $309.2 million | Down from $314.0 million |
| Adjusted EBITDA | $12.1 million | Up from $10.0 million | $327.4 million | Down from $334.0 million |
| Operating cash flow | Not separately provided | Not separately provided | $259.1 million | Up from $145.0 million |
Third-quarter cost of products sold declined 41.7% to $94.2 million, and represented 42.8% of revenue versus 54.3% in the prior-year quarter. Nine-month cost of products sold declined 44.1% to $535.8 million, or 43.1% of revenue versus 56.5%. The improvement primarily reflected sharply lower wholesale commodity costs, which declined faster than selling prices.
Third-quarter retail propane volume declined 6.6% to 77.6 million gallons, while fuel oil and refined fuels volume declined 11.5% to 6.2 million gallons. For the first nine months, propane volume declined 9.4% and fuel oil and refined fuels volume declined 14.3%.
Cash and cash equivalents were $147.0 million at June 27, 2015, compared with $92.6 million at September 27, 2014. Total assets were $2.54 billion and total partners’ capital was $1.02 billion. Long-term borrowings were $1.24 billion, broadly unchanged from fiscal year-end.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because average propane and fuel oil selling prices fell 23.0% and 28.3%, respectively, in the third quarter, reflecting lower commodity costs. Lower volumes also contributed.
- Warmer weather reduced demand. Third-quarter temperatures across service territories were 16% warmer than normal and 6% warmer than the prior-year quarter.
- Operating expenses declined 13.6% in the third quarter and 9.2% for the nine-month period, reflecting lower headcount, vehicle costs, fuel costs, insurance, bad debt, and integration-related expenses.
- Net interest expense declined 8.4% in the quarter and 7.1% year to date following refinancing transactions.
- The Partnership refinanced its $250.0 million of 7.375% senior notes due 2020 with $250.0 million of 5.75% notes due 2025. The refinancing generated a $15.1 million debt-extinguishment loss in the second quarter.
- Inergy Propane integration efforts were described as substantially complete. Integration-related costs were $1.1 million in the third quarter and $5.1 million for the nine-month period, compared with $4.3 million and $9.1 million, respectively, in the prior-year periods.
- Working-capital requirements declined substantially as lower commodity prices reduced inventory and receivables, contributing to the $114.2 million increase in year-to-date operating cash flow.
Debt, Liquidity, Distributions, and Outlook
Debt consisted principally of $346.2 million of 7.375% senior notes due 2021, $525.0 million of 5.5% senior notes due 2024, $250.0 million of 5.75% senior notes due 2025, and $100.0 million drawn under a $400.0 million secured revolving credit facility. After $53.2 million of standby letters of credit and the outstanding revolver borrowings, available borrowing capacity was $246.8 million. The revolver interest rate was approximately 2.5% at quarter-end.
The Partnership was in compliance with its debt covenants at June 27, 2015. Debt maturities were reported as $100.0 million in fiscal 2017 and $1.12 billion thereafter. Management expected approximately $9.0 million of capital expenditures, $21.4 million of interest payments, and $53.7 million of distributions during the remainder of fiscal 2015.
On July 23, 2015, after the reporting period, the Partnership announced a third-quarter distribution of $0.8875 per common unit, or $3.55 annualized, payable August 11, 2015.
No formal earnings or volume guidance was provided. Management emphasized continued cost savings, completed or substantially completed Inergy integration, balance-sheet improvement, and the importance of weather, commodity prices, demand, and customer conservation. Management stated that third-quarter results were seasonally affected by lower heating demand and that lower operating profits or net losses are normally expected in the April-to-September period.
Risks, Contingencies, and Unusual Items
- Results remain sensitive to weather, commodity and transportation costs, customer conservation, product availability, competition, and the ability to pass cost increases through to customers.
- Derivative instruments are used for hedging rather than speculation. A hypothetical 10% adverse change in commodity prices was estimated to reduce potential future net gains by $2.2 million; actual results could differ materially.
- The Partnership had a net interest-rate-swap liability of approximately $1.4 million and exposure to variable-rate debt.
- Self-insurance liabilities were $61.5 million, with a related insurance recovery asset of $17.7 million.
- The Partnership had accrued $6.8 million for estimated multi-employer pension withdrawal obligations and could face additional liability depending on future events and Inergy integration matters.
- Residual-value guarantees on operating leases had a maximum potential exposure of approximately $11.8 million, although the recorded fair value was de minimis.
- Management did not believe pending or threatened litigation would have a material adverse effect, but litigation and operating hazards involving combustible fuels remain inherent risks.
- Disclosure controls and procedures were effective as of June 27, 2015, and no material changes in internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Whether lower commodity prices and cost reductions offset continued volume pressure and unfavorable weather in subsequent heating seasons.
- The sustainability of cash flow and the ability to fund distributions, capital expenditures, interest, and the $100.0 million fiscal 2017 debt maturity.
- Actual leverage, interest-coverage, and fixed-charge-coverage ratios relative to covenant limits.
- Progress toward fully realizing Inergy-related synergies and whether integration costs have ended.
- The impact of commodity-price volatility, hedging results, and variable interest rates on earnings and cash flow.
- Potential changes in multi-employer pension withdrawal liability, self-insurance reserves, litigation exposure, and environmental or regulatory obligations.