Business Context and Reporting Period
Suburban Propane Partners, L.P. is a retail marketer and distributor of propane, fuel oil and refined fuels, natural gas and electricity, with related home-comfort equipment and service activities. This unaudited Form 10-Q covers the 13 weeks ended December 28, 2013, compared with the 13 weeks ended December 29, 2012. Results are highly seasonal, with the first and second fiscal quarters representing the peak heating season.
Financial Performance and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $526.1 million | $490.7 million | +7.2% |
| Operating income | $80.1 million | $82.3 million | -2.7% |
| Net income | $58.7 million | $57.6 million | +1.8% |
| Basic income per common unit | $0.97 | $1.01 | Lower |
| EBITDA | $114.9 million | $112.8 million | +1.8% |
| Adjusted EBITDA | $117.7 million | $117.5 million | +0.2% |
| Net cash from operating activities | $4.2 million | $61.5 million | Down $57.4 million |
Revenue growth was driven principally by higher propane selling prices and a 2.6% increase in retail propane volume to 157.9 million gallons. Fuel oil and refined-fuels volume declined 11.9% to 14.0 million gallons. Propane revenue increased 11.7%, while fuel oil and refined-fuels revenue declined 12.7%.
Operating margin declined to approximately 15.2% from 16.8%, and net margin was approximately 11.2% versus 11.7%. Cost of products sold increased 14.5% to $280.5 million and rose to 53.3% of revenue from 49.9%, primarily because propane wholesale costs increased faster than selling prices. Operating and general and administrative expenses declined modestly, but depreciation and amortization increased 14.1% to $34.8 million.
Net interest expense decreased 13.6% to $21.2 million following the $157.3 million reduction in long-term borrowings during the prior quarter. Q1 FY2014 included $2.5 million of Inergy Propane integration costs and $0.3 million of unrealized derivative losses, compared with $1.0 million and $3.6 million, respectively, in the prior-year quarter.
At December 28, 2013, cash and cash equivalents were $55.3 million, compared with $107.2 million at September 28, 2013. Accounts receivable increased to $199.0 million and inventories to $100.5 million, reflecting higher commodity prices and seasonal working-capital needs. Total assets were $2.78 billion and partners' capital was $1.14 billion.
Net cash from operations was constrained by a $104.2 million increase in accounts receivable and a $22.9 million increase in inventories. Capital expenditures were $9.3 million, partly offset by $5.9 million of proceeds from asset sales. The Partnership paid $52.7 million in distributions.
Debt, Liquidity and Distributions
- Long-term borrowings totaled $1.24 billion, including $100.0 million drawn under the $400.0 million revolving credit facility.
- Senior notes consisted principally of $496.6 million due 2018, $250.0 million due 2020 and $346.2 million due 2021.
- Available revolver capacity was $253.3 million after $46.7 million of standby letters of credit and the $100.0 million borrowing.
- The Partnership was in compliance with its debt covenants. At quarter-end, the minimum interest coverage requirement was 2.25 to 1.0 and the maximum leverage requirement was 4.75 to 1.0; the minimum interest coverage requirement rises to 2.5 to 1.0 beginning in the second fiscal quarter.
- Management estimated approximately $20.0 million of remaining fiscal 2014 capital expenditures, $67.7 million of interest payments and $158.3 million of distributions at the then-current distribution rate.
- A quarterly distribution of $0.8750 per common unit was declared, equivalent to $3.50 per unit on an annualized basis.
Material Changes, Outlook and Risks
- Average posted propane prices increased 35.0% year over year and December prices increased 59.0%, reflecting supply and logistics constraints. Management cautioned that rapid commodity-price increases may not be fully or immediately passed through to customers and may encourage conservation.
- Weather across service territories was normal on average but 9% colder than the prior-year quarter, with December colder than the prior year; weather materially affects heating demand and profitability.
- Management paused most Inergy Propane integration activity during the heating season to focus on customers, plans to resume activities late in the second quarter and expects to achieve its annual synergy goals by fiscal year-end.
- Management reported that working-capital needs were funded from cash without additional revolver borrowings during the quarter, but cash flow was significantly below the prior year because of higher commodity-related working capital.
- Key risks include weather variability, propane and fuel-price volatility, supply and transportation interruptions, customer conservation, competition, integration execution, interest rates, regulation, litigation and operating hazards associated with combustible fuels.
- The Partnership uses derivatives for hedging rather than speculation. A hypothetical 10% adverse commodity-price change in open derivative positions indicated potential future net losses of approximately $2.4 million.
- Self-insurance liabilities were $58.8 million, with an $18.4 million insurance-recovery asset. Residual-value guarantees on operating leases had a maximum potential exposure of approximately $16.0 million.
- Pending litigation was not expected to have a material adverse effect, and a previously reported putative class action was dismissed with prejudice on February 4, 2014. No material changes to previously disclosed risk factors were reported.
Important Facts to Verify
- Whether propane supply and logistics constraints persist and whether retail pricing can maintain margins.
- Actual cash generation after seasonal receivables, inventory, distributions and planned capital expenditures.
- Progress toward Inergy integration savings and the level of remaining integration charges.
- Compliance with the tighter second-quarter interest-coverage covenant and the Partnership's leverage trajectory.
- Sustainability of the $0.8750 per-unit quarterly distribution relative to distributable cash flow and adjusted EBITDA.
- Exposure to weather, commodity-price movements, derivative valuation changes, self-insurance claims and potential multi-employer pension withdrawal liabilities.