Suburban Propane Partners, L.P. — Fiscal 2013 Form 10-K Summary
Reporting period: Fiscal year ended September 28, 2013. Fiscal 2013 contained 52 weeks versus 53 weeks in fiscal 2012; the filing’s fourth quarter contained 13 weeks versus 14 weeks in the prior-year quarter.
Business context
Suburban is a nationwide marketer and distributor of propane, fuel oil and refined fuels, natural gas and electricity, and related heating and ventilation services. At year-end, it served more than 1.2 million customers through approximately 750 locations in 41 states. The August 2012 acquisition of Inergy Propane approximately doubled the customer base and expanded operations into the Midwest; fiscal 2013 included a full year of Inergy results.
Key financial metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Revenue | $1,703.6 million | $1,063.5 million | +60.2% |
| Operating income | $177.0 million | $41.7 million | +324.9% |
| Net income | $78.8 million | $0.6 million | Substantial increase |
| Basic earnings per common unit | $1.35 | $0.02 | Substantial increase |
| Cash flow from operations | $214.3 million | $111.0 million | +93.1% |
| EBITDA | $305.2 million | $86.4 million | +253.1% |
| Adjusted EBITDA | $329.3 million | $108.5 million | +203.4% |
| Capital expenditures | $27.8 million | $17.5 million | +59.2% |
| Cash and equivalents | $107.2 million | $134.3 million | Down $27.1 million |
| Total debt | $1,245.2 million | $1,422.1 million | Down $176.8 million |
Reported margins were approximately 49.4% gross, 10.4% operating, 4.6% net, 17.9% EBITDA and 19.3% adjusted EBITDA. Cost of products sold declined to 50.6% of revenue from 56.3%, primarily because propane costs fell faster than average selling prices and the business had a greater mix of residential volumes.
- Propane revenue was $1,357.1 million, up 60.9%; retail propane volume rose 88.4% to 534.6 million gallons.
- Fuel oil and refined fuels revenue was $209.0 million, up 82.8%; volume rose 88.4% to 53.7 million gallons.
- Natural gas and electricity revenue increased 17.8% to $79.4 million.
- Distributions increased to $0.8750 per unit per quarter, or $3.50 annualized, from $0.8525 per quarter in fiscal 2012.
Material changes versus the prior comparable period
- The full-year inclusion of Inergy Propane was the principal driver of revenue, volume and EBITDA growth. Fiscal 2013 also benefited from weather that was closer to normal than fiscal 2012, although service territories remained 4% warmer than normal.
- Operating expenses increased 57.1% to $469.5 million, but declined to 27.6% of revenue from 28.1%, reflecting scale and integration efficiencies.
- Depreciation and amortization increased 177.2% to $130.4 million due to acquired tangible and intangible assets.
- Net interest expense increased 147.0% to $95.4 million because of debt issued in connection with the Inergy acquisition.
- Suburban issued 3.105 million common units for net proceeds of $143.4 million and used the proceeds, together with cash, to repurchase $157.3 million of 2021 senior notes. A $2.1 million debt extinguishment loss was recorded.
- Fiscal 2013 included $10.6 million of Inergy integration costs and a $7.0 million multi-employer pension withdrawal charge. Fiscal 2012 included $17.9 million of acquisition costs, a $4.5 million legal settlement charge and a $2.1 million asset-disposal loss.
- Fourth-quarter fiscal 2013 revenue was $243.7 million and net loss was $63.1 million, compared with fourth-quarter fiscal 2012 revenue of $226.3 million and net loss of $62.8 million. The business is highly seasonal, with losses commonly occurring in the third and fourth fiscal quarters.
Liquidity, debt and outlook
- Debt consisted principally of $496.6 million of 7.5% notes due 2018, $250.0 million of 7.375% notes due 2020, $346.2 million of 7.375% notes due 2021 and $100.0 million drawn under a $400.0 million revolving credit facility.
- Available revolving-credit capacity was $253.3 million after $46.7 million of standby letters of credit. The facility matures January 5, 2017; scheduled debt maturities are $100.0 million in fiscal 2017, $496.6 million in fiscal 2018 and $596.2 million thereafter.
- Management expected fiscal 2014 capital expenditures of approximately $30.0 million, interest and income-tax payments of approximately $88.1 million, and unitholder distributions of approximately $211.1 million assuming the $3.50 annualized distribution rate.
- Management expected available cash, operating cash flow and revolver capacity to be sufficient for anticipated obligations. The partnership reported compliance with all debt covenants at September 28, 2013.
- Management continued to focus on integrating Inergy operations, consolidating systems and facilities, realizing cost synergies, improving customer retention and pursuing selective acquisitions.
Risks, contingencies and unusual items
- Results are highly sensitive to winter weather, commodity prices, customer conservation, competition from natural gas and electricity, and the ability to pass through product-cost increases.
- Integration of Inergy remains a material execution risk; additional integration expenses, customer losses, employee departures or delayed synergies could adversely affect results.
- Environmental, safety, transportation, self-insurance and litigation exposures are material operational considerations. Environmental liabilities accrued at year-end were $0.7 million, while self-insurance liabilities totaled $58.2 million.
- A putative class action remained pending; class certification had been denied without prejudice, and the partnership had not accrued a loss beyond defense costs because the potential loss could not be reasonably estimated.
- Multi-employer pension plans included underfunded plans in the red zone. The partnership accrued $7.0 million for fiscal 2013 withdrawals, but future withdrawal liabilities could not be determined.
- A hypothetical 10% adverse change in commodity prices for open derivatives indicated a potential $2.2 million increase in future net losses; actual results could differ materially.
- The partnership’s distribution policy depends on available cash and is subject to debt covenants, cash reserves, operating performance and seasonal working-capital requirements.
Investor verification items
- Verify the extent to which fiscal 2013 earnings and cash flow were attributable to the full-year Inergy contribution versus legacy operations, weather and one-time adjustments.
- Reconcile reported EBITDA and adjusted EBITDA to GAAP net income and operating cash flow; these are non-GAAP measures and exclude selected costs.
- Assess distribution coverage after interest, capital expenditures, taxes, integration costs and required debt repayments.
- Monitor leverage and covenant headroom as the minimum interest-coverage requirement increases to 2.5-to-1 beginning in fiscal 2014.
- Evaluate refinancing requirements for the 2017 and 2018 maturities and the sensitivity of cash flow to interest rates and commodity prices.
- Track progress and remaining costs of Inergy integration, including pension withdrawal obligations and potential customer attrition.
- Review exposure to warm winters, natural-gas substitution, environmental claims, self-insurance and unresolved litigation.