Suburban Propane Partners, L.P. — Form 10-Q Summary
Business context and reporting period
The filing covers the fiscal quarter and nine months ended June 23, 2012, compared with June 25, 2011. Suburban Propane markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and related home-comfort services. Results are highly seasonal, with approximately two-thirds of retail propane volume sold during the October–March heating season.
Financial performance and liquidity
| Metric | Three months ended June 23, 2012 | Three months ended June 25, 2011 | Nine months ended June 23, 2012 | Nine months ended June 25, 2011 |
|---|---|---|---|---|
| Revenue | $179.6 million | $216.6 million | $837.1 million | $1,009.0 million |
| Operating income | $(2.7) million | $0.4 million | $83.7 million | $157.9 million |
| Net income/(loss) | $(9.3) million | $(6.8) million | $63.5 million | $136.7 million |
| Basic income/(loss) per unit | $(0.26) | $(0.19) | $1.78 | $3.85 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $73.3 million | $109.8 million |
| Adjusted EBITDA | $3.5 million | $10.3 million | $108.4 million | $184.0 million |
Third-quarter cost of products sold was $88.8 million, or 49.4% of revenue, versus 57.8% in the prior-year quarter. The resulting gross margin was approximately 50.6%, compared with approximately 42.2% previously. Reported third-quarter operating margin was approximately negative 1.5%; nine-month operating margin was approximately 10.0%, compared with 15.6% in the prior-year period.
At June 23, 2012, cash and cash equivalents were $115.8 million, total assets were $896.1 million, total liabilities were $558.5 million, and partners’ capital was $337.5 million. Long-term borrowings were $348.3 million, consisting principally of $250.0 million of 7.375% senior notes due 2020 and $100.0 million outstanding under a revolving credit facility. After $46.9 million of outstanding letters of credit, available revolver capacity was $103.1 million. The Partnership was in compliance with its debt covenants.
Nine-month investing cash outflows were $12.0 million, including $14.4 million of capital expenditures. Financing cash outflows were $95.0 million, principally distributions of $90.8 million. Cash declined by $33.7 million from September 24, 2011 to $115.8 million at quarter-end.
Material changes versus the prior comparable period
- Third-quarter revenue decreased 17.1% and nine-month revenue decreased 17.0%, primarily because of lower volumes caused by unusually warm weather, customer conservation and economic conditions.
- Third-quarter retail propane volume declined 10.3% to 49.0 million gallons; fuel oil and refined-fuels volume declined 23.2% to 4.3 million gallons. For the nine months, propane volume declined 16.4% to 213.2 million gallons and fuel oil/refined-fuels volume declined 32.1% to 22.6 million gallons.
- Average temperatures across service territories were 16% warmer than normal and the prior-year third quarter; the first nine months were 14% warmer than normal and the comparable prior-year period.
- Nine-month net income fell 53.5% to $63.5 million, while Adjusted EBITDA declined 41.1% to $108.4 million. Third-quarter Adjusted EBITDA declined 66.5% to $3.5 million.
- Third-quarter results included $5.9 million of acquisition-related costs. Cost of products sold also included an $8.2 million unrealized, non-cash derivative gain, versus a $0.3 million loss in the prior-year quarter.
- Operating expenses decreased 5.3% for the nine months, but general and administrative expense increased 7.6%, including a $2.1 million non-cash asset-disposal loss. The prior-year period included a $2.0 million severance charge and a $2.5 million gain on asset sales.
Outlook, acquisition, risks and unusual items
On August 1, 2012, after the reporting date, the Partnership completed the acquisition of Inergy Propane. Consideration included approximately $1.075 billion of new senior notes, $184.8 million of cash to tendering noteholders, $65.0 million of consent payments, and 14,201 newly issued common units valued at approximately $590.0 million, partially offset by $18.0 million of cash received from Inergy.
The acquisition added retail propane operations that had served customers in 33 states. The Partnership also drew $225.0 million under a 364-day incremental term loan and increased its revolving credit facility from $250.0 million to $400.0 million. Management stated that it intends to repay the incremental borrowing with future equity financing, subject to market conditions. Post-acquisition covenants were amended, including a temporarily higher permitted leverage ratio and lower minimum interest-coverage requirement.
Management declared a quarterly distribution of $0.8525 per common unit, or $3.41 annualized, payable August 7, 2012. Expected remaining fiscal 2012 cash requirements were approximately $7.6 million for capital expenditures, $10.5 million for interest and $30.3 million for distributions.
Principal risks include weather-driven demand volatility, commodity-price and supply risk, customer conservation, competition, interest-rate and credit-market conditions, regulatory and tax changes, operating hazards, self-insurance exposure, litigation and the integration, financing and expected benefits of the Inergy Propane acquisition. The Partnership reported two putative class actions and other commercial suits; no loss contingency beyond defense costs was recorded based on the information available.
Important facts for investors to verify
- Whether the Inergy Propane acquisition achieves expected operating benefits and whether integration costs, revenue and cash-flow impacts differ from management’s expectations.
- The timing and terms of the planned equity financing to repay the $225.0 million 364-day facility, and the resulting leverage and covenant compliance.
- Actual weather, propane and fuel-oil volumes, customer conservation and commodity prices in subsequent heating seasons.
- The sustainability of the $0.8525 quarterly distribution after the acquisition and under the revised debt covenants.
- Exposure from self-insurance liabilities, residual-value guarantees, litigation and derivative positions; a hypothetical 10% adverse commodity-price movement implied potential future losses of $3.7 million at June 23, 2012.
- The pro forma acquisition figures are unaudited and not necessarily indicative of future results; reported historical results exclude Inergy Propane before August 1, 2012.