Suburban Propane Partners, L.P. — Fiscal 2013 Second-Quarter Form 10-Q
Business Context and Reporting Period
The filing covers the three and six months ended March 30, 2013, compared with the periods ended March 24, 2012. The Partnership distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides home-comfort equipment and service. Results include the Inergy Propane operations acquired August 1, 2012; the acquisition was therefore a major driver of year-over-year changes.
Key Financial Metrics
| Metric | Three months ended March 30, 2013 | Prior comparable period | Six months ended March 30, 2013 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $678.4 million | $357.6 million | $1.169 billion | $657.5 million |
| Operating income | $155.6 million | $56.1 million | $240.1 million | $86.4 million |
| Net income | $131.2 million | $49.6 million | $190.9 million | $72.8 million |
| Basic income per common unit | $2.29 | $1.39 | $3.34 | $2.05 |
| Operating margin | 22.9% | 15.7% | 20.5% | 13.1% |
| Net margin | 19.3% | 13.9% | 16.3% | 11.1% |
| EBITDA | $185.3 million | $63.3 million | $298.1 million | $101.3 million |
| Adjusted EBITDA | $190.7 million | $65.9 million | $307.1 million | $105.0 million |
Six-month net cash provided by operating activities was $134.0 million, compared with $17.0 million in the prior year. Investing cash flow was an outflow of $3.2 million, including $12.9 million of capital expenditures, partly offset by a $5.9 million Inergy purchase-price adjustment and $3.9 million of asset-sale proceeds. Financing cash flow was an outflow of $98.6 million, primarily from partnership distributions.
At March 30, 2013, cash and cash equivalents were $166.6 million, total assets were $3.0 billion, and total partners’ capital was $1.191 billion. Long-term borrowings were $1.418 billion, including $1.318 billion of senior notes and $100.0 million drawn on the revolving credit facility. Available revolver capacity was $250.8 million after $49.2 million of letters of credit. The Partnership was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 89.7%; six-month revenue increased 77.8%, principally from the Inergy Propane acquisition, higher volumes, and more favorable weather.
- Second-quarter retail propane volume increased 133.8% to 210.3 million gallons; fuel-oil and refined-fuels volume increased 119.8% to 23.2 million gallons.
- Propane and fuel-oil average selling prices declined, reflecting lower commodity costs, but lower wholesale propane costs improved product margins. Cost of products sold declined to 51.1% of revenue in the quarter from 58.3% and to 50.6% for six months from 59.6%.
- Operating expenses increased with the acquired business, while operating expenses as a percentage of revenue improved modestly. Depreciation and amortization increased substantially because of acquired tangible and intangible assets.
- Net interest expense increased to $24.3 million in the quarter and $48.9 million for six months, primarily because of senior notes issued in connection with the acquisition.
- Fiscal 2013 results included $2.7 million of integration-related costs in the quarter and six months, and $6.3 million of unrealized derivative losses for six months. The prior-year quarter included a $2.1 million non-cash asset-disposal charge and a $0.5 million debt-extinguishment loss.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal earnings guidance. It expected approximately $38.1 million of maintenance and growth capital expenditures, $74.3 million of interest payments, and approximately $100.0 million of cash distributions during the remainder of fiscal 2013, based on the then-current distribution rate.
Management reported continued progress integrating Inergy Propane, including regional restructuring, local operating-footprint decisions, management alignment, location consolidation, and operating-system conversions. It cautioned that significant integration work remained before the next heating season.
The business is highly seasonal and weather-sensitive; approximately two-thirds of retail propane volume and three-fourths of fuel-oil volume are sold during the October-to-March heating season. Key risks include warmer weather, commodity-price volatility, customer conservation, inability to pass through cost increases, supply and transportation constraints, competition, acquisition-integration risk, interest-rate exposure, regulatory and environmental requirements, operating hazards, litigation, and capital-market conditions.
The Partnership had accrued $4.5 million for settlement of a California class action. A separate putative class action remained unresolved, with no reserve recorded beyond defense costs because a loss could not reasonably be estimated. Self-insurance liabilities were $60.6 million, partly offset by a $19.3 million insurance-recovery asset. Residual-value guarantees on operating leases had a maximum potential exposure of approximately $16.1 million, although fair value was de minimis.
The quarterly distribution declared for the second quarter was $0.8750 per common unit, or $3.50 annualized, payable May 14, 2013. A hypothetical 10% adverse commodity-price movement implied potential future derivative losses of $1.6 million as of March 30, 2013; management stated this was not a worst-case estimate.
Important Facts for Investors to Verify
- Assess sustainable earnings excluding acquisition-related integration costs, derivative mark-to-market losses, and other unusual items.
- Evaluate whether Inergy Propane cost savings and revenue contribution can be fully realized without materially higher integration costs.
- Monitor leverage, interest coverage, the $100.0 million revolver balance, covenant thresholds, and the $1.25 billion of debt maturing after fiscal 2017.
- Test distribution sustainability against seasonal cash generation, planned capital spending, interest obligations, and working-capital requirements.
- Review weather-normalized volumes and margins, particularly because the quarter benefited from colder conditions versus the prior year.
- Follow the California settlement, remaining putative class action, self-insurance claims, and lease-guarantee exposure.