Suburban Propane Partners, L.P. — Fiscal 2012 Form 10-K Summary
Business context and reporting period
The filing covers the 53-week fiscal year ended September 29, 2012, including the fourth quarter, which contained 14 weeks. Suburban markets and distributes propane, fuel oil and refined fuels, and markets natural gas and electricity, with related equipment installation and service businesses. At year-end, it served more than 1.2 million customers through approximately 750 locations in 41 states.
On August 1, 2012, Suburban completed the approximately $1.9 billion acquisition of Inergy Propane. Fiscal 2012 results include approximately two months of acquired operations; management states that the acquisition’s separate impact on consolidated revenue and earnings cannot be clearly determined.
Key financial metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $1,063.5 million | $1,190.6 million | Down 10.7% |
| Operating income | $42.9 million | $143.2 million | Down 70.0% |
| Net income | $1.9 million | $115.0 million | Down 98.4% |
| Net income per basic unit | $0.05 | $3.24 | Down $3.19 |
| EBITDA | $86.4 million | $178.9 million | Down 51.7% |
| Adjusted EBITDA | $108.5 million | $179.4 million | Down 39.5% |
| Cash flow from operations | $111.0 million | $132.8 million | Down 16.4% |
| Capital expenditures | $17.5 million | $22.3 million | Down 21.6% |
| Cash and equivalents | $134.3 million | $149.6 million | Down $15.2 million |
Reported operating margin was approximately 4.0%, compared with 12.0% in fiscal 2011. Net margin was approximately 0.2%, compared with 9.7%. Adjusted EBITDA margin was approximately 10.2%, compared with 15.1%.
- Propane revenue was $843.6 million, down 9.2%; propane retail volume was 283.8 million gallons, down 5.1%.
- Fuel oil and refined fuels revenue was $114.3 million, down 18.1%; volume was 28.5 million gallons, down 23.4%.
- Natural gas and electricity revenue was $67.4 million, down 20.4%.
- Total product cost was $599.1 million, or 56.3% of revenue, compared with 57.0% in the prior year.
- Operating expenses increased 7.0% to $298.8 million, while general and administrative expenses increased 14.3% to $59.0 million.
Fourth-quarter results
| Metric | Fiscal Q4 2012 | Fiscal Q4 2011 |
|---|---|---|
| Revenue | $226.3 million | $181.6 million |
| Operating income (loss) | $(40.8) million | $(14.7) million |
| Net income (loss) | $(61.6) million | $(21.7) million |
| Basic loss per unit | $(1.29) | $(0.61) |
| Cash flow from operations | $37.7 million | $22.9 million |
Fourth-quarter revenue benefited from the acquired Inergy operations and an extra week, but profitability was adversely affected by acquisition-related costs, the $4.5 million legal settlement accrual and seasonal weakness.
Material changes versus the prior comparable period
- Record warm weather was the primary operating headwind. Heating degree days in Suburban’s service territories were 14% warmer than normal and 13% warmer than the prior year; the October 2011–March 2012 heating season was reported as the warmest on record in the contiguous United States.
- The Inergy acquisition approximately doubled the customer base, expanded operations into 11 additional states and added 27.0 million propane gallons and 2.5 million refined-fuel gallons during the two-month post-acquisition period.
- Fiscal 2012 included $17.9 million of acquisition-related costs, a $4.5 million legal settlement charge, a $2.2 million loss on debt extinguishment and a $2.1 million non-cash asset-disposal loss.
- Debt increased materially to $1.42 billion from $348.2 million, primarily because of debt assumed or issued in connection with the acquisition.
- Common units outstanding increased to 57.0 million from 35.4 million, reflecting 14.2 million units issued in the acquisition and 7.2 million units sold in a public offering.
- Quarterly distributions remained $0.8525 per unit, or $3.41 annualized, for fiscal 2012. Management expected the annualized rate to increase to $3.50 beginning with the first-quarter fiscal 2013 distribution.
Debt, liquidity and cash obligations
- Debt consisted of $496.6 million of 7.5% senior notes due 2018, $250.0 million of 7.375% senior notes due 2020, $503.4 million of 7.375% senior notes due 2021 and $100.0 million drawn on a $400.0 million revolving credit facility.
- Available borrowing capacity under the revolver was $253.2 million after $46.8 million of standby letters of credit.
- The Partnership was in compliance with its debt covenants at September 29, 2012. The filing cites a minimum interest coverage ratio of 2.0x and maximum consolidated leverage ratio of 5.75x at year-end under the amended credit agreement.
- Fiscal 2013 anticipated cash requirements included approximately $51.0 million of maintenance and growth capital expenditures, $100.0 million of interest and income-tax payments, and $198.3 million of distributions, assuming the stated distribution rates.
- Management expected cash on hand, revolver availability and operating cash flow to fund current and anticipated obligations, but distributions remain subject to available cash, reserves, debt covenants and operating performance.
Guidance, outlook, risks and unusual items
- Management expected adequate propane and fuel-oil supplies during fiscal 2013 and planned to focus on integrating Inergy, realizing operating efficiencies, centralizing selected functions and leveraging its operating systems.
- The company expects demand for propane and fuel oil to remain flat to moderately declining over the next several years. Results are highly seasonal, with approximately two-thirds of propane volume and three-fourths of fuel-oil volume sold from October through March.
- Principal risks include warm weather, commodity-price volatility, customer conservation, competition from natural gas and other energy sources, supply interruptions, transportation constraints, economic weakness and higher interest expense.
- Integration of Inergy could produce higher-than-expected costs, customer losses, employee turnover, system disruptions, regulatory issues or delayed or unrealized synergies. Inergy’s internal controls were excluded from management’s year-end control assessment because the acquisition occurred shortly before year-end.
- Environmental and safety matters remain contingencies. Accrued environmental liabilities were $1.4 million, and self-insurance liabilities were $54.6 million. The maximum potential payments under residual-value guarantees on certain leases were approximately $18.0 million, although fair value was de minimis.
- A California class action settlement resulted in a $4.5 million accrual; preliminary court approval was obtained on November 19, 2012. A separate putative class action remained unresolved, with no loss reserve recorded other than defense costs.
- The pension plan was underfunded by $32.0 million at year-end, compared with $26.2 million in the prior year. No minimum funding requirement was projected for fiscal 2013.
Most important facts for investors to verify
- Whether Inergy integration delivers the expected cost savings, revenue retention and cash-flow benefits after the partial-period fiscal 2012 contribution.
- Post-acquisition leverage, interest coverage and compliance with increasingly restrictive debt covenants.
- The sustainability of the $3.50 annualized distribution target given fiscal 2012 earnings, seasonal cash flow and acquisition-related obligations.
- Normalized operating margins and Adjusted EBITDA excluding acquisition, legal, debt-extinguishment and derivative-mark-to-market items.
- Exposure to weather normalization, commodity prices, customer conservation and competition from natural gas.
- Final purchase-price allocation for Inergy, including goodwill, intangible-asset values and resulting depreciation and amortization.
- Resolution and ultimate cost of the California settlement and other litigation, environmental matters and self-insurance claims.