Suburban Propane Partners, L.P. — Fiscal 2013 First-Quarter Form 10-Q
Business context and reporting period
The filing covers the 13 weeks ended December 29, 2012, compared with the three months ended December 24, 2011. Suburban Propane markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and home-comfort equipment and services. Results were materially affected by the August 1, 2012 acquisition of Inergy Propane.
Key financial metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $490.7 million | $299.9 million | Up 63.6% |
| Operating income | $84.5 million | $30.3 million | Up 178.9% |
| Net income | $59.8 million | $23.2 million | Up 157.4% |
| Basic earnings per common unit | $1.05 | $0.65 | Up 61.5% |
| Adjusted EBITDA | $116.4 million | $39.1 million | Up $77.3 million |
| Net cash from operating activities | $61.5 million | $(25.3) million | Improved by $86.9 million |
Operating margin was approximately 17.2%, versus 10.1% in the prior-year quarter. Net margin was approximately 12.2%, versus 7.7%. Cost of products sold declined to 49.9% of revenue from 61.2%, primarily because lower propane product costs more than offset lower average selling prices. Operating expenses increased to $114.9 million from $65.9 million, and depreciation and amortization increased to $28.4 million from $7.8 million, principally because of the Inergy acquisition.
Retail propane gallons sold increased to 153.9 million from approximately 74.2 million, while fuel oil and refined fuels gallons increased to 15.9 million from 7.7 million. Management stated that the volume increases were almost entirely attributable to Inergy Propane; service territories remained 9% warmer than normal, although temperatures were 4% cooler than in the prior-year quarter.
At December 29, 2012, cash and cash equivalents were $149.1 million, total assets were $2.93 billion, and total partners’ capital was $1.11 billion. Long-term borrowings were $1.42 billion, consisting primarily of senior notes and $100.0 million outstanding under the revolving credit facility. The $400.0 million revolving facility had $253.2 million of available borrowing capacity after $46.8 million of letters of credit. The Partnership was in compliance with its debt covenants.
Material changes versus the prior comparable period
- The Inergy Propane acquisition more than doubled propane volumes and significantly expanded revenue, operating income, assets, depreciation and amortization.
- Debt increased substantially because the Partnership issued $496.6 million of 7.5% senior notes due 2018 and $503.4 million of 7.375% senior notes due 2021 in connection with the acquisition. Net interest expense increased to $24.6 million from $6.8 million.
- Cash flow benefited from higher earnings, lower propane prices and working capital acquired with Inergy. Accounts receivable increased by $61.4 million during the quarter, reflecting seasonal growth and expanded operations.
- The Partnership paid $48.6 million of distributions during the quarter, compared with $30.2 million in the prior-year quarter.
- Non-cash losses on commodity derivatives increased to $3.6 million from $1.0 million and were included in cost of products sold.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings guidance. Management anticipated fiscal 2013 cash requirements of approximately $44.2 million for maintenance and growth capital expenditures, $88.4 million for interest payments and $149.9 million for cash distributions at the then-current distribution rate.
On January 24, 2013, the Partnership announced a quarterly distribution of $0.8750 per common unit, or $3.50 annualized, representing a 2.6% increase from the comparable prior-year rate.
The business is highly seasonal and weather-sensitive, with most propane and fuel oil volumes sold during the October-through-March heating season. Key risks include warmer-than-normal weather, commodity-price volatility, customer conservation, inability to pass through cost increases, competition, supply and transportation constraints, interest-rate exposure, acquisition integration risk and regulatory, environmental, legal and operating hazards.
The purchase-price allocation for Inergy Propane remained preliminary, with final fair-value determinations expected by July 31, 2013. The Partnership accrued $4.5 million for a proposed settlement of a California class action. It also reported $59.6 million of self-insurance liabilities, a potential maximum of approximately $17.9 million under residual-value lease guarantees, and a $17.9 million insurance recovery asset.
A hypothetical 10% adverse change in commodity prices was estimated to produce approximately $0.3 million of potential future losses on relevant open derivative positions. Disclosure controls were assessed as effective, and the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Inergy Propane integration, cost savings and acquired revenue meet management’s expectations and whether the preliminary purchase-price allocation changes materially.
- Weather trends and heating-degree days, since earnings and cash flow are concentrated in the heating season.
- Propane and fuel oil prices, margins, volumes, derivative positions and the ability to pass commodity-cost changes to customers.
- Leverage, interest coverage and covenant compliance as debt maturities approach, particularly the $100.0 million maturity in fiscal 2017 and $1.25 billion thereafter.
- Coverage of distributions by operating cash flow after capital expenditures, interest and required reserves.
- Resolution and ultimate cost of the California settlement and the remaining putative class action.
- Self-insurance claims, pension and postretirement obligations, and the potential exposure under lease residual-value guarantees.