SUBURBAN PROPANE PARTNERS LP quarterly report, Q3 FY2013

Suburban Propane Partners, L.P. — Fiscal 2013 Third-Quarter Form 10-Q

Reporting period: Quarter ended June 29, 2013; year-to-date period ended June 29, 2013. The filing presents unaudited results against the comparable periods ended June 23, 2012. The Partnership distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides home-comfort equipment and services. Results include the Inergy Propane acquisition from August 1, 2012.

Financial performance and condition

Metric	Three months ended June 29, 2013	Three months ended June 23, 2012	Nine months ended June 29, 2013	Nine months ended June 23, 2012
Revenue	$290.8 million	$179.6 million	$1,459.9 million	$837.1 million
Operating income (loss)	$(20.7) million	$(2.7) million	$215.6 million	$83.7 million
Net income (loss)	$(45.2) million	$(9.3) million	$141.9 million	$63.5 million
Basic income (loss) per unit	$(0.77)	$(0.26)	$2.46	$1.78
Net cash provided by operating activities	Not separately disclosed	Not separately disclosed	$200.5 million	$73.3 million
EBITDA	$10.9 million	$5.7 million	$309.0 million	$107.1 million
Adjusted EBITDA	$19.2 million	$3.5 million	$326.3 million	$108.4 million

Third-quarter revenue increased 61.9%, primarily from higher volumes following the Inergy acquisition and colder April weather. Nine-month revenue increased 74.4%.
Third-quarter operating loss widened because of seasonality, higher depreciation and amortization, integration costs, and the multi-employer pension withdrawal charge. The Partnership normally reports a loss in the third quarter because heating-related demand is concentrated in the first and second quarters.
Nine-month operating income more than doubled, while net income increased 123.6% year over year. Nine-month basic income per unit rose to $2.46 from $1.78, although weighted-average units increased materially.
Third-quarter product cost was 51.0% of revenue versus 49.4% in the prior-year quarter. For nine months, product cost improved to 50.7% of revenue from 57.4%, primarily because propane costs declined faster than selling prices.
Retail propane volume increased to 92.1 million gallons in the quarter from 49.0 million and to 456.3 million gallons for nine months from 213.2 million. Fuel oil and refined-fuel volume increased to 8.3 million gallons from 4.3 million in the quarter and to 47.4 million from 22.6 million for nine months.
Cash and cash equivalents were $320.0 million at June 29, 2013, compared with $134.3 million at September 29, 2012. Current assets were $510.4 million versus current liabilities of $198.3 million.
Capital expenditures were $21.2 million for nine months, including approximately $6.3 million of maintenance spending and $14.9 million for growth. Investing cash outflow was $9.7 million.

Debt, liquidity and distributions

Long-term borrowings were $1.416 billion at June 29, 2013, consisting of $496.6 million of 7.5% notes due 2018, $250.0 million of 7.375% notes due 2020, $503.4 million of 7.375% notes due 2021, and $100.0 million drawn under the revolving credit facility.
The $400.0 million revolving facility had $49.2 million of outstanding letters of credit and $250.8 million of available borrowing capacity. The revolver interest rate was approximately 2.8% at quarter-end.
The Partnership reported compliance with its debt covenants. The required minimum interest-coverage ratio was 2.25 to 1.0 and the maximum leverage ratio was 4.75 to 1.0 at quarter-end.
In May 2013, the Partnership issued 3.105 million common units for net proceeds of $143.4 million. After quarter-end, it repurchased $157.3 million of 2021 notes using offering proceeds and cash on hand; a fourth-quarter debt-extinguishment loss of approximately $2.1 million was expected.
A quarterly distribution of $0.8750 per common unit was declared, equivalent to $3.50 per unit annualized, payable August 13, 2013.
Management expected approximately $10 million to $15 million of remaining fiscal 2013 capital expenditures, $47.7 million of interest payments, and $52.7 million of cash distributions based on the then-current distribution rate.

Material changes and unusual items

The Inergy Propane acquisition significantly expanded volumes, revenue, assets, depreciation and amortization, interest expense, and debt. Final purchase-price allocation increased identifiable intangible assets and reduced goodwill by $4.9 million from provisional estimates.
Third-quarter results included $6.0 million for withdrawal from multi-employer pension plans and $2.2 million of integration-related costs. Nine-month integration-related costs were $5.0 million.
The Partnership recorded a $4.5 million accrual for a California propane-fee class-action settlement. Distribution of settlement proceeds was scheduled to begin August 7, 2013.
The Partnership accrued $6.0 million for estimated obligations related to withdrawal from certain multi-employer pension plans. The ultimate amount and timing of any additional withdrawal liability could not be determined.
Derivative instruments produced a $6.3 million unrealized loss in cost of products sold for the nine-month period, compared with a $7.2 million unrealized gain in the prior-year period.
The filing states that the results are highly seasonal and that interim results are not necessarily indicative of full-year performance.

Outlook, commentary and risks

Management stated that integration activities would continue through October 2013, pause during the heating season, and resume in March 2014. Regional management, operating footprints, management teams, and retail system conversions had been substantially advanced.
Management reported that working-capital needs were funded from cash without additional revolver borrowings and that, excluding the equity-offering proceeds, quarter-end cash exceeded $176.6 million.
Key operating sensitivities include weather, propane and other commodity-price volatility, customer conservation, the ability to pass through cost increases, supply and transportation availability, and competitive conditions.
Hedging is used to manage commodity and interest-rate exposure and is not used for speculative trading. A hypothetical 10% adverse commodity-price movement indicated potential future losses of approximately $1.6 million, although actual results could differ materially.
Other risks include acquisition integration, operating hazards, environmental and regulatory matters, litigation, self-insurance claims, tax-law changes, access to capital, and the possibility that expected acquisition synergies or revenue may not be realized.
The filing reported no material changes to the risk factors in the prior Form 10-K and concluded that disclosure controls and procedures were effective as of July 29, 2013.

Investor verification points

Verify the post-quarter-end repurchase of $157.3 million of 2021 notes, the approximately $2.1 million debt-extinguishment charge, and the resulting debt and liquidity profile.
Assess whether Inergy integration synergies offset recurring integration, severance, pension, depreciation, and interest costs.
Evaluate coverage of the $0.8750 quarterly distribution after maintenance capital expenditures, interest, debt repayments, and seasonal working-capital needs.
Review covenant headroom, particularly the 2.25-to-1.0 interest-coverage and 4.75-to-1.0 leverage requirements, as seasonal EBITDA changes.
Monitor weather, commodity prices, derivative fair-value changes, customer conservation, and the ability to recover higher product costs through pricing.
Review the California settlement, unresolved putative class action, self-insurance liabilities, and potential multi-employer pension withdrawal liabilities.
Confirm period references in the MD&A: portions of the text refer to the three and nine months ended June 23, 2013, while the financial statements identify the current reporting period as ending June 29, 2013.