Business Context and Reporting Period
Suburban Propane Partners, L.P. filed this unaudited Form 10-Q for the fiscal quarter ended March 24, 2012, with comparative periods ended March 26, 2011. The Partnership markets and distributes propane, fuel oil and refined fuels, natural gas and electricity, and provides home-comfort equipment services. Results are highly seasonal, with most heating-related sales occurring from October through March.
Key Financial Metrics
| Metric | Three months ended March 24, 2012 | Prior year | Six months ended March 24, 2012 | Prior year |
|---|---|---|---|---|
| Revenue | $357.6 million | $464.1 million | $657.5 million | $792.4 million |
| Operating income | $56.1 million | $107.2 million | $86.4 million | $157.6 million |
| Net income | $49.6 million | $100.3 million | $72.8 million | $143.4 million |
| Basic income per common unit | $1.39 | $2.82 | $2.05 | $4.04 |
| EBITDA | $63.3 million | $115.7 million | $101.3 million | $174.2 million |
| Adjusted EBITDA | $65.9 million | $113.6 million | $105.0 million | $173.7 million |
| Net cash from operations | Not separately provided in the statement | Not separately provided in the statement | $17.0 million | $49.8 million |
Three-month operating margin was approximately 15.7%, compared with 23.1% in the prior year; net margin was approximately 13.9%, compared with 21.6%. Six-month operating margin was approximately 13.1%, compared with 19.9%; net margin was approximately 11.1%, compared with 18.1%.
- Second-quarter propane revenue declined 20.8% to $283.8 million; propane gallons sold fell 21.1% to 89.9 million gallons.
- Second-quarter fuel oil and refined fuels revenue declined 31.1% to $43.7 million; volumes fell 34.6% to 10.6 million gallons.
- Cost of products sold represented 58.3% of second-quarter revenue, compared with 56.0% in the prior year; the six-month ratio increased to 59.6% from 56.3%.
- Cash and cash equivalents were $96.2 million at March 24, 2012, compared with $149.6 million at September 24, 2011.
- Total 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 the revolving credit facility.
- Available revolving-credit capacity was $103.1 million after $46.9 million of outstanding letters of credit.
- Total assets were $931.5 million and total partners’ capital was $376.2 million at March 24, 2012.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income and net income fell substantially because record-warm weather reduced heating demand, particularly among residential customers. Management reported second-quarter temperatures 17% warmer than the prior year and 16% warmer than normal across its service territories.
- High commodity prices, customer conservation and sluggish economic conditions further reduced volumes and limited the Partnership’s ability to pass higher wholesale costs through to customers.
- Operating expenses declined 6.2% in the quarter and 5.4% for the six-month period, reflecting lower headcount, payroll and benefit costs, operating efficiencies, lower insurance costs and lower bad-debt expense.
- General and administrative expense increased 33.9% in the quarter, primarily because of a $2.1 million non-cash loss on disposal of an asset. The prior-year quarter included a $2.5 million gain on asset sales.
- The Partnership recorded a $0.5 million non-cash loss on debt extinguishment related to its January 2012 credit-agreement amendment. The prior-year quarter included $2.0 million of severance expense.
- Cash from operations decreased to $17.0 million for the first six months, primarily because of lower earnings, although reduced sales volumes lowered working-capital requirements.
- The amended credit agreement extended the revolving facility maturity to January 5, 2017 and reduced borrowing rates and commitment fees. The Partnership was in compliance with its debt covenants at March 24, 2012.
Guidance, Outlook, Risks and Unusual Items
Management expected second-half fiscal 2012 sales volumes to remain pressured by weak heating-season usage. It also cited economic weakness and high commodity prices as continuing risks to customer buying patterns, volumes and margins, while pointing to its flexible cost structure, operating efficiencies and financial strength as mitigating factors.
- Expected remaining fiscal 2012 cash requirements included approximately $12.6 million of maintenance and growth capital expenditures, $11.8 million of interest payments and $60.5 million of cash distributions.
- Management did not anticipate needing to borrow for working-capital requirements during the remainder of fiscal 2012 based on projected operating cash flow and available cash.
- The Partnership declared a quarterly distribution of $0.8525 per common unit, or $3.41 annualized, payable May 8, 2012.
- On April 25, 2012, after quarter-end, the Partnership agreed to acquire Inergy Propane for an approximately $1.8 billion total acquisition value, subject to closing adjustments. Consideration was expected to include $1.0 billion of new senior notes, $200.0 million of cash and $600.0 million of newly issued common units.
- In connection with the proposed acquisition, the Partnership planned an exchange of approximately $1.2 billion of Inergy senior notes, sought approximately $250.0 million of equity financing, and obtained commitments for a $250.0 million 364-day term loan and an increase in revolving capacity from $250.0 million to $400.0 million.
- Key risks include weather variability, commodity-price volatility, customer conservation, competition, supply and transportation availability, interest rates, regulatory and tax changes, operating hazards, litigation, credit-market conditions and acquisition integration and financing risks.
- Pending commercial lawsuits, including two putative class actions with no class certified, allege pricing, fee-disclosure and tank-ownership violations. Management considers the claims without merit and reported no required loss-contingency accrual beyond legal defense costs.
- Residual-value guarantees on certain operating leases had a maximum potential exposure of approximately $10.5 million, although their fair value was de minimis.
Important Facts for Investors to Verify
- Verify the completion, financing, debt terms, equity dilution and integration results of the proposed Inergy Propane acquisition.
- Assess whether warmer-than-normal weather effects were temporary or indicate ongoing volume and customer-conservation pressure.
- Review distribution coverage using recurring operating cash flow rather than EBITDA alone, particularly given six-month operating cash flow of only $17.0 million versus $60.5 million of distributions.
- Monitor leverage, interest coverage, covenant compliance and available borrowing capacity after any acquisition financing.
- Evaluate exposure to propane and fuel-oil prices, hedging results and the reported $1.8 million potential earnings impact from a hypothetical 10% adverse commodity-price movement.
- Review litigation, self-insurance liabilities, pension and postretirement obligations, and the approximately $49.9 million accrued insurance liability.