Suburban Propane Partners LP (SPH) markets and distributes fuel oil, kerosene, diesel fuel and gasoline to residential and commercial customers, and is now the third largest retail marketer of propane in the United States, measured by retail gallons sold. This article analyzes the most recent quarterly and the trailing twelve months ("TTM") results of SPH and attempts to look "under the hood" to properly ascertain sustainability of Distributable Cash Flow ("DCF"). The task is not easy because the definitions of DCF and "Adjusted EBITDA," the primary measures typically used by master limited partnerships ("MLPs") to evaluate their operating results, are complex. In addition, each MLP may define these terms differently, making comparison across MLPs very difficult. Nevertheless, this is an exercise that must be undertaken to ascertain what portions of the distributions being received are really sustainable.
Comparison of selected performance metrics for the quarter and trailing twelve months ("TTM") ended 12/31/12 to the prior year periods is set forth in table 1 below:
Table 1: Figures in $ Millions except weighted average units outstanding; fiscal year ends Sep.
The second fiscal quarter ending 3/31/13 is also the second quarter of operations following the acquisition of the retail propane business from Inergy L.P. (NRGY) on August 1, 2012. This transformative acquisition effectively doubled the size of SPH's customer base and expanded its geographic reach into 11 more states, including a new presence in portions of the Midwest.
Acquisition consideration consisted of ~$1.9 billion, the principal components of which were ~$1.075 billion in newly issued notes; ~$185 million in cash to NRGY note holders; and 14.2 million new SPH units (valued at ~$590 million) distributed to NRGY unit holders. These new SPH units account for the bulk of the increase in the weighted average number outstanding shown in Table 1.
The improvement in results for the quarter and the TTM ending 3/31/13 over the prior year periods is primarily attributable to the inclusion, for the first time, of NRGY's retail propane business in SPH's financials. In addition, operating performance in SPH's legacy operations improved as a result of a combination of colder average temperatures, lower wholesale propane costs and continued savings in operating expenses. The improvement was pronounced even on a pro-forma basis (i.e., combining the Adjusted EBITDA of Suburban Propane and Inergy Propane in the prior year period). For example, in the quarter ended 3/31/13, propane volumes were up 14.5% and Adjusted EBITDA was up more than 45% vs. the pro forma results in the prior period quarter.
Management's original projections of achieving $50 million in synergies within three years of the NRGY acquisition, of which $10-$15 million would be realized in year one, appear to be on track. For the first six months of fiscal year 2013 (October 2012 to March 2103), management estimates net synergies of ~ $5 to $7 million and anticipates achieving the first year target in this fiscal year.
DCF is a quantitative standard viewed by investors, analysts and the general partners as an indicator of an MLP's ability to generate cash flow at a level that can sustain or support an increase in quarterly distribution rates. Since DCF is not a Generally Accepted Accounting Principles ("GAAP") measure, its definition is not standardized. In fact, as shown in a prior article, each MLP may define DCF differently. In the case of SPH, DCF is not a metric defined, measured or reported. The only non-GAAP measure SPH reports is Adjusted EBITDA which adds back to EBITDA items such as acquisition-related costs, losses on asset disposals, legal settlements, debt extinguishment and derivatives. But I believe investors should also evaluate the partnership's sustainable DCF and provide my estimates in Table 2 below:
Table 2: Figures in $ Millions
Comparing sustainable cash flow to partnership distributions is one yardstick I use to ascertain whether distributions are sustainable and whether they were funded by additional debt by issuing additional units or other sources of cash that I consider non-sustainable. Table 3 below provides this comparison:
Table 3: Figures in $ Millions except Distribution Coverage; fiscal year ends Sep 30.
SPH typically sells ~ 2/3 of its retail propane volume and ~ 3/4 of its retail fuel oil volume during the peak heating season of October through March. Consequently, sales and operating profits are concentrated in the first and second fiscal quarters (ending ~December 31 and ~March 31, respectively). Cash flows from operations, DCF and DCF coverage ratios are greatest during the second fiscal quarter and the third (ending ~June 30) when customers pay for product purchased during the winter heating season. SPH uses some of the excess cash in these quarters to cover distributions in the next two quarters when coverage ratios typically turn negative. Analysis based on TTM is not affected by this seasonality, which is why I find the improvement from 0.64 to 1.27 in the TTM ending 3/31/13 very encouraging.
Cash flow statements are also useful in analyzing whether MLP distributions are funded by issuing debt or through issuance of additional partnership units, and thus cannot be considered sustainable. An analysis of SPH's cash flow statements is provided in Table 4 below:
Simplified Sources and Uses of Funds:
Table 4: Figures in $ Millions; fiscal year ends Sep 30.
Table 4 indicates that net cash from operations, less maintenance capital expenditures, exceeded distributions by $61 million in the TTM ending 3/31/13 (there was a $31 million shortfall in the TTM ending 3/31/12). Although SPH issued additional partnership units in the latest TTM period (7.245 million units were issued in a public offering at a price per unit of $37.61 realizing net proceeds of ~$260 million in August 2012), proceeds were used for acquisitions and debt repayment, not for funding distributions.
Management noted that despite the increased size of its business and the increased working capital requirements, SPH funded all working capital needs from cash on hand without the need to borrow under its revolving credit facility and, as of 3/31/13, had more than $166 million of cash on hand. Additional cash was raised on May 14, 2013, when SPH priced at $48.16 per unit an offering that raised ~$143 million from the sale of 3.105 million units. The bulk of the proceeds will be used to repay $135 million of senior unsecured debt.
A comparison of SPH's yield to that of the other MLPs I follow is presented in Table 5 below:
As of 05/20/13:
Magellan Midstream Partners (MMP)
Plains All American Pipeline (PAA)
Enterprise Products Partners (EPD)
El Paso Pipeline Partners (EPB)
Targa Resources Partners (NGLS)
Kinder Morgan Energy Partners (KMP)
Buckeye Partners (BPL)
Williams Partners (WPZ)
Boardwalk Pipeline Partners (BWP)
Energy Transfer Partners (ETP)
Regency Energy Partners (RGP)
Suburban Propane Partners
I established my SPH position in the hope is that management scrubbed the balance sheet and that charges taken in fiscal 2012 (acquisition-related costs, losses on asset disposals, legal settlements, debt extinguishment) were indeed one-time. While the very low leverage and high distribution coverage ratios achieved by SPH in prior years (pre-acquisition) were, to an extent, due to a much more favorable price and demand environment, they also reflected a careful, disciplined and conservative management style. I also hoped this approach would be applied to the acquisition of NRGY's retail propane business. Results from the first six months of operations following the acquisition of the retail propane business from NRGY are encouraging. Given its exposure to propane prices and the weather, SPH should yield more than pipeline MLPs. The question is how much more. I believe there is an opportunity to both capture an attractive yield and benefit from some capital appreciation through a modest narrowing of the spread relative to other MLPs.