SUBURBAN PROPANE PARTNERS LP quarterly report, Q3 FY2016

Business Context and Reporting Period

Suburban Propane Partners, L.P. is a seasonal energy distributor and marketer of propane, fuel oil and refined fuels, natural gas and electricity, plus home-comfort equipment and services. This unaudited Form 10-Q covers the 13-week quarter and nine months ended June 25, 2016, compared with June 27, 2015. Results are materially seasonal, with the majority of heating-related volumes generated from October through March.

Financial Performance and Key Metrics

Metric	Q3 FY2016	Q3 FY2015	9M FY2016	9M FY2015
Revenue	$205.1 million	$220.3 million	$885.1 million	$1,242.6 million
Operating income/(loss)	$(10.8) million	$(21.8) million	$131.8 million	$225.7 million
Net income/(loss)	$(29.6) million	$(41.0) million	$74.7 million	$151.5 million
Net income/(loss) per basic unit	$(0.49)	$(0.67)	$1.23	$2.50
Adjusted EBITDA	$18.4 million	$12.1 million	$230.7 million	$327.4 million
Net cash from operations	Not separately provided	Not separately provided	$128.7 million	$259.1 million

Q3 revenue declined 6.9%, primarily from lower average selling prices, partly offset by higher propane volumes. Propane gallons sold rose 3.4% to 80.2 million, while fuel oil and refined-fuel gallons declined 6.6% to 5.8 million.
Q3 cost of products sold fell 19.9% to $75.5 million and declined to 36.8% of revenue from 42.8%, reflecting lower average inventory costs and wholesale costs.
Q3 operating expenses increased 3.1% to $103.3 million, including a $6.6 million multi-employer pension withdrawal charge and severance-related costs. Excluding specified unusual items, operating expenses declined.
Q3 adjusted EBITDA improved despite lower revenue, benefiting from lower product costs and expense reductions. The reported operating loss included a $9.8 million gain on sale of a business.
For the first nine months, revenue declined 28.8%, with propane gallons down 14.6% and fuel oil/refined-fuel gallons down 26.0%. Management attributed the decline primarily to record warm weather and lower prices.
Nine-month adjusted EBITDA declined 29.0% to $230.7 million, and operating margin was approximately 14.9% versus 18.2% in the prior-year period.
Cash and cash equivalents were $67.4 million at June 25, 2016, compared with $152.3 million at September 26, 2015. Total assets were $2.36 billion and partners’ capital was $822.1 million.

Material Changes Versus the Prior Comparable Period

Weather was the principal adverse factor: temperatures across service territories were 17% warmer than normal and 16% warmer than the prior-year period for the first nine months; heating-season temperatures were 18% warmer than normal and 19% warmer than the prior year.
Q3 benefited from cooler temperatures than the prior-year quarter, although temperatures remained 9% warmer than normal.
Operating and general and administrative cost controls included lower headcount, reduced vehicle count, lower fuel costs and lower variable compensation.
The Partnership sold assets and operations in a non-strategic propane market on April 22, 2016 for $26.0 million, recognizing a $9.8 million gain. It acquired Propane USA Distribution, LLC for $45.0 million plus working capital, funded from cash.
The new five-year $500.0 million revolving credit facility became effective March 3, 2016, replacing the prior facility and extending maturity to March 3, 2021.
Interest expense declined 3.9% for the first nine months, primarily because of prior-year refinancing of higher-cost debt and the 2016 revolving-credit refinancing.
The prior-year period included a $15.1 million loss on extinguishment of debt and $5.1 million of integration costs; the current-year period included a $6.6 million multi-employer pension withdrawal charge, a $3.0 million product-liability settlement and a $0.3 million debt-cost write-off.

Debt, Liquidity, Distribution and Outlook

Long-term borrowings totaled $1.239 billion at June 25, 2016, consisting primarily of $1.121 billion principal amount of senior notes and $100.0 million drawn on the revolving facility. Substantially all scheduled maturities are after fiscal 2020, with $1.221 billion due thereafter.
The revolving facility had $356.7 million of available borrowing capacity after $100.0 million of borrowings and $43.3 million of letters of credit. The borrowing rate was approximately 3.1% at quarter-end.
The Partnership was in compliance with all debt covenants, including minimum interest coverage of 2.5-to-1.0 and maximum consolidated leverage of 5.5-to-1.0.
Management expected approximately $9.7 million of remaining fiscal 2016 capital expenditures, $21.7 million of interest and tax payments, and $53.9 million of cash distributions. Management stated that cash on hand, revolver availability and expected operating cash flow should be sufficient for current and future obligations.
A quarterly distribution of $0.8875 per Common Unit was declared for Q3 FY2016, equivalent to $3.55 annualized, payable August 9, 2016.
No formal earnings or volume guidance was provided. Management cautioned that weather, commodity prices, customer conservation, supply availability, competition, regulation, interest rates and capital-market conditions could materially affect results.

Risks, Contingencies and Unusual Items

Commodity price exposure is managed through futures, options, swaps and forward contracts; the Partnership does not use derivatives for speculative trading. A hypothetical 10% adverse commodity-price movement in open derivative positions indicated a potential $1.3 million increase in future net losses.
Interest-rate swaps had a net liability fair value of $0.5 million at June 25, 2016. Variable-rate borrowings expose the Partnership to changes in LIBOR and other benchmark rates.
The Partnership is self-insured for certain general, product, workers’ compensation and automobile liabilities. Accrued insurance liabilities were $56.0 million, with a $15.0 million insurance-recovery asset.
The Partnership accrued $6.6 million for voluntary full withdrawal from a multi-employer pension plan. Its estimated obligation to multi-employer plans was $24.5 million, but the timing and amount of future payments remain uncertain.
Maximum potential payments under operating-lease residual-value guarantees were $14.4 million, although their fair value was de minimis.
Management stated that pending or threatened litigation was not expected to have a material adverse effect, while noting the inherent uncertainty of litigation and operating hazards involving combustible fuels.
There were no material changes to the risk factors reported in the fiscal 2015 Form 10-K. Disclosure controls were reported effective.

Important Facts for Investors to Verify

Whether unusually warm weather continues to reduce heating-season volumes and distribution coverage.
The sustainability of the $0.8875 quarterly distribution relative to distributable cash flow, adjusted EBITDA and debt covenants.
Leverage, interest coverage and available revolver capacity under changing commodity prices and seasonal working-capital needs.
The financial contribution and integration progress of the Propane USA acquisition, and the effect of the non-strategic-market divestiture.
Potential additional multi-employer pension withdrawal liabilities, self-insurance claims and other contingencies.
The effect of commodity-price movements and derivative positions on product margins, cash flow and earnings.