SUBURBAN PROPANE PARTNERS LP quarterly report, Q3 FY2014

Business Context and Reporting Period

Suburban Propane Partners, L.P. is a publicly traded master limited partnership engaged in the retail distribution of propane, fuel oil and refined fuels, marketing of natural gas and electricity, and home-comfort equipment services. This unaudited Form 10-Q covers the quarter ended June 28, 2014 and the nine months then ended. Results are highly seasonal, with most retail volumes and operating profits generated during the October–March heating season.

Key Financial Metrics

Metric	Three Months Ended June 28, 2014	Three Months Ended June 29, 2013	Nine Months Ended June 28, 2014	Nine Months Ended June 29, 2013
Revenue	$297.1 million	$290.8 million	$1,697.0 million	$1,459.9 million
Operating income (loss)	$(26.6) million	$(20.7) million	$224.5 million	$215.6 million
Net income (loss)	$(59.0) million	$(45.2) million	$149.2 million	$141.9 million
Income (loss) per common unit	$(0.98)	$(0.77)	$2.47	$2.46
EBITDA	$(5.2) million	$10.9 million	$314.0 million	$309.0 million
Adjusted EBITDA	$10.0 million	$19.2 million	$334.0 million	$327.3 million
Net cash provided by operating activities	Not separately provided	Not separately provided	$145.0 million	$200.5 million

Third-quarter operating margin was approximately negative 8.9% and net margin was approximately negative 19.9%. For the first nine months, operating margin was approximately 13.2% and net margin was approximately 8.8%.

Third-quarter propane revenue increased 4.9% to $242.2 million, but propane gallons sold declined 9.7% to 83.2 million gallons.
Third-quarter fuel oil and refined fuels revenue decreased 13.3% to $26.9 million, with volumes down 15.7% to 7.0 million gallons.
Nine-month revenue increased 16.2%, primarily from higher propane prices. Propane gallons sold declined 0.4% to 454.7 million gallons.
Product costs represented 54.3% of third-quarter revenue versus 51.0% in the prior year and 56.5% for the nine-month period versus 50.7% previously.
Cash and cash equivalents were $69.3 million at June 28, 2014, compared with $107.2 million at September 28, 2013.
Total assets were $2.65 billion and total liabilities were $1.52 billion at June 28, 2014.

Material Changes Versus the Prior Comparable Period

Third-quarter net loss increased by $13.8 million year over year, driven by lower volumes, higher product costs, $11.6 million of debt-extinguishment losses, and $4.3 million of Inergy integration costs.
Third-quarter Adjusted EBITDA declined $9.1 million, or approximately 47%, to $10.0 million. Excluding special items and derivative mark-to-market effects, profitability was lower than the prior year.
Warmer-than-normal third-quarter weather, elevated customer energy bills, customer conservation, and efforts to control customer receivable exposure reduced demand.
Operating and general and administrative expenses declined modestly in the third quarter as integration synergies lowered payroll and vehicle costs, although bad debt expense increased.
Interest expense declined 15.3% in the third quarter and 13.9% for the first nine months, reflecting prior debt reductions and refinancing.
Operating cash flow declined $55.5 million for the first nine months, principally because higher wholesale propane prices increased receivables, inventory requirements, and other working capital needs.

Debt, Liquidity, Distribution and Outlook

Long-term borrowings totaled $1.243 billion at June 28, 2014, consisting principally of $250.0 million of 7.375% notes due 2020, $346.2 million of 7.375% notes due 2021, $525.0 million of 5.50% notes due 2024, and $100.0 million outstanding under the revolving credit facility.
In May 2014, the Partnership issued $525.0 million of 5.50% senior notes due 2024 and used the proceeds and cash on hand to redeem all 7.5% senior notes due 2018. The refinancing generated an $11.6 million loss on debt extinguishment but reduced the applicable coupon and extended maturity.
The revolving credit facility provides $400.0 million of capacity; $100.0 million was drawn and $53.7 million of letters of credit were outstanding, leaving $246.3 million of available borrowing capacity. The facility bore interest at approximately 2.5% at quarter-end.
The Partnership was in compliance with its debt covenants at June 28, 2014. Covenant requirements include minimum interest coverage of 2.5-to-1.0 and maximum leverage of 4.75-to-1.0, subject to the agreement’s definitions and exceptions.
Management expected approximately $8.4 million of capital expenditures, $24.5 million of interest payments, and $52.8 million of cash distributions during the remainder of fiscal 2014.
A quarterly distribution of $0.8750 per common unit was declared for the third quarter, equivalent to $3.50 per unit on an annualized basis.
Management reported substantial progress integrating the acquired Inergy Propane operations, including system conversions, physical blending, employee training, and operating-model refinement.

Risks, Contingencies and Unusual Items

Results remain materially exposed to weather, propane and fuel price volatility, supply availability, transportation constraints, customer conservation, and the ability to pass through cost increases.
Industry-wide propane supply shortages and logistics issues increased transportation costs and constrained volumes during the heating season.
Integration of Inergy Propane may require additional costs and may not produce expected revenue or cost synergies within the expected timeframe.
The Partnership is self-insured for specified risks and had accrued insurance liabilities of $58.7 million, with a related insurance recovery asset of $16.3 million.
Pending litigation was not expected by management to have a material adverse effect, although the filing notes that litigation and operating hazards involving combustible liquids are inherently uncertain.
Residual value guarantees on operating leases could require aggregate future payments of up to approximately $15.5 million if covered equipment were deemed worthless at lease expiration.
The Partnership had accrued $6.9 million for estimated obligations associated with multi-employer pension plan withdrawals; the amount and timing of any additional withdrawal liability remain uncertain.
Third-quarter results included a $0.7 million unrealized derivative gain, compared with a $0.1 million unrealized loss in the prior year. Management does not use derivatives for speculative trading.
The filing does not provide formal full-year earnings or EBITDA guidance. Management’s outlook emphasizes seasonality, continued integration work, and the need to reserve cash for distributions and obligations.

Important Facts for Investors to Verify

Whether propane supply conditions, commodity prices, weather, and customer conservation improve or further pressure volumes and margins.
Progress, remaining costs, and realized savings from the Inergy Propane integration.
Distribution coverage and cash generation after required debt service, capital expenditures, working capital needs, and distributions.
Compliance with the revolving-credit interest-coverage and leverage covenants, particularly during the lower-profitability summer quarters.
Actual debt maturities, refinancing requirements, and the effect of the 2024 note refinancing on future interest expense.
Changes in accounts receivable, the allowance for doubtful accounts, inventory, and operating cash flow following the substantial increase in wholesale propane prices.
Potential self-insurance, legal, pension withdrawal, lease-guarantee, and derivative exposures.