SUBURBAN PROPANE PARTNERS LP quarterly report, Q2 FY2017

Suburban Propane Partners, L.P. — Fiscal 2017 Second-Quarter Form 10-Q

Business context and reporting period

The Partnership distributes propane, fuel oil and refined fuels, markets natural gas and electricity, and provides home-comfort equipment and related services. This unaudited Form 10-Q covers the three and six months ended March 25, 2017, compared with March 26, 2016. Operations are highly seasonal, with approximately two-thirds of retail propane volume sold during the October–March heating season.

Key financial metrics

Metric	Three months ended March 25, 2017	Three months ended March 26, 2016	Six months ended March 25, 2017	Six months ended March 26, 2016
Revenue	$450.6 million	$404.1 million	$767.9 million	$680.0 million
Operating income	$102.9 million	$111.2 million	$156.3 million	$142.6 million
Net income	$83.8 million	$92.0 million	$118.3 million	$104.3 million
Net income per basic Common Unit	$1.37	$1.51	$1.94	$1.72
Adjusted EBITDA	$138.0 million	$145.1 million	$222.3 million	$212.3 million
Net cash from operating activities	Not separately provided	Not separately provided	$78.8 million	$80.5 million

Second-quarter operating margin was approximately 22.8%, versus 27.5% in the prior-year quarter. Six-month operating margin was approximately 20.4%, versus 21.0%. Second-quarter net margin was approximately 18.6%, versus 22.8%; six-month net margin was approximately 15.4%, versus 15.3%.

Second-quarter revenue increased 11.5%, primarily from higher selling prices, while retail propane gallons declined 4.8% and fuel-oil and refined-fuel gallons declined 2.3%.
Six-month revenue increased 12.9%; propane gallons increased 0.4% and fuel-oil and refined-fuel gallons increased 0.7%.
Second-quarter cost of products sold rose 40.5% to $192.5 million, and increased to 42.7% of revenue from 33.9%, as wholesale product costs rose faster than selling prices.
Second-quarter operating expenses increased 2.7% to $110.4 million, while general and administrative expense declined 20.0% to $12.2 million. The six-month changes were a 1.3% decline in operating expenses and an 11.4% decline in general and administrative expense.
Accounts receivable increased to $125.2 million from $53.8 million at September 24, 2016, largely reflecting higher commodity prices and seasonal receivables. Cash declined to $7.0 million from $37.3 million.
Total assets were $2.284 billion and total liabilities were $1.559 billion at March 25, 2017. Partners’ capital was $725.1 million.

Debt, liquidity and distributions

Long-term borrowings were $1.238 billion, including $525.0 million of 5.5% senior notes due 2024, $250.0 million of 5.75% notes due 2025, $350.0 million of 5.875% notes due 2027 and $129.8 million outstanding under the revolving credit facility.
In February 2017, the Partnership issued the 2027 senior notes and used the proceeds, together with revolver borrowings, to redeem all outstanding 2021 senior notes. The transaction generated a $1.6 million loss on debt extinguishment but reduced second-quarter net interest expense by $1.4 million year over year.
The $500.0 million revolving facility matures in 2021; approximately $43.3 million of standby letters of credit were outstanding. The Partnership reported compliance with debt covenants as of March 25, 2017.
Six-month financing cash outflows were $95.3 million, including $108.1 million of partnership distributions. Capital expenditures were $17.2 million, including approximately $11.1 million for growth and $6.1 million for maintenance.
The Partnership declared a quarterly distribution of $0.8875 per Common Unit, equivalent to $3.55 annually, payable May 9, 2017.
Management expected approximately $20.8 million of additional capital expenditures, $36.7 million of interest and income-tax payments, and $108.5 million of distributions for the remainder of fiscal 2017. Management stated that available cash, revolver capacity and expected operating cash flow should be sufficient for obligations.

Material changes, outlook and risks

Weather was materially warmer than normal: second-quarter heating degree days were 15% below normal and 2% warmer than the prior year; the first six months were 14% warmer than normal. Warmer weather reduced heating demand and volumes, particularly in Midwest and Southeast markets.
Average posted propane and fuel-oil prices were 84.6% and 48.9% higher, respectively, in the second quarter than in the prior-year quarter. Higher prices increased revenue but pressured margins and increased receivables and potential credit losses.
Management attributed cost savings to reduced headcount, fewer vehicles and operational streamlining, partly offset by higher insurance, fleet-fuel, claims and uncollectible-account provisions.
The Partnership reported a $2.5 million second-quarter unrealized derivative loss and a $2.1 million six-month unrealized derivative loss. Derivatives are used for hedging and not speculative trading; a hypothetical 10% adverse commodity-price movement indicated potential future losses of approximately $1.2 million.
On May 1, 2017, the revolver agreement was amended to permit temporarily higher total consolidated leverage, up to 5.95:1.00 for specified quarters through June 2018, with the limit stepping down to 5.50:1.00 beginning in December 2018. Higher pricing would apply if leverage exceeded 5.50:1.00.
Key risks include weather variability, commodity-price and supply volatility, customer conservation, competition, interest-rate exposure, access to credit, regulatory and tax changes, operating hazards, insurance and litigation claims, pension obligations and the ability to maintain distributions.
Pending litigation was not expected by management to have a material adverse effect, although the business remains exposed to claims involving combustible products. Self-insurance liabilities were $65.1 million, with an associated insurance recovery asset of $18.8 million.
The Partnership reported effective disclosure controls and no material changes to internal control over financial reporting. The final IRS and Treasury regulations on qualifying income did not affect its publicly traded partnership status or propane-income treatment.

Important facts for investors to verify

Whether warmer weather and lower second-quarter volumes persist into the less profitable April–September period.
Wholesale commodity prices, realized margins and the Partnership’s ability to pass cost increases through to customers.
Leverage, revolver availability and compliance with the amended leverage covenants.
Operating cash flow after working-capital needs, capital expenditures and quarterly distributions.
The sustainability of the $0.8875 per-unit quarterly distribution given low cash on hand and seasonal cash flows.
Exposure to self-insurance, pension and multi-employer pension obligations, legal claims and operating hazards.
The effect of future interest-rate changes and the absence of an interest-rate swap as of March 25, 2017.