A Closer Look At Suburban Propane Partners' Q1 FY 2016 Distributable Cash Flow

| About: Suburban Propane (SPH)

Summary

In 6 of the last 9 periods, propane gallons sold declined vs. the same quarter in the prior year. When similarly measured, gross margins have declined for 7 consecutive quarters.

EBITDA and Adjusted EBITDA in the first fiscal quarter ended December 2015 declined by 42% and 34%, respectively, vs. the comparable prior year period.

DCF coverage of distributions ratio was negative (below 1x) in 2015, a marked deterioration compared to 2014.

Distributions appear secure at the current levels, but may not be entirely covered by sustainable DCF, especially if propane prices increase and with them working capital requirements.

This article focuses on some of the key facts and trends revealed by results recently reported by Suburban Propane Partners L.P. (NYSE:SPH). The quarters are noted with an FY designation because SPH's fiscal year ends in September. Its first quarter of fiscal 2016 ended on 12/26/15 and is designated as 1QFY16. The article evaluates the sustainability of the partnership's Distributable Cash Flow ("DCF") and assesses whether SPH is financing its distributions via issuance of new units or debt.

SPH is organized into 3 principal business segments. The propane segment, which generates the bulk of SPH's revenues and cash flows, is primarily engaged in the retail distribution of propane to residential, commercial, industrial and agricultural customers and, to a lesser extent, wholesale distribution to large industrial end users. The fuel oil and refined fuels segment is primarily engaged in the retail distribution of fuel oil, diesel, kerosene and gasoline to residential and commercial customers for use primarily as a source of heat in homes and buildings. The natural gas and electricity segment is engaged in the marketing of natural gas and electricity to residential and commercial customers in the deregulated energy markets of New York and Pennsylvania. SPH is also engaged in other activities, primarily the sale, installation and servicing of a wide variety of home comfort equipment, particularly in the areas of heating and ventilation.

SPH's business is highly seasonal. It 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, the bulk of sales and operating profits are concentrated in the quarters ending December and March (the first and second quarters of the fiscal year). In the quarters ended June and September SPH typically reports losses. Cash flows and DCF coverage ratios are typically highest during the quarters ending March and June; this is when customers pay for product purchased during the winter heating season.

SPH's profitability is largely dependent on volumes generated by its retail propane operations and on the gross margin it achieves on propane sales - the difference between retail sales price and product cost. Table 1 shows the SPH is facing weak customer demand and declining margins: in 6 of the last 9 periods, propane gallons sold declined vs. the same quarter in the prior year; when similarly measured, gross margins declined for 7 consecutive quarters:

Click to enlarge Table 1: Figures in $ Millions, except gallons and percentages. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Average temperatures in 1QFY16 were 25% warmer than normal and 17% warmer than 1QFY15 in areas served by SPH. The unseasonably warm weather adversely affected customer demand, resulting in lower volumes and earnings for SPH.

Propane prices in 1QFY16 averaged $0.42 per gallon, a 44.8% decline vs. 1QFY15. Lower propane prices benefit SPH's customers and affect SPH by decreasing both its revenues and cost of goods sold. The impact on gross margin may vary; in 1QFY16 gross margin increased to 66% of revenues compared to 56% in 1QFY15 because SPH did not pass on to its customers all the benefits of lower propane costs. However, gross margin declined in absolute dollar terms ($183 million vs. $235million) due to lower volumes.

DCF and adjusted earnings before interest, depreciation & amortization and income tax expenses ("Adjusted EBITDA") are the primary measures typically used master limited partnerships ("MLPs") to evaluate their operating results. Making comparisons between MLPs is difficult because of lack of standard definitions these terms (a recent article discusses some examples). It is even more so in the case of SPH because it does not measure its results in terms of DCF and does not provide DCF data. However, SPH does provide Adjusted EBITDA figures:

Click to enlarge Table 2: Figures in $ Millions except per unit amounts, percent change and gallons sold. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Adjusted EBITDA in 1QFY16 was derived after adding back a $3 million charge related to a product liability settlement, and a $1.2 million unrealized loss on mark-to-market of derivatives. In 1QFY15 $1.9 million of acquisition integration expenses were added back, as were $9.5 million of unrealized gains on mark-to-market of derivatives. Absent these adjustments, EBITDA declined 42%.

SPH was able to decrease its investment in working capital in 2015, with lower commodity prices significantly reducing both inventories and accounts receivable. This more than offset the negative effect of lower net income on net cash from operations for the two most recent trailing 12-month ("TTM") periods, as shown in Table 3:

Table 3: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.

To enable an assessment of DCF and distribution coverage ratios, investors must generate their own estimates because, as previously noted, SPH does not utilize the DCF metric. Table 4 provides my estimate of sustainable DCF generated by SPH in 2015 and 2014 and the corresponding coverage ratios:

Table 4: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Coverage ratio was negative (below 1x) in 2015, a marked deterioration compared to 2014. Weak operational results are also the principal reason why the ratio of long terms debt, net of cash, to EBITDA has risen to 3.9 from 3.3 six months ago (although still lower than most MLP peers).

Table 5 provides selected metrics comparing the MLPs I follow based on the latest available TTM results. Of course, investment decisions should be take into consideration other parameters as well as qualitative factors. Though not structured as an MLP, I include KMI as its business and operations make it comparable to midstream energy MLPs.

As of 2/12/16:

Price

Current Yield

TTM

EBITDA

EV / TTM EBITDA

IDR- Adjusted EV/

EBITDA

LT Debt to TTM

EBITDA

1-Year

Total

Return

Buckeye Partners (NYSE:BPL)

$54.70

8.68%

868

12.5

12.5

4.3

-20.26%

Boardwalk Pipeline Partners (NYSE:BWP)

$10.83

3.69%

692

8.9

9.0

5.0

-33.75%

Enterprise Products Partners (NYSE:EPD)

$20.59

7.58%

5,267

12.2

12.2

4.3

-35.77%

Energy Transfer Partners (NYSE:ETP)

$23.67

17.83%

5,636

6.8

8.3

4.7

-53.86%

Kinder Morgan Inc. (NYSE:KMI)

$14.96

3.34%

7,372

10.4

10.4

5.8

-60.53%

Magellan Midstream (NYSE:MMP)

$59.33

5.29%

1,172

14.5

14.5

2.9

-22.48%

Targa Resources Partners (NYSE:NGLS)

$10.02

32.93%

1,124

6.3

7.5

4.7

-70.94%

Plains All American Pipeline (NYSE:PAA)

$17.32

16.17%

2,168

8.0

10.6

4.8

-60.96%

Suburban Propane Partners

$22.78

15.58%

334

7.4

7.4

3.3

-41.77%

Williams Partners (NYSE:WPZ)

$14.03

24.23%

3,795

6.8

8.6

4.6

-63.24%

Alerian MLP Index (AMZX)

11.34%

-48.11%

Click to enlarge

Table 5: Enterprise Value ("EV") and TTM EBITDA figures are in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Note that BPL, EPD, KMI, MMP and SPH are not burdened by general partner incentive IDRs that siphon off a significant portion of cash available for distribution to limited partners (typically 48%). Hence multiples of MLPs without IDRs can be expected to be much higher (see Table 4, column 5). In order to make the multiples somewhat more comparable, I added column 6, a second EV/EBITDA column. I derived this column by subtracting IDR payments from EBITDA for the TTM period. Other approaches can also be used to adjust for the IDRs of the relevant MLPs.

In prior articles I expressed concerns regarding the susceptibility of SPH to warmer weather, volatile commodity costs, customer migration to natural gas or electricity, and difficulties encountered by SPH in passing on higher propane costs to its customers when its costs rise. But, having seen SPH demonstrate less unit price volatility and better performance than the Alerian MLP Index, I suggested investors consider initiating, or adding to, positions in SPH if they were brave enough to broaden their exposure to midstream energy MLPs. Weak operational results discussed in this article undermine that conclusion. While distributions appear secure at the current levels (given $57 million of cash on hand and $250 million available under a revolving credit facility), there is a question as to whether they can be covered by sustainable DCF, especially if propane prices increase and with them working capital requirements.

Disclosure: I am/we are long EPD, MMP, ETE, ETP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.