SUBURBAN PROPANE PARTNERS, L.P. The following is a discussion of the financial condition and results of operations of the Partnership as of and for the three and six months endedMarch 28, 2020 . The discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the historical consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year endedSeptember 28, 2019 .
Executive Overview
The following are factors that regularly affect our operating results and financial condition. In addition, the COVID-19 pandemic has impacted our operating results and financial condition, which we are managing. As with most businesses in the current pandemic environment, our performance can be expected to remain impacted as and to the extent the pandemic continues and there are ongoing restrictions on business activity and social gathering. Our business is furthermore subject to the risks and uncertainties described in Item 1A included in the Annual Report on Form 10-K for the fiscal year endedSeptember 28, 2019 and in this Quarterly Report. COVID-19 Pandemic The COVID-19 pandemic has resulted in increased unemployment, commodity and stock market volatility, and uncertainty about conditions that will prevail in the months ahead. Certain of our commercial and industrial customers have temporarily curtailed or suspended operations in light of the pandemic, many in response to temporary governmental measures seeking to manage the progress of the COVID-19 virus. We have seen a slowing in cash collections on outstanding accounts receivable as well, which we believe is in response to general economic conditions and uncertainty. As a result, we are experiencing lower revenues, and we are closely monitoring credit and collections activities. We have also seen restrictions on our ability to decline business or to enforce our collection rights with respect to certain customers who refuse to pay for or negotiate a payment plan for products or services rendered in certain states in which we operate. In addition, as a result of the current economic environment and the impact that the COVID-19 pandemic has had on the global capital and energy markets, our market capitalization has declined. While the ultimate scope and scale of this decline is uncertain, at this time the decline has not negatively impacted our available liquidity, carrying values or assessments of our long-lived tangible and intangible assets. While we expect that many of these effects will not be permanent, it is impossible to predict their duration. We are developing alternative operational plans, inclusive of manpower levels, to address different customer demand scenarios, and evaluating the potential impact on cash flows and access to adequate liquidity as we progress through the remainder of fiscal 2020 and plan for a new heating season in fiscal 2021.
Product Costs and Supply
The level of profitability in the retail propane, fuel oil, natural gas and electricity businesses is largely dependent on the difference between retail sales price and our costs to acquire and transport products. The unit cost of our products, particularly propane, fuel oil and natural gas, is subject to volatility as a result of supply and demand dynamics or other market conditions, including, but not limited to, economic and political factors impacting crude oil and natural gas supply or pricing. We enter into product supply contracts that are generally one-year agreements subject to annual renewal, and also purchase product on the open market. We attempt to reduce price risk by pricing product on a short-term basis. Our propane supply contracts typically provide for pricing based upon index formulas using the posted prices established at major supply points such asMont Belvieu, Texas , orConway, Kansas (plus transportation costs) at the time of delivery. To supplement our annual purchase requirements, we may utilize forward fixed price purchase contracts to acquire a portion of the propane that we resell to our customers, which allows us to manage our exposure to unfavorable changes in commodity prices and to assure adequate physical supply. The percentage of contract purchases, and the amount of supply contracted for under forward contracts at fixed prices, will vary from year to year based on market conditions. Changes in our costs to acquire and transport products can occur rapidly over a short period of time and can impact profitability. There is no assurance that we will be able to pass on product acquisition and transportation cost increases fully or immediately, particularly when such costs increase rapidly. Therefore, average retail sales prices can vary significantly from year to year as our costs fluctuate with the propane, fuel oil, crude oil and natural gas commodity markets and infrastructure conditions. In addition, periods of sustained higher commodity and/or transportation prices can lead to customer conservation, resulting in reduced demand for our product. 24
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Table of Contents Seasonality The retail propane and fuel oil distribution businesses, as well as the natural gas marketing business, are seasonal because these fuels are primarily used for heating in residential and commercial buildings. Historically, approximately twothirds of our retail propane volume is sold during the six-month peak heating season from October through March. The fuel oil business tends to experience greater seasonality given its more limited use for space heating and approximately three-fourths of our fuel oil volumes are sold between October and March. Consequently, sales and operating profits are concentrated in our first and second fiscal quarters. Cash flows from operations, therefore, are greatest during the second and third fiscal quarters when customers pay for product purchased during the winter heating season. We expect lower operating profits and either net losses or lower net income during the period from April through September (our third and fourth fiscal quarters). To the extent necessary, we will reserve cash from the second and third quarters for distribution to holders of our Common Units in the fourth quarter and the following fiscal year first quarter. CARES Act OnMarch 27, 2020 ,Congress passed and the President ofthe United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to provide emergency economic assistance to those affected by the novel coronavirus. We intend to take advantage of certain of the benefits offered under the CARES Act, including but not necessarily limited to:
• deferral of our contribution of the employer portion of the social
security payroll tax that is otherwise due with respect to wages accrued
between
• acceleration of our ability to recover full refunds for alternative
minimum tax credit carryforwards; and
• deferral until
contributions to our defined pension plan that would otherwise be due
during calendar year 2020.
Weather
Weather conditions have a significant impact on the demand for our products, in particular propane, fuel oil and natural gas, for both heating and agricultural purposes. Many of our customers rely heavily on propane, fuel oil or natural gas as a heating source. Accordingly, the volume sold is directly affected by the severity of the winter weather in our service areas, which can vary substantially from year to year. In any given area, sustained warmer than normal temperatures will tend to result in reduced propane, fuel oil and natural gas consumption, while sustained colder than normal temperatures will tend to result in greater consumption.
Hedging and Risk Management Activities
We engage in hedging and risk management activities to reduce the effect of price volatility on our product costs and to ensure the availability of product during periods of short supply. We enter into propane forward, options and swap agreements with third parties, and use futures and options contracts traded on theNew York Mercantile Exchange ("NYMEX") to purchase and sell propane, fuel oil, crude oil and natural gas at fixed prices in the future. The majority of the futures, forward and options agreements are used to hedge price risk associated with propane and fuel oil physical inventory, as well as, in certain instances, forecasted purchases of propane or fuel oil. In addition, we sell propane and fuel oil to customers at fixed prices, and enter into derivative instruments to hedge a portion of our exposure to fluctuations in commodity prices as a result of selling the fixed price contracts. Forward contracts are generally settled physically at the expiration of the contract whereas futures, options and swap contracts are generally settled at the expiration of the contract through a net settlement mechanism. Although we use derivative instruments to reduce the effect of price volatility associated with priced physical inventory and forecasted transactions, we do not use derivative instruments for speculative trading purposes. Risk management activities are monitored by an internal Commodity Risk Management Committee, made up of six members of management and reporting to the Audit Committee, through enforcement of our Hedging and Risk Management Policy.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 2, "Summary of
Significant Accounting Policies," included within the Notes to Consolidated
Financial Statements section of our Annual Report on Form 10-K for the fiscal
year ended
Certain amounts included in or affecting our consolidated financial statements and related disclosures must be estimated, requiring management to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and 25
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the reported amounts of revenues and expenses during the reporting period. We are also subject to risks and uncertainties that may cause actual results to differ from estimated results. Estimates are used when accounting for depreciation and amortization of long-lived assets, employee benefit plans, self-insurance and litigation reserves, environmental reserves, allowances for doubtful accounts, asset valuation assessments and valuation of derivative instruments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known to us. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of ourBoard of Supervisors .
Results of Operations and Financial Condition
Net income for the second quarter of fiscal 2020 was$77.4 million , or$1.24 per Common Unit, compared to net income of$121.0 million , or$1.96 per Common Unit, in the prior year second quarter. Adjusted EBITDA (as defined and reconciled below) amounted to$130.6 million for the second quarter of fiscal 2020, compared to$163.0 million in the prior year second quarter. Retail propane gallons sold in the second quarter of fiscal 2020 were 145.1 million gallons, 12.2% lower than the prior year second quarter. According to theNational Oceanic and Atmospheric Administration , average temperatures (as measured by heating degree days) across all of the Partnership's service territories for the second quarter of fiscal 2020 were 16% warmer than normal, and 13% warmer than the prior year second quarter. Unseasonably warm temperatures started at the end of the fiscal 2020 first quarter, with average temperatures in the month ofDecember 2019 that were 10% warmer than normal and, when combined with the second quarter, average temperatures during the most critical months for heat-related demand were 14% warmer than normal -- on par with the warmest temperatures on record. Revenues in the second quarter of fiscal 2020 of$401.1 million decreased$103.3 million , or 20.5%, compared to the prior year second quarter, primarily due to lower volumes sold, coupled with lower retail selling prices associated with lower wholesale product costs. Average posted propane prices (basisMont Belvieu, Texas ) were 44.3% lower than the prior year second quarter. Cost of products sold for the second quarter of fiscal 2020 of$150.1 million decreased$51.4 million , or 25.5%, compared to the prior year, primarily due to lower volumes sold and lower wholesale product costs. Cost of products sold included a$4.7 million unrealized non-cash loss attributable to the mark-to-market adjustment for derivative instruments used in risk management activities, compared to an$8.5 million unrealized non-cash gain in the prior year second quarter. These unrealized gains and losses were excluded from Adjusted EBITDA for both periods in the table below.
Combined operating and general and administrative expenses of
OnMarch 5, 2020 ourOperating Partnership entered into a Third Amended and Restated Credit Agreement (the "Credit Agreement") that provides for a$500.0 million revolving credit facility (the "Revolving Credit Facility"), of which$145.1 million was outstanding as ofMarch 28, 2020 . The Revolving Credit Facility matures on the earlier of (A) the date that is ninety-one (91) days prior to maturity of the 2024 Senior Notes, as defined in Item 1, Note 10 of this Quarterly Report, (unless the notes have been refinanced prior to such date) and (B)March 5, 2025 . The Credit Agreement amends and restates the previous credit agreement to, among other things, extend the maturity, lower borrowing costs, and amend certain affirmative and negative covenants, including an increase to the maximum permitted Total Consolidated Leverage Ratio from 5.50x to 5.75x. During the second quarter of fiscal 2020, we repaid approximately$29.4 million under our Revolving Credit Facility from operating cash flows, which reduced outstanding revolver borrowings to$145.1 million as ofMarch 28, 2020 . Our Total Consolidated Leverage Ratio as ofMarch 28, 2020 was 5.22x. As previously announced onApril 23, 2020 , the Partnership'sBoard of Supervisors has declared a quarterly distribution of$0.60 per Common Unit for the three months endedMarch 28, 2020 . The distribution is payable onMay 12, 2020 to Common Unitholders of record as ofMay 5, 2020 . Our anticipated cash requirements for the remainder of fiscal 2020 include: (i) maintenance and growth capital expenditures of approximately$14.5 million ; (ii) interest and income tax payments of approximately$36.1 million ; and (iii) cash distributions of approximately$74.6 million to our Common Unitholders based on the current quarterly distribution rate of$0.60 per Common Unit. Based on our liquidity position, which includes cash on hand, availability of funds under our Revolving Credit Facility and expected cash flow from operating activities, we expect to have sufficient funds to meet our current and future obligations. 26
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On the heels of near-record warm temperatures in the fiscal 2020 heating season, we are also now faced with the uncertainties surrounding the unprecedented health crisis from COVID-19, which has had a profound negative overall impact on employment and the economy. While our business is considered an essential critical service, our business is not immune to the challenges presented by the dramatic economic slowdown instituted to mitigate the spread of the virus. The areas of our business that may be impacted by the economic slowdown are:
• The temporary suspension of business operations by certain of our
commercial and industrial customers may result in lower demand from these
customer markets;
• Depending on the length and depth of the economic slowdown, or the
possibility of an economic recession, we could see demand destruction from
businesses that are unable to recover, or from conservation efforts by all
customer types;
• We may experience a slowdown in the rate of cash collections, or a higher
amount of bad debts, from all customer types as they deal with their own
economic uncertainties;
• In certain states, restrictions placed on our business to decline or
refuse to service certain customers who have not or are unwilling to pay
for product delivered or services rendered;
• There may be potential disruptions in the propane supply chain resulting
from the combination of lower commodity prices and a lower demand outlook
for crude oil, and the resultant impact on propane and fuel oil production
and logistics; and
• The potential for increasing costs to implement additional measures to
help protect our employees, customers and local communities as state and
federal governments provide guidance on re-opening the economy.
Although there is uncertainty related to the anticipated impact of the COVID-19 pandemic on our future results, we believe our efficient and flexible business model, as well as the recent steps taken to strengthen our balance sheet, leave us well positioned to manage our business through the crisis as it continues to unfold. Nonetheless, as we progress through the fiscal 2020 third quarter, there remains significant uncertainty regarding the length of the economic slowdown instituted to mitigate the spread of COVID-19, the timing of a potential economic recovery and the potential impact on the ability of our customers to recover from the effects of the slowdown. In response, we are developing alternative operational plans inclusive of manpower levels under different customer demand scenarios, and evaluating the potential impact on cash flows and access to adequate liquidity as we progress through the remainder of fiscal 2020 and plan for a new heating season in fiscal 2021. As we gain more visibility into the potential impact of the COVID-19 pandemic on our business and operations, we may take proactive steps to work with our bank group to evaluate options to gain added financial flexibility and additional liquidity to manage through this period of uncertainty. This may also include evaluating other levers, including re-evaluating the level of the quarterly distribution to strengthen our balance sheet, manage our cash requirements and ensure adequate liquidity to fund working capital and continue investing in our long-term growth initiatives.
Three Months Ended
Revenues
(Dollars and gallons in thousands) Three Months Ended
March 28, March 30, Percent
2020 2019 (Decrease) (Decrease)
Revenues
Propane $ 347,686 $ 433,056 $ (85,370 ) (19.7 )%
Fuel oil and refined fuels 31,502 41,598 (10,096 ) (24.3 )%
Natural gas and electricity 10,198 17,596 (7,398 ) (42.0 )%
All other 11,669 12,127 (458 ) (3.8 )%
Total revenues $ 401,055 $ 504,377 $ (103,322 ) (20.5 )%
Retail gallons sold
Propane 145,098 165,241 (20,143 ) (12.2 )%
Fuel oil and refined fuels 10,120 13,240 (3,120 ) (23.6 )%
As discussed above, average temperatures (as measured in heating degrees days)
across all of our service territories during the second quarter of fiscal 2020
were 16% and 13% warmer than normal and the prior year second quarter,
respectively. Unseasonably warm temperatures started at the end of the fiscal
2020 first quarter, with average temperatures in the month of December 2019 that
were 10% warmer than normal and, when combined with the second quarter, average
temperatures during the most critical months for heat-related demand were 14%
warmer than normal -- on par with the warmest temperatures on record.
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Revenues from the distribution of propane and related activities of$347.7 million decreased$85.4 million , or 19.7%, compared to the prior year, primarily due to lower volumes sold and lower average retail selling prices. As a result of the impact of warmer weather on customer demand, retail propane gallons sold decreased 20.1 million gallons, or 12.2%, compared to the prior year, resulting in a$52.4 million decrease in revenues. Additionally, toward the end ofMarch 2020 , as a result of the economic slowdown related to COVID-19, demand in the commercial and industrial segments of our customer base began to soften. Average propane selling prices decreased 7.8% compared to the prior year, reflecting lower average wholesale costs, resulting in a$29.5 million decrease in revenues. Included within the propane segment are revenues from other propane activities, which decreased$3.5 million primarily due to a lower notional amount of hedging contracts used in risk management activities that were settled physically. Revenues from the distribution of fuel oil and refined fuels of$31.5 million were$10.1 million , or 24.3%, lower than the prior year, primarily due to lower volumes sold as average selling prices were essentially flat to the prior year. Fuel oil and refined fuels gallons sold decreased 23.6%, primarily due to warmer weather across our service territories in the northeast. Revenues in our natural gas and electricity segment of$10.2 million were$7.4 million , or 42.0%, lower than the prior year, primarily due to a reduction to the customer base resulting from actions taken by theNew York State Public Utility Commission that limited energy service companies, including our natural gas and electricity business, from servicing certain customers in the state ofNew York , and a decrease in usage due to warmer weather in the northeast, along with lower average selling prices. Cost of Products Sold (Dollars in thousands) Three Months Ended March 28, March 30, Percent 2020 2019 (Decrease) (Decrease) Cost of products sold Propane$ 122,140 $ 160,579 $ (38,439 ) (23.9 )% Fuel oil and refined fuels 19,300 27,146 (7,846 ) (28.9 )% Natural gas and electricity 5,547 10,447 (4,900 ) (46.9 )% All other 3,131 3,350 (219 ) (6.5 )%
Total cost of products sold
The cost of products sold reported in the condensed consolidated statements of operations represents the weighted average unit cost of propane, fuel oil and refined fuels, and natural gas and electricity sold, including transportation costs to deliver product from our supply points to storage or to our customer service centers. Cost of products sold also includes the cost of appliances and related parts sold or installed by our customer service centers computed on a basis that approximates the average cost of the products. Given the retail nature of our operations, we maintain a certain level of priced physical inventory to help ensure that our field operations have adequate supply commensurate with the time of year. Our strategy has been, and will continue to be, to keep our physical inventory priced relatively close to market for our field operations. Consistent with past practices, we principally utilize futures and/or options contracts traded on the NYMEX to mitigate the price risk associated with our priced physical inventory. In addition, we sell propane and fuel oil to customers at fixed prices, and enter into derivative instruments to hedge a portion of our exposure to fluctuations in commodity prices as a result of selling the fixed price contracts. At expiration, the derivative contracts are settled by the delivery of the product to the respective party or are settled by the payment of a net amount equal to the difference between the then market price and the fixed contract price or option exercise price. Under this risk management strategy, realized gains or losses on futures or options contracts, which are reported in cost of products sold, will typically offset losses or gains on the physical inventory once the product is sold (which may or may not occur in the same accounting period). We do not use futures or options contracts, or other derivative instruments, for speculative trading purposes. Unrealized non-cash gains or losses from changes in the fair value of derivative instruments that are not designated as cash flow hedges are recorded within cost of products sold. Cost of products sold excludes depreciation and amortization; these amounts are reported separately within the condensed consolidated statements of operations. In the commodities markets, average posted propane prices (basisMont Belvieu, Texas ) and fuel oil prices were 44.3% and 19.9% lower than the prior year second quarter, respectively. The net change in the fair value of derivative instruments resulted in a$4.7 million unrealized non-cash loss in the second quarter of fiscal 2020 compared to an$8.5 million unrealized non-cash gain in the prior year second quarter, resulting in an increase of$13.2 million in cost of products sold year-over-year, all of which was reported within the propane segment. These unrealized mark-to-market adjustments are excluded from Adjusted EBITDA for both periods. 28
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Cost of products sold associated with the distribution of propane and related activities of$122.1 million decreased$38.4 million , or 23.9%, compared to the prior year second quarter. Lower average wholesale costs and lower volumes sold contributed to decreases in cost of products sold of$27.1 million and$20.2 million , respectively. Included within the propane segment are costs from other propane activities which decreased$4.3 million compared to the prior year, as well as the$13.2 million impact of mark-to-market adjustments on derivative instruments discussed above. Cost of products sold associated with our fuel oil and refined fuels segment of$19.3 million decreased$7.8 million , or 28.9%, compared to the prior year second quarter. Lower volumes sold and lower average wholesale costs contributed to decreases in cost of products sold of$6.4 million and$1.4 million , respectively. Cost of products sold in our natural gas and electricity segment of$5.5 million decreased$4.9 million , or 46.9%, compared to the prior year primarily due to lower usage and lower wholesale costs for electricity and natural gas.
Total cost of products sold as a percent of total revenues decreased 2.6 percentage points to 37.4% from 40.0% primarily due to the year-over-year decline in wholesale propane costs outpacing the year-over-year decline in average propane selling prices, partially offset by the impact of mark-to-market adjustments on derivative instruments.
Operating Expenses
(Dollars in thousands) Three Months Ended
March 28, March 30, Percent
2020 2019 Increase Increase
Operating expenses $ 110,588 $ 108,154 $ 2,434 2.3 %
As a percent of total revenues 27.6 % 21.4 %
All costs of operating our retail distribution and appliance sales and service
operations are reported within operating expenses in the condensed consolidated
statements of operations. These operating expenses include the compensation and
benefits of field and direct operating support personnel, costs of operating and
maintaining our vehicle fleet, overhead and other costs of our purchasing,
training and safety departments and other direct and indirect costs of operating
our customer service centers.
Operating expenses of $110.6 million for the second quarter of fiscal 2020
increased $2.4 million , or 2.3%, compared to the prior year second quarter,
primarily due to an increase in accruals for self-insured liabilities, offset to
an extent by lower volume-related variable operating costs and lower variable
compensation costs given lower earnings.
General and Administrative Expenses
(Dollars in thousands) Three Months Ended
March 28, March 30, Percent
2020 2019 Decrease Decrease
General and administrative expenses $ 13,436 $ 21,988 $ (8,552 ) (38.9 )%
As a percent of total revenues 3.4 % 4.4 %
All costs of our back office support functions, including compensation and
benefits for executives and other support functions, as well as other costs and
expenses to maintain finance and accounting, treasury, legal, human resources,
corporate development and the information systems functions are reported within
general and administrative expenses in the condensed consolidated statements of
operations.
General and administrative expenses of $13.4 million for the second quarter of
fiscal 2020 decreased $8.6 million , or 38.9%, compared to the prior year second
quarter, primarily due to lower variable compensation costs attributable to
lower earnings.
Depreciation and Amortization
(Dollars in thousands) Three Months Ended
March 28, March 30, Percent
2020 2019 Decrease Decrease
Depreciation and amortization
(4.4 )%
As a percent of total revenues 7.3 % 6.1 %
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Depreciation and amortization expense of$29.3 million for the second quarter of fiscal 2020 decreased$1.3 million , or 4.4%, compared to the prior year second quarter, primarily due to accelerated depreciation expense recorded in the prior year for assets taken out of service. Interest Expense, net (Dollars in thousands) Three Months Ended March 28, March 30, Percent 2020 2019 Decrease Decrease Interest expense, net$ 19,176 $ 19,647 $ (471 ) (2.4 )% As a percent of total revenues 4.8 % 3.9 % Net interest expense of$19.2 million in the second quarter of fiscal 2020 decreased$0.5 million compared to the prior year quarter, primarily due to a decrease in benchmark interest rates on borrowings under our Revolving Credit Facility. See Liquidity and Capital Resources below for additional discussion.
Loss on Debt Extinguishment
In connection with the refinancing of our previous revolving credit facility during the second quarter of fiscal 2020, we recognized a non-cash charge of$0.1 million to write-off a portion of unamortized debt origination costs.
EBITDA and Adjusted EBITDA
EBITDA represents net income before deducting interest expense, income taxes,
depreciation and amortization. Adjusted EBITDA represents EBITDA excluding the
unrealized net gain or loss on mark-to-market activity for derivative
instruments and other items, as applicable, as provided in the table below. Our
management uses EBITDA and Adjusted EBITDA as supplemental measures of operating
performance and we are including them because we believe that they provide our
investors and industry analysts with additional information that we determined
is useful to evaluate our operating results. EBITDA and Adjusted EBITDA are not
recognized terms under US GAAP and should not be considered as an alternative to
net income or net cash provided by operating activities determined in accordance
with US GAAP. Because EBITDA and Adjusted EBITDA as determined by us excludes
some, but not all, items that affect net income, they may not be comparable to
EBITDA and Adjusted EBITDA or similarly titled measures used by other companies.
The following table sets forth our calculations of EBITDA and Adjusted EBITDA:
(Dollars in thousands) Three Months Ended
March 28, March 30,
2020 2019
Net income $ 77,361 $ 121,016
Add:
Provision for income taxes - 252
Interest expense, net 19,176 19,647
Depreciation and amortization 29,288 30,623
EBITDA 125,825
171,538
Unrealized non-cash losses (gains) on changes in fair value of derivatives 4,714 (8,521 ) Loss on debt extinguishment 109 - Adjusted EBITDA$ 130,648 $ 163,017 30
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Six Months Ended
Revenues
(Dollars and gallons in thousands) Six Months Ended
March 28, March 30, Percent
2020 2019 (Decrease) (Decrease)
Revenues
Propane $ 633,111 $ 754,416 $ (121,305 ) (16.1 )%
Fuel oil and refined fuels 57,393 70,507 (13,114 ) (18.6 )%
Natural gas and electricity 18,919 31,000 (12,081 ) (39.0 )%
All other 25,510 25,558 (48 ) (0.2 )%
Total revenues $ 734,933 $ 881,481 $ (146,548 ) (16.6 )%
Retail gallons sold
Propane 266,249 289,294 (23,045 ) (8.0 )%
Fuel oil and refined fuels 18,557 22,376 (3,819 ) (17.1 )%
Average temperatures (as measured in heating degree days) across all of our
service territories for the first six months of fiscal 2020 were 11% and 8%
warmer than normal and the prior year first half, respectively. The warmer
temperatures compared to the prior year were experienced throughout most of the
fiscal 2020 heating season, with exceptionally warm temperatures occurring
during December 2019 through February 2020 which are the most critical months
for heat-related demand. Average temperatures during the months of December 2019
through February 2020 were 14% warmer than normal, which was comparable to the
warmest temperatures on record for that period, and 7% warmer than the same
period of the prior year.
Revenues from the distribution of propane and related activities of $633.1
million decreased $121.3 million , or 16.1%, compared to the prior year first
half, primarily due to lower volumes sold and lower average retail selling
prices. Retail propane gallons sold decreased 23.0 million gallons, or 8.0%,
compared to the prior year, resulting in a $59.8 million decrease in
revenues. Average propane selling prices decreased 8.4% compared to the prior
year period reflecting lower average wholesale costs, resulting in a $58.0
million decrease in revenues. Included within the propane segment are revenues
from other propane activities, which decreased $3.5 million primarily due to a
lower notional amount of hedging contracts used in risk management activities
that were settled physically.
Revenues from the distribution of fuel oil and refined fuels of $57.4 million
decreased $13.1 million , or 18.6%, compared to the prior year first half,
primarily due to lower volumes sold and lower average selling prices. Fuel oil
and refined fuels volumes sold decreased 3.8 million gallons, or 17.1%,
resulting in a $12.0 million decrease in revenues. Average selling prices for
fuel oil and refined fuels decreased 1.9%, resulting in a $1.1 million decrease
in revenues.
Revenues in our natural gas and electricity segment of $18.9 million were $12.1
million , or 39.0%, lower than the prior year first half, resulting from actions
taken by the New York State Public Utility Commission that limited energy
service companies, including our natural gas and electricity business, from
servicing certain customers in the state of New York , and a decrease in usage
due to warmer weather in the northeast.
Cost of Products Sold
(Dollars in thousands) Six Months Ended Percent
March 28, March 30, (Decrease) (Decrease)
2020 2019 Increase Increase
Cost of products sold
Propane $ 213,817 $ 310,600 $ (96,783 ) (31.2 )%
Fuel oil and refined fuels 36,877 47,534 (10,657 ) (22.4 )%
Natural gas and electricity 10,429 18,896 (8,467 ) (44.8 )%
All other 7,595 7,077 518 7.3 %
Total cost of products sold
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In the commodities markets, average posted propane prices (basisMont Belvieu, Texas ) and fuel oil prices were 40.6% and 12.5% lower than the prior year first half, respectively. The net change in the fair value of derivative instruments resulted in a$1.9 million and$7.4 million unrealized non-cash loss in the first six months of fiscal 2020 and 2019, respectively, resulting in a decrease of$5.5 million in cost of products sold year-over-year, all of which was reported within the propane segment. These unrealized mark-to-market adjustments are excluded from Adjusted EBITDA for both periods. Cost of products sold associated with the distribution of propane and related activities of$213.8 million decreased$96.8 million , or 31.2%, compared to the prior year first half. Lower average wholesale costs and lower volumes sold contributed to decreases in cost of products sold of$63.1 million and$23.8 million , respectively. Included within the propane segment are costs from other propane activities which decreased$4.4 million compared to the prior year, as well as the$5.5 million impact of mark-to-market adjustments on derivative instruments discussed above. Cost of products sold associated with our fuel oil and refined fuels segment of$36.9 million decreased$10.7 million , or 22.4%, compared to the prior year first half. Lower volumes sold and lower average wholesale costs contributed to decreases in cost of products sold of$8.1 million and$2.6 million , respectively.
Cost of products sold in our natural gas and electricity segment of
Total cost of products sold as a percent of total revenues decreased 7.0
percentage points to 36.6% from 43.6% primarily due to the year-over-year
decline in wholesale propane costs outpacing the decline in average propane
selling prices, coupled with the impact of mark-to-market adjustments on
derivative instruments.
Operating Expenses
(Dollars in thousands) Six Months Ended
March 28, March 30, Percent
2020 2019 Increase Increase
Operating expenses $ 217,464 $ 207,563 $ 9,901 4.8 %
As a percent of total revenues 29.6 % 23.5 %
Operating expenses of $217.5 million for the first half of fiscal 2020 increased
$9.9 million , or 4.8%, compared to the prior year first half. The increase in
operating expenses was primarily due to higher general insurance costs, which
included a charge of approximately $5.0 million for the settlement of certain
product liability and other legal matters, and higher vehicle expenses, offset
to an extent by lower variable volume-related operating cost and lower variable
compensation costs given lower earnings.
General and Administrative Expenses
(Dollars in thousands) Six Months Ended
March 28, March 30, Percent
2020 2019 Decrease Decrease
General and administrative expenses $ 32,710 $ 38,493 $ (5,783 ) (15.0 )%
As a percent of total revenues 4.5 % 4.4 %
General and administrative expenses of $32.7 million for the first half of
fiscal 2020 decreased $5.8 million , or 15.0%, compared to the prior year period
primarily due to lower variable compensation expenses attributable to lower
earnings, partially offset by higher professional services fees for marketing
and advertising initiatives.
Depreciation and Amortization
(Dollars in thousands) Six Months Ended
March 28, March 30, Percent
2020 2019 Decrease Decrease
Depreciation and amortization
8.0 % 6.9 %
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Depreciation and amortization expense of$58.6 million in the first half of fiscal 2020 decreased$2.1 million , or 3.5%, primarily as a result of accelerated depreciation recorded in the prior year for assets taken out of service. Interest Expense, net (Dollars in thousands) Six Months Ended March 28, March 30, Percent 2020 2019 Decrease Decrease Interest expense, net$ 38,248 $ 39,135 $ (887 ) (2.3 )% As a percent of total revenues 5.2 % 4.4 % Net interest expense of$38.2 million in the first half of fiscal 2020 decreased$0.9 million compared to the prior year first half, primarily due to a decrease in benchmark interest rates on outstanding borrowings under our Revolving Credit Facility. See Liquidity and Capital Resources below for additional discussion.
Loss on Debt Extinguishment
In connection with the refinancing of our previous revolving credit facility during the second quarter of fiscal 2020, we recognized a non-cash charge of$0.1 million to write-off a portion of unamortized debt origination costs.
EBITDA and Adjusted EBITDA
The following table sets forth our calculations of EBITDA and Adjusted EBITDA:
(Dollars in thousands) Six Months Ended
March 28, March 30,
2020 2019
Net income $ 117,524 $ 148,735
Add:
(Benefit from) provision for income taxes (359 ) 403
Interest expense, net 38,248
39,135
Depreciation and amortization 58,562
60,694
EBITDA 213,975
248,967
Unrealized non-cash losses on changes in fair value of derivatives 1,938 7,390 Loss on debt extinguishment 109 - Adjusted EBITDA$ 216,022 $ 256,357
Liquidity and Capital Resources
Analysis of Cash Flows
Although there is uncertainty related to the anticipated impact of the COVID-19 pandemic on our future results, we believe our efficient and flexible business model, as well as the recent steps taken to strengthen our balance sheet leave us well positioned to manage our business through the crisis as it continues to unfold. Nonetheless, as we progress through the fiscal 2020 third quarter, there remains significant uncertainty regarding the length of the economic slowdown instituted to mitigate the spread of COVID-19, the timing of a potential economic recovery and the potential impact on the ability of our customers to recover from the effects of the slowdown. We are assessing alternative operational plans inclusive of manpower levels under different customer demand scenarios, and evaluating the potential impact on our cash flows and access to adequate liquidity as we progress through the remainder of fiscal 2020 and plan for a new heating season in fiscal 2021. As we gain more visibility into the potential impact of the COVID-19 pandemic on our business and operations, we may take proactive steps to work with our bank group to evaluate options to provide ourselves with added financial flexibility and additional liquidity to manage through this period of uncertainty. Operating Activities. Net cash provided by operating activities for the first half of fiscal 2020 and fiscal 2019 was$91.3 million and$101.2 million , respectively. The$9.9 million year-over-year decrease in net cash provided by operating activities was primarily attributable to lower earnings (discussed above) offset to an extent by a smaller increase in working capital compared to the prior year, stemming from the decline in average wholesale costs for propane. Given the seasonal nature of the propane and fuel oil businesses, working capital requirements typically peak towards the end of the heating season, after which accounts receivable becomes a significant source of cash from operating activities. 33
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Investing Activities. Net cash used in investing activities of$40.1 million for the first half of fiscal 2020 consisted of capital expenditures of$20.5 million (including approximately$12.6 million to support the growth of operations and$7.9 million for maintenance expenditures), and$21.5 million used to fund the acquisitions of two retail propane businesses (see Item 1, Note 4 of this Quarterly Report), partially offset by approximately$1.8 million in proceeds from the sale of property, plant and equipment. Net cash used in investing activities of$24.0 million for the first half of fiscal 2019 consisted of capital expenditures of$16.6 million (including approximately$9.1 million to support the growth of operations and$7.5 million for maintenance expenditures), and$10.6 million used in the acquisition of a business, partially offset by$3.1 million in proceeds from the sale of property, plant and equipment. Financing Activities. Net cash used in financing activities for the first half of fiscal 2020 reflected$74.3 million paid for the quarterly distributions to Common Unitholders at a rate of$0.60 per Common Unit paid in respect of the fourth quarter of fiscal 2019 and first quarter of fiscal 2020,$2.7 million in issuance costs for the refinancing of our previous revolving credit facility and other financing activities of$3.1 million . These uses of cash for financing activities were partially offset by$31.6 million in net borrowings under the Revolving Credit Facility, which were used to fund a portion of our seasonal working capital and the two acquisitions noted above. Net cash used in financing activities for the first half of fiscal 2019 reflected$73.8 million paid for the quarterly distributions to Common Unitholders at a rate of$0.60 per Common Unit paid in respect of the fourth quarter of fiscal 2018 and first quarter of fiscal 2019,$0.1 million of net repayments under the Revolving Credit Facility and other financing activities of$2.5 million .
Summary of Long-Term Debt Obligations and Revolving Credit Facility
As ofMarch 28, 2020 , our long-term debt consisted of$525.0 million in aggregate principal amount of 5.5% senior notes dueJune 1, 2024 ,$250.0 million in aggregate principal amount of 5.75% senior notes dueMarch 1, 2025 ,$350.0 million in aggregate principal amount of 5.875% senior notes dueMarch 1, 2027 and$145.1 million outstanding under our Revolving Credit Facility. See Item 1, Note 10 of this Quarterly Report. Based upon the Partnership's Consolidated EBITDA, as defined in the Credit Agreement, for the trailing twelve month period endedMarch 28, 2020 , and outstanding borrowings and letters of credits issued under the Revolving Credit Facility as ofMarch 28, 2020 , our borrowing capacity under the Revolving Credit Facility was$129.8 million at the end of the second quarter of fiscal 2020. The aggregate amounts of long-term debt maturities subsequent toMarch 28, 2020 are as follows: fiscal 2020:$-0 -; fiscal 2021:$-0 -; fiscal 2022:$-0 -; fiscal 2023:$-0 -; fiscal 2024:$525.0 million ; and thereafter:$745.1 million .
Partnership Distributions
We are required to make distributions in an amount equal to all of our Available Cash, as defined in our Third Amended and Restated Partnership Agreement, as amended (the "Partnership Agreement"), no more than 45 days after the end of each fiscal quarter to holders of record on the applicable record dates. Available Cash, as defined in the Partnership Agreement, generally means all cash on hand at the end of the respective fiscal quarter less the amount of cash reserves established by theBoard of Supervisors in its reasonable discretion for future cash requirements. These reserves are retained for the proper conduct of our business, the payment of debt principal and interest and for distributions during the next four quarters. TheBoard of Supervisors reviews the level of Available Cash on a quarterly basis based upon information provided by management.
On
Other Commitments
We have a noncontributory, cash balance format, defined benefit pension plan which was frozen to new participants effectiveJanuary 1, 2000 . EffectiveJanuary 1, 2003 , the defined benefit pension plan was amended such that future service credits ceased and eligible employees would receive interest credits only toward their ultimate retirement benefit. We also provide postretirement health care and life insurance benefits for certain retired employees under a plan that was frozen to new participants effectiveMarch 31, 1998 . AtMarch 28, 2020 , we had a liability for the defined benefit pension plan and accrued retiree health and life benefits of$33.3 million and$9.3 million , respectively. 34
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We are self-insured for general and product, workers' compensation and automobile liabilities up to predetermined thresholds above which third party insurance applies. AtMarch 28, 2020 , we had accrued insurance liabilities of$68.5 million , and a receivable of$17.3 million related to the amount of the liability expected to be covered by insurance.
Legal Matters
See Item 1, Note 13, Legal Matters subsection of this Quarterly Report.
Off-Balance Sheet Arrangements
Guarantees
See Item 1, Note 14 of this Quarterly Report.
Recently Issued Accounting Pronouncements
See Item 1, Note 2, Recently Issued Accounting Pronouncements subsection of this Quarterly Report.
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